UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2004;
or
| | Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to .
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Commission File Number 0-18596
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AMERICAN NATURAL ENERGY CORPORATION
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(Exact name of small business issuer as specified in its charter)
OKLAHOMA 73-1605215
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(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
7030 SOUTH YALE, SUITE 404, TULSA, OKLAHOMA 74136
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(Address of principal executive offices, zip code)
(918) 481-1440
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(Issuer's Telephone Number, Including Area Code)
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 issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 13, 2004, 26,154,546 shares of the Registrant's Common Stock,
$0.01 par value, were outstanding.
AMERICAN NATURAL ENERGY CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - March 31, 2004 4
and December 31, 2003
Condensed Consolidated Statements of Operations - 5
Three Months Ended March 31, 2004 and
March 31, 2003
Condensed Consolidated Statements of Cash Flows - 6
Three Months Ended March 31, 2004 and
March 31, 2003
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of 12
Operation
Item 3. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
AMERICAN NATURAL ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2004 DECEMBER 31, 2003
$ $
ASSETS
Current assets:
Cash and cash equivalents 99,710 1,650,110
Accounts receivable - joint interest billing 724,933 1,308,981
Accounts receivable - oil and gas sales 1,553,558 384,003
Accounts receivable - other 36,539 50,194
Prepaid expenses 60,969 88,762
Oil inventory 11,898 14,947
---------------- ----------------
Total current assets 2,487,607 3,496,997
Proved oil and natural gas properties, net of accumulated depletion, depreciation,
amortization and impairment of $8,669,556 and $8,356,023 4,061,882 3,702,897
Unproved oil and natural gas properties 5,887,096 3,773,136
Equipment and other fixed assets, net of accumulated depreciation of
$241,796 and $205,237 755,496 757,759
Deferred expenses 537,921 589,983
---------------- ----------------
Total assets 13,730,002 12,320,772
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 2,348,588 2,587,815
Revenue payable 2,464,859 836,679
Accrued payroll 60,000 170,000
Accrued interest 5,999 4,734
Notes payable and current portion of long-term debt -- 13,367
---------------- ----------------
Total current liabilities 4,879,446 3,612,595
Deferred income taxes -- --
Convertible secured debentures, $12,000,000 net of discount of $5,691,404 and
$6,267,705, respectively 6,308,596 5,732,295
Asset retirement obligation 1,470,289 1,438,773
---------------- ----------------
Total liabilities 12,658,331 10,783,663
---------------- ----------------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock
Authorized - 100,000,000 shares with par value of $0.01
issued - 26,154,546 261,545 261,545
Additional paid-in capital 14,492,998 14,492,998
Accumulated deficit, since January 1, 2002 (in conjunction with the quasi-
reorganization stated capital was reduced by an accumulated deficit of
$2,015,495) (14,778,483) (14,412,031)
Accumulated other comprehensive income 1,095,611 1,194,597
---------------- ----------------
Total stockholders' equity 1,071,671 1,537,109
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Total liabilities and stockholders' deficit 13,730,002 12,320,772
---------------- ----------------
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AMERICAN NATURAL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three-month periods ended March 31, 2004 and March 31, 2003
2004 2003
$ $
Revenues:
Oil and gas sales 731,525 237,327
Operations income 37,894 2,809
Interest and other income 1,025 --
--------------- ---------------
770,444 240,136
--------------- ---------------
Expenses:
Lease operating expense 102,132 147,153
Production tax expense 37,719 9,088
General and administrative 511,018 308,811
Foreign exchange (gain) loss (99,026) 549,748
Interest and financing costs 151,477 65,963
Gain on sale of marketable securities -- (172,788)
Impairment of oil and gas properties -- 152,064
Depreciation, depletion and amortization - oil and gas properties 343,707 197,154
Depreciation and amortization - other assets 89,869 31,494
--------------- ---------------
Total expenses 1,136,896 1,288,687
--------------- ---------------
Loss before income tax expense and cumulative effect of
accounting change (366,452) (1,048,551)
Income tax expense -- --
--------------- ---------------
Net loss before cumulative effect of accounting change (366,452) (1,048,551)
Cumulative effect of accounting change -- (1,005,460)
--------------- ---------------
Net loss (366,452) (2,054,011)
--------------- ---------------
Other comprehensive income (loss) - net of tax:
Unrealized gain on marketable securities -- 13,870
Foreign exchange translation (98,986) 547,186
Reclassification adjustment for gains on marketable
securities included in net loss -- (172,788)
--------------- ---------------
Other comprehensive income (loss) (98,986) 388,268
Comprehensive loss (465,438) (1,665,743)
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Basic and diluted loss per share before
cumulative effect of accounting change (0.01) (0.04)
--------------- ---------------
Cumulative effect of accounting change -- (0.04)
