U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2001
Commission File No. 0-20975
Tengasco, Inc. and Subsidiaries
-------------------------------
(Exact name of small business issuer as specified in its charter)
Tennessee 87-0267438
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
603 Main Avenue, Suite 500, Knoxville, TN 37902
-----------------------------------------------
(Address of principal executive offices)
(865-523-1124)
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes _X_ No ___
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,558,110 common
shares at March 31, 2001.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000................................................ 3-4
* Consolidated Statements of Loss for the three
months ended March 31, 2001 and 2000............................. 5
* Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 2001................................ 6
* Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000.................................... 7
* Notes to Consolidated Financial Statements....................... 8-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................. 10-13
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK............................... 14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS............................................ 14
* Signature................................................. 15
2
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2000
(Unaudited)
----------- -----------
Current Assets:
Cash and cash equivalents ........................ $ 767,192 $ 1,603,975
Accounts receivable, net ......................... 848,997 835,404
Other current assets ............................. 353,838 251,345
----------- -----------
Total current assets ............................... 1,970,027 2,690,724
Oil and gas properties, net
(on the basis of full cost accounting) ........... 10,183,774 9,704,029
Completed pipeline facilities ...................... 13,351,972 4,200,000
Pipeline facilities, under construction, at cost ... 0 6,847,038
Property and equipment, net ........................ 1,653,532 1,677,432
Other .............................................. 72,613 105,501
----------- -----------
$27,231,918 $25,224,724
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2001 2000
(Unaudited)
------------ ------------
Current liabilities
Current maturities of long term
debt-related party $ 500,000 $ 500,000
Current maturities of long-term debt 1,514,648 1,608,486
Accounts payable-trade 1,054,271 1,016,462
Accrued interest Payable 365,582 135,435
Accrued liabilities 253,560 52,640
------------ ------------
Total current liabilities 3,688,061 3,313,023
Long term debt-related parties,
less current maturities 4,845,000 4,845,000
Long term debt, less current maturities 1,884,583 2,263,599
------------ ------------
Total long term debt 6,729,583 7,108,599
------------ ------------
Total liabilities 10,417,644 10,421,622
------------ ------------
Preferred Stock
Convertible redeemable preferred;
redemption value $3,938,900;
39,389 shares outstanding 3,938,900 3,938,900
------------ ------------
Stockholders' Equity
Common stock, $.001 per value,
50,000,000 shares authorized 9,559 9,296
Additional paid-in capital 28,400,164 25,941,709
Accumulated deficit (15,534,349) (15,086,803)
------------ ------------
Total stockholders' equity 12,875,374 10,864,202
------------ ------------
$ 27,231,918 $ 25,224,724
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
TENGASCO, INC. AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF LOSS
For the Three For the Three
Months Ended Months Ended
March 31, 2001 March 31, 2000
(Unaudited) (Unaudited)
----------- -----------
Oil and gas revenues $ 1,448,318 $ 1,179,912
----------- -----------
Costs and other deductions
Production costs and taxes 731,835 455,825
Depletion, depreciation and amortization 97,500 63,000
Interest expense 77,924 98,933
General and administrative costs 754,062 565,830
Legal and accounting 155,765 66,777
----------- -----------
Total costs and other deductions 1,817,086 1,250,365
----------- -----------
Net loss (368,768) (70,453)
----------- -----------
Dividends on preferred stock 78,778 39,778
- -------------------------------------------- ----------- -----------
Net loss attributable to common shareholders $ (447,546) $ (110,231)
- -------------------------------------------- ----------- -----------
Net loss attributable to common shareholders
Per share basic and diluted $ (0.05) $ (0.01)
- -------------------------------------------- =========== ===========
Weighted average shares outstanding 9,415,797 8,722,892
- -------------------------------------------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
--------------------- Paid In Accumulated
Shares Amount Capital Deficit
---------- -------- ----------- ------------
Balance December 31, 2000 $9,295,558 $ 9,296 $25,941,709 $(15,086,803)
Common stock issued in 75,000 75 884,925 0
private placements
Common stock issued on 22,068 22 134,978 0
conversion of debt
Common stock issued as a 1,159 1 14,776 0
charitable donation
Stock options exercised 164,325 165 1,368,576 0
Payment of dividends on
convertible redeemable
preferred stock 0 0 0 (78,778)
Net loss for the three
months ended March 31, 2001 0 0 0 (368,768)
---------- -------- ----------- ------------
Balance, March 31, 2001 9,558,110 $ 9,559 $28,344,964 $(15,534,349)
========== ======== =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
TENGASCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
2001 2000
(Unaudited) (Unaudited)
----------- ----------
Operating activities
Net loss $ (368,768) $ (70,453)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization 97,500 63,000
Compensation paid in stock options 55,200 --
Changes in assets and liabilities
Accounts receivable (13,593) 2,657
Other current assets (102,493) (1,000)
Accounts payable 37,809 (169,476)
Accrued liabilities 200,920 (60,175)
Accrued Interest Payable 230,147 0
----------- ----------
Net cash provided by (used in) operating activities 136,722 (235,447)
----------- ----------
Investing activities
Additions to property and equipment (23,600) (143,893)
Net additions to oil and gas properties (529,745) (424,846)
Net additions to pipeline facilities (2,304,934) (32,238)
Decrease in restricted cash 0 625,000
Other assets 32,888 0
----------- ----------
Net cash provided by (used in) investing activities (2,825,391) 24,023
----------- ----------
Financing activities
Repayments of borrowings (337,854) (979,898)
Dividends on convertible redeemable
preferred stock (78,778) (39,778)
Proceeds from private placements of
common stock 2,268,518 496,000
Proceeds from private placements of
preferred stock 0 1,000,000
----------- ----------
Net cash provided by financing activities 1,851,886 476,324
----------- ----------
Net change in cash and cash equivalents (836,783) 264,900
Cash and cash equivalents, beginning of period 1,603,975 420,590
----------- ----------
Cash and cash equivalents, end of period $ 767,192 $ 685,490
=========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
Tengasco, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
(1) The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Item 210 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. For
further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended December 31, 2000,
included in the Company's annual report on Form 10-KSB.
