SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 84-0592823
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
633 Seventeenth Street, Suite 1670, Denver, Colorado 80202-3635
(Address of principal executive offices) (Zip Code)
(303) 294-9525
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No
Shares of common stock outstanding on November 12, 1996: 16,580,487
<PAGE>
BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets - September 30, 1996
and March 31, 1996 3
Consolidated Statements of Operations - Quarter Ended
and Six Months Ended September 30, 1996 and
September 30, 1995 5
Consolidated Statements of Cash Flows - Six Months Ended
September 30, 1996 and September 30, 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
<PAGE>
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
(Unaudited) (Audited)
------------ ---------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $116,000 $92,000
Accounts receivable:
Oil and gas sales 281,000 322,000
Joint interest and other, net 186,000 155,000
Other current assets 145,000 148,000
----------- ----------
Total current assets 728,000 717,000
Property and equipment
Oil and gas property
(full cost method) 31,994,000 31,844,000
Support equipment 421,000 432,000
----------- -----------
32,415,000 32,276,000
Accumulated depletion - FCP
(includes cumulative ceiling limitation
charges of $14,091,000) (29,561,000) (29,295,000)
Accumulated depreciation (353,000) (356,000)
------------ ------------
Net property and equipment 2,501,000 2,625,000
Other noncurrent assets 78,000 77,000
------------ ------------
Total Assets $3,307,000 $3,419,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
(Unaudited) (Audited)
------------- -----------
<S> <C> <C>
Liabilities
Current liabilities
Accounts payable and accrued
liabilities $565,000 $699,000
Current portion of long-term debt 96,000 126,000
----------- ----------
Total current liabilities 661,000 825,000
Long-term debt, less current
portion 584,000 692,000
----------- ----------
Total liabilities 1,245,000 1,517,000
Shareholders' Equity
Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares ----- -----
Common stock, $.001 par value
32,000,000 shares authorized;
16,580,487 shares outstanding at
March 31 and September 30 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (20,632,000) (20,792,000)
Less: treasury stock (299,265
shares at March 31 and
September 30); at cost (15,000) (15,000)
------------ ------------
Total shareholders' equity 2,062,000 1,902,000
------------ ------------
Total Liab. & Shareholders' Equity $3,307,000 $3,419,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Quarter Ended
September 30 September 30
1996 1995 1996 1995
----------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Oil and gas sales $1,480,000 $1,397,000 $755,000 $646,000
Well service rev. 17,000 3,000 6,000 2,000
---------- ---------- -------- --------
Total revenue 1,497,000 1,400,000 761,000 648,000
---------- ---------- -------- --------
Expenses:
Oil &gas production 789,000 881,000 404,000 395,000
Production tax 140,000 114,000 70,000 55,000
Well service exp. 17,000 3,000 5,000 2,000
Depreciation, depletion
and amortization 273,000 342,000 141,000 168,000
General & admin. 83,000 68,000 41,000 34,000
--------- --------- --------- ---------
Total expenses 1,302,000 1,408,000 661,000 654,000
--------- --------- --------- ---------
Income (loss) from
operations 195,000 (8,000) 100,000 (6,000)
--------- --------- --------- ---------
Other income (expense):
Interest/other inc. 10,000 2,000 7,000 -----
Interest expense (45,000) (57,000) (21,000) (24,000)
--------- --------- --------- ---------
Total other income
(expense) (35,000) (55,000) (14,000) (24,000)
--------- --------- --------- ---------
Income (loss) before
income taxes 160,000 (63,000) 86,000 (30,000)
Income taxes ----- ----- ----- -----
--------- --------- --------- ---------
Net income (loss) $160,000 $(63,000) $86,000 $(30,000)
========= ========= ========= =========
Weighted average number of
shares outstanding 16,580,487 16,377,247 16,580,487 16,446,721
========== ========== ========== ==========
Net income (loss)
per share $.010 $(.004) $.005 $(.002)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $160,000 $(63,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 273,000 342,000
Change in current assets and current
liabilities:
Accounts receivable, net 8,000 238,000
Accounts payable and accrued liabilities (137,000) 22,000
Other current assets 2,000 (21,000)
Other noncurrent assets 2,000 (15,000)
Other adjustments 7,000 6,000
--------- ---------
Net cash provided by operating activities 315,000 509,000
--------- ---------
Cash flows from investing activities:
Capital expenditures:
Oil and gas property (150,000) (120,000)
Support equipment (4,000) (5,000)
Proceeds from sale of property & equipment 1,000 -----
--------- ---------
Net cash used in investing activities (153,000) (125,000)
--------- ---------
Cash flows from financing activities:
Long-term debt payments (180,000) (315,000)
Proceeds from borrowing 42,000 -----
Purchase of treasury stock ----- -----
--------- ---------
Net cash used in financing activities (138,000) (315,000)
--------- ---------
Cash:
Net increase 24,000 69,000
Balance at beginning of period 92,000 83,000
--------- ---------
Balance at end of period $116,000 $152,000
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest $45,000 $57,000
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
September 30, 1996
The accompanying interim financial statements of Basic Earth Science Systems,
Inc. (Basic or the Company) are unaudited. However, in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim period.
