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 June 30, 1997
[ ] 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
(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 August 14, 1997: 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 - June 30, 1997
and March 31, 1997 3
Consolidated Statements of Operations - Quarter Ended
June 30, 1997 and June 30, 1996 5
Consolidated Statements of Cash Flows - Quarter Ended
June 30, 1997 and June 30, 1996 6
Notes to Financial Statements 7
Summary of Significant Accounting Policies 7
Income Taxes 7
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
Results of Operations 10
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>
June 30 March 31
1997 1997
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $83,000 $97,000
Accounts receivable:
Oil and gas sales 235,000 255,000
Joint interest & other receivables 87,000 128,000
Less: allow. for doubtful accounts (44,000) (40,000)
Other current assets 165,000 283,000
------------ ------------
Total current assets 526,000 723,000
------------ ------------
Property and equipment
Oil and gas property (full cost method) 32,225,000 32,171,000
Furniture, fixtures and equipment 445,000 445,000
------------ ------------
32,670,000 32,616,000
Accumulated depletion (includes cumulative
ceiling limitation charges of $14,091,000) (29,931,000) (29,812,000)
Accumulated depreciation (357,000) (357,000)
------------ ------------
Net property and equipment 2,382,000 2,447,000
Other noncurrent assets 73,000 75,000
------------ ------------
Total noncurrent assets 2,455,000 2,522,000
------------ ------------
TOTAL ASSETS $2,981,000 $3,245,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
<TABLE>
<CAPTION>
June 30 March 31
1997 1997
---------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Current liabilities
Accounts payable $279,000 $466,000
Accrued liabilities 98,000 119,000
------------ ------------
Total current liabilities 377,000 585,000
Long-term debt, less current portion 559,000 649,000
------------ ------------
TOTAL LIABILITIES 936,000 1,234,000
------------ ------------
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 at June 30 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (20,649,000) (20,683,000)
Less treasury stock (299,265 shares at March 31
and June 30); at cost (15,000) (15,000)
------------ ------------
Total shareholders' equity 2,045,000 2,011,000
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $2,981,000 $3,245,000
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30
1997 1996
------------ ------------
<S> <C> <C>
REVENUE
Oil and gas sales $650,000 $725,000
Well service revenue 1,000 11,000
------------ ------------
Total revenue 651,000 736,000
------------ ------------
EXPENSES
Oil and gas production 400,000 385,000
Production tax 63,000 70,000
Well service expenses 1,000 12,000
Depreciation, depletion and amortization 122,000 132,000
General and administrative 28,000 42,000
------------ ------------
Total operating expenses 614,000 641,000
------------ ------------
INCOME FROM OPERATIONS 37,000 95,000
------------ ------------
OTHER INCOME (EXPENSE)
Interest and other income 8,000 3,000
Interest expense (11,000) (24,000)
------------ ------------
Total other expense (3,000) (21,000)
INCOME BEFORE INCOME TAXES 34,000 74,000
Income taxes --- ---
------------ ------------
NET INCOME $34,000 $74,000
============ ============
WEIGHTED AVG. NUMBER OF SHARES OUTSTANDING 16,580,487 16,580,487
============ ============
NET INCOME PER SHARE $.002 $.004
============ ============
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVIITIES
Net income $34,000 $74,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 122,000 132,000
Change in current assets & current liabilities:
Accounts receivable, net 65,000 57,000
Accounts payable & accrued liabilities (208,000) (210,000)
Other current assets 118,000 2,000
Change in other assets 2,000 ---
Loss/(gain) on sale of assets (7,000) (1,000)
Other 4,000 3,000
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 130,000 57,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
Oil and gas property (54,000) (56,000)
Support equipment --- ---
Proceeds from sale of property and equipment --- 1,000
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (54,000) (55,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowing --- 42,000
Long-term debt payments (90,000) (90,000)
Purchase of treasury stock --- ---
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (90,000) (48,000)
------------ ------------
CASH
Net increase (decrease) (14,000) (46,000)
Balance at beginning of period 97,000 92,000
------------ ------------
Balance at end of period $83,000 $46,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $11,000 $24,000
</TABLE>
See accompanying notes.
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
June 30, 1997
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
Form 10-KSB as of March 31, 1997.
