U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] 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 0-9147
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CANARGO ENERGY CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 91-0881481
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
CanArgo Energy Corporation
P.O. Box 291, St. Peter Port, Guernsey, British Isles GY1 3RR
----------------------------------------------------- ----------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(44) 1481 729 980
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(REGISTRANT'S TELEPHONE NUMBER)
150 Buckingham Palace Road, London, SW1W 9TR
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(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 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 X No
----- -----
The number of shares of registrant's common stock outstanding on April 30, 2003
was 97,356,206.
CANARGO ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Cash flows 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25
PART 2. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index 27
(b) Reports on Form 8-K 30
Signatures 31
Certifications 32
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 CanArgo's
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 CanArgo's 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.
2
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
Unaudited
----------------------------
MARCH 31, December 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 1,894,567 $ 1,598,304
Accounts receivable 380,697 306,336
Inventory 152,348 185,924
Prepayments 293,781 211,623
Assets held for sale 8,223,686 8,095,947
Other current assets 173,830 175,951
------------ ------------
Total current assets $ 11,118,909 $ 10,574,085
Capital assets, net (including unevaluated
amounts of $37,457,900 and $36,843,425,
respectively) 60,144,348 59,702,525
Investments in and advances to oil and gas
and other ventures - net 355,895 459,308
------------ ------------
TOTAL ASSETS $ 71,619,152 $ 70,735,918
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,298,804 $ 871,996
Loans payable 380,000 --
Deferred revenue 2,000,000 1,500,000
Income taxes payable 61,000 61,000
Accrued liabilities 268,167 204,045
Liabilities held for sale 2,463,249 2,351,965
------------ ------------
Total current liabilities $ 6,471,220 $ 4,989,006
Provision for future site restoration 141,000 122,290
Minority interest in subsidiaries 3,502,050 3,519,342
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock, par value $0.10 per share 9,735,620 9,735,620
Capital in excess of par value 145,151,475 145,151,475
Foreign currency translation adjustment 34,833 4,668
Accumulated deficit (93,417,046) (92,786,483)
------------ ------------
Total stockholders' equity $ 61,504,882 $ 62,105,280
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,619,152 $ 70,735,918
============ ============
See accompanying notes to unaudited consolidated condensed financial statements.
3
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Unaudited
--------------------------
MARCH 31, MARCH 31,
2003 2002
----------- -----------
Operating Revenues from Continuing Operations:
Oil and gas sales $ 1,141,458 $ 1,637,929
Other -- 1,243,505
----------- -----------
1,141,458 2,881,434
----------- -----------
Operating Expenses:
Field operating expenses 319,178 595,976
Direct project costs 166,586 629,439
Selling, general and administrative 766,367 751,545
Depreciation, depletion and amortization 578,638 769,413
----------- -----------
1,830,769 2,746,373
----------- -----------
OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS (689,311) 135,061
----------- -----------
Other Income (Expense):
Interest, net (2,304) (4,519)
Other 1,205 (59,819)
Equity income (loss) from investments 21,515 (8,125)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 20,416 (72,462)
----------- -----------
NET (LOSS) INCOME BEFORE MINORITY INTEREST (668,895) 62,599
=========== ===========
Minority interest in income (loss) of consolidated
subsidiaries 6,184 (81,575)
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS $ (662,711) $ (18,976)
=========== ===========
NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET
OF TAXES AND MINORITY INTEREST (9,142) 106,019
Cumulative effect of change in accounting principle 41,290 --
----------- -----------
NET (LOSS) INCOME (630,563) 87,043
=========== ===========
OTHER COMPREHENSIVE INCOME:
Foreign currency translation 30,165 --
----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (600,398) $ 87,043
=========== ===========
Weighted average number of
common shares outstanding 97,356,206 94,787,113
----------- -----------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
- from continuing operations $ (0.01) $ 0.00
- from discontinued operations $ (0.00) 0.00
----------- -----------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ 0.00
----------- -----------
See accompanying notes to unaudited consolidated condensed financial statements.
4
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
--------------------------
MARCH 31, March 31,
2003 2002
----------- -----------
Operating activities:
Net (loss) from continued operations (662,711) (18,976)
Depreciation, depletion and amortization 578,638 769,413
Cumulative effect of change in accounting principle 41,290 --
Equity income from investments (21,515) 8,125
Minority interest in (loss) income of consolidated
subsidiaries (6,184) 81,575
Changes in assets and liabilities:
Accounts receivable (74,361) (785,528)
Inventory 33,576 258,772
Prepayments (47,071) 604,127
Other current assets 2,121 (656,139)
Accounts payable 426,808 1,186,926
Accrued liabilities 64,122 (63,342)
----------- -----------
NET CASH GENERATED BY OPERATING ACTIVITIES 334,713 1,384,953
----------- -----------
Investing activities:
Capital expenditures (971,586) (4,246,953)
Repayments from (Investments in and advances to)
oil and gas and other ventures 124,928 (41,349)
Advance proceeds from the sale of CanArgo
Standard Oil Products 500,000 --
Change in non cash working capital items (35,087) 1,143,541
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (381,745) (3,144,761)
----------- -----------
Financing activities:
Proceeds from sale of common stock -- 1,762,433
Share issue costs -- (162,215)
Funds held in trust -- (1,762,433)
Minority shareholder advances -- 445,000
(Repayment of) Advances from minority interest (11,108) --
Proceeds from loans 380,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 368,892 282,785
NET CASH FLOWS FROM ASSETS AND LIABILITIES HELD FOR SALE (25,597) (7,876)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 296,263 (1,484,899)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,598,304 5,891,038
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,894,567 $ 4,406,139
=========== ===========
See accompanying notes to unaudited consolidated condensed financial statements.
5
PART I - FINANCIAL INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002 (UNAUDITED)
(1) Basis of Presentation
The interim consolidated condensed financial statements and notes
thereto of CanArgo Energy Corporation and its subsidiaries
(collectively, CanArgo) have been prepared by management without audit.
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. The accompanying consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in CanArgo's Annual
Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission. All amounts are in U.S. dollars.
Certain items in the consolidated condensed financial statements have
been reclassified to conform to the current year presentation. There
was no effect on net loss as a result of these reclassifications.
During 2002, the Company adopted the self-sustaining method of
accounting for CanArgo Standard Oil Products. The adoption of the
self-sustaining method was necessitated by the fact that CanArgo
Standard Oil Products was no longer financially and operationally
dependant upon its parent company. Under the self-sustaining method of
foreign currency translation, assets and liabilities are translated
into US dollars at period end exchange rates and income and expenses
are translated into US dollars at average rates in effect during the
period. Exchange gains and losses on translation are reflected as a
separate component of shareholders' equity.
(2) Need for Significant Additional Capital, Possible Impairment of Assets
Development of the oil and gas properties and ventures in which CanArgo
has interests involves multi-year efforts and substantial cash
expenditures. Full development of these properties will require the
availability of substantial funds from external sources. CanArgo
believes that it will be able to generate funds from external sources
including quasi-governmental financing agencies, conventional lenders,
equity investors and other oil and gas companies that may desire to
participate in CanArgo's oil and gas projects, although no firm funding
commitments have been received and there can be no assurance that any
such commitments will be obtained, or, if obtained, will be on
commercially acceptable terms.
Ultimate realization of the carrying value of CanArgo's oil and gas
properties 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. This is dependent upon, among
other factors, achieving significant production at costs that provide
acceptable margins, reasonable levels of taxation from local
authorities, the ability to transport production at acceptable costs
and the ability to market the oil and gas produced at or near world
prices. In addition, CanArgo must mobilize drilling equipment and
personnel to initiate drilling, completion and production activities.
If one or more of the above factors, or other factors, are different
than anticipated, CanArgo may not recover the carrying value of its oil
and gas properties.
CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has
an interest. There can be no assurance, however, that CanArgo 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 or that such financing if available will be on terms that are
acceptable to or are deemed to be in the best interests of CanArgo,
such entities or their respective stockholders or participants.
The consolidated financial statements of CanArgo do not give effect to
any additional impairment in the value of CanArgo's oil and gas
properties and ventures or other adjustments that would be necessary if
financing cannot be arranged for the development of such properties and
ventures or if they are unable to achieve profitable operations.
Failure to arrange such financing on reasonable terms or failure of
such
6
properties and ventures to achieve profitability would have a material
adverse effect on the financial position, including realization of
assets, results of operations, cash flows and prospects of CanArgo.
