EARTHSTONE ENERGY INC - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
þ
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended September 30, 2009
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 0-7914
BASIC
EARTH SCIENCE SYSTEMS, INC.
633
Seventeenth St, Suite 1645
Denver,
Colorado 80202-3625
Telephone
(303) 296-3076
|
Incorporated
in Delaware
|
IRS
ID# 84-0592823
|
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 the filing requirements for the past
90 days. Yes þ
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated filer o
Non-accelerated
filer o (Do not
check if a smaller reporting
company) Smaller reporting
company þ
Check
whether the issuer is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Shares of
common stock outstanding on November 16, 2009: 17,113,630
BASIC EARTH SCIENCE SYSTEMS, INC.
FORM
10-Q
INDEX
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PART
I. FINANCIAL INFORMATION
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Page
|
|
|
Item 1.
|
4
|
|
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September
30, 2009 (Unaudited) and March 31, 2009
|
4
|
|
|
Three
and Six Months Ended September 30, 2009 and 2008
(Unaudited)
|
6
|
|
|
Six
Months Ended September 30, 2009 and 2008 (Unaudited)
|
7
|
|
|
September
30, 2009 (Unaudited)
|
8
|
|
|
Item 2.
|
13
|
|
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Item 3.
|
17
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|
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Item 4T.
|
17
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|
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PART
II. OTHER INFORMATION
|
||
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Item 1.
|
18
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|
|
Item
1A.
|
18
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|
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Item 2.
|
18
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|
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Item 3.
|
18
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|
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Item 4.
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18
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Item 5.
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18
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|
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Item 6.
|
19
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20
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FORWARD-LOOKING
STATEMENTS
This
Current Report on Form 10-Q, including information incorporated herein by
reference, contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. The use of any statements containing
the words "anticipate," "intend," "believe," "estimate," "project," "expect,"
"plan," "should" or similar expressions are intended to identify such
statements. Forward-looking statements relate to, among other
things:
• our
future financial position, including anticipated liquidity;
• amounts
and nature of future capital expenditures;
• acquisitions
and other business opportunities;
• operating
costs and other expenses;
• wells
expected to be drilled;
• asset
retirement obligations; and
• estimates
of proved oil and natural gas reserves, deferred tax liabilities, and depletion
rates.
Factors
that could cause actual results to differ materially from our expectations
include, among others, such things as:
• oil
and natural gas prices;
• our
ability to replace oil and natural gas reserves;
• loss
of senior management or technical personnel;
• inaccuracy
in reserve estimates and expected production rates;
• exploitation,
development and exploration results;
• the
actual costs related to asset retirement obligations, and whether or not those
retirements actually occur in the future;
• a
lack of available capital and financing;
• the
potential unavailability of drilling rigs and other field equipment and
services;
• the
existence of unanticipated liabilities or problems relating to acquired
properties;
• general
economic, market or business conditions;
• factors
affecting the nature and timing of our capital expenditures, including the
availability of service contractors and equipment,
• permitting
issues, workovers, and weather;
• the
impact and costs related to compliance with or changes in laws or regulations
governing our oil and natural gas operations;
• environmental
liabilities;
• acquisitions
and other business opportunities (or the lack thereof) that may be presented to
and pursued by us;
• competition
for available properties and the effect of such competition on the price of
those properties;
• risk
factors discussed in this report; and
• other
factors, many of which are beyond our control.
Although
we believe that the expectations reflected in such forward-looking statements
are reasonable, those expectations may prove to be
incorrect. Disclosure of important factors that could cause actual
results to differ materially from our expectations, or cautionary statements,
are included in our Annual Report on Form 10-K for the fiscal year ended March
31, 2009, under the heading "Risk Factors", and elsewhere in this report,
including, without limitation, in conjunction with the forward-looking
statements. All forward-looking statements speak only as of the date
made. All subsequent written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements. Except as required by
law, we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which it is made or to reflect
the occurrence of anticipated or unanticipated events or
circumstances.
PART I – FINANCIAL INFORMATION
Item 1. Financial
Statements
Basic
Earth Science Systems, Inc.
Consolidated
Balance Sheets
Page
1 of 2
|
September
30,
|
March
31,
|
|||||||
|
2009
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
5,307,000
|
$
|
4,088,000
|
||||
|
Accounts
receivable:
|
||||||||
|
Oil
and gas sales
|
1,192,000
|
1,611,000
|
||||||
|
Joint
interest and other receivables, net of $71,000 and $71,000
in allowance, respectively
|
274,000
|
230,000
|
||||||
|
Other
current assets
|
390,000
|
508,000
|
||||||
|
Total
current assets
|
7,163,000
|
6,437,000
|
||||||
|
Oil
and gas property, full cost method:
|
||||||||
|
Proved
property
|
32,909,000
|
32,187,000
|
||||||
|
Unproved
property
|
796,000
|
1,077,000
|
||||||
|
Accumulated
depletion and impairment
|
(22,953,000
|
)
|
(22,397,000
|
)
|
||||
|
Net
oil and gas property
|
10,752,000
|
10,867,000
|
||||||
|
Support
equipment and other non-current assets, net of $355,000 and $337,000 in
accumulated depreciation, respectively
|
461,000
|
458,000
|
||||||
|
Total
non-current assets
|
11,213,000
|
11,325,000
|
||||||
|
Total
assets
|
$
|
18,376,000
|
$
|
17,762,000
|
||||
See
accompanying notes to unaudited consolidated financial statements.
Basic
Earth Science Systems, Inc.