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.
Management believes the disclosures made are adequate to make the information
not misleading and suggests that these condensed financial statements be read in
conjunction with the financial statements and notes hereto included in Basic's
March 31, 1996 Form 10-KSB.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATIONS Certain prior year amounts may have been reclassified to
conform to current year presentation.
CASH AND CASH EQUIVALENTS For purposes of the Consolidated Balance Sheets and
Statements of Cash Flows, Basic considers all highly liquid investments with a
maturity of ninety days or less when purchased to be cash equivalents.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. There are many factors, including global events, that 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.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities based upon
enacted tax laws for all temporary differences between financial reporting and
tax bases of assets, liabilities and carryforwards. Deferred tax assets are
then reduced, if deemed necessary (i.e., more likely than not), by a valuation
allowance for the amount of any tax benefits which, based on current
circumstances, are not expected to be realized.
The Company's deferred tax liabilities and assets are comprised of the following
components at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities
Depreciation and depletion $(427,000) $(494,000)
Deferred tax assets
Net operating loss carryforwards 5,279,000 5,706,000
Statutory depletion carryforward 1,237,000 1,186,000
Valuation allowance (6,089,000) (6,398,000)
----------- -----------
Net deferred tax asset $0 $0
=========== ===========
</TABLE>
At March 31, 1996, the Company had available approximately $15,083,000 of net
operating loss carryforwards which expire in varying amounts in the years 1997
through 2011. The Company also has available a depletion carryover of
approximately $3,534,000.
The Company has established a valuation allowance due to the uncertainty that
the full amount of the operating loss carryforwards will be utilized due to
expiration and other factors. Although management expects improvement in future
results of operations, it emphasizes past performance rather than income
projections when determining the valuation allowance. Any subsequent
adjustments to the valuation allowance, if deemed appropriate due to changed
circumstances, will be recognized as a separate component of the provision for
income taxes.
Item 2. Management's Discussion and Analysis
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY During the six months just ended, current assets increased 2% from
$717,000 at year ended March 31, 1996 (March 31) to $728,000 at September 30,
1996 (September 30) and current liabilities decreased 20% from $825,000 at March
31 to $661,000 at September 30. Consequently, the Company's current ratio
increased from .87:1 at March 31 to 1.10:1 at September 30. For Bank covenant
purposes, at March 31 the current ratio was 1.03:1 and increased to 1.29:1 at
September 30.
DEBT During the six months ended September 30, 1996, long-term debt decreased
through the normal course of required monthly payments. There were no changes
to the terms of the Company's debt facilities. Reference should be made to the
Company's Form 10-KSB as of March 31, 1996 for disclosure regarding the
Company's debt.
HEDGING At September 30, 1996, the Company had 50 open futures and/or options
contracts to hedge future deliveries with maturities ranging from November 1996
through June 1997 at prices ranging from $17.35 to $25.00 per barrel. It should
be noted that 50 contracts does not necessarily indicate that the Company has
hedged 50,000 barrels of production in that some futures contracts and option
contracts may offset each other in volume.
LIQUIDITY OUTLOOK The Company's primary source of funding is the net cash flow
from the sale of its oil and gas production. The profitability and cash flow
generated by the Company's operations in any particular accounting period will
be directly related to: (a) the volume of oil and gas produced and then sold,
(b) the average realized prices for oil and gas sold, and (c) lifting costs.
Management believes the cash generated from operations and hedging activities
will enable the Company to meet its existing and normal recurring obligations as
they become due in fiscal year 1997.