(2) During 2000, the Company acquired debt financing in the amount of
$3,850,000 from two members of the board of directors, one affiliate, and
two shareholders in order to complete construction of its pipeline from
Swan Creek to Kingsport. The directors will also receive a throughput fee
once production begins, and will continue to receive such fees until the
debt is repaid. The throughput fee is 10 cents per MMBtu delivered through
the pipeline in proportion to the director's proportion of total debt. The
volume delivered shall be calculated on a monthly basis. The original
agreement provided for quarterly interest payments to begin in March 2001.
The holders of the note have agreed to extend the interest repayment term
to commence on July 15, 2001. All other terms of the agreement remain in
effect.
During 2000, the Company acquired debt financing from a major
officer/stockholder in the amount of $995,000 in order to purchase a
drilling rig.
During 2000 the Company paid approximately $270,000 in consulting fees and
commissions on equity transactions to a member of the Board of Directors.
(3) In accordance with SFAS No. 128, "Earnings Per Share", basic and diluted
loss per share are based on 9,547,462 weighted average shares outstanding
for the quarter ended March 31, 2001 and 8,722,892 weighted average shares
outstanding for the quarter ended March 31, 2000. There were 475,827 and
475,827 potential weighted average common shares outstanding at March 31,
2001 and March 31, 2000, respectively, related to common stock options and
warrants. These shares were included in the computation of the diluted
income and loss per share amount.
8
(4) SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for all fiscal years beginning after
June 15, 2000 (as amended by FAS 138). This statement requires recognition
of all derivative contracts as either assets or liabilities in the balance
sheet and the measurement of them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of any gains or losses on the hedge with
the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. Historically, the Company has not entered
into any material derivative contracts either to hedge existing risks or
for speculative purposes. The adoption of the new standard on January 1,
2001 did not affect the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements" which outlines the basic
criteria that must be met to recognize revenue and provided guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC. Adoption of SAB No.
101 did not have a material impact on the Company's financial position or
its results of operations.
(5) During the three months ended March 31, 2001, the Company converted
$135,000 of debt through the issuance of approximately 22,000 shares of
common stock. Additionally, the Company donated 1,159 shares of common
stock to a charitable organization during this period. The donation,
totaling $14,777 was recorded as a charitable contribution and is included
in general and administrative expenses in the accompanying consolidated
statement of loss for the three months ended March 31, 2001.
(6) During the three months ended March 31, 2001, the Stock Option Committee
granted 115,000 options to purchase the Company's stock at prevailing
market prices. The options were granted to employees and directors of the
Company under the terms of the Tengasco, Inc. Stock Incentive Plan.
Additionally, the Company extended the exercise period of one employee's
stock options resulting in recorded compensation of $55,200 during the
three months ended March 31, 2001.
9
Tengasco, Inc. and Subsidiaries
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The Company is in the business of exploring for, producing and transporting oil
and natural gas in Tennessee and Kansas and marketing gas for others in
Tennessee. The Company has 208 producing oil and gas wells in Kansas and has 30
producing natural gas and five oil wells in Tennessee.