(3) Stock Based Compensation Plans
CanArgo has adopted only the disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure -
An amendment of FASB Statement No. 123 ("SFAS No. 148"), and has
elected to continue to record stock-based compensation expense using
the intrinsic-value approach prescribed by Accounting Principles Board
("APB") Opinion 25. The application of APB Opinion 25 has further been
clarified by Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation". Accordingly, CanArgo computes compensation cost
for each employee stock option granted as the amount by which the
quoted market price of the CanArgo's Common Stock on the date of grant
exceeds the amount the employee must pay to acquire the stock. The
amount of compensation costs, if any, is charged to operations over the
vesting period.
The following table, prepared in accordance with SFAS No. 148, sets
forth the income statement had compensation cost for stock options been
determined consistent with SFAS No. 123 for the three month period
ended March 31, 2003, and the three month period ended March 31, 2002:
Income statement had compensation cost
for stock options been determined
consistent with SFAS No. 123
MARCH 31, 2003 MARCH 31, 2002
(Unaudited) (Unaudited)
-------------- --------------
Net Loss as reported $ (630,563) $ 87,043
Net Loss per common share - Basic and
Diluted as reported (0.01) (0.00)
Stock-based compensation cost, net of
related tax effects, included in the
determination of net income reported -- --
Stock-based compensation cost, net of
related tax effects, that would have
been included in the determination of 404,076 231,335
net income reported if the fair value
based method had been applied to all
awards
Net Loss as if the fair value based
method had been applied to all awards (1,034,639) (144,292)
Net Loss per common share - Basic and
Diluted as if the fair value based (0.01) (0.00)
method had been applied to all awards
7
(4) Asset Retirement Obligations
On January 1, 2003 CanArgo adopted FASB Statement No. 143 "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires
companies to record the discounted fair value of a liability for an
asset retirement obligation in the period in which the liability is
incurred concurrent with an increase in the long-lived assets carrying
value. The increase and subsequent adjustments in the related
long-lived assets carrying value is amortised over its useful life.
Upon settlement of the liability a gain or loss is recorded for the
difference between the settled liability and the recorded amount. The
discount associated with the liability is accreted into income over the
related asset's useful life. Upon adoption of this standard an entity
is required to record the fair value of its existing asset retirement
obligations as if the liabilities had been initially accounted for in
accordance with SFAS 143 using assumptions present at the date of
adoption. The income statement effect of the treatment is recorded as
a cumulative effect in accounting principle in the period of adoption,
no retroactive restatement is permitted. During the first quarter of
2003, CanArgo recorded a credit to income for the cumulative effect of
change in accounting principle of $41,290, increased long-term
liabilities to recognise its total obligation and increased net capital
assets in accordance with the provisions of SFAS No. 143 to the amount
of $82,000. No deferred tax expense has been recognised on the SFAS 143
credit as the group is in a net deferred tax asset position against
which full allowance has been made as it is considered more likely than
not that the deferred tax asset will not be realised. There was no
impact on the Company's cash flows as a result of adopting SFAS No.
143. The pro forma asset retirement obligation would have been $138,000
at December 31, 2002 had the Company adopted SFAS No. 143 on January 1,
2002. The asset retirement obligation, which is included on the
Consolidated Balance Sheet in Provision for Future site restoration,
was $141,000 at March 31, 2003. The pro-forma amounts assuming the new
method of determination under SFAS 143 were not materially different to
the amounts shown in the income statement and the balance sheet for the
prior year.
(6) Accounts Receivable
Accounts receivable at March 31, 2003 and December 31, 2002 consisted
of the following:
MARCH 31, December 31,
2003 2002
------------ ------------
Accounts Receivable before allowance
for doubtful debts 1,032,618 958,257
Allowance for doubtful debts (651,921) (651,921)
---------- ----------
$ 380,697 $ 306,336
========== ==========
8
(7) Inventory
Inventory at March 31, 2003 and December 31, 2002 consisted of the
following:
MARCH 31, December 31,
2003 2002
------------ ------------
Crude oil $ 126,498 $ 158,896
Refined products 25,850 27,028
---------- ----------
$ 152,348 $ 185,924
========== ==========
(8) Capital Assets, Net
Capital assets, net of accumulated depreciation and impairment, at
March 31, 2003 and December 31, 2002 include the following:
December 31,
MARCH 31, 2003 2002
---------------------------------------- ------------
ACCUMULATED
DEPRECIATION NET NET
AND CAPITAL CAPITAL
COST IMPAIRMENT ASSETS ASSETS
----------- ------------ ----------- ------------
OIL AND GAS PROPERTIES
Proved properties $33,076,498 $18,859,771 $14,216,727 $14,020,971
Unproved properties 37,457,900 37,457,900 36,843,425
----------- ----------- ----------- -----------
70,534,398 18,859,771 51,674,627 50,864,396
PROPERTY AND EQUIPMENT
Oil and gas related
equipment 11,759,878 3,908,028 7,851,850 8,203,963
Office furniture, fixtures
and equipment and other 1,197,853 679,982 517,871 534,166
----------- ----------- ----------- -----------
12,957,731 4,588,010 8,369,721 8,738,129
REFINING 4,154,216 4,054,216 100,000 100,000
----------- ----------- ----------- -----------
TOTAL $87,646,345 $27,501,997 $60,144,348 $59,702,525
=========== =========== =========== ===========
Unproved property additions relate to CanArgo's exploration activity in
the period. Oil and gas related equipment includes new or refurbished
drilling rigs and related equipment, all of which are in the Republic
of Georgia.
(9) Investments in and Advances to Oil and Gas and Other Ventures
CanArgo has acquired interests in oil and gas and other ventures
through less than majority interests in corporate and corporate-like
entities. A summary of CanArgo's net investment in and advances to oil
and gas and other ventures at March 31, 2003 and December 31, 2002 is
set out below:
MARCH 31, December 31,
2003 2002
------------ ------------
INVESTMENTS IN AND ADVANCES TO OIL AND
GAS AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw
Through 45% ownership of Boryslaw
Oil Company $6,442,223 $6,524,121
Other Investments 75,000 75,000
---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO
OIL AND GAS AND OTHER VENTURES $6,517,223 $6,599,121
---------- ----------
9
MARCH 31, December 31,
2003 2002
------------ ------------
EQUITY IN PROFIT (LOSS) OF OIL AND GAS
AND OTHER VENTURES
Ukraine - Stynawske Field, Boryslaw $ (701,535) $ (680,020)
----------- -----------
CUMULATIVE EQUITY IN PROFIT (LOSS) OF
OIL AND GAS AND OTHER VENTURES $ (701,535) $ (680,020)
IMPAIRMENT - STYNAWSKE FIELD, BORYSLAW (5,459,793) (5,459,793)
---------- ----------
TOTAL INVESTMENTS IN AND ADVANCES TO OIL
AND GAS AND OTHER VENTURES, NET OF EQUITY
LOSS AND IMPAIRMENT $ 355,895 $ 459,308
=========== ===========
Under the terms of the license Boryslaw Oil Company holds in the
Stynawske field, field operations were to be transferred to Boryslaw
Oil Company effective January 1, 1999. As a result of prolonged
negotiations, which created significant uncertainty as to CanArgo's
ability to raise funds for the project or enter into a satisfactory
farm-out agreement on a timely basis, CanArgo recorded in the third
quarter of 1999 an impairment charge of $5,459,793 against its entire
investment in and advances to Boryslaw Oil Company.
In 2001 an agreement was reached to undertake a limited investment and
development program by June 2002 in respect of Boryslaw Oil Company to
increase production and to meet certain work commitments under the
Stynawske field licence. These obligations have not been fully met,
however, Boryslaw Oil Company is seeking modifications to the licence
to allow a proper assessment of the workovers and development plans
completed to date. CanArgo's advance to Boryslaw Oil Company of
$500,000 has also been repaid in full at March 31, 2003. Boryslaw Oil
Company has not been given notice by the Ukrainian licensing body of
early termination of the license. CanArgo is actively seeking to
farm-out part of its interest in Boryslaw Oil Company in return for
financing to carry out the work programme. If Boryslaw Oil Company does
not proceed with the Stynawske field development programme or if
modifications to the current licence agreement cannot be obtained, it
may be in breach of obligations it has with regard to the field license
and an impairment charge against CanArgo's investment in and advances
to Boryslaw Oil Company may be required.
CanArgo's venture in Boryslaw Oil Company is in the development stage
and accordingly, realization of this investment is dependent upon
successful development of and ultimately cash flows from operations of
the venture.
Other investments represent CanArgo's 10% interest in a Caspian Sea
exploration project.