STRATEGY IMPLEMENTATION
The Company previously disclosed it participated with unrelated third parties
for a minority interest (10%) in the development of a small 3-D seismic prospect
in southwest Texas. Subsequent to the end of the quarter covered by this
report, seismic interpretation indicated a structure, but one too small to
justify drilling. The Company invested $40,000 in this effort. Management
believes these types of projects provide exposure to "high tech" exploration
techniques and, if successful, are capable of increasing reserves and cash flow
with reasonable risk. Management, therefore, does not rule out similar efforts
in the future.
The Company bid on three acquisition packages in the last quarter. In each
case, the Company was out bid. However, if Basic had been successful, these
efforts would have required funding in the amount of $1.4 million.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 1997
To the extent that funds are available, the Company intends to pursue the
acquisition of producing properties and the exploitation of both existing
properties and those which it acquires. However, the Company may alter or vary
its plan of operation based upon changes in circumstances, unforeseen
opportunities, inability to negotiate favorable acquisition or loan terms, lack
of funding, change in oil or gas prices, lending institution requirements and
other events which the Company is not able to anticipate.
RESULTS OF OPERATIONS
YEAR-TO-DATE COMPARISON
OVERVIEW
Operations in the six months ended September 30, 1996 (1996) resulted in net
income of $160,000 compared to a net loss of $63,000 for the same period in 1995
(1995).
REVENUES
Oil and gas sales revenue increased $83,000 (6%) in 1996 from 1995. Of this
amount, $107,000 (-129%) was attributable to a decrease in oil production while
oil price increases accounted for a positive variance of $177,000 (214%). Gas
volume decreases accounted for a slight negative variance (-1%) and gas price
increases accounted for a positive variance of $13,000 (16%).
VOLUMES AND PRICES
Total liquid production decreased 9% from 75,800 barrels in 1995 to 69,200
barrels in 1996 while the price per barrel increased 16% from $16.23 in 1995 to
$18.79 in 1996. Total gas production decreased slightly (less than 1%) from
110,600 MCFs in 1995 to 110,400 MCFs in 1996 while the price per MCF increased
8% from $1.51 in 1995 to $1.63 in 1996. The decrease in both liquid and gas
production was primarily due to normal production decline.
EXPENSES
Oil and gas production expense, including production tax, decreased $66,000 (7%)
in 1996 from 1995 due to fewer workovers and lower maintenance primarily on
properties acquired at the end of fiscal 1995. In spite of the decreased
production expense, the overall lifting cost per equivalent barrel increased
slightly (1%) from $10.56 in 1995 to $10.61 in 1996 as a result of the decrease
in production volume.
Depreciation, depletion and amortization expense decreased $69,000 (20%) in 1996
from 1995 due to decreases in Basic's production volumes in the six months just
ended combined with an increase in the Company's reserves at the end of fiscal
1996. As a result, the average depletion expense per equivalent barrel
decreased 15% from $3.56 in 1995 to $3.03 in 1996.
Net general and administrative expense increased $15,000 (22%) in 1996 from
1995. This increase was primarily the result of a three-month vacancy in
Basic's land department from approximately August 1995 through October 1995.
Consequently, salaries and related expenses were lower during that time period.
In addition, fewer expenses were charged out to the full cost pool in 1996,
causing net general and administrative expense to increase. Partially
offsetting this increase in salaries in 1996 was a decrease in consulting fees.
As a result of the overall increase, and in conjunction with decreased
production volumes in 1996 compared to 1995, net general and administrative
expense per equivalent barrel increased from $.72 in 1995 to $.95 in 1996.
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1995
OVERVIEW
Operations in the quarter ended September 30, 1996 (1996) resulted in net income
of $86,000 compared to a net loss of $30,000 in the quarter ended September 30,
1995 (1995).
REVENUES
Oil and gas sales revenue increased $109,000 (17%) in 1996 from 1995. Of this
amount, approximately $38,000 (-33%) was attributable to a decrease in oil
production while oil price increases accounted for a positive variance of
$134,000 (120%). Gas volume increases accounted for a positive variance of
$8,000 (8%) and an increase in gas prices accounted for a positive $5,000 (5%)
of the total variance.