Consolidated
Balance Sheets
Page
2 of 2
|
September
30,
|
March
31,
|
|||||||
|
2009
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
352,000
|
$
|
64,000
|
||||
|
Accrued
liabilities
|
1,226,000
|
1,328,000
|
||||||
|
Total
current liabilities
|
1,578,000
|
1,392,000
|
||||||
|
Long-term
liabilities:
|
||||||||
|
Deferred
tax liability
|
2,269,000
|
2,242,000
|
||||||
|
Asset
retirement obligation
|
1,519,000
|
1,558,000
|
||||||
|
Total
long-term liabilities
|
3,788,000
|
3,800,000
|
||||||
|
Total
liabilities
|
5,366,000
|
5,192,000
|
||||||
|
Shareholders’
Equity:
|
||||||||
|
Preferred
stock, $.001 par value, 3,000,000 authorized, and none issued or
outstanding
|
—
|
—
|
||||||
|
Common
stock, $.001 par value, 32,000,000 shares authorized, and 17,703,000 and
17,506,000 shares issued and outstanding respectively
|
18,000
|
18,000
|
||||||
|
Additional
paid-in capital
|
22,910,000
|
22,825,000
|
||||||
|
Treasury
stock (590,000 and 380,000 shares respectively); at cost
|
(208,000
|
)
|
(43,000
|
)
|
||||
|
Accumulated
deficit
|
(9,710,000
|
)
|
(10,230,000
|
)
|
||||
|
Total
shareholders’ equity
|
13,010,000
|
12,570,000
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
18,376,000
|
$
|
17,762,000
|
||||
See
accompanying notes to unaudited consolidated financial statements.
Basic Earth Science Systems, Inc.
Consolidated
Statements of Operations
(Unaudited)
|
Six
Months Ended
|
Three
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Oil
and gas sales
|
$
|
3,470,000
|
$
|
6,009,000
|
$
|
2,010,000
|
$
|
2,697,000
|
||||||||
|
Well service and water disposal revenue
|
27,000
|
45,000
|
11,000
|
38,000
|
||||||||||||
|
Total
revenues
|
3,497,000
|
6,054,000
|
2,021,000
|
2,735,000
|
||||||||||||
|
Expenses:
|
||||||||||||||||
|
Oil
and gas production
|
1,020,000
|
1,129,000
|
552,000
|
563,000
|
||||||||||||
|
Production
tax
|
385,000
|
498,000
|
265,000
|
216,000
|
||||||||||||
|
Well
servicing expenses
|
26,000
|
53,000
|
11,000
|
44,000
|
||||||||||||
|
Depreciation
and depletion
|
574,000
|
418,000
|
336,000
|
197,000
|
||||||||||||
|
Accretion of asset retirement obligation
|
83,000
|
36,000
|
41,000
|
23,000
|
||||||||||||
|
Asset
retirement expense
|
4,000
|
129,000
|
―
|
175,000
|
||||||||||||
|
General
and administrative
|
827,000
|
558,000
|
492,000
|
255,000
|
||||||||||||
|
Total
expenses
|
2,919,000
|
2,821,000
|
1,697,000
|
1,473,000
|
||||||||||||
|
Income
from operations
|
578,000
|
3,233,000
|
324,000
|
1,262,000
|
||||||||||||
|
Other
Income (Expense):
|
||||||||||||||||
|
Interest
and other income
|
50,000
|
42,000
|
50,000
|
34,000
|
||||||||||||
|
Interest
and other expenses
|
(19,000
|
)
|
(16,000
|
)
|
(4,000
|
)
|
(13,000
|
)
|
||||||||
|
Total
other income
|
31,000
|
26,000
|
46,000
|
21,000
|
||||||||||||
|
Income
before income taxes
|
609,000
|
3,259,000
|
370,000
|
1,283,000
|
||||||||||||
|
Current
income tax expense
|
61,000
|
368,000
|
119,000
|
187,000
|
||||||||||||
|
Provision
for deferred income taxes
|
28,000
|
565,000
|
(20,000
|
)
|
150,000
|
|||||||||||
|
Total
income tax expense
|
89,000
|
933,000
|
99,000
|
337,000
|
||||||||||||
|
Net
income
|
$
|
520,000
|
$
|
2,326,000
|
$
|
271,000
|
$
|
946,000
|
||||||||
|
Per
share amounts:
|
||||||||||||||||
|
Basic
|
$
|
0.03
|
$
|
0.13
|
$
|
0.02
|
$
|
0.05
|
||||||||
|
Diluted
|
$
|
0.03
|
$
|
0.13
|
$
|
0.02
|
$
|
0.05
|
||||||||
|
Weighted
average common shares outstanding:
|
||||||||||||||||
|
Basic
|
17,069,682
|
17,116,020
|
17,114,293
|
17,116,020
|
||||||||||||
|
Diluted
|
17,069,682
|
17,139,192
|
17,114,293
|
17,139,037
|
||||||||||||
See
accompanying notes to unaudited consolidated financial statements.