(10) Accounts Payable
Accounts payable as at March 31, 2003 and December 31, 2002 consisted
of the following:
MARCH 31, December 31,
2003 2002
------------ ------------
Trade creditors 1,298,804 871,996
---------- ----------
$1,298,804 $ 871,996
========== ==========
10
(11 Loans Payable
Loans payable as at March 31, 2003 and December 31, 2002 consisted of
the following:
MARCH 31, December 31,
2003 2002
------------ ------------
Loans payable 380,000 --
---------- ----------
$ 380,000 $ --
========== ==========
Loans payable of $380,000 at March 31, 2003 relates to a short-term
secured loan facility maturing on February 27, 2004, that a subsidiary
of CanArgo entered into, locally in Georgia, at an effective interest
rate of 20% in order to fund the drilling of a new horizontal well,
N4H, at the Ninotsminda field in Georgia. No parent company guarantees
have been provided by CanArgo with respect to this loan.
(12) Deferred Revenue
Deferred revenue as at March 31, 2003 and December 31, 2002 consisted
of the following:
MARCH 31, December 31,
2003 2002
------------ ------------
Prepaid sales 1,000,000 1,000,000
Advanced proceeds from the sale
of subsidiary 1,000,000 500,000
---------- ----------
$2,000,000 $1,500,000
========== ==========
See note 19 for details of the sale of the subsidiary classified as
discontinued operation.
(13) Accrued Liabilities
Accrued liabilities at March 31, 2003 and December 31, 2002 include the
following:
MARCH 31, December 31,
2003 2002
------------ ------------
Professional fees $ 76,500 $ 105,000
Other 191,667 99,045
---------- ----------
$ 268,167 $ 204,045
========== ==========
(14) Minority Interest
In November 2002, CanArgo reached agreement with the other shareholders
in CanArgo's subsidiary, CanArgo Norio Limited (Norio), on increasing
CanArgo's interest in Norio. Under the agreement CanArgo's interest
increased from 50% to 64.2% in Norio and its existing Norio and North
Kumisi production sharing agreement. As a result of the finalisation of
respective equity interest, CanArgo's interest was adjusted to reflect
its share of $6,031,070, the carrying net asset value of Norio. The
nominal
11
value of the final shares issued in Norio were $1,250 per share which
gives a nominal value for Norio of $11,328,928 of which CanArgo share
is $7,269,023 and the minority shareholders share is $4,059,875.
CanArgo Norio Limited (Norio) is consolidated in the accounts of
CanArgo.
J.F. Russell Hammond, a non-executive director of CanArgo, is also an
investment advisor to Provincial Securities who became a minority
shareholder in the Norio and North Kumisi Production Sharing Agreement
through a farm-in agreement to the Norio MK72 well.
(15) Stockholders' Equity
COMMON STOCK
--------------------------
NUMBER OF
SHARES ADDITIONAL FOREIGN TOTAL
ISSUED AND PAID-IN CURRENCY ACCUMULATED STOCKHOLDERS'
ISSUABLE PAR VALUE CAPITAL TRANSLATION DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------ -------------
TOTAL, DECEMBER 31, 2002 97,356,206 $ 9,735,620 $145,151,475 $ 4,668 $(92,786,483) $ 62,105,280
Current year adjustment 30,165 30,165
Net loss (630,563) (630,563)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL, MARCH 30, 2003 97,356,206 $ 9,735,620 $145,151,476 $ 34,833 $(93,417,046) $ 61,504,882
============ ============ ============ ============ ============ ============
(16) Net Loss Per Common Share
Basic and diluted net loss per common share for the three month periods
ended March 31, 2003 and 2002 are based on the weighted average number
of common shares outstanding during those periods. The weighted average
numbers of shares issued and issuable without receipt of additional
consideration for the three month periods ended March 31, 2003 and 2002
are 97,356,206 and 94,787,113 respectively. Options to purchase
CanArgo's common stock were outstanding at March 31, 2003 but were not
included in the computation of diluted net loss per common share
because the effect of such inclusion would have been anti-dilutive.
(17) Commitments and Contingencies
OIL AND GAS PROPERTIES AND INVESTMENTS IN OIL AND GAS VENTURES
CanArgo has contingent obligations and may incur additional
obligations, absolute and contingent, with respect to acquiring and
developing oil and gas properties and ventures. At March 31, 2003,
CanArgo had the contingent obligation to issue an aggregate of 187,500
shares of its common stock, subject to the satisfaction of conditions
related to the achievement of specified performance standards by the
Stynawske field project.
The shareholders agreement with the other shareholder of Norio calls
for a bonus payment of $800,000 to be paid by CanArgo should commercial
production be obtained from the Middle Eocene or older strata and a
second bonus payment of $800,000 should production from the Block from
the Middle Eocene or older strata exceed 250 tonnes of oil per day over
any 90 day period.
In 2002 the Participation Agreement for the three well exploration
programme on the Ninotsminda area with AES was terminated without AES
earning any rights to any of the Ninotsminda field 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, AES will be entitled to
recover
12
its costs in the project at the rate of 15% of future gas sales from
the sub Middle Eocene, net of operating costs, approximately $7.5
million, representing their prior funding under the Participation
Agreement.
In January 2003, CanArgo won exclusive rights to negotiate a Production
Sharing Contract (PSC) for Block XIX in southern Syria. CanArgo has the
contingent obligation to issue an aggregate of 333,000 stock options at
a proposed exercise price of $0.17 per share, subject to the successful
award and ratification of the PSC for Block XIX in southern Syria.
(18) Segment Information
Operating revenues from continued operations for the three month
periods ended March 31, 2003 and 2002 by geographical area were as
follows:
MARCH 31, March 31,
2003 2002
------------ ------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $1,114,458 $1,637,929
OTHER
Eastern Europe -- 1,243,505
---------- ----------
TOTAL $1,114,458 $2,881,434
========== ==========
Other Eastern Europe operating revenue relates to income from the
provision of drilling services in Georgia.
Operating (loss) income from continued operations for the three month
periods ended March 31, 2003 and 2002 by geographical area was as
follows:
MARCH 31, March 31,
2003 2002
------------ ------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $ 332,718 $ 1,589,651
REFINING
Eastern Europe (12,691) 24,731
CORPORATE AND OTHER EXPENSES (1,009,338) (1,479,321)
----------- -----------
TOTAL OPERATING (LOSS) INCOME $ (689,311) $ 135,061
=========== ===========
Net (loss) income before minority interest from continuing operations
for the three month periods ended March 31, 2003 and 2002 by geographic
area was as follows:
MARCH 31, March 31,
2003 2002
------------ ------------
OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION
Eastern Europe $ 332,718 $ 1,514,055
REFINING
Eastern Europe (12,362) 19,875
CORPORATE AND OTHER EXPENSES (989,251) (1,471,331)
----------- -----------
NET (LOSS) INCOME BEFORE MINORITY
INTEREST $ (668,895) $ 62,599
=========== ===========
13
Identifiable assets of continuing and discontinued operations as of
March 31, 2003 and December 31, 2002 by business segment and
geographical area were as follows:
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
CORPORATE
Eastern Europe $ 44,081 $ 203,291
Western Europe (principally cash) 2,451,141 2,274,847
----------- -----------
TOTAL CORPORATE 2,895,222 2,478,138
----------- -----------
OIL AND GAS EXPLORATION,
DEVELOPMENT AND PRODUCTION
Eastern Europe 60,044,349 59,602,525
REFINING
Eastern Europe 100,000 100,000
ASSETS HELD FOR SALE
Eastern Europe 7,657,875 7,536,677
Western Europe 565,811 559,270
----------- -----------
TOTAL ASSETS HELD FOR SALE 8,223,686 8,095,947
----------- -----------
OTHER ENERGY PROJECTS
Eastern Europe 355,895 459,308
----------- -----------
TOTAL IDENTIFIABLE ASSETS $71,619,152 $70,735,918
=========== ===========
(19) Discontinued Operations
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil
Products to finance Georgian and Ukrainian development projects and in
October 2002, CanArgo agreed to sell its 50% holding to an unaffiliated
company for $4 million in an arms-length transaction, with legal
ownership being transferred upon receipt of final payment due in August
2003. The agreed consideration to be exchanged does not result in an
impairment of the carrying value of assets held for sale. The assets
and liabilities of CanArgo Standard Oil Products have been classified
as "Assets held for sale" and "Liabilities held for sale" for all
periods presented. The results of operations of CanArgo Standard Oil
Products have been classified as discontinued for all periods
presented. The minority interest related to CanArgo Standard Oil
Products has not been reclassified for any of the periods presented,
however net income from discontinued operations is disclosed net of
taxes and minority interest.