With the completion of its 65 mile pipeline and the flow of gas through the
pipeline, the Company will be able to deliver its gas to Eastman Chemical
Company ("Eastman"), BAE SYSTEMS at the Holston Army Ammunition Plant and other
customers in the Kingsport area and anticipates being able to sell substantially
all of its natural gas production from the Swan Creek Field. The Company
anticipates that its agreement with Eastman will require Eastman to purchase a
minimum of 10,000 MMBTU of gas per day. Initial deliveries of gas to Eastman
were made on May 21, 2001. Deliveries of natural gas to BAE SYSTEMS at the
Holston facility commenced on April 4, 2001 and the Company anticipates that
purchases under that agreement will ultimately be 1,800 MMBTU of gas per day.
The anticipated sales of natural gas resulting from the completion of the
pipeline will also allow the Company to focus on its drilling program on the
Swan Creek leases and continue the development of that field.
The Company's present plan of operations for the next two years calls for the
drilling of 50 additional wells in the Swan Creek Field at a cost of
approximately $250,000 per well. Although the Company does not presently have
the funds needed to enable it to complete its drilling program, it anticipates
that as a result of the completion of the pipeline, it will receive sufficient
proceeds from the sale of gas from the Swan Creek Field, in particular sales to
Eastman, to complete the program.
Alternatively, the Company believes that if proceeds from gas sales are
insufficient to pay for the drilling program it will be able to obtain the
necessary funds from other sources such as a bank loan, equity investment, or a
joint venture with another company. Although there can be no assurances that
such financing will be available, the Company believes that it will be able to
procure such financing.
The Company's present plan of operation also calls for contracting for sales of
additional volumes of natural gas not only to Eastman and BAE Systems as their
needs increase, but to other industrial customers in the Kingsport, Tennessee
area as greater volumes of gas become available from the Swan Creek Field as a
result of additional drilling. Other large industrial customers in Kingsport
presently served by an interstate pipeline include Willamette Paper, General
Shale (brick manufacturer) and AFG Glass.
10
The aggregate requirements of these customers exceeds the requirements of
Eastman. The Company has not entered into any contracts for sales to any of
these potential customers, and no assurances can be made that such contracts
will be agreed upon. However, the Company plans to fully exploit this
significant potential market in the Kingsport area for serving large volume
industrial customers. In addition, the Company's subsidiary, Tengasco Pipeline
Corporation, has entered into a franchise agreement with the City of Kingsport
that grants it authority for twenty years to construct facilities and to sell
and distribute natural gas to all classes of customers in Kingsport, not only
the large industrial customers listed herein. The franchise agreement is subject
to approval by the Tennessee Regulatory Authority which the Company expects to
be granted in the near future.
On January 25, 2000, the Company's wholly owned subsidiary, Tengasco Pipeline
Corporation, signed an agreement to install and operate a new natural gas
utility service to residential, commercial and industrial users in Hancock
County, Tennessee for the Powell Valley Utility District. The Powell Valley
District previously had no natural gas facilities. The system was installed in
the year 2000 and initially extends to a small number of initial customers, and
will be gradually expanded over time to serve as many of the 6,900 residential
and commercial customers in the county as may be economically possible.
The Company has hired a full time geologist in Kansas to oversee operations in
the Kansas Properties. The Company plans to drill between five and ten new wells
in Ellis and Rush Counties, Kansas on its existing leases during this next
fiscal year in response to drilling activity in the area establishing new areas
of production.
The Company is also engaged in gathering for a fee the gas produced from wells
owned by others located in Kansas adjacent to the Company's wells and near the
Company's gathering lines. The Company's plans for its Kansas properties include
maintaining the current productive capacity of its existing wells through normal
workovers and maintenance of the wells, performing gathering or sales services
for adjacent producers, and expanding the Company's own production through
drilling these additional wells. In addition, there are several capital
development projects that are available with respect to the Kansas Properties
which include recompletion of wells and major workovers to increase current
production. These projects when completed may well increase production in
Kansas. However, the Company does not presently have the funds necessary for
such projects and the ability to undertake such efforts is dependent on the
Company obtaining such funds. Management has made the decision not to undertake
such efforts at this time. It will however, reconsider its decision if such
funds become available through the Company's operations or other sources of
financing.
The Company's plan of operation also includes exploration in six or more
additional major geological structures in the East Tennessee area that are
similar to the Swan Creek structure and which the Company's geology staff
indicate have a high probability of producing hydrocarbons.
11
The Company has either acquired seismic data on these structures from third
party sources, or is conducting its own seismic studies with its own trucks and
equipment. The seismic data is being analyzed at facilities of the University of
Tennessee as part of the strategic alliance between the Company and the
University of Tennessee. The seismic analysis and related leasing activities
should be completed in approximately six months, and the Company plans to
conduct exploration activities in these new areas. The Company plans to obtain
funds for these activities from results of operations or from third party
sources such as a bank loan or other third party financing.
The Company has no plans, at present, to increase the number of its employees
significantly.