VOLUMES AND PRICES
Total liquid production decreased 7% from 36,200 barrels in 1995 to 33,800
barrels in 1996 while the price per barrel increased 26% from $15.62 in 1995 to
$19.61 in 1996. Total gas production increased 11% from 54,000 MCFs in 1995 to
60,000 MCFs in 1996 and the price per MCF increased 6% from $1.48 in 1995 to
$1.57 in 1996. The increase in gas production was primarily due to the receipt
in September 1996 of gas revenue from a well in Montana. This revenue had been
in suspense since December 1995 pending the receipt of signed division orders.
EXPENSES
Oil and gas production expense, including production tax, increased $24,000 (5%)
in 1996 from 1995. The majority of this increase occurred in production taxes,
which increased $15,000 (27%) in 1996 due to the increase in oil and gas sales
revenue. The overall lifting cost per equivalent barrel increased 9% from $9.96
in 1995 to $10.82 in 1996.
Depreciation, depletion and amortization expense decreased $27,000 (16%) in 1996
from 1995 due to the decrease in Basic's oil production volume in 1996 combined
with an increase in the Company's reserves at the end of fiscal 1996. As a
result, the average depletion expense per equivalent barrel decreased 14% from
$3.65 in 1995 to $3.13 in 1996.
Net general and administrative expense increased $7,000 (21%) in 1996 compared
to 1995. This increase was primarily the result of a three-month vacancy in
Basic's land department from approximately August 1995 through October 1995.
Consequently, salaries and related employee expenses were lower during that time
period. Partially offsetting the increase in salaries in 1996 was a decrease in
consulting fees. As a result of the overall increase, and in conjunction with
decreased oil production volumes in 1996 compared to 1995, net general and
administrative expense per equivalent barrel increased from $.75 in 1995 to $.94
in 1996.
<PAGE>
LIQUIDS AND NATURAL GAS PRODUCTION, SALES PRICE AND PRODUCTION COSTS
The following table shows selected financial information for the six months and
quarter ended September 30 in the current and prior year. Certain prior year
amounts may have been reclassified to conform to current year presentation.
<TABLE>
<CAPTION>
Six Months Ended Quarter Ended
September 30 September 30
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales volume
Oil (barrels) 69,200 75,800 33,800 36,200
Gas (mcf) 110,400 110,600 60,000 54,000
Revenue
Oil $1,301,000 $1,230,000 $662,000 $566,000
Gas 179,000 167,000 93,000 80,000
---------- ---------- -------- --------
1,480,000 1,397,000 755,000 646,000
Total production exp.(1) 929,000 995,000 474,000 450,000
---------- ---------- -------- --------
Gross profit $551,000 $402,000 $281,000 $196,000
========== ========== ======== ========
Depletion expense $265,000 $335,000 $137,000 $165,000
Depl. exp. per BOE(3) $3.03 $3.56 $3.13 $3.65
Avg. prod. exp.(2)(3) $10.61 $10.56 $10.82 $9.96
Average sales price(3)
Oil (per barrel) $18.79 $16.23 $19.61 $15.62
Gas (per mcf) 1.63 1.51 1.57 1.48
</TABLE>
- ----------------------------
(1) Operating expenses, including production tax
(2 Operating expenses, including production tax, per equivalent barrel (6 mcf
of gas is equivalent to 1 barrel of oil)
(3) Averages calculated based upon non-rounded figures
<PAGE>
PART II.
OTHER INFORMATION
(Cumulative from March 31, 1996)
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
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 and Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed by the following authorized person on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
Ray Singleton, President Karen E. Riner, Controller
/s/ Ray Singleton /s/ Karen E. Riner
(formerly Karen E. Morris)
Principal Accounting Officer
Date: November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, statements of operations, and statements of cash
flows found on pages 3, 4, 5 and 6 of the Company's Form 10-QSB for the
year-to-date and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 116,000
<SECURITIES> 0
<RECEIVABLES> 508,000
<ALLOWANCES> (41,000)
<INVENTORY> 0
<CURRENT-ASSETS> 728,000
<PP&E> 32,415,000
<DEPRECIATION> (29,914,000)
<TOTAL-ASSETS> 3,307,000
<CURRENT-LIABILITIES> 661,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 17,000
<TOTAL-LIABILITY-AND-EQUITY> 3,307,000
<SALES> 1,480,000
<TOTAL-REVENUES> 1,497,000
<CGS> 1,302,000
<TOTAL-COSTS> 1,302,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 45,000
<INCOME-PRETAX> 160,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 160,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,000
<EPS-PRIMARY> .010
<EPS-DILUTED> .010
</TABLE>