The results of discontinued operations at March 31, 2003 and March 31,
2002 consisted of the following:
MARCH 31, March 31,
2003 2002
------------ ------------
Operating Revenues 2,070,440 1,364,705
(Loss) Income Before Income taxes
and Minority Interest (18,284) 186,488
Income Taxes -- (37,301)
Minority Interest in Loss (Income) 9,142 (106,019)
---------- ----------
Net (Loss) Income from Discontinued
Operation $ (9,142) $ 106,019
========== ==========
14
Gross consolidated assets and liabilities of subsidiary held for sale
that are included in "assets and liabilities held for sale" at March
31, 2003 and December 31, 2002 consisted of the following:
MARCH 31, December 31,
2003 2002
------------ ------------
Assets held for sale:
Cash and cash equivalents 68,607 37,948
Accounts receivable 191,736 243,529
Inventory 143,338 224,733
Other current assets 203,066 155,079
Capital assets, net 6,490,680 6,326,478
Investment in other ventures, net 560,448 548,910
---------- ----------
$7,657,875 $7,536,677
========== ==========
Liabilities held for sale:
Accounts payable 188,003 143,296
Current portion of long term debt 1,718,287 1,268,422
Income taxes payable 32,559 48,880
Long term debt 524,400 891,367
---------- ----------
$2,463,249 $2,351,965
========== ==========
Other investments include three petrol station sites in Tbilisi,
Georgia in which CanArgo has a 50% non-controlling interest. CanArgo
accounts for its interest in the three petrol station sites using the
equity method and consolidates the remaining sites in which it has
controlling interest. In 2002, CanArgo purchased the remaining 50% of
Petro-Invest, a petrol station site in which CanArgo previously held a
50% non-controlling interest. This site is now consolidated in the
results of CanArgo Standard Oil Products, above.
Cash consideration received at March 31, 2003 in respect of this
transaction was $1,000,000 and has been recorded in deferred revenue
(see Note 12). The sale will be reflected on receipt of the final $3
million in August 2003, in accordance with the Sale and Purchase
Agreement.
In 2002, the three petrol station sites that CanArgo has a 50%
non-controlling interest entered into credit facility agreements of
$550,000 with a commercial lender in Georgia. As at March, 2003
$520,000 of these facilities were drawn of which $446,553 under the
facilities were outstanding. The loans bear interest at 18% per annum
and are secured by the assets of the petrol stations. The full amount
of the loans are to be repaid by June 2005. No company guarantees have
been provided by CanArgo with respect to these loans.
In November 2001, CanArgo Standard Oil Products Limited entered into a
$1,000,000 credit facility agreement, in May 2002 a further $240,000
credit facility agreement, in September 2002 a further $1,900,000
credit facility agreement, and in February 2003 a further $400,000 with
commercial lenders in Georgia and Greece to fund further expansion of
its petrol station network. In 2001, the full amount of the first
facility was drawn, in 2002 $180,000 of the second facility was drawn,
in September 2002 the full amount of the third facility was drawn, and
in February 2003 the full amount of the fourth facility was drawn. As
at March 31, 2003, $2,242,688 of the total facility was outstanding.
The loans bear interest between 13% and 18% per annum and are secured
by the assets of petrol stations. The full amount of the first loan was
repaid by March 2003, the second loan is to be repaid by November 2004,
the third loan by July 2005, and the fourth loan by August 2004. No
parent company guarantees have been provided by CanArgo with respect to
these loans.
The remaining 50% interest in CanArgo Standard Oil Products is held by
Standard Oil Products of Georgia and an individual, Mr. Levan
Pkhakazde, who is one of the founders of Standard Oil Products and the
General Director of CanArgo Standard Oil Products.
15
(21) Stock Based Compensation Plans
For the year ended December 31, 2002 CanArgo had 6,734,501 share
options outstanding with exercise prices in the range of $0.14 to
$1.85 a share. During March 2003, CanArgo re-priced 5,117,501 fully
vested options to an exercise price of US $0.10 to better align the
option value with current CanArgo share price ($0.04 at the date of
the re-pricing). Due to the fact CanArgo share price at the date of
the re-pricing was less than the exercise price of the re-priced
options no compensation expense is required to be recorded in
accordance with APB Opinion No. 25. In addition, during February 2003
CanArgo issued 1,589,166 new options at an exercise price of $0.10,
which vested immediately and expire in 5 years. No compensation
expense was recognized under APB Opinion No. 25 in relation to the new
options due to the fact that the share price at the date of issuance
was greater the exercise price of the options. The pro-forma fair
value of each stock option granted by CanArgo was calculated using the
Black-Scholes option-pricing model applying the following weighted-
average assumptions for the period ended March 31, 2003 and the year
ended December 31, 2002 dividend yield of 0.00%, risk-free interest
rate of 2.91% for the period ended March 31, 2003, dividend yield of
80.470%, risk-free interest rate of 2.91% for the year ended December
31, 2001, the average expected lives of options of 5.0 years and
volatility of 80.47% for the period ended March 31, 2003 and 80.47%
for the year ended December 31, 2002.
(21) Subsequent Events
On April 22, 2003 CanArgo announced the results of horizontal well
N4H, in the Ninotsminda Field, Georgia. The well, which is a
horizontal sidetrack from an existing well bore in the Middle Eocene
reservoir at approximately 2,356 metres. The horizontal production
section extends for a total distance of 400 metres in the west central
area of the field between the N4 and N9 wells. Following extensive
production testing, the well was placed on production at a rate of
over 1,000 barrels of oil per day, thus more than doubling field
production. The current production from the well is approximately
1,400 barrels of oil per day.
On May 2, 2003 CanArgo announced the appointment of Mr Vincent
McDonnell to the position of director on the Board of CanArgo. On the
same date, CanArgo reached agreement with Vazon Energy Limited on a
deed of variation of the Management Services Agreement (MSA) under
which Vazon Energy Limited supplied the services of Dr David Robson.
In May 2003, Ninotsminda Oil Company entered into a new 12 month crude
oil sales agreement whereby the buyer will provide security payment to
$1.75 million in return for the right to lift up to 5,000 metric
tonnes of oil per month for the 12 month period commencing August
2003. At the end of the 12 months the security payment will be repaid
through the delivery of additional crude oil equal to the value of the
security. This agreement replaces an existing crude oil sales
agreement, where the buyer had already provided $1million security.
16
ITEM 2. MANAGEMENT'S 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, CanArgo had working capital of $4,648,000, compared to
working capital of $5,585,000 as of December 31, 2002. The $937,000 decrease in
working capital from December 31, 2002 to March 31, 2003 is principally due to a
reduction in cash related to capital expenditures on the Ninotsminda project.
As a result of AES Gardabani withdrawing from the Participation Agreement with
respect to the Cretaceous gas exploration programme and unexpected mechanical
difficulties drilling exploration wells M11 at the Ninotsminda field and MK72 on
the Norio Production Sharing Agreement, and delays in testing well N100, capital
expenditures exceeded initial estimates and production volumes available for
sale are less than anticipated. These events resulted in lower than expected
cash resources from which CanArgo could continue its development activities in
Georgia. In order to preserve available cash resources while still maintaining
essential field operations and development activities in Georgia, a significant
cost reduction plan was implemented with both direct project and general and
administrative costs being reduced. These reductions together with the
additional resource being generated by the successful horizontal production
well, N4H, on the Ninotsminda field, the receipt of the final $3 million payment
from the agreed sale of CanArgo's interest in its retail operation CanArgo
Standard Oil Products, the planned selective sale of certain non-core assets
including CanArgo's generator, and a portion or all of CanArgo's drilling
equipment should provide CanArgo the working capital necessary to cover
CanArgo's immediate and near term funding requirements with respect to its
activities in the Republic of Georgia and elsewhere.
In January 2003, in an attempt to increase production at the Ninotsminda field
and further improve working capital, drilling of a new horizontal well, N4H,
commenced targeting an existing producing reservoir. The well was successfully
completed and put on production at over 1,000 barrels of oil per day in April
2003. This has more than doubled production from the field. Provided funds are
available, immediate and near term development plans include the drilling of
further production horizontal sidetracks on the Ninotsminda field, the
completion of testing of well N100 and the continued drilling of wells M11 and
Norio MK72, two deep exploration wells. CanArgo has temporarily suspended
further drilling of well M11 below its current casing point at 4,182 metres in
order to fully review available technical data, and to estimate the cost to
complete the well. Norio MK72, has been cased at a depth of 2,932 metres in the
Lower Sarmatian. Farm-in partners are currently being sought to provide
additional capital for completing these wells.
In April 2001, CanArgo acquired Lateral Vector Resources Inc. ("LVR") for total
cash consideration of $3,421,000 which according to publicly available
information at the time had concluded with Ukrnafta a Joint Investment
Production Activity (JIPA) agreement to develop the Bugruvativske Field in
Eastern Ukraine. Funding for the LVR acquisition was provided from existing cash
resources.