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Net loss per share (0.01) (0.08)
--------------- ---------------
Weighted average number of shares outstanding
Basic 26,154,546 25,321,418
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Diluted 26,154,546 25,321,418
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AMERICAN NATURAL ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three-month periods ended March 31, 2004 and March 31, 2003
2004 2003
$ $
Cash flows from operating activities:
Net loss (366,452) (2,054,011)
Non cash items:
Depreciation, depletion and amortization 433,576 228,648
Impairment of oil and gas properties -- 152,064
Foreign exchange (gain) loss (99,026) 549,748
Gain on sale of marketable securities -- (172,788)
Cumulative effect of accounting change -- 1,005,460
Non cash compensation expense -- 29,531
Changes in working capital items:
Accounts receivables (571,852) (1,029,938)
Oil inventory 4,391 (6,242)
Prepaid expenses 26,543 20,126
Accounts payable, revenue payable and
accrued liabilities 935,816 1,804,333
---------------- ----------------
Net cash provided by operating activities 362,996 526,931
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of marketable securities -- 208,051
Proceeds from sale of oil and gas properties -- 200,000
Purchase and development of oil and gas properties (1,865,775) (1,125,367)
Purchase of fixed assets (34,294) (12,920)
---------------- ----------------
Net cash used in investing activities (1,900,069) (730,236)
---------------- ----------------
Cash flows from financing activities:
Issuance of notes payable -- 2,500,000
Payment of notes payable (13,367) (2,750,000)
Production payments issued -- 766,996
---------------- ----------------
Cash (used in) provided by financing activities (13,367) 516,996
Effect of exchange rate changes on cash 40 (3,796)
---------------- ----------------
Increase (decrease) in cash and cash equivalents (1,550,400) 309,895
---------------- ----------------
Cash beginning of period 1,650,110 86,295
---------------- ----------------
Cash end of period 99,710 396,190
---------------- ----------------
Supplemental disclosures:
Interest paid, net of capitalized interest 150,187 8,500
Non cash financing and investing activities
Capitalized interest included in unproved properties 576,301 82,845
Accrued interest refinanced upon modification of debt -- 331,728
Common shares issued in conjunction with issuance of
notes payable -- 300,000
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AMERICAN NATURAL ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004 and 2003
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1 SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and methods followed in preparing these unaudited
condensed consolidated financial statements are those used by American
Natural Energy Corporation (the "Company") as described in Note 1 of the
notes to consolidated financial statements included in the Annual Report on
Form 10-KSB. However, the unaudited condensed consolidated financial
statements for the three-month periods ended March 31, 2004 and 2003 do not
conform in all respects to the disclosure and information that is required
for annual consolidated financial statements. The year-end condensed
balance sheet data was derived from audited financial statements, but does
not include all disclosures required by accounting principles generally
accepted in the United States of America. These interim condensed
consolidated financial statements should be read in conjunction with the
most recent annual consolidated financial statements of the company.
In the opinion of management, all adjustments considered necessary for fair
statement have been included in these interim condensed consolidated
financial statements. Operating results for the three-month period ended
March 31, 2004 are not indicative of the results that may be expected for
the full year ending December 31, 2004.
STOCK-BASED COMPENSATION
The Company has a stock-based compensation plan, and accounts for stock
options granted to employees under this plan in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, ("APB 25"). Pursuant to provisions of APB 25,
compensation expense is recognized based on the difference, if any, on the
measurement date, as defined, between the estimated fair value of the
Company's stock and the amount an employee must pay to acquire the stock.
Compensation expense is recognized immediately for past services and
ratably for future services over the option's vesting period. Compensation
expense is recognized for any grants to individuals who do not meet the
definition of employee.
The Company accounts for equity instruments issued in exchange for the
receipt of goods or services from other than employees in accordance with
SFAS 123, Accounting for Stock-Based Compensation, and the conclusions
reached by the Emerging Issues Task Force in Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services ("EITF 96-18").
Costs are measured at the estimated fair market value of the consideration
received or the estimated fair value of the equity instruments issued,
whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the
provider of goods or services as defined by EITF 96-18.
7
AMERICAN NATURAL ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004 and 2003
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The following table illustrates the pro-forma effect of stock-based
employee compensation on net loss and loss per share had the Company
applied the fair value recognition provisions of SFAS 123 to such
compensation.