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
At March 31, 1997, the Company had available approximately $11,552,000 of net
operating loss carryforwards which expire in varying amounts in the years 1998
through 2011. The Company also has available a depletion carryover of
approximately $3,723,000.
The Company recognizes deferred income tax assets and liabilities based on
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 net deferred tax
asset of $5,099,000 was offset by a valuation allowance of an equal amount,
resulting in no cumulative effect on operations.
The Company's deferred tax liabilities and assets are comprised of the following
components at March 31, 1997:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Deferred tax liabilities
Depreciation and depletion $(582,000)
Deferred tax assets
Net operating loss carryforwards 4,292,000
Statutory depletion carryforward 1,389,000
Valuation allowance (5,099,000)
------------
Net deferred tax asset $0
============
</TABLE>
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 the
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 OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY During the quarter just ended, current assets decreased 27% from
$723,000 at year ended March 31, 1997 (March 31) to $526,000 at June 30, 1997
(June 30) and current liabilities decreased 36% from $585,000 at March 31 to
$377,000 at June 30. Consequently, the Company's current ratio increased from
1.24:1 at March 31 to 1.40:1 at June 30.
The decrease in current assets was due to (1) lower accounts receivable and (2)
fewer other current assets at June 30. Oil and gas sales receivable was lower
due to decreases in volumes sold and average prices. Joint interest and other
receivables were lower due to the receipt of payments during the normal course
of business. Other current assets decreased from March 31 due to either the
sale of unused lease and well equipment to unrelated third parties or the
transfer of such equipment to other wells operated by the Company.
The decrease in current liabilities consisted primarily of payments of ad
valorem and production taxes as well as the payment of invoices during the
normal course of business.
DEBT During the fiscal quarter ended June 30, 1997, long-term debt decreased as
a result of monthly principal payments of thirty thousand dollars per month.
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, 1997 for disclosure
regarding the Company's debt.
HEDGING At June 30, 1997, the Company had 35 open futures and/or options
contracts to hedge future deliveries with maturities ranging from July 1997
through May 1998 at prices ranging from $19.80 to $20.02 per barrel. It should
be noted that 35 contracts does not necessarily indicate that the Company has
hedged 35,000 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.
Assuming that oil prices do not decline significantly from current levels,
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 1998.
STRATEGY IMPLEMENTATION
The Company previously disclosed it successfully recompleted the George Anderson
#25-1 in North Dakota into the Gunton formation at an initial production rate of
149 barrels of oil per day (BOPD), 20 barrels of water per day (BWPD) and 41
thousand cubic feet of gas per day (MCFGPD). Subsequent to the end of the first
fiscal quarter, the well ceased to produce due to a build-up of salt in the
tubing. Attempts to repair the well were successful in that the well was
returned to production. However, post-repair production is approximately 70
BOPD, 20 BWPD and 25 MCFGPD. At this time it is not known if the well was
damaged in the repair or if this is an indication of partial depletion of a
limited reservoir. Basic has a fifty-one percent (51%) revenue interest in the
well. Management believes if the well maintains even the post-repair production
rate, the well will have a favorable impact on Basic's future reserves and cash
flow.
Subsequent to the end of the first fiscal quarter, the Company began an effort
to exploit "behind pipe" potential in a Sheridan County, Montana well. The
effort proved unsuccessful in the first zone entered. However, there are four
remaining formations in this wellbore that the Company plans to investigate.
Results of this effort are expected to be known by the end of the second fiscal
quarter. Basic has an approximately eighty-five percent (85%) revenue interest
in the well.
As indicated in previous reports, the Company has a number of uneconomic wells
which recently have been shut-in. The Company plans to plug and abandon five
such wells in the second fiscal quarter. The Company expects the sale of
salvaged equipment to cover the cost of this effort.
The Company continues to pursue the acquisition of wells, primarily in the
Williston basin, as its core strategy. The Company made three unsuccessful
offers in the first fiscal quarter and expects to make two acquisition attempts
in its second fiscal quarter. The Company has no way to predict if such efforts
will be successful.
OUTLOOK FOR REMAINDER OF FISCAL YEAR 1998
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
QUARTER ENDED JUNE 30,1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
OVERVIEW
Operations in the quarter ended June 30, 1997 (1997) resulted in net income of
$34,000 compared to net income of $74,000 in the same quarter in 1996 (1996).