In September 2002 CanArgo agreed terms with Ukrnafta, the Ukrainian State Oil
Company, on revisions to the existing Joint Investment Production Activity
agreement (JIPA) for the development of the Bugruvativske field in Ukraine and
reached an agreement with a local Ukrainian oil and gas company on the terms of
a farm-in to the JIPA. The terms of the farm-in are that the local Ukrainian oil
and gas company will invest approximately $3 million in the Bugruvativske field
over the course of 12 months in order to drill two new wells and will bear the
financial risk under the JIPA during this period. CanArgo can match up to the
amount invested by the local Ukrainian oil and gas company, prior to 31 December
2003. Additionally, agreement has been reached with Ukrnafta, on revisions to
the commercial terms of the JIPA. The revised JIPA provides that (assuming
CanArgo matches the local Ukrainian oil and gas company's initial expenditure)
the financing risk shall be shared between CanArgo and a subsidiary of the local
Ukrainian oil and gas company, IPEC. Ukrnafta shall be entitled to 25% of all
net profits distributed to the parties to the JIPA and the remainder shall be
shared between CanArgo and IPEC. Assuming that CanArgo matches the local
Ukrainian oil and gas company's initial expenditure, CanArgo will be entitled to
approximately 34.5% of net profits generated under the JIPA (or a proportionally
smaller amount if the amount invested is less than that invested by IPEC). In
the event that CanArgo decides not to invest in the project by 31 December 2003,
it will receive an ongoing project fee of between 3-4% of the net profits
generated under the JIPA in recognition of its earlier involvement in the
project.
17
Initial costs in respect of CanArgo's investment in the Bugruvativske field,
through its direct investment in LVR, are included in "capital assets - unproved
properties". These costs will continue to be disclosed as unproved properties
until CanArgo participates in the JIPA by investing an amount up to the cash
contribution made by its JIPA partner, IPEC. Any contribution must be made prior
to 31 December 2003, in order for CanArgo to participate in the existing JIPA.
In September 2002, CanArgo approved a plan to sell CanArgo Standard Oil Products
to finance Georgian and Ukrainian development projects and in October 2002,
CanArgo agreed to sell its 50% holding for $4 million with legal ownership being
transferred upon receipt of the final $3 million payment due in August 2003.
In 2001 an agreement was reached to undertake a limited investment and
development programme by June 2002 in respect of Boryslaw Oil Company to
increase production and to meet certain work commitments under the Stynawske
field licence. These obligations have not been fully met; however, Boryslaw Oil
Company is seeking modifications to the licence agreement to allow a proper
assessment of the workovers and development plans completed to date. CanArgo's
advance to Boryslaw Oil Company of $500,000 has also been repaid in full at
March 31, 2003. Boryslaw Oil Company has so far not been given notice by the
Ukrainian licensing body of early termination of the license. CanArgo is
actively seeking to farm-out part of its interest in Boryslaw Oil Company in
return for financing to carry out the work programme. If Boryslaw Oil Company
does not proceed with the Stynawske field development programme or if
modifications to the current licence agreement cannot be obtained, it may be in
breach of obligations it has with regard to the field license and an impairment
charge against CanArgo's investment in and advances to Boryslaw Oil Company may
be required.
Despite limited funding an assessment of both the Bugruvativske and Stynawske
fields and preparation of a development programme with Ukrnafta continues. Based
on its efforts to date and, should funding be available, CanArgo plans to
significantly increase production from these fields by investing in both
remedial workover activity and potential infill drilling, horizontal drilling
and pressure maintenance utilising appropriate technologies.
While a considerable amount of infrastructure for the Ninotsminda, Bugruvativske
and Stynawske fields has already been put in place, CanArgo cannot provide
assurance that:
o for the Bugruvativske and Stynawske fields, an adequate investment
agreement and development plan can be put in place;
o funding of field development plans will be timely;
o that development plans will be successfully completed or will increase
production; or
o that field operating revenues after completion of the development plan
will exceed operating costs.
To pursue existing projects beyond CanArgo's immediate development plan and to
pursue new opportunities, CanArgo will 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
equity, project financing, debt financing and the participation of other oil and
gas entities in CanArgo's projects. Based on CanArgo's past history of raising
capital and continuing discussions, CanArgo believes 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 and CanArgo should be unable to maintain
its current positive cash flow or unable to sell some or all of its non-core
assets, further cost reductions and additional funding will be required in order
for CanArgo to remain a going concern.
Development of the oil and gas properties and ventures in which CanArgo has
interests involves multi-year efforts and substantial cash expenditures. Full
development of CanArgo's oil and gas properties and ventures will require the
availability of substantial additional financing from external sources. CanArgo
may also, where opportunities exist, seek to transfer portions of its interests
in oil and gas properties and ventures to entities in exchange for such
financing. CanArgo generally has the principal responsibility for arranging
financing for the oil and gas properties and ventures in which it has an
interest. There can be no assurance, however, that CanArgo 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 as is available will be 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.
18
Ultimate realization of the carrying value of CanArgo's 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:
o mobilization of equipment and personnel to implement effectively
drilling, completion and production activities;
o raising of additional finance;
o achieving significant production at costs that provide acceptable
margins;
o reasonable levels of taxation, or economic arrangements in lieu of
taxation in host countries; and
o the ability to market the oil and gas produced at or near world
prices.
Subject to the raising of additional capital, above, CanArgo has plans to
mobilize resources and achieve levels of production and profits sufficient to
recover the carrying value of its 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 CanArgo may not recover the
carrying value of its oil and gas properties and ventures. CanArgo should be
entitled to distributions from the various properties and ventures in which it
participates in accordance with the arrangements governing the respective
properties and ventures.
STATEMENT OF CASH FLOWS
All balances represent results from continuing operations, unless disclosed
otherwise.
Cash and cash equivalents increased $297,000 to $1,895,000 at March 31, 2003
from $1,598,000 at December 31, 2002. The increase was primarily due to loan
received in the period, provided to fund the cost of drilling a new horizontal
well, N4H, at the Ninotsminda field in Georgia.
Accounts receivable increased to $381,000 at March 31, 2003 from $306,000 at
December 31, 2002. The increase is primarily a result of accounts receivable
generated from oil and natural gas sales..
Inventory decreased to $152,000 at March 31, 2003 from $186,000 at December 31,
2002 primarily as result of the sale of oil by Ninotsminda Oil Company from
storage. Approximately 26,000 barrels of oil were held in storage by Ninotsminda
Oil Company at March 31, 2003 for sale to the Georgian domestic, regional or
international market.
Prepayments increased to $294,000 at March 31, 2003 from $212,000 at December
31, 2002 as a result of payment of materials and services related to CanArgo's
exploration activities. This increase is included in the statement of cash flows
as an investing activity.
Assets held for sale, consisting of assets of discontinued operations and a 3
megawatt duel fuel power generator, increased by $128,000 to $8,224,000 at March
31, 2003 from $8,096,000 at December 31, 2002 primarily due to activity at
CanArgo Standard Oil Products relating to the addition of new petrol stations in
Georgia.
Other currents assets decreased from $176,000 at December 31, 2002 to $174,000
at March 31, 2003.
Capital assets, net increased from $59,703,000 at December 31, 2002 to
$60,144,000 at March 31, 2003, primarily as a result of investment of $972,000
in capital assets including oil and gas properties and equipment, principally
related to the Ninotsminda production sharing contract.
Investments in and advances to oil and gas and other ventures, net deceased from
$459,000 at December 31, 2002 to $356,000 at March 31, 2003. The decrease
reflects repayment by Boryslaw Oil Company of CanArgo's advances in 2003
partially offset by an increase in equity income related to CanArgo's investment
in Boryslaw Oil Company.
Accounts payable increased to $1,299,000 at March 31, 2003 from $872,000 at
December 31, 2002 primarily due to an absolute increase in corporate payables,
and payables relating to materials and services related to the drilling of a new
horizontal well, N4H, at the Ninotsminda field in Georgia.
Loans payable of $380,000 at March 31, 2003 relates to a short-term secured loan
facility maturing on February 27, 2004, that a subsidiary of CanArgo entered
into, locally in Georgia, at an effective interest rate of 20% in order to
19
fund the drilling of a new horizontal well, N4H, at the Ninotsminda field in
Georgia. No parent company guarantees have been provided by CanArgo with respect
to this loan.
Deferred revenue increased to $2,000,000 at March 31, 2003 from $1,500,000 at
December 31, 2002 due to advanced proceeds received for the sale of CanArgo
Standard Oil Products in the period. Proceeds received in respect of the CanArgo
Standard Oil Products sale are $1,000,000 at March 31, 2003.
Accrued liabilities increased to $268,000 at March 31, 2003 from $204,000 at
December 31, 2002 primarily due to notification of liabilities relating to 2001
and 2002 business rates payable on CanArgo's London office, partially offset by
a reduction in accrued professional fees.