Three Months Ended March 31,
2004 2003
$ $
------------- --------------
Net loss, as reported (366,452) (2,054,011)
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (134,836) (17,173)
------------- ---------------
Pro forma net loss (501,288) (2,071,184)
============= ===============
Loss per share
Basic and diluted-as reported (0.01) (0.08)
============= ===============
Basic and diluted-pro forma (0.02) (0.08)
============= ===============
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period, which is
two years. Because our stock options vest over two years and additional
awards may be made each year, the above pro forma disclosures may not be
representative of the effects on pro forma net income for future quarters.
NEW PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and Statement of Financial Accounting Standards No. 142,
Goodwill and Intangible Assets ("SFAS 142") were issued by the Financial
Accounting Standards Board in June 2001 and became effective for us on July
1, 2001 and January 1, 2002, respectively. SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Additionally, SFAS 141 requires companies to disaggregate
and report separately from goodwill certain intangible assets. SFAS 142
establishes new guidelines for accounting for goodwill and other intangible
assets. Under SFAS 142, goodwill and certain other intangible assets are
not amortized, but rather are reviewed annually for impairment. The
Emerging Issues Task Forces (EITF) is considering Issue No. 03-S,
Application of SFAS No. 142, Goodwill and Other Intangible Assets to Oil
and Gas Companies, intended to address whether oil and gas mineral rights
are considered intangible assets subject to the classification and
disclosure provisions of SFAS 142. In addition, the FASB has recently
issued proposed FSP FAS 141-a and 142-a "Interaction of FASB Statements No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, and EITF Issue No. 04-2, "Whether Mineral Rights Are Tangible or
8
AMERICAN NATURAL ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004 and 2003
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Intangible Assets." The recently issued FSP would amend FAS 141 and FAS 142
to remove some inconsistencies between the standards related to the proper
classification of assets related to mineral rights. We will continue to
monitor this issue.
The Company classifies the cost of oil and gas mineral rights as proved and
unproved oil and natural gas properties and believes that this is
consistent with oil and gas accounting and industry practice. If the EITF
determines that oil and gas mineral rights are intangible assets and are
subject to the applicable classification and disclosure provisions of SFAS
142, we estimate that $4.3 million and $3.8 million of unproved oil and gas
properties balance would be classified on our condensed consolidated
balance sheets as "intangible undeveloped leasehold" and $2.7 million and
$2.4 million of the net book value of proved oil and gas reserves would be
classified as "intangible developed leasehold" as of March 31, 2004 and
December 31, 2003, respectively. There would be no effect on the condensed
consolidated statements of operations or cash flows as the intangible
assets related to oil and gas mineral rights would continue to be amortized
under the full cost method of accounting.
2 EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income or loss
(the numerator) by the weighted average number of shares outstanding during
the period (the denominator). The computation of diluted earnings per share
is the same as for basic earnings per share except the denominator is
increased to include the weighted average additional number of shares that
would have been outstanding if previously granted stock options had been
exercised, unless they are anti-dilutive.
A reconciliation of the numerators and denominators used in calculating
basic and diluted earnings per share were as follows:
Three Months Ended March 31,
2004 (1) 2003 (2)
$ $
Numerator - net loss before
cumulative effect of accounting
change
Basic (366,452) (1,048,551)
Diluted (366,452) (1,048,551)
Cumulative effect of accounting
change -- (1,005,460)
Net loss - basic (366,452) (2,054,011)
Net loss - diluted (366,452) (2,054,011)
Denominator - weighted average
number of shares outstanding
Basic 26,154,546 25,321,418
Diluted 26,154,546 25,321,418
9
AMERICAN NATURAL ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004 and 2003
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-------------------
(1) Does not include 2,000,000 outstanding potentially dilutive
options and warrants at a weighted average price of $0.41 per
share, and the effects of 26,666,667 common shares issuable
upon conversion of 8% debentures due to the net loss.
(2) Does not include 1,750,000 outstanding potentially dilutive
options and warrants at a weighted average price of $0.33 per
share due to the net loss.
3 LIQUIDITY AND CAPITAL RESOURCES
The Company has no current borrowing capacity with any lender. The Company
has sustained substantial losses in the quarter ended March 31, 2004 and
during the year ended December 31, 2003 totaling approximately $0.4 million
and $5.7 million and negative cash flow from operations for the year ended
December 31, 2003, which leads to questions concerning the ability of the
Company to meet its obligations as they come due. The Company also has a
need for substantial funds to develop its oil and gas properties.
The accompanying financial statements have been prepared on a going concern
basis which contemplates continuity of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. As a
result of the losses incurred and current negative working capital, there
is no assurance that the carrying amounts of assets will be realized or
that liabilities will be liquidated or settled for the amounts recorded.