Basic Earth Science Systems, Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
Six
Months Ended
|
||||||||
|
September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$
|
520,000
|
$
|
2,326,000
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and depletion
|
574,000
|
418,000
|
||||||
|
Deferred
tax liability
|
27,000
|
565,000
|
||||||
|
Accretion
of asset retirement obligation
|
83,000
|
36,000
|
||||||
|
Share
based compensation
|
36,000
|
24,000
|
||||||
|
Change
in:
|
||||||||
|
Accounts
receivable, net
|
375,000
|
(965,000)
|
||||||
|
Other
assets
|
118,000
|
(13,000)
|
||||||
|
Accounts
payable and accrued liabilities
|
142,000
|
460,000
|
||||||
|
Net
cash provided by operating activities
|
1,875,000
|
2,851,000
|
||||||
|
Cash
flows used in investing activities:
|
||||||||
|
Oil
and gas property
|
(482,000)
|
(2,668,000)
|
||||||
|
Support
equipment
|
(9,000)
|
―
|
||||||
|
Net
cash used in investing activities
|
(491,000)
|
(2,668,000)
|
||||||
|
Cash
flows used in financing activities:
|
||||||||
|
Purchase
of treasury shares
|
(165,000)
|
―
|
||||||
|
Net
cash used in financing activities
|
(165,000)
|
―
|
||||||
|
Cash
and cash equivalents:
|
||||||||
|
Increase
in cash and cash equivalents
|
1,219,000
|
183,000
|
||||||
|
Balance,
beginning of year
|
4,088,000
|
5,571,000
|
||||||
|
Balance,
end of period
|
$
|
5,307,000
|
$
|
5,754,000
|
||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$
|
13,000
|
$
|
5,000
|
||||
|
Cash
paid for income tax
|
$
|
14,000
|
$
|
205,000
|
||||
|
Non-cash:
|
||||||||
|
Decrease
in oil and gas property due to asset retirement obligation
|
$
|
31,000
|
$
|
32,000
|
||||
|
Decrease
in accrued liabilities of vested shares
|
$
|
48,000
|
$
|
—
|
||||
|
Additions
to oil and gas also included in accrued liabilities
|
$
|
79,000
|
$
|
642,000
|
||||
See
accompanying notes to unaudited consolidated financial statements.
Basic Earth Science Systems, Inc.
Notes
to Unaudited Consolidated Financial Statements
September
30, 2009
1.
Presentation of Consolidated Financial Statements
The
accompanying interim financial statements of Basic Earth Science Systems, Inc.
(sometimes referred to as “the Company” “we” “our” or “us”) are unaudited.
However, in the opinion of management, the interim data includes any applicable
adjustments necessary for a fair presentation of the results for the interim
period.
At the
directive of the Securities and Exchange Commission to use “plain English” in
public filings, the Company will use such terms as “we”, “our” and “us” in place
of Basic Earth Science Systems, Inc. or “the Company.” When such terms are used
in this manner throughout this document they are in reference only to the
corporation, Basic Earth Science Systems, Inc. and its subsidiaries, and are not
used in reference to the board of directors, corporate officers, management, or
any individual employee or group of employees.
The
financial statements included herein have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. We believe the
disclosures made are adequate to make the information not misleading and suggest
that these financial statements be read in conjunction with the financial
statements and related notes thereto included in our Annual Report on Form 10-K
for the year ended March 31, 2009 and Quarterly Report on Form 10-Q for the
quarter ended June 30, 2009.
We have
evaluated events subsequent to September 30, 2009 through November 12,
2009, the filing date of this report, and determined that there were no
subsequent events to recognize or disclose in these consolidated financial
statements which would either impact the results reflected in this report or the
Company’s results going forward.
Organization and
Nature of Operations. Basic Earth Science Systems, Inc. was originally
organized in July 1969 and had its first public offering in 1980. We are
principally engaged in the acquisition, exploitation, development, operation and
production of crude oil and natural gas. Our primary areas of operation are the
Williston basin in North Dakota and Montana, south Texas and the
Denver-Julesburg basin in Colorado.
Principles of
Consolidation. The consolidated financial statements include our accounts
and those of our wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
2.
Summary of Significant Accounting Policies and Recent Accounting
Pronouncements
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the actual amounts of assets and liabilities at the date of the
financial statements and the actual amounts of revenues and expenses during the
reporting period. We base these estimates on assumptions that we understand are
reasonable under the circumstances. The estimated results that are produced by
this effort will differ under different assumptions or conditions. We
understand that these estimates are necessary and that actual results could vary
significantly from the estimated amounts for the current and future periods.
There are many factors, including global events, which may influence the
production, processing, marketing, and valuation of crude oil and natural gas. A
reduction in the valuation of oil and gas properties resulting from declining
prices or production could adversely impact depletion rates and ceiling test
limitations. We understand the following accounting policies and estimates are
necessary in the preparation of our consolidated financial statements: the
carrying value of our oil and gas property, the accounting for oil and gas
reserves, the estimate of our asset retirement obligations, the estimate of our
income tax assets and liabilities and estimates of accrued quantities and prices
in our oil and gas receivable.
Oil and Gas
Reserves. Oil and gas reserves represent theoretical, estimated
quantities of crude oil and natural gas which geological and engineering data
estimate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. There are numerous
uncertainties inherent in estimating oil and gas reserves and their values,
including many factors beyond our control. Accordingly, reserve estimates are
different from the future quantities of oil and gas that are ultimately
recovered and the corresponding lifting costs associated with the recovery of
these reserves. At March 31, 2009, ninety-eight percent of our reported oil and
gas reserves are based on estimates prepared by Ryder Scott Company, L.P, a
nationally recognized, independent petroleum engineering firm. The remaining two
percent of our oil and gas reserves were prepared by our technical in-house
staff.
Each
quarter, we update reserve estimates by substituting the prices we would have
received at quarter-end for the year-end prices that were used by our
independent petroleum engineers. In conducting this “re-pricing” no
changes are made to the decline rates, tax rates or lifting costs used by our
independent petroleum engineers. The determinations of depletion
expense, as well as the results of ceiling tests and corresponding write-downs,
if any, are highly dependent on these reserve and quarterly “re-pricing”
estimates.