Liabilities held for sale, in respect of discontinued operations, increased by
$111,000 to $2,463,000 at March 31, 2003 from $2,352,000 at December 31, 2002
primarily due to additional bank loans drawn by CanArgo Standard Oil Products in
Tbilisi at an effective interest rate of 18% per annum, in order to fund the
construction of new petrol stations in Georgia. No parent company guarantees
have been provided by CanArgo with respect to these loans.
Minority interest in continuing and discontinued subsidiaries decreased by
$17,000 to $3,502,000 at March 31, 2003 from $3,519,000 at December 31, 2002,
due to minority interest shareholder's share of losses in the period.
The foreign currency translation is due to the Company adopted self-sustaining
method of accounting for CanArgo Standard Oil Products. The adoption of the
self-sustaining method was necessitated by the fact that CanArgo Standard Oil
Products was no longer financially and operationally dependant upon its parent
company. Under the self-sustaining method of foreign currency translation,
assets and liabilities are translated into US dollars at period end exchange
rates and income and expenses are translated into US dollars at average rates in
effect during the period. Exchange gains and losses on translation are reflected
as a separate component of shareholders' equity.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL TERMS
Our principal business and assets are derived from production sharing contracts
in the Republic of Georgia. The legislative and procedural regimes governing
production sharing contracts and mineral use licenses in Georgia have undergone
a series of changes in recent years resulting in certain legal uncertainties.
Our production sharing contracts 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 production sharing contracts,
conflicts between the interpretation of our production sharing contracts and
mineral use licenses and current legislation could arise. Such conflicts, if
they arose, could cause an adverse effect on our rights under the production
sharing contracts. However the Norio (Block XI(c)) and North Kumisi Production
Sharing Agreement was concluded after enactment of the Petroleum Law, and under
the terms and conditions of this legislation.
To confirm that the Ninotsminda production sharing contract 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:
o The State of Georgia recognizes and confirms the validity and
enforceability of the production sharing contract and the license and
all undertakings the State has covenanted with Ninotsminda Oil Company
thereunder;
o 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
o 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
Ninotsminda Oil Company by virtue of its interest in the license
holder and the contractual rights under the production sharing
contract.
Despite this confirmation and the grandfathering of the terms of existing
production sharing contracts in the Petroleum Law, subsequent legislative or
other governmental changes could conflict with, challenge our rights or
otherwise change current operations under the production sharing contract.
20
In 2002 the Participation Agreement for the three well exploration programme on
the Ninotsminda field with AES was terminated without AES earning any rights to
any of the Ninotsminda field 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, AES with be entitled
to recover at the rate of 15% of future gas sales from the Sub Middle Eocene,
net of operating costs, approximately $7.5 million, representing their prior
funding under the Participation Agreement.
In January 2003, CanArgo won exclusive rights to negotiate a Production Sharing
Contract (PSC) for Block XIX in southern Syria. CanArgo has the contingent
obligation to issue an aggregate of 333,000 stock options at a proposed exercise
price of $0.17 per share, subject to the successful award and ratification of
the PSC for Block XIX in southern Syria.
CanArgo has 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 it has interests that require or may
require CanArgo to expend funds and to issue shares of its Common Stock.
At March 31, 2003, CanArgo 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. As
CanArgo develops current projects and undertakes other projects, it could incur
significant additional obligations.
The second phase of the preliminary work programme under the Norio and North
Kumisi production sharing agreement commenced in January 2002 with the first
exploration well at a cost of up to $4.4 million of which CanArgo's share of
costs was $3.2 million. The State Agency for Oil and Gas Regulations in Georgia
has confirmed that CanArgo has satisfied all drilling and work obligations under
the terms of the Norio and Kumisi production sharing agreement. The well is
currently suspended while CanArgo actively seeks partners for funding to deepen
the well to the target zone.
The shareholders agreement with the other shareholder of Norio calls for a bonus
payment of $800,000 to be paid by CanArgo should commercial production be
obtained from the Middle Eocene or older strata and a second bonus payment of
$800,000 should production from the Block from the Middle Eocene or older strata
exceed 250 tonnes of oil per day over any 90 day period.
In 2001 an agreement was reached to undertake a limited investment and
development program by June 2002 in respect of Boryslaw Oil Company to increase
production and to meet certain work commitments under the Stynawske field
licence. These obligations have not been fully met; however, Boryslaw Oil
Company is seeking modifications to the licence agreement to allow a proper
assessment of the workovers and development plans completed to date. CanArgo's
advance to Boryslaw Oil Company of $500,000 was repaid by March 31, 2003.
Boryslaw Oil Company has so far not been given notice by the Ukrainian licensing
body of early termination of the license. CanArgo is actively seeking to
farm-out part of its interest in Boryslaw Oil Company in return for finance to
carry out the work programme.
If Boryslaw Oil Company does not proceed with the Stynawske field development
programme or if modifications to the current licence agreement cannot be
obtained, it may be in breach of obligations it has with regard to the field
license and an impairment charge against CanArgo's investment in and advances to
Boryslaw Oil Company may be required.
In August 2002, Ninotsminda Oil Company entered into a 12 month crude oil sales
agreement to sell its monthly share of oil produced under the Ninotsminda
production sharing contract. As security for payment the buyer has paid to
Ninotsminda Oil Company $1 million to be repaid at the end of the twelve month
period through the delivery of additional crude oil equal to the value of the
security. In May 2003, the parties entered into a new oil sales agreement
whereby the buyer will increase the security payment to $1.75 million in return
for the right to lift up to 5,000 metric tonnes of oil per month for the 12
month period commencing August 2003. At the end of the 12 months the security
payment will be repaid through the delivery of additional crude oil equal to the
value of the security. Under both agreements, crude oil will be sold at dated
Brent less a fixed discount per barrel depending on the Brent price. The
discount ranges from a minimum of $6.00 per barrel when dated price is less than
$15.00 per barrel to a maximum $7.50 per barrel when dated Brent is greater than
$25.01 per barrel.
21
RESULTS OF CONTINUING OPERATIONS
Three Month Period Ended March 31, 2003 Compared to Three Month Period Ended
March 31, 2002
CanArgo recorded operating revenue from continuing operations of $1,141,000
during the three month period ended March 31, 2003 compared with $2,881,000 for
the three month period ended March 31, 2002. The decrease is primarily
attributable to lower oil and gas revenues, and no other revenue being recorded
in the three month period ended March 31, 2003. Other revenue for the three
month period ended March 31, 2002, represented the provision of drilling
services in Georgia.
Ninotsminda Oil Company generated $1,141,000 of oil and gas revenue in the three
month period ended March 31, 2003 compared with $1,638,000 for the three month
period ended March 31, 2002 due principally to lower volume of sales from
storage in the three month period ended March 31, 2003 compared to the three
month period ended March 31, 2002, partially offset by a higher average net
sales price achieved in the period. Its net share of the 65,779 barrels (731
barrels per day) of gross oil production for sale from the Ninotsminda field in
the period amounted to 42,756 barrels. In the period, 6,711 barrels of oil were
removed from storage and sold. For the three month period ended March 31, 2002,
Ninotsminda Oil Company's net share of the 73,374 barrels (815 barrels per day)
of gross oil production was 47,693 barrels. The decline in production is due to
limited workover investment resulting in a natural reservoir rate of decline.
Ninotsminda Oil Company's entire share of production was sold locally in Georgia
under both national and international contracts. Net sale prices for Ninotsminda
oil sold during the first quarter for 2003 averaged $22.59 per barrel as
compared with an average of $16.20 per barrel in the first quarter of 2002. Its
net share of the 29,184 thousand cubic feet (mcf) of gas delivered was 18,970
mcf at an average net sale price of $1.27 per mcf of gas. For the three month
period ended March 31, 2002, Ninotsminda Oil Company's net share of the 27,925
mcf of gas delivered was 18,151 mcf at an average net sales price of $1.18 per
mcf of gas.
CanArgo had other revenue of $1,244,000 for the three month period ended March
31, 2002 compared to no revenue recorded for the three month period ended March
31, 2003. In 2002, other revenue consisted of the provision of drilling
services. In September 2001, CanArgo entered into an agreement to provide
drilling services to a third party using one of CanArgo's rigs. Commercial
drilling operations commenced in October 2001 and continued through February
2002. The company subsequently established a well services subsidiary and at the
end of March 2003 concluded a new drilling service contract with an operating
company in Georgia. It will continue to bid in local tenders for drilling
contracts in order to utilise drilling equipment not otherwise used in its own
operations.
The operating loss from continuing operations for the three month period ended
March 31, 2003 amounted to $689,000 compared with operating income of $135,000
for the three month period ended March 31, 2002. The increase in operating loss
is attributable primarily to profit generated from a drilling services contract,
partially offset by a reduced field operating costs; and reduced depreciation,
depletion and amortization in the period.