The ability of the Company to continue as a going concern is dependent upon
adequate sources of capital and the ability to sustain positive results of
operations and cash flows sufficient to continue to explore for and develop
its oil and gas reserves.
In the ordinary course of business, the Company makes substantial capital
expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures,
debt service and working capital requirements with the proceeds of debt and
private offering of its securities. Cash flow from operations is sensitive
to the prices the Company receives for its oil and natural gas. A reduction
in planned capital spending or an extended decline in oil and gas prices
could result in less than anticipated cash flow from operations and an
inability to sell more of its common stock or refinance its debt with
current lenders or new lenders, which would likely have a further material
adverse effect on the Company.
Management's strategy is to obtain additional financing and failure to do
so can be expected to adversely affect the Company's ability to further the
development of its properties and the ExxonMobil AMI, grow revenues, oil
and gas reserves and achieve and maintain a significant level of revenues
and profitability. There can be no assurance the Company will obtain this
additional funding. Such funding may be obtained through the sale of equity
securities or by incurring additional indebtedness. Certain covenants
included in the 8% convertible secured debentures due September 30, 2005
limit the amount of additional indebtedness we can incur to $2 million.
Without additional funding, revenues will continue to be limited and it can
be expected that operations will not be profitable. In addition, any
additional equity funding that is obtained may result in material dilution
to the current holders of common stock.
10
AMERICAN NATURAL ENERGY CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004 and 2003
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4 COMMITMENTS AND CONTINGENCIES
Bank of Oklahoma, N.A. has issued an irrevocable standby letter of credit,
dated December 24, 2003 and expiring December 24, 2004, in the amount of
$125,000 drawn in favor of RLI Insurance Company securing a surety bond in
favor of the Louisiana Office of Conservation for plugging and abandonment
obligations which may occur as a result of drilling operations in St.
Charles Parish, Louisiana.
As part of the purchase price of the assets acquired in 2001, the Company
agreed that the holders of unsecured claims aggregating approximately $4.9
million would receive payment of 100% of their allowed claim out of a net
profits interest and overriding royalty in the production from existing
wells on the Bayou Couba lease and new wells drilled on an area of mutual
interest covering an approximately 23.5 square mile area outside the area
covered by the Bayou Couba lease. The net profits interest and overriding
royalty provide that such creditors will be allocated 50% of the net
profits from production from the workover of wells existing on December 31,
2001 on the Bayou Couba lease acreage, 15% of the net profits from
production from the drilling after December 31, 2001 of new wells on the
Bayou Couba lease acreage and 6% of the net profits from production from
the drilling after December 31, 2001 of new wells on the area of mutual
interest. The net profits interest and overriding royalty interest
terminate upon repayment of the unsecured claims. As new wells are drilled,
the overriding royalty interest and net profits interest will reduce future
revenues of the Company. Additionally, the Company agreed that, after
repayment to it of 200% of all costs of bankruptcy, drilling, development
and field operations from net revenues of the Bayou Couba lease and the
area of mutual interest, the former holders of equity securities of Couba
will be entitled to a reversionary interest in the wells in the Bayou Couba
lease equal to 25% of the working interest obtained by the Company directly
from Couba at the time of confirmation and as a result of the plan of
reorganization of Couba.
We are a defendant in a number of legal proceedings which we consider to be
routine litigation that is incidental to our business. We do not expect to
incur any material liability as a consequence of such litigation.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
We are engaged in the acquisition, development, exploitation and
production of oil and natural gas. Our revenues and profitability are dependent,
to a significant extent, upon prevailing spot market prices for oil and natural
gas. Additionally, our revenues and profitability are dependent upon the
quantities of oil and natural gas produced and sold. Prices for oil and natural
gas are subject to wide fluctuations in response to changes in supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond our control. Such factors include political conditions,
weather conditions, government regulations, the price and availability of
alternative fuels and overall economic conditions.
Our financial statements have been prepared on a going concern basis
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. We have sustained
substantial losses in years 2003 and 2002, totaling approximately $5.7 and $8.7
million and negative cash flow from operations in each of 2003 and 2002, and a
net loss in the quarter ended March 31, 2004 of $0.4 million, all of which lead
to questions concerning our ability to meet our obligations as they come due. We
also have a need for substantial funds to develop our oil and gas properties. We
have financed our activities using private debt and equity financing and we have
no line of credit or other financing agreement providing borrowing availability
with a commercial lender. As a result of the losses incurred and current
negative working capital and other matters described above, there is no
assurance that the carrying amounts of our assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. Our ability
to continue as a going concern is dependent upon adequate sources of capital and
the ability to sustain positive results of operations and cash flows sufficient
to continue to explore for and develop our oil and gas reserves. See the
discussion under the caption "How We Have Financed Our Activities".