Oil and Gas
Sales. We derive revenue primarily from the sale of produced natural gas
and crude oil. We report revenue on a gross basis for the amounts received
before taking into account production taxes and transportation costs, which are
reported as separate expenses. Revenue is recorded using the sales method, which
occurs in the month production is delivered to the purchaser, at which time
title changes hands. Payment is generally received between 30 and 90 days
after the date of production. We make estimates of the amount of production
delivered to purchasers and the prices we will receive. We use our knowledge of
our properties, their historical performance, NYMEX and local spot market
prices, and other factors as the basis for these estimates. Variances between
estimates and the actual amounts received are recorded when payment is received,
or when better information is available.
Oil and Gas
Property. We follow the full cost method of accounting for our oil and
gas property. Accordingly, all costs associated with the acquisition,
exploration and development of oil and gas properties are capitalized. These
capitalized costs are subject to a ceiling test that limits such pooled costs to
the aggregate of the present value of future net revenues attributable to proved
oil and gas reserves using current prices and costs discounted at
10 percent plus the lower of cost or fair value of unproved properties less
any associated tax effects. If the full cost pool of capitalized oil and gas
property costs exceeds the ceiling, we will record a ceiling test write-down to
the extent of such excess. This write-down is a non-cash charge to earnings. If
required, it reduces earnings and impacts shareholders’ equity in the period of
occurrence. The write-down may not be reversed in future periods, even though
higher oil and gas prices in the future may subsequently and significantly
increase reserve estimates in future periods. As of September 30,
2009, our capitalized costs did not exceed the ceiling test limit.
Cash and Cash
Equivalents. For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, we consider all highly liquid investments with a
maturity of ninety days or less when purchased to be cash equivalents. The
carrying amount of cash equivalents approximates fair value because of the
short-term maturity of those instruments. During the period and at the balance
sheet date, balances of cash and cash equivalents exceeded the federally insured
limit.
Support Equipment
and Other. Support equipment (including such items as vehicles, office
furniture and equipment and well servicing equipment) is stated at cost.
Depreciation of support equipment and other property is computed using the
straight-line method over periods ranging from five to seven
years.
Long-Term
Assets. We regularly evaluate all long-lived assets for possible
impairment. Assets are reported at the lower of cost or their estimated
recoverable amounts. During 2009 and 2008, there was no impairment recorded for
long-lived assets.
Fair Value
Measurements. Effective April 1, 2009, we adopted the provisions for
nonfinancial assets and liabilities that are not required to be measured at fair
value on a recurring basis, which include, among others, those nonfinancial
long-lived assets measured at fair value for impairment assessment and asset
retirement obligations initially measured at fair value. Fair value used in the
initial recognition of asset retirement obligations is determined based on the
present value of expected future dismantlement costs incorporating our estimate
of inputs used by industry participants when valuing similar liabilities.
Accordingly, the fair value is based on unobservable pricing inputs and
therefore, is considered a level 3 value input in the fair value
hierarchy.
Asset Retirement
Obligations. We have obligations related to the plugging and abandonment
of our oil and gas wells. We estimate the future cost of these obligations,
discount this cost to its present value, and record a corresponding asset and
liability in our Consolidated Balance Sheets. The values ultimately derived are
based on numerous and significant estimates, including the ultimate expected
cost of the obligation, the expected future date of the required cash
expenditures, and inflation rates. The nature of these estimates requires us to
make judgments based on historical experience and future expectations related to
timing. We review the estimate of our future asset retirement obligations
quarterly. These quarterly reviews may require revisions to these estimates
based on such things as changes to cost estimates or the timing of future cash
outlays. Any such changes that result in upward or downward revisions in the
estimated obligation will result in an adjustment to the related capitalized
asset and corresponding liability on a prospective basis.
We
recognize two components on our consolidated statement of operations; accretion
of asset retirement obligations and asset retirement
expense. Accretion of asset retirement obligation reflects the
periodic accretion of the present value of future plugging and abandonment
costs. Asset retirement expense reflects the actual current period
gains and losses on plugging and abandonment costs relative to previously
estimated future costs. We have closed gains and losses on asset
retirements to the consolidated statement of operations as a component of asset
retirement expense.
The
information below reconciles the value of the asset retirement obligation for
the period presented. This includes a short term obligation of
$124,000, which is carried within the accrued liabilities line item of the
balance sheet.
|
Six
Months Ended
|
||||
| September 30, | ||||
|
2009
|
||||
|
Balance
beginning of period
|
$
|
1,698,000
|
||
|
Liabilities
incurred
|
16,000
|
|||
|
Liabilities
settled
|
(107,000
|
)
|
||
|
Revisions
to estimates
|
(47,000
|
)
|
||
|
Accretion
expense
|
83,000
|
|||
|
Balance
end of period
|
$
|
1,643,000
|
||
Commitments. We
currently office in a 4,000 square foot office space located in downtown Denver,
Colorado, and are committed to a total of $281,000 for the five-year lease term
ending April 1, 2013. We have no off balance sheet transactions
or arrangements.
Income Taxes.
We account for income taxes with deferred tax liabilities and assets
which are determined based on the temporary differences between the financial
statements and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Projections
of future income taxes and their timing require significant estimates with
respect to future operating results. Accordingly, the net deferred tax liability
is continually re-evaluated and numerous estimates are revised over time. As
such, the net deferred tax liability may change significantly as more
information and data is gathered with respect to such events as changes in
commodity prices, their effect on the estimate of oil and gas reserves, and the
depletion of these long-lived reserves.