Field operating expenses decreased to $319,000 for the three month period ended
March 31, 2003 as compared to $596,000 for the three month period ended March
31, 2002. The decrease is primarily a result of decreased activity at the
Ninotsminda field.
Direct project costs decreased to $167,000 for the three month period ended
March 31, 2003, from $629,000 for the three month period ended March 31, 2002,
primarily due to costs associated with the provision of drilling services in
Georgia in 2002.
Selling, general and administrative costs increased to $766,000 for the three
month period ended March 31, 2003, from $752,000 for the three month period
ended March 31, 2002. The increase is primarily as a result of notification of
liabilities relating to 2001 and 2002 business rates payable on CanArgo's London
office, partially offset by the impact of a corporate cost reduction programme
initiated in the last quarter of 2002.
The decrease in depreciation, depletion and amortization expense to $579,000 for
the three month period ended March 31, 2003 from $769,000 for the three month
period ended March 31, 2002 is attributable principally to lower production, due
to limited workover investment resulting in a natural reservoir rate of decline.
22
CanArgo recorded net other income of $20,000 for the for the three month period
ended March 31, 2003, as compared to net other expense of $72,000 for the three
month period ended March 31, 2002. This is primarily due to foreign exchange
losses recorded in 2002 and higher equity income in the period.
Equity income from investments increased to $22,000 for the three month period
ended March 31, 2003 from an equity loss of $8,000 for the three month period
ended March 31, 2002 as a result of increased equity income from production and
sales of crude oil by Boryslaw Oil Company.
The cumulative effect of the change in accounting principle of $42,000 for the
three month period ended March 31, 2003 is a result of the adoption of
accounting standard FAS 143 relating to the treatment of asset retirement
obligations.
The net loss from continuing operations of $663,000 or $0.01 per share for the
three month period ended March 31, 2003 compares to net loss from continuing
operations of $19,000 or $0.00 per share for the three month period ended March
31, 2002. The weighted average number of common shares outstanding was higher
during the three month period ended March 31, 2003 than during the three month
period ended March 31, 2002, due in large part to private placements in February
and May 2002.
RESULTS OF DISCONTINUED OPERATIONS
Three Month Period Ended March 31, 2003 Compared to Three Month Period Ended
March 31, 2002
The net loss from discontinued operations, net of taxes and minority interest
for the three month period ended March 31, 2003 amounted to $9,000 compared with
net income of $106,000 for the corresponding period in 2002. The decrease in net
income from discontinued operations, net of taxes and minority interest relates
entirely to the activities of CanArgo Standard Oil Products, and is due to more
competitive operating margins for the three month period ended March 31, 2003
compared with the corresponding period in 2002 and interest on additional bank
loans drawn by CanArgo Standard Oil Products in Tbilisi at an effective interest
rate of 18% per annum, in order to fund the construction of new petrol stations
in Georgia.
NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"). This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The standard replaced the existing guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
statement became effective for CanArgo on January 1, 2003. CanArgo does not
expect the adoption of this standard to have a material effect on its financial
statements.
We continue to apply the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB
Statement No. 123," .in 2003 and for the year ended December 31, 2002. SFAS No.
148 amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. As permitted by SFAS No. 148, we
continue to account for stock options under APB Opinion No. 25.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified became effective January 1, 2003.
CanArgo does not expected the adoption of this standard to have a material
effect on its financial statements. To date we have not entered into or modified
any such guarantees.
23
On January 1, 2003 CanArgo adopted FASB Statement No. 143 Accounting for Asset
Retirement Obligations. Statement 143 requires companies to record the fair
value of a liability for an asset retirement obligation in the period in which
the liability is incurred concurrent with an increase in the long-lived assets
carrying value. The increase and subsequent adjustments in the related
long-lived assets carrying value is amortised over its useful life. Upon
settlement of the liability a gain or loss is recorded for the difference
between the settled liability and the recorded amount.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company will consolidate
or disclose information about variable interest entities when the Interpretation
becomes effective.
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.
CanArgo does not have a majority of the equity in the entity that is the
licensed developer of some projects, such as the Bugruvativske and Stynawske
field projects, that CanArgo may pursue in Eastern Europe, even though we may be
the designated operator of the oil or gas field. In these 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. As a result of all of the foregoing,
among other matters, any forward-looking statements regarding the occurrence and
timing of future events may well anticipate results that will not be realized.
Demands by or expectations of governments, co-venturers, customers and others
may affect CanArgo's strategy regarding the various projects. Failure to meet
such demands or expectations could adversely affect CanArgo's participation in
such projects or our ability to obtain or maintain necessary licenses and other
approvals.
CanArgo's ability to finance all of its 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 CanArgo to scale back or
abandon part or all of CanArgo's project development, capital expenditure,
production and other plans. The availability of equity or debt financing to
CanArgo or to the entities that are developing projects in which CanArgo has
interests is affected by many factors, including:
o world economic conditions;
o international relations;
o the stability and policies of various governments;
o fluctuations in the price of oil and gas, the outlook for the oil and
gas industry and competition for funds; and
o an evaluation of CanArgo and specific projects in which CanArgo has 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 inherent in
estimating production quantities and in projecting future production rates and
the timing and amount of future
24
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 CanArgo's properties
are subject to change as additional information becomes available.
Most of CanArgo's interests in oil and gas properties and ventures are located
in Eastern European countries. Operations in those countries are subject to
certain additional risks including the following:
o enforceability of contracts;
o currency convertibility and transferability;
o unexpected changes in tax rates;
o sudden or unexpected changes in demand for crude oil and or natural
gas;
o availability of trained personnel; and
o availability 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 CanArgo's
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 CanArgo's strategy regarding the various projects. Failure to meet
such demands or expectations could adversely affect CanArgo's participation in
such projects or its ability to obtain or maintain necessary licenses and other
approvals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CanArgo's 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 CanArgo is exposed to changes in oil and gas prices as
well as changes in supply and demand which could affect its revenues. CanArgo
does not engage in any commodity hedging activities. Due to the ready market for
its production in the Republic of Georgia, CanArgo does not believe that any
current exposures from this risk will materially affect CanArgo's 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 CanArgo's operations
are being conducted in Eastern Europe, CanArgo is potentially exposed to the
market risk of fluctuations in the relative values of the currencies in areas in
which it operates. At present CanArgo does not engage in any currency hedging
operations since, to the extent it receives payments for its production,
refining and marketing activities in local currencies, it is utilizing such
currencies to pay for its local operations. In addition, it currently has
contracts to sell its production from the Ninotsminda field in the Republic of
Georgia which provide for payment in dollars.
While CanArgo Standard Oil Products marketing revenue is denominated in Lari,
the local Georgian currency, and is used to pay Lari denominated operating
costs, its long term debt is denominated in dollars. As a result, changes in the
exchange rate could have a material adverse effect on its ability to pay off
non-Lari denominated indebtedness such as its existing credit facility. The
sensitivity to changes in exchange rates for CanArgo Standard Oil Products was
determined using current market pricing models. We estimate that a 10%
appreciation or devaluation in the foreign exchange rate of the Lari against the
dollar in 2003 would not have had a significant impact on operations.
CanArgo had no material interest in investments subject to market risk during
the period covered by this report.
ITEM 4. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures as defined in Rules 13a-14
and 15d-14 of the Securities Exchange Act of 1934, as amended, are effective, as
of the evaluation date, in timely alerting them to material information relating
to our Company required to be included in our reports filed or submitted under
the Exchange Act. However, no cost-effective internal control system will
preclude all errors and irregularities, and management is necessarily required
to apply its judgment in evaluating the cost-benefit
25
relationship of possible controls and procedures. Since the date of the
evaluation, there have been no significant changes in our internal controls or
in other factors that could significantly affect such controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
26
PART II - OTHER INFORMATION
CANARGO ENERGY CORPORATION AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Management Contracts, Compensation Plans and Arrangements
are identified by an asterisk (*) Documents filed herewith
are identified by a cross (+).
1(1) Escrow Agreement with Signature Stock Transfer, Inc.
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on September 9, 1999).
1(2) Selling Agent Agreement with each of Credifinance Securities
Limited, David Williamson Associates Limited, and Orkla
Finans (Fondsmegling) ASA (Incorporated herein by reference
from Form S-1 Registration Statement, File No. 333-72295
filed on September 9, 1999).
1(3) Escrow Agreement with Orkla Finans (Fondsmegling) ASA
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on September 9, 1999).
1(4) Selling Agent Agreement with National Securities Corporation
(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).
1(5) Escrow Agreement with Continental Stock Transfer & Trust
Company (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).