The independent auditors' report on our financial statements as of
and for the years ended December 31, 2003 and 2002 includes an explanatory
paragraph which states that we have sustained substantial losses during the
three year period ended December 31, 2003, and had a working capital deficiency
and an accumulated deficit at December 31, 2003, thereby raising substantial
doubt about our ability to continue as a going concern.
In the ordinary course of business, we have made and expect to continue
to make substantial capital expenditures for the exploration and development of
oil and natural gas reserves. In the past, we have financed our capital
expenditures, debt service and working capital requirements with the proceeds of
debt and private offerings of our securities. Our cash flow from operations is
sensitive to the prices we receive for our oil and natural gas. A reduction in
planned capital spending or an extended decline in oil and gas prices could
result in less than anticipated cash flow from operations and a lessened ability
to sell more of our common stock or refinance our debt with current lenders or
new lenders, which would likely have a further material adverse effect on us.
The uncertainty as to whether or not we can raise additional capital in the
future is likely to have an effect on our future revenues and operations if we
are unable to raise additional capital.
12
A COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND MARCH 31, 2003
We incurred a net loss of $366,000 during the three months ended March
31, 2004 compared to a net loss of $2,054,000 for the three months ended March
31, 2003. During the three months ended March 31, 2004, our revenues were
comprised of oil and gas sales and operations income totaling $769,000 compared
with oil and gas sales and operations income of $240,000 during the same period
of 2003. Our oil and gas sales and operations income for the three months ended
March 31, 2004 increased primarily as a result of our growing base of producing
properties and higher oil and gas production, attained through drilling during
2003 and early 2004. As of March 31, 2004, we had 12 (7.06 net) wells producing
approximately 1,181 (269 net) barrels of oil equivalents per day, whereas as of
March 31, 2003 we had 7 (4.68 net) wells producing approximately 180 (94 net)
barrels of oil per day. Production from our existing wells is subject to
fluctuation from time to time based upon the zones of the wells where we are
obtaining production. We had interest and other income during 2004 of $1,000
compared with no interest and other income during the three months ended March
31, 2003.
Our total expenses were $1,137,000 for the three months ended March 31,
2004 compared to $1,289,000 for the three months ended March 31, 2003. Our
general and administrative expenses during the three months ended March 31, 2004
were $511,000 compared to $309,000 during the three months ended March 31, 2003.
These expenses increased in 2004 largely because of our increased level of
corporate activities and the timing of various services provided to the company
during 2004 compared to 2003, including engineering, auditing, and legal
services, and, to a lesser extent, the increase in general and administrative
expenses was a result of increase in payroll costs. Interest expense, net of
interest capitalized of $672,000 and $83,000 in the first quarter of 2004 and
2003, respectively, increased from $66,000 in 2003 to $151,000 in 2004. While
debt outstanding is higher at March 31, 2004 than at March 31, 2003, interest
expense (before capitalization of interest) also reflects the amortization of
discount arising from a beneficial conversion feature related to the issuance in
October 2003 of our 8% convertible debentures. Such amortization of the
beneficial conversion feature was $576,000 during the three months ended March
31, 2004. Lease operating expenses of $102,000, production taxes of $38,000 and
depletion, depreciation and amortization of $434,000 during the quarter ended
March 31, 2004 changed from $147,000, $9,000, and $229,000, respectively during
the quarter ended March 31, 2003. While production increased in the quarter
ended March 31, 2004 over 2003 resulting in increased depletion, depreciation
and amortization charges and increased production taxes, actual lease operating
expenses decreased reflecting more efficient operations in the field. We
incurred an impairment charge reflecting a write-down of the carrying value of
our oil and gas properties of $152,000 during the quarter ended March 31, 2003
with no comparable impairment charge during the quarter ended March 31, 2004.
The impairment charge recorded during the quarter ended March 31, 2003 was
incurred because the capitalized cost of our proved oil and gas properties
exceeded the estimated future net cash flows to be derived from proved reserves.
During the quarter ended March 31, 2004, we had a foreign exchange gain
of $99,000, compared to a foreign exchange loss of $550,000 for the three months
ended March 31, 2003. Our foreign exchange gains and losses arise from an
inter-company indebtedness owing by
13
ANEC to our wholly-owned subsidiary, Gothic, which is repayable in Canadian
dollars. The foreign exchange gain during the quarter ended March 31, 2004 was
caused by the strengthening of the US dollar against the Canadian dollar. During
the quarter ended March 31, 2003, we had a gain on the sale of marketable
securities of $173,000.