We are
subject to U.S. federal income tax and income tax from multiple state
jurisdictions. The tax years remaining subject to examination by tax authorities
are fiscal years 2006 through 2008. We recognize interest and penalties related
to uncertain tax positions in income tax expense. As of September 30, 2009, we
made no provisions for interest or penalties related to uncertain tax
positions.
Earnings Per
Share. Our earnings per share (EPS) is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS is calculated by dividing net income by the diluted weighted average number
of common shares. The diluted weighted average number of common shares is
computed using the treasury stock method for common stock that may be issued for
outstanding stock options. As of the balance sheet date, no dilutive
securities were outstanding.
Reclassifications.
Certain prior year amounts were reclassified to conform to current year
presentation. Such reclassifications had no effect on net
income.
Recent
Accounting Pronouncements
In June
2009, The Financial Accounting Standards Board (FASB) issued Accounting
Standards Codification, “Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles” (Codification) which will become the
source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of the Codification will not have a
material impact on our consolidated financial statements or results of
operations.
In
June 2009, the FASB issued guidance related to subsequent events which
incorporates the guidance contained in the auditing standards literature into
authoritative accounting literature. It also requires entities to disclose the
date through which they have evaluated subsequent events and whether the date
corresponds with the release of their financial statements. The new guidance is
effective for all interim and annual periods ending after June 15, 2009.
The Company adopted the guidance upon its issuance and it had no material impact
on our consolidated financial statements.
On
April 29, 2009, the FASB issued guidance related to financial Instruments,
which requires publicly-traded companies to provide disclosures on the fair
value of financial instruments in interim financial statements, and is effective
for interim periods ending after June 15, 2009. We have adopted these new
provisions, which did not have a material impact on the Company’s consolidated
financial statements or results of operations.
On
April 1, 2009, the FASB issued guidance related to business Combinations,
which addresses application issues associated with initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination, including the
treatment of contingent consideration, acquisition costs, research and
development assets and restructuring costs. In addition, changes in deferred tax
asset valuation allowances and acquired income tax uncertainties in a business
combination after the measurement period will impact income taxes. The new
guidance is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. We will apply the new provisions to future
acquisitions.
In
December 2008, the SEC announced final approval of new requirements for
reporting oil and gas reserves. Among the changes to the disclosure requirements
is a broader definition of reserves, which allows reporting of probable and
possible reserves, in addition to consideration of new technologies and
non-traditional resources. In addition, oil and gas reserves will be reported
using an average price based on the prior 12-month period, rather than year-end
prices, and allow companies to disclose their probable and possible reserves to
investors. The new rules are expected to be effective for years ending on or
after December 31, 2009. The Company is in the process of evaluating the
effect of these new requirements, and has not yet determined the impact that it
will have on its financial statements upon full adoption on March 31,
2010.
In
September 2006, the FASB issued guidance related to fair value measurements
and disclosures, which defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. The new guidance is effective
for fiscal years beginning after November 15, 2007. In February 2008,
the FASB proposed a one year deferral of the implementation for non-financial
assets and liabilities that are recognized or disclosed at fair value on a
nonrecurring basis (less frequent than annually). On April 1, 2008, we
adopted the new guidance with the one-year deferral for non-financial assets and
liabilities. The adoption of the new guidance did not have a material impact on
our financial position, results of operations, or cash flows. Beginning
April 1, 2009, we have adopted the provisions for non-financial assets and
non-financial liabilities that are not required or permitted to be measured at
fair value on a recurring basis. The adoption did not have a material impact on
our financial statements.
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
As a crude
oil and natural gas producer, our revenue, cash flow from operations, other
income and profitability, reserve values, access to capital and future rate of
growth are substantially dependent upon the prevailing prices of crude oil and
natural gas. Declines in commodity prices will materially and adversely affect
our financial condition, liquidity, ability to obtain financing and operating
results. Lower commodity prices may reduce the amount of crude oil and natural
gas that we can produce economically. Prevailing prices for such commodities are
subject to wide fluctuation in response to relatively minor changes in supply
and demand and a variety of additional factors beyond our control, such as
global, political and economic conditions. Historically, prices received for
crude oil and natural gas production have been volatile and unpredictable, and
such volatility is expected to continue. Most of our production is sold at
market prices. Generally, if the commodity indexes fall, the price that we
receive for our production will also decline. Therefore, the amount of revenue
that we realize is to a large extent determined by factors beyond our
control.
Liquidity
and Capital Resources
Liquidity
Outlook. Our primary source of funding is the net cash flow from the sale
of our oil and gas production. The profitability and cash flow generated by our
operations in any particular accounting period will be directly related to:
(a) the volume of oil and gas produced and sold, (b) the average realized
prices for oil and gas sold, and (c) lifting costs. Assuming that oil
prices do not decline from current levels, we believe the cash generated from
operations, along with existing cash balances, will enable us to meet our
existing and normal recurring obligations during the next fiscal year and
beyond.
Working Capital.
At September 30, 2009, we had a working capital surplus of $5,585,000 (a
current ratio of 4.53:1) compared to a working capital surplus at March 31, 2009
of $5,045,000 (a current ratio of 4.62:1). The decrease in current ratio is
largely a result of the timing between payments made for payables, and cash
received for revenue.
Cash Flow.