This plan of operations is based upon many variables and estimates, all of which
may change or prove to be other than or different from information relied upon.
The information contained in this Report, in certain instances, includes certain
forward- looking statements. When used in this document, the words budget,
budgeted, anticipate, expects, estimates, believes, goals or projects and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, the following: production variances from expectations, volatility of oil and
gas prices, the need to develop and replace reserves, the substantial capital
expenditures required for construction of pipelines and the drilling of wells
and the related need to fund such capital requirements through commercial banks
and/or public securities markets, environmental risks, drilling and operating
risks, risks related to exploration and development drilling, the uncertainty
inherent in estimating future oil and gas production or reserves, uncertainty
inherent in litigation, competition, government regulation, and the ability of
the Company to implement its business strategy, including risks inherent in
integrating acquisition operations into the Company's operations.
12
Results of Operations and Financial Condition
The Company recognized $1,448,318 in revenues from the Kansas oil and gas field
and Swan Creek during the first quarter of 2001 compared to $1,179,912 in the
first quarter of 2000. This increased revenue resulted from the significant
increase in gas prices during the first quarter of 2001. Gas prices in Kansas in
the first quarter of 2000 were approximately $2.40 per mcf whereas prices in
2001 were approximately $7.07 per mcf. Also oil production from Swan Creek
increased from 11,294 barrels in the first quarter of 2000 to 13,917 in 2001.
Although the Company's revenues increased during the first quarter of 2001, the
Company incurred a net loss to holders of common stock of $447,546 ($.05 per
share of common stock) during this period compared to a net loss in the first
three months of 2000 to holders of common stock of $110,231 ($.01 per share of
common stock).
This loss was primarily due to the following:
Production costs and taxes for the first three months of 2001 of $731,835,
was higher compared to $455,825 in the first quarter of 2000. This was due to
some well work overs in Kansas in order to increase future production and
completion of additional maintenance cost in Swan Creek in preparation for
production beginning in April of 2001.
Depreciation, Depletion and Amortization expense for the first three months
of 2001 was $97,500, compared to $63,000 for the first three months of 2000,
this difference was due to a change in estimate and depreciation on additional
equipment purchased late in 2000.
Interest Expense for the first three months of 2001 was $77,924, as
compared to $98,933 in 2000. This difference is due to capitalized interest of
$147,810 during construction of Phase II of the Company's 65 mile pipeline.
General and Administrative Expenses for the first three months of 2001
increased $188,232 from the first three months of 2000 amount of $565,830.
Approximately $90,000 of this increase was due to an increase in insurance to
expand coverage including blowout insurance for the Company and approximately
$40,000 was attributable to public relations costs. The Company also incurred a
$55,200 compensation adjustment resulting from the extension of the exercise
period for options granted to an employee.
Legal and accounting fees increased $88,988 for the first three months of
2001. The increase was for additional auditing services provided by our auditors
and attorney fees associated with year-end filings.
During the three months ended March 31, 2001, the Company incurred approximately
$2,300,000 of additional costs associated with the Swan Creek Pipeline. On March
8, 2001, the pipeline was ready for its intended use; accordingly, pipeline
facilities under construction were reclassified to completed pipeline facilities
on the accompanying consolidated balance sheet as of March 31, 2001.
13
Quantitative and Qualitative Disclosure About Market Risk:
The Company's major market risk exposure is in the pricing applicable to its
natural gas and crude oil production. Historically, prices received for gas
production have been volatile and unpredictable. Pricing volatility is expected
to continue.
The Company also has risk exposure for interest rates on its outstanding debt. A
significant portion of the Company's long term debt is based upon published
prime rates. Interest rates have recently been somewhat volatile, and although
it is difficult to predict future fluctuations of interest rates in the future,
volatility is expected to continue.
Changes in Securities and Use of Proceeds
During the first quarter of 2001, 75,000 shares of restricted common stock were
sold in a private placement, 22,068 shares were issued pursuant to the
conversion of convertible notes and 164,325 shares of common stock were issued
pursuant to the exercise of options, the majority of which were granted under
the Tengasco, Inc. Stock Incentive Plan.
The Company has issued a private placement offering memorandum for a minimum of
10,000 and a maximum of 30,000 shares of Series B 8% Cumulative Convertible
Preferred Stock. As of this date, the Company has not sold any shares pursuant
to this offering. The offering will terminate upon the sale of the maximum
number of shares or June 15, 2001, whichever occurs first. The purpose of the
offering is to provide funds for the Company's drilling program in the Swan
Creek field, the exploration of new geological structures, and working capital,
as the Company deems appropriate.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Dated: May 18, 2001 TENGASCO, INC.
By:
-------------------------------------
Robert M. Carter, President
By:
-------------------------------------
Mark A. Ruth, Chief Financial Officer
15