We also had a charge for the cumulative effect of an accounting change
resulting from the application of Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations, in the amount of $1.0
million during the quarter ended March 31, 2003. We had no comparable charge
during the quarter ended March 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
A COMPARISON OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
MARCH 31, 2003
Our net cash provided by operations was $363,000 for the three months
ended March 31, 2004 as compared to net cash provided by operations of $527,000
for the three months ended March 31, 2003. Before considering changes in working
capital, cash flows from operating activities were an outflow of $32,000 and
$261,000 during the three months ended March 31, 2004 and 2003, respectively, an
increase of approximately $229,000. Such increase is a result of higher cash
inflows from increased oil and natural gas production volumes, as discussed
above, partially offset by higher cash outflows for general and administrative
expenses and interest charges. Changes in working capital positively contributed
to cash flows from operating activities by $395,000 and $788,000 during the
quarter ended March 31, 2004 and 2003, respectively. Changes in working capital
items had the effect of increasing cash flows from operating activities because
accounts receivable turnover exceeded that of accounts payable, revenue payable
and accrued liabilities.
We used $1,900,000 of net cash in investing activities during the three
months ended March 31, 2004 compared to net cash used of $730,000 in 2003. The
2003 cash used in investing activities includes $1,125,000 for the purchase and
development of oil and gas properties compared to $1,866,000 expended in 2004.
Higher expenditures for the purchase and development of oil and gas properties
during the first quarter of 2004 are a result of higher drilling activity as
compared to the same period of 2003. During the three months ended March 31,
2003 we also realized $208,000 in proceeds from the sale of marketable
securities and $200,000 in proceeds from the sale oil and gas properties. There
were no such sales during the three months ended March 31, 2004.
We had $13,000 of cash used in financing activities for the three months
ended March 31, 2004 compared to $517,000 provided in 2003.
While production from our drilling program increased revenues during the
year ended December 31, 2003 and the first quarter of 2004, such increase has
not been sufficient to fund our operations. We have funded our capital
expenditures and operating activities through a series of private debt and
equity transactions. At March 31, 2004, we do not have any available
14
borrowing capacity under existing credit facilities. We have substantial needs
for funds to develop our oil and gas prospects and opportunities identified in
our area of mutual interest (AMI) we share with ExxonMobil Corp. At March 31,
2004, we have no commitments to expend additional funds for drilling activities
for the rest of 2004. Any capital expenditures we make will be funded from our
available cash flows. To the extent additional funds are required to fully
exploit and develop the ExxonMobil Corp. AMI, it is management's plan to raise
additional capital through the sale of our equity securities or the sale of
interests in our drilling activities; however, we currently have no firm
commitment from any potential investors and such additional capital may not be
available to us in the future.
CRITICAL ACCOUNTING POLICIES
We consider accounting policies related to stock options, oil and gas
properties, revenue recognition, income taxes, and notes payable and long-term
debt to be Critical Accounting Policies. These policies are summarized in
Management's Discussion and Analysis or Plan of Operations in our Annual Report
on Form 10-KSB for the year ended December 31, 2003, except for our accounting
policy related to stock options which is summarized in Note 1 to the notes to
the consolidated financial statements included in our Annual Report on Form
10-KSB.
HOW WE HAVE FINANCED OUR ACTIVITIES
Our activities since 2002 have been financed primarily from private sales
of debt and equity securities. Most recently, in October 2003, we completed the
private sale of $12.0 million principal amount of 8% Convertible Secured
Debentures (the "Debentures") due September 30, 2005. The Debentures bear
interest payable quarterly commencing December 31, 2003 at 8% per annum. The
outstanding principal of the Debentures is convertible into shares of our Common
Stock at any time prior to maturity at a conversion price of $0.45 per share,
subject to anti-dilution adjustment, and the Debentures are redeemable by us at
any time after October 1, 2004 if the average weighted price per share of our
common stock on the TSX Venture Exchange for a 20 consecutive trading day period
prior to the date notice of redemption is given has exceeded 166-2/3% of the
conversion price. The Debentures are collateralized by substantially all of our
assets. A finder's fee in the amount of $360,000 was paid to Middlemarch
Partners Limited in connection with the financing. We used approximately $5.9
million of the proceeds of the financing for the repayment of secured debt,
approximately $2.1 million for the payment of accounts payable and used most of
the balance primarily for exploration and development of our Bayou Couba oil and
gas leases within the ExxonMobil Joint Development Project in St. Charles
Parish, Louisiana. The secured indebtedness repaid with the Debentures proceeds
included $2.5 million to Quest Capital Corp., which was due October 31, 2003,
and approximately $1.7 million owing to Bank One Michigan, NA. In addition, we
paid out of the proceeds a $1.7 million production payment owing to
TransAtlantic Petroleum (USA) Corp. TransAtlantic retained its 10% participation
right in our AMI with ExxonMobil Corp. which was granted as partial
consideration for the $2.0 million financing
15
entered into in March 2003. On both October 21 and 31, 2003, the dates the
transaction was completed, the closing sale prices for our shares were $0.70 on
the TSX Venture Exchange.