Net cash provided by operating activities decreased 34.2% from $2,851,000
in the six months ended September 30, 2008 (“2008”) to $1,875,000 in the six
months ended September 30, 2009 (“2009”) primarily due to decreased oil and gas
commodity prices.
Net cash
used in investing activities decreased 81.6% from $2,668,000 during 2008 to
$491,000 in the six months ended September 30, 2009. The difference relates
primarily to significantly more expenditures made during the prior year on the
DJ Basin wells in Colorado.
Net cash
used in financing activities was $165,000 at September 30, 2009 as compared to
no cash used for financing activities at September 30, 2008 since the Company
did not adopt its stock buyback program until October 2008.
Credit
Line. Our current banking relationship, established in March 2002,
is with American National Bank (“the Bank”), located in Denver, Colorado.
Subject to evaluation every six months, the line of credit amount was set at
$20,000,000 with a concurrent borrowing base of $4,000,000. Effective
December 31, 2008 the loan agreement was amended to extend the maturity
date of the credit agreement to December 31, 2010. We renewed
the line with an interest rate of prime plus 0.25% or 6.5% whichever is
higher. During the year ended March 31, 2009 and for the six
months ending September 30, 2009, we did not utilize our credit
facility. The loan contains several covenant
restrictions. At September 30, 2009, we were in compliance with all
covenants. This line may be used for purposes of borrowing funds to
reduce payables, finance re-completion or drilling efforts, fund property
acquisitions, or pursue other opportunities that might arise.
Capital
Expenditures
The
amounts presented herein are presented on an accrual basis, and as such may not
be consistent with the amounts presented on the consolidated statement of cash
flows under investing activities for expenditures on oil and gas property in
that the amounts contained therein are presented on a cash basis.
During
the quarter ended September 30, 2009, we spent approximately $95,000 on various
projects. This compares to $575,000 for the quarter ended
September 30, 2008. The decrease in capital expenditures is primarily
attributable to the timing of expenditures incurred. During the
quarter ended September 30, 2009, 85% of capital expenditures were dedicated to
leasing and completions. We spent approximately 71% of our capital
expenditures amount on leasing acreage for the Banks prospect, 6% on
recompletion of the Guenther 1-8 in Sheridan County, Montana, and 8% on
completion efforts of the Lassen 41-26H in McKenzie County, North
Dakota. These projects were funded with internally generated cash
flow from operations.
At
present cash levels, and with the extension of our available borrowing capacity,
we expect to have sufficient funds available for our share of any additional
acreage, seismic and/or drilling cost requirements that might arise from these
opportunities. We may alter or vary all or part of any planned
capital expenditures for reasons including but not limited to; changes in
circumstances, unforeseen opportunities, inability to negotiate favorable
acquisition, farmout or joint venture terms, lack of cash flow, and lack of
additional funding.
We
currently have no capital expenditure commitments. We are continually
evaluating other drilling and acquisition opportunities for possible
participation. Typically, at any one time, several opportunities are in various
stages of due diligence. Our policy is to not disclose the specifics of a
project or prospect, nor to speculate on such ventures, until such time as those
various opportunities are finalized and undertaken. We caution that the absence
of news and/or press releases should not be interpreted as a lack of development
or activity.
Divestitures/Abandonments
During
the quarter ended September 30, 2009 we commenced the plugging of one
well.
Results
of Operations
Overview.
Net income for the three and six months ended September 30, 2009 was
$271,000 and $520,000 compared to net income of $946,000 and $2,326,000, for the
three and six months ended September 30, 2008. The following table
shows selected financial information for the three and six months ended
September 30 in the current and prior year. Certain prior year amounts may have
been reclassified to conform to current year presentation.
14
|
Six Months
Ended
|
Three
Months
Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Sales
volume
|
||||||||||||||||
|
Oil
(barrels)
|
51,609
|
43,300
|
27,266
|
19,400
|
||||||||||||
|
Gas
(mcf)
|
119,326
|
81,900
|
84,140
|
38,800
|
||||||||||||
|
Revenue
|
||||||||||||||||
|
Oil
|
$
|
2,981,000
|
$
|
5,106,000
|
$
|
1,711,000
|
$
|
2,234,000
|
||||||||
|
Gas
|
489,000
|
903,000
|
299,000
|
463,000
|
||||||||||||
|
Total
revenue1
|
3,470,000
|
6,009,000
|
2,010,000
|
2,697,000
|
||||||||||||
|
Total
production expense2
|
1,405,000
|
1,627,000
|
817,000
|
779,000
|
||||||||||||
|
Gross
profit
|
$
|
2,065,000
|
$
|
4,382,000
|
$
|
1,193,000
|
$
|
1,918,000
|
||||||||
|
Depletion
expense
|
$
|
556,000
|
$
|
400,000
|
$
|
326,000
|
$
|
179,000
|
||||||||
|
Average
sales price3
|
||||||||||||||||
|
Oil
(per barrel)
|
$
|
57.76
|
$
|
117.86
|
$
|
62.75
|
$
|
115.09
|
||||||||
|
Gas
(per mcf)
|
$
|
4.10
|
$
|
10.98
|
$
|
3.55
|
$
|
11.98
|
||||||||
|
Average
per BOE
|
||||||||||||||||
|
Production
expense2,3,4
|
$
|
19.65
|
$
|
28.54
|
$
|
19.79
|
$
|
30.13
|
||||||||
|
Gross
profit3,4
|
$
|
28.88
|
$
|
76.88
|
$
|
28.89
|
$
|
74.05
|
||||||||
|
Depletion
expense3,4
|
$
|
7.78
|
$
|
7.33
|
$
|
8.14
|
$
|
7.61
|
||||||||
|
1
|
Net
of $11,000 and $27,000 in water service and disposal revenue, to total
$2,021,000 and $3,497,000 in revenue for the three and six months ended
September 30, 2009, compared to $38,000 and $45,000 to total $2,735,000
and $6,054,000 for the same period in 2008.
|
|
|
2
|
Overall
lifting cost (oil and gas production expenses and production
taxes)
|
|
|
3
|
Averages
calculated based upon non-rounded figures
|
|
|
4
|
Per
equivalent barrel (6 Mcf of gas is equivalent to 1 barrel of
oil)
|
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Revenues.