1(6) Engagement Agreement with Sundal Collier & Co ASA dated
August 13, 2001. (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).
2(1) Agreement Relating to the Sale and Purchase of All the
Issued Share Capital of Gastron International Limited dated
August 10, 1995 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from October 19, 1995 Form 8-K).
2(2) Supplemental Agreement Relating to the Sale and Purchase of
All the Issued Share Capital of Gastron International
Limited dated November 3, 1995 by and among Ribalta
Holdings, Inc. as Vendor and Fountain Oil Incorporated as
Purchaser, and John Richard Tate as Warrantor (Incorporated
herein by reference from October 19, 1995 Form 8-K).
2(3) Supplemental Deed Relating to the Sale and Purchase of All
the Issued Share Capital of Gastron International Limited
dated May 29, 1996 by and among Ribalta Holdings, Inc. as
Vendor and Fountain Oil Incorporated as Purchaser, and John
Richard Tate as Warrantor (Incorporated herein by reference
from September 30, 1997 Form 10-Q).
2(4) 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).
2(5) Amended and Restated Combination Agreement between Fountain
Oil Incorporated and
27
CanArgo Energy Inc. dated as of February 2, 1998
(Incorporated herein by reference from Form S-3 Registration
Statement, File No. 333-48287 filed on September 9, 1998).
2(6) Voting, Support and Exchange Trust Agreement (Incorporated
herein by reference as Annex G from Form S-3 Registration
Statement, File No. 333-48287 filed on September 9, 1998).
3(1) Registrant's Certificate of Incorporation and amendments
thereto (Incorporated herein by reference from July 15, 1998
Form 8-K).
3(2) Registrant's 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).
4(1) Registration Rights Agreement between Registrant and JKX
Nederland B.V. dated September 28, 2000, relating to
purchase of 21.2% interest in Ninotsminda Oil Company
(Incorporated herein by reference from July 20, 2000 Form
8-K).
*10(1) Form of Option Agreement for options granted to certain
persons, including Directors (Incorporated herein by
reference from August 31, 1994 Form 10-KSB, filed by
Electromagnetic Oil Recovery, Inc., the Company's
predecessor).
*10(2) 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).
*10(3) Amended and Restated CanArgo Energy Inc. Stock Option Plan
(Incorporated herein by reference from September 30, 1998
Form 10-Q).
10(4) Agreement between Georgian American Oil Refinery Company
and CanArgo Petroleum Products Ltd. dated September 26, 1998
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on February 12, 1999).
10(5) Terrenex Acquisition Corporation Option regarding CanArgo
(Nazvrevi) Limited (Incorporated herein by reference from
Form S-1 Registration Statement, File No. 333-72295 filed on
February 12, 1999).
10(6) Production Sharing Contract between (1) Georgia and (2)
Georgian Oil and JKX Navtobi Ltd. dated February 12, 1996
(Incorporated herein by reference from Form S-1 Registration
Statement, File No. 333-72295 filed on September 7, 1999).
10(7) Agreement on Financial Advisory Services between CanArgo
Energy Corporation, Orkla Finans (Fondsmegling) A.S and
Sundal Collier & Co. ASA dated December 8, 1999
(Incorporated herein by reference from December 28, 1999
Form 8-K).
10(8) Form of Subscription Agreement (Incorporated herein by
reference from December 28, 1999 Form 8-K).
10(9) Agreement between CanArgo Energy Corporation and JKX
Nederland BV dated January 19, 2000 (Incorporated herein by
reference from December 31, 1999 Form 10-K).
10(10) Agreement between Ninotsminda Oil Company and AES
Gardabani dated March 10, 2000 (Incorporated herein by
reference from December 31, 1999 Form 10-K).
10(11) Term Sheet dated September 27, 2000 relating to sale of
15,660,916 shares of Registrant's common stock (Incorporated
herein by reference from July 20, 2000 Form 8-K).
10(12) Form of Subscription Agreement relating to sale of
15,660,916 shares of the Registrant's common stock
(Incorporated herein by reference from July 20, 2000 Form
8-K).
28
10(13) Subscription Agreement between Registrant and JKX
Nederland B.V. dated September 15, 2000 relating to purchase
of 21.2% interest in Ninotsminda Oil Company (Incorporated
herein by reference from July 20, 2000 Form 8-K).
*10(14) 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 September
30, 2000 Form 10-Q).
10(15) Tenancy Agreement between CanArgo Energy Corporation and
Grosvenor West End Properties dated September 8, 2000
(Incorporated herein by reference from September 30, 2000
Form 10-Q).
10(16) Agreement between CanArgo Energy Corporation and Roger
Brittain dated August 18, 2000 (Incorporated herein by
reference from December 31, 2000 Form 10-K).
*10(17) Employment Agreements between CanArgo Energy Corporation
and Murray Chancellor dated September 22, 2000 (Incorporated
herein by reference from December 31, 2000 Form 10-K).
*10(18) Employment Agreements between CanArgo Energy Corporation
and Anthony Potter dated October 1, 2000 (Incorporated
herein by reference from December 31, 2000 Form 10-K).
10(19) 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).
10(20) Agreement between CanArgo Energy Corporation and Georgian
British Oil Services Company dated November 10, 2000
relating to the purchase of 9.35% interest in Georgian
American Oil Refinery (Incorporated herein by reference from
December 31, 2000 Form 10-K).
10(21) Share Exchange Agreement between CanArgo Energy
Corporation and Argonaut Oil and Gas Limited dated November
10, 2000, related to the purchase of 28.7% interest in
Georgian American Oil Refinery (Incorporated herein by
reference from December 31, 2000 Form 10-K).
*10(22) Employment Agreements between CanArgo Energy Corporation
and Vincent McDonnell dated December 1, 2000 (Incorporated
herein by reference from December 31, 2001 Form 10-K).
10(23) Agreement Number 1 dated March 20, 1998 on Joint
Investment Production Activity for further development and
further exploration of Bugruvativske Field (Incorporated
herein by reference from June 30, 2001 Form 10-Q).
10(24) Crude Oil Sales Agreement dated August 13, 2002
(Incorporated herein by reference from June 30, 2002 Form
10-Q)
10(25) Covenant on terms and conditions of participation in
investment activity under the Joint Investment Production
Activity agreement dated of March 20, 1998, dated July 23,
2002. (Incorporated herein by reference from September 30,
2002 Form 10-Q)
10(26) Stock sale purchase contract of IPEC between Lateral
Vector Resources and Northern Industrial Development dated
July 25, 2002. (Incorporated herein by reference from
September 30, 2002 Form 10-Q)
10(27) Amendments of and Additions to Joint Investment Production
Activity agreement of March 20, 1998, dated August 8, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(28) Amendment of Clause 9.3.1 of Amendments of and Additions
to the Joint Investment
29
Production Activity agreement of March 20, 1998, dated
September 17, 2002. (Incorporated herein by reference from
September 30, 2002 Form 10-Q)
10(29) Stock sale purchase contract of IPEC between Lateral
Vector Resources Inc. and Lystopad dated September 24, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(30) Stock sale purchase contract of IPEC between Lateral
Vector Resources Inc. and Lyutyi dated September 24, 2002.
(Incorporated herein by reference from September 30, 2002
Form 10-Q)
10(31) Sale agreement of CanArgo Petroleum Products Limited
between CanArgo Limited and Westrade Alliance LLC dated
October 14, 2002. (Incorporated herein by reference from
September 30, 2002 Form 10-Q)
21 List of Subsidiaries (Incorporated herein by reference from
June 30, 2001 Form 10-Q)
25(1) Power of attorney of certain signatories (Incorporated
herein by reference from December 17, 2002 Form S1/A)
Additional Exhibits. In accordance with SEC Release No.
33-8212, Exhibits 99(1) and 99(2) are to be treated as
"accompanying" this Report rather than "filed" as part of
the Report.
+99(1) Certification of Chief Executive Officer pursuant to
18.U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
+99(2) Certification of Chief Financial Officer pursuant to
18.U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8 K:
The following current reports on form 8-K were filed during the quarter ended
March 31, 2003.
On January 30, 2003 CanArgo announced drilling had commenced on a new horizontal
well N4H, targeting an existing producing reservoir in the Ninotsminda field in
Georgia.
On February 28, 2003 CanArgo announced its preliminary results for the year
ended December 31,2002.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CANARGO ENERGY CORPORATION
Date: May 14, 2003 By: /s/ Vincent McDonnell
------------------------------
Vincent McDonnell
Chief Financial Officer
31
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Robson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CanArgo Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Dr David Robson
---------------------------
Dr David Robson
Chairman, President and Chief Executive
Officer
32
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Vincent McDonnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CanArgo Energy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Vincent McDonnell
-------------------------------
Vincent McDonnell
Chief Financial Officer
33