In connection with the financing and under the terms of the transaction,
Jules Poscente, Chairman and Director of Eurogas Corp., of Calgary, Alberta, was
elected to our Board of Directors. It is expected that another person to be
selected by the holders of the Debentures will be elected to our Board of
Directors.
The Debentures are convertible into common shares at a conversion price
of $0.45 per share. On the dates the transaction was completed, the closing
price for shares of the Company's common stock on the TSX Venture Exchange was
$0.70 per share. Because the market price of the Company's stock on the dates
the transaction was completed exceeded the conversion price, the Debentures
included a beneficial conversion feature of approximately $6.7 million. The
estimated value of the beneficial conversion feature was recorded as a discount
to the carrying value of the bonds and as an increase in additional paid-in
capital. The discount is being amortized to interest expense over the life of
the Debentures using the effective interest method. In the event any Debentures
are converted prior to September 30, 2005, any unamortized discount attributed
to those proportionate holdings will be expensed at the time of conversion.
FUTURE CAPITAL REQUIREMENTS AND RESOURCES
Our capital requirements relate to the acquisition, exploration,
enhancement, development and operation of oil and natural gas properties. In
general, because our oil and natural gas reserves will be depleted by production
over time, the success of our business strategy is dependent upon a continuous
acquisition, exploitation, enhancement, and development program. In order to
achieve profitability and generate cash flow, we are dependent upon acquiring or
developing additional oil and natural gas properties or entering into joint oil
and natural gas well development arrangements.
At March 31, 2004, we have made no commitments to expend funds for
drilling activities for the rest of 2004. Any capital expenditure will be funded
from our available cash flows. We currently have no borrowing capacity with any
lender. To the extent additional funds are required to fully exploit and develop
oil and gas properties, it is management's plan to raise additional capital
through the sale of our equity securities, borrowings, or the sale of interests
in our drilling activities, however, we currently have no firm commitment from
any potential investors or lenders, and such additional capital may not be
available to us in the future.
Our business strategy requires us to obtain additional financing and our
failure to do so can be expected to adversely affect our ability to further the
development of our oil and gas properties and the ExxonMobil AMI, grow our
revenues, oil and gas reserves, and achieve and maintain a significant level of
revenues and profitability. There can be no assurance we will obtain this
additional funding. Such funding may be obtained through the sale of equity
securities or by incurring additional indebtedness. Without such funding, our
revenues will continue to be limited and it can be expected that our operations
will not be profitable. In addition, any additional equity funding that we
obtain may result in material dilution to the
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current holders of our common stock. Further, certain covenants included in our
Debentures limit the amount of additional indebtedness we can incur to $2
million.
We intend, as opportunities arise, to evaluate the acquisition and
development of additional leasehold interests. We are unable at this time to
state whether or where any such additional properties may be acquired, to
estimate the purchase price for any properties we may acquire or to state the
terms on which financing for these purposes can be obtained.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and Statement of Financial Accounting Standards No. 142, Goodwill
and Intangible Assets ("SFAS 142") were issued by the Financial Accounting
Standards Board in June 2001 and became effective for us on July 1, 2001 and
January 1, 2002, respectively. SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Additionally, SFAS 141 requires companies to disaggregate and report separately
from goodwill certain intangible assets. SFAS 142 establishes new guidelines for
accounting for goodwill and other intangible assets. Under SFAS 142, goodwill
and certain other intangible assets are not amortized, but rather are reviewed
annually for impairment. The Emerging Issues Task Forces (EITF) is considering
Issue No. 03-S, Application of SFAS No. 142, Goodwill and Other Intangible
Assets to Oil and Gas Companies, intended to address whether oil and gas mineral
rights are considered intangible assets subject to the classification and
disclosure provisions of SFAS 142. In addition, the FASB has recently issued
proposed FSP FAS 141-a and 142-a "Interaction of FASB Statements No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets, and
EITF Issue No. 04-2, "Whether Mineral Rights Are Tangible or Intangible Assets."