Oil and gas sales revenue decreased $687,000 (25.5%) in 2009 from 2008 due to
lower realized oil and gas prices. Oil sales revenue decreased $523,000 (23.4%),
and gas sales revenue decreased $164,000 (35.4%) in 2009 from
2008.
Volumes and
Prices. Oil sales volumes increased 40.5%, from 19,400 barrels in 2008 to
27,266 barrels in 2009 while there was a decrease of 45.5% in the average price
per barrel from $115.09 in 2008 to $62.75 in 2009. Gas sales volume changed
116.9% from 38,800 thousand cubic feet (Mcf) in 2008 to 84,140 Mcf in 2009,
while the average price per Mcf decreased 70.3%, from $11.98 in 2008 to $3.55 in
2009. The increase in gas sales volume, and to some extent the change in oil
sales volume, is primarily due to the receipt of sales volume information
related to the production from the Antenna Federal property in Weld County,
Colorado which differed significantly from accruals for prior
periods. The reported sales volumes, while mathematically accurate
and in accordance with GAAP, are not representative of actual sales volume for
this three month period and should not be used to discern or predict future
production or sales volumes. Therefore, as a result of this
adjustment, any metric whose denominator is related to sales volumes may be
understated. On an equivalent barrel (BOE) basis, sales volume increased
59.4% from 25,900 BOE in 2008 to 41,290 BOE in 2009.
Expenses.
Oil and gas production expense decreased $11,000 (2.0%) in 2009 over 2008,
primarily due to workover expense decreasing $35,000 (44.9%) from $78,000 in
2008 to $43,000 in 2009 and routine lease operating expense increasing by
$24,000 (4.9%) from $485,000 in 2008 to $509,000 in 2009. Routine
lease operating expense per BOE decreased 34.2% from $18.73 in 2008 to $12.33 in
2009 due to the overall increase in BOE, while workover expense per BOE
decreased 65.4% from $3.01 in 2008 to $1.04 in 2009 due to fewer workover
operations in 2009.
Production
taxes, which are generally a percentage of sales revenue, increased $49,000
(22.7%) in 2009 compared to 2008. Production taxes, as a percent of sales
revenue increased from 7.9% in 2008 to 13.1% in 2009, which is due to the
adjustment as mentioned above and the corresponding rate of production tax
withheld on the Antenna Federal property in Weld County, Colorado. The
overall lifting cost (oil and gas production expense and production taxes) per
BOE decreased 34.2% from $30.08 in 2008 to $19.79 in 2009.
Depreciation,
depletion and amortization expense increased $139,000 (70.6%) in 2009 compared
to 2008 as a result of the change in gas volumes as mentioned above and a
decrease in our reserve values due to the decline in oil and gas
prices.
General
and administrative expense increased $237,000 (92.9%) in 2009 over
2008. Approximately 75% of this increase is related to professional
services (legal and consulting fees) while all other categories increased 10% or
less. G&A expense per BOE increased 21.0% from $9.85 in
2008 to $11.92 in 2009. As a percent of total sales revenue, G&A expense
increased from 9.3% in 2008 to 24.3% in 2009.
Income Tax
Expense. For the three months ended September 30, 2009 we recorded an
income tax expense of $99,000. This amount consists of a current period expense
of $119,000 which was partially reduced by a deferred tax benefit of
$20,000. Our effective income tax rate decreased from 26.28% for the
three months ended September 30, 2008 to 16.27% for the three months ended
2009. Our effective income tax rate was lower for 2009 primarily due
to an increase in estimated deductions for statutory
depletion.
Six
Months Ended September 30, 2009 Compared to Six Months Ended September 30,
2008
Revenues.
Oil and gas sales revenue decreased $2,539,000 (42.3%) in 2009 from 2008 due to
lower realized oil and gas prices. Oil sales revenue decreased $2,125,000
(41.6%), and gas sales revenue decreased $414,000 (45.8%) in 2009 from
2008.
Volumes and
Prices. Oil sales volumes increased 19.2%, from 43,300 barrels in 2008 to
51,609 barrels in 2009 while there was a decrease of 51.0% in the average price
per barrel from $117.86 in 2008 to $57.76 in 2009. Gas sales volume changed
45.7% from 81,900 thousand cubic feet (Mcf) in 2008 to 119,326 Mcf in 2009,
while the average price per Mcf decreased 62.7%, from $10.98 in 2008 to $4.10 in
2009. The increase in gas sales volume, and to some extent the change in oil
sales volume, is primarily due to the receipt of sales volume information
related to the production from the Antenna Federal property in Weld County,
Colorado which differed significantly from accruals for prior
periods. The reported sales volumes while mathematically accurate and
in accordance with GAAP, are not representative of actual sales volume for the
period and should not be used to discern or predict future production or sales
volumes. Therefore, as a result of this adjustment, any metric whose
denominator is related to sales volumes may be understated. On an equivalent
barrel (BOE) basis, sales volume increased 25.4% from 57,000 BOE in 2008 to
71,497 BOE in 2009.
