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, 1998
-------------------
_____ 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 November 16, 1998: 16,530,487
<PAGE>
BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................... 3
Consolidated Balance Sheets - June 30, 1998
and March 31, 1998........................................ 3
Consolidated Statements of Operations - Quarter Ended
June 30, 1998 and June 30, 1997........................... 5
Consolidated Statements of Cash Flows - Quarter Ended
June 30, 1998 and June 30, 1997........................... 6
Notes to Financial Statements............................. 7
Summary of Significant Accounting Policies................ 8
Item 2. Management's Discussion and Analysis or Plan of Operation. 9
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
2
<PAGE>
PART I.
FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
June 30 March 31
1998 1998
------------ -------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 110,000 $ 52,000
Accounts receivable:
Oil and gas sales 144,000 160,000
Joint interest and other receivables 84,000 97,000
Less: allowance for doubtful accounts (54,000) (54,000)
Other current assets 251,000 226,000
------------ ------------
Total current assets 535,000 481,000
------------ ------------
Property and equipment