REVENUES
Oil and gas sales revenue decreased $75,000 (10%) in 1997 from 1996. Of this
amount, lower oil sales accounted for a negative variance of -$53,000 (-71%).
Gas volume decreases accounted for a negative variance of -$17,000 (-23%) and
the remaining variance of -$5,000 (-6%) was attributable to gas price decreases.
VOLUMES AND PRICES
Total liquid sales decreased 8%, from 35,400 barrels in 1996 to 32,400 barrels
in 1997 while the price per barrel increased slightly from $18.08 in 1996 to
$18.09 in 1997. Total gas sales decreased 20%, from 50,100 MCF's in 1996 to
39,900 MCF's in 1997, and the price per MCF decreased 7%, from $1.70 in 1996 to
$1.58 in 1997. Liquid sales were adversely impacted when produced inventory
was not sold in time to be included with first quarter sales. The decrease in
gas sales was primarily due to normal production decline.
EXPENSES
Oil and gas production expense, including production tax, increased $8,000 (2%)
in 1997 from 1996 primarily due to workovers on several key properties. As a
result of the increased production expense combined with lower sales volumes,
the overall lifting cost per equivalent barrel increased from $10.40 in 1996 to
$11.84 in 1997.
Depreciation, depletion and amortization expense decreased $10,000 (8%) in 1997
from 1996 due to decreases in Basic's sales volumes in the quarter just ended.
As a result, the depletion rate increased from $2.93 per equivalent barrel in
1996 to $3.16 per equivalent barrel in 1997.
Net general and administrative expense decreased $14,000 (33%), from $42,000 in
1996 to $28,000 in 1997. Salaries and benefits were lower in 1997 due to having
fewer employees. Professional fees, meals & entertainment, and other expenses
were also lower in 1997. Consequently, as a result of this overall decrease,
and in conjunction with decreased sales volumes, net general and administrative
expense per equivalent barrel decreased from $.96 in 1996 to $.72 in 1997.
(Intentionally left blank)
<PAGE>
LIQUIDS AND NATURAL GAS PRODUCTION SALES PRICE AND PRODUCTION COST
The following table shows selected financial information for the quarter ended
June 30 in the current and prior year.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Sales volume
Oil (barrels) 32,400 35,400
Gas (mcf) 39,900 50,100
Revenue
Oil $587,000 $640,000
Gas 63,000 85,000
---------- ----------
Total revenue 650,000 725,000
Total production expense(1) 463,000 455,000
---------- ----------
Gross profit $187,000 $270,000
========== ==========
Depletion expense $119,000 $128,000
Depletion expense per BOE(3) $3.16 $2.93
Average production expense(2)(3) $11.84 $10.40
Average sales price(3)
Oil (per barrel) $18.09 $18.08
Gas (per mcf) $1.58 $1.70
</TABLE>
- ----------------------------
(1) Operating costs, including production tax
(2) Operating costs, 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
(Intentionally left blank)
<PAGE>
PART II. OTHER INFORMATION
(Cumulative from March 31, 1997)
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
During the period ending June 30, 1997, there were no meetings of Basic's
shareholders nor were any matters submitted to a vote of security holders
through the solicitation of consents, proxies or otherwise.
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 persons on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton /s/ Karen E. Riner
- --------------------- -----------------------
Ray Singleton, President Karen E. Riner, Controller
Principal Accounting Officer
Date: August 14, 1997
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 83,000
<SECURITIES> 0
<RECEIVABLES> 322,000
<ALLOWANCES> (44,000)
<INVENTORY> 0
<CURRENT-ASSETS> 526,000
<PP&E> 32,670,000
<DEPRECIATION> (30,288,000)
<TOTAL-ASSETS> 2,981,000
<CURRENT-LIABILITIES> 377,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 17,000
<TOTAL-LIABILITY-AND-EQUITY> 2,981,000
<SALES> 650,000
<TOTAL-REVENUES> 651,000
<CGS> 614,000
<TOTAL-COSTS> 614,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,000
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> 34,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 34,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,000
<EPS-PRIMARY> .002
<EPS-DILUTED> .002
</TABLE>