Expenses.
Oil and gas production expense decreased $109,000 (9.7%) in 2009 over 2008,
primarily due to routine lease operating expense declining by $90,000 (9.6%)
from $938,000 in 2008 to $848,000 in 2009. Workover expense, which is
more volatile than routine lease operating expense, decreased $19,000 (9.9%)
from $191,000 in 2008 to $172,000 in 2009. Routine lease operating expense per
BOE decreased 27.9% from $16.46 in 2008 to $11.86 in 2009 while workover expense
per BOE decreased 28.2% from $3.35 in 2008 to $2.41 in 2009.
Production
taxes, which are generally a percentage of sales revenue, decreased $113,000
(22.7%) in 2009 compared to 2008 primarily due to the overall decline of oil
prices. Production taxes, as a percent of sales revenue increased from 8.2% in
2008 to 11.0% in 2009, which is due to the adjustment as mentioned above and the
corresponding rate of production tax withheld on the Antenna Federal property in
Weld County, Colorado. The overall lifting cost (oil and gas
production expense and production taxes) per BOE decreased 31.2% from $28.54 in
2008 to $19.65 in 2009.
Depreciation,
depletion and amortization expense increased $156,000 (37.3%) in 2009 compared
to 2008 as a result of the change in oil and gas volumes and a decrease in our
reserve values due to the decline in oil and gas prices.
General
and administrative expense increased $269,000 (48.2%) in 2009 over
2008. Approximately 68% of this increase is related to professional
services (legal and consulting fees) while all other categories increased 15% or
less. G&A expense per BOE increased 18.2% from $9.79 in 2008 to
$11.57 in 2009. As a percent of total sales revenue, G&A expense increased
from 9.2% in 2008 to 23.6% in 2009.
Income Tax
Expense. For the six months ended September 30, 2009 we recorded an
income tax expense of $89,000. This includes current period expense of $87,000
and a deferred tax expense of $2,000. Our effective income tax rate
decreased from 28.67% for the six months ended September 30, 2008 to 14.63% for
the six months ended 2009. Our effective income tax rate was lower
for 2009 primarily due to an increase in estimated deductions for statutory
depletion.
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,”
we are not required to provide this information.
The
Company maintains a system of disclosure controls and procedures for the purpose
of ensuring that information required to be disclosed in its SEC reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including the Chief Executive Officer
and the Principal Accounting Officer, as appropriate to allow timely decisions
regarding required disclosures.
For the
quarter ended September 30, 2009, we carried out an evaluation under the
supervision and with the participation of the Company’s Chief Executive Officer
and Principal Accounting Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures. Based upon that
evaluation, we determined that an amendment to our Annual Report on Form 10-K
for the period ended March 31, 2009, was necessary and such amendment was filed
on October 9, 2009. Except for the amendment to our Annual Report on Form 10-K
that was filed, it was otherwise concluded that the Company’s disclosure
controls and procedures are effective for the purposes discussed
above.
There
have been no changes in the Company’s internal control over financial reporting
that occurred during the Company’s quarter ended September 30, 2009 that have
materially affected, or were reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal
Proceedings
None.
Item
1A. Risk
Factors
As a
“smaller reporting company,” we are not required to provide this
information.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
Purchases
of Equity Securities
The
following table summarizes stock repurchase activity for the three months ended
September 30, 2009:
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid Per Share
|
Number
of Shares Purchased as Part of a Publicly Announced Plan
(1)
|
Maximum
Shares that May Yet be Purchased under the Plan
(1)
|
|||||||||||||
|
July
1, 2009 - July 31, 2009
|
1,000
|
$
|
0.85
|
1,000
|
261,800
|
|||||||||||
|
Aug
1, 2009 - Aug 31, 2009
|
—
|
$
|
—
|
—
|
261,800
|
|||||||||||
|
Sept
1, 2009 - Sept 30, 2009
|
|
2,000
|
$
|
0.78
|
2,000
|
259,800
|
||||||||||
|
|
||||||||||||||||
|
Total
|
|
3,000
|
3,000
|
|||||||||||||
|
(1)
|
In
October 22 2008, the Company’s Board of Directors authorized a stock
buyback program for the Company to repurchase up to 500,000 shares of its
common stock for a period of up to 18 months. The program does not require
the Company to repurchase any specific number of shares, and
the Company may terminate the repurchase program at any
time. During the three months ended September 30, 2009,
3,000 shares were repurchased under the stock buyback program and 259,800
shares remain available for future
repurchase.
|
Item 3.
Defaults
Upon Senior Securities
None.
Item 4. Submission of Matters to a
Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
Exhibit
No.
|
Document
|
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray
Singleton, Chief Executive Officer).
|
||
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Joseph
Young, Principal Accounting Officer).
|
||
|
Certification
Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive
Officer).
|
||
|
Certification
Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Joseph Young, Principal Accounting
Officer).
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report is
signed by the following authorized persons on behalf of Basic.
|
BASIC
EARTH SCIENCE SYSTEMS, INC.
|
||
|
By: /s/ Ray Singleton
|
||
|
Ray
Singleton
|
||
|
President
and Chief Executive Officer
|
||
|
By:
/s/ Joseph Young
|
||
|
Joseph
Young
|
||
|
Principal
Accounting Officer
|
||
|
Date:
November 16, 2009
|