The recently issued FSP would amend FAS 141 and FAS 142 to remove some
inconsistencies between the standards related to the proper classification of
assets related to mineral rights. We will continue to monitor this issue.
The Company classifies the cost of oil and gas mineral rights as proved and
unproved oil and natural gas properties and believes that this is consistent
with oil and gas accounting and industry practice. If the EITF determines that
oil and gas mineral rights are intangible assets and are subject to the
applicable classification and disclosure provisions of SFAS 142, we estimate
that $4.3 million and $3.8 million of unproved oil and gas properties balance
would be classified on our condensed consolidated balance sheets as "intangible
undeveloped leasehold" and $2.7 million and $2.4 million of the net book value
of proved oil and gas reserves would be classified as "intangible developed
leasehold" as of March 31, 2004 and December 31, 2003, respectively. There would
be no effect on the condensed consolidated statements of operations or cash
flows as the intangible assets related to oil and gas mineral rights would
continue to be amortized under the full cost method of accounting.
17
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters we discussed below
and elsewhere in this Report are "forward-looking statements" as defined under
the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. The forward-looking statements appear in various places including
under the headings Item 1. Financial Information and Item 2. Management's
Discussion and Analysis or Plan of Operation. These risks and uncertainties
relate to our capital requirements, business strategy, ability to raise capital
and fund our oil and gas well drilling and development plans, our ability to
fund the repayment of our outstanding indebtedness, our ability to attain and
maintain profitability and cash flow and continue as a going concern, our
ability to increase our reserves of oil and gas through drilling activities and
acquisitions, our ability to enhance and maintain production from existing wells
and successfully develop additional producing wells, our access to debt and
equity capital and the availability of joint venture development arrangements,
our ability to remain in compliance with the terms of any agreements pursuant to
which we borrow money and to repay the principal and interest when due, our
estimates as to our needs for additional capital and the times at which
additional capital will be required, our expectations as to our sources for this
capital and funds, our ability to successfully implement our business strategy,
our ability to identify and integrate successfully any additional producing oil
and gas properties we acquire and operate such properties profitably, our
ability to maintain compliance with covenants of our loan documents and other
agreements pursuant to which we issue securities or borrow funds and to obtain
waivers and amendments when and as required, our ability to borrow funds or
maintain levels of borrowing availability under our borrowing arrangements, our
ability to meet our intended capital expenditures, our statements and estimates
about quantities of production of oil and gas as it implies continuing
production rates at those levels, proved reserves or borrowing availability
based on proved reserves and our future net cash flows and their present value.
Readers are cautioned that the risk factors described in our Annual
Report on Form 10-KSB for the year ended December 31, 2003 and other reports
filed with the Commission, as well as those described elsewhere in this Report,
in some cases have affected, and in the future could affect, our business plans
and actual results of operations and could cause our actual consolidated results
during 2004 and beyond, to differ materially from those expressed in any
forward-looking statements made by or on our behalf.
Our common shares have no trading market in the United States, and there
can be no assurance as to the liquidity of any markets that may develop for our
common shares, the ability of the holders of common shares to sell their common
shares in the United States or the price at which holders would be able to sell
their common shares. Any future trading prices of the common shares will depend
on many factors, including, among others, our operating results and the market
for similar securities.
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ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including Michael K. Paulk, our President, and Steven P. Ensz, our Vice
President, Finance, we have evaluated our disclosure controls and procedures as
of the end of the period covered by this report, and, based on their evaluation,
Mr. Paulk and Mr. Ensz have concluded that these controls and procedures are
effective. There were no changes in our internal controls over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, the company's internal control
over financial reporting.
Disclosure controls and procedures are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including Mr. Paulk and Mr. Ensz, as appropriate to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of President and Chief Executive Officer
Pursuant to Rule 13a-14(a)(1)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)(1)
32.1 Certification of President and Chief Executive Officer
Pursuant to Section 1350 (furnished, not filed)(1)
32.2 Certification of Chief Financial Officer Pursuant to
Section 1350 (furnished, not filed)(1)
- ----------------------------
(1) Filed or furnished herewith.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K in response
to the Items named:
Report Date Item
----------- ----
19
January 6, 2004 Item 7. Financial Statements
and Exhibit (Press Release
dated January 6, 2004)
February 18, 2004 Item 7. Financial Statements
and Exhibit (Press Release
dated February 18, 2004)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN NATURAL ENERGY CORPORATION
-----------------------------------
(Registrant)
Date: May 14, 2004 /S/ Michael K. Paulk
--------------------------------
Michael K. Paulk
President and Chief Executive Officer
/S/ Steven P. Ensz
-------------------------------------
Steven P. Ensz
Principal Financial and Accounting Officer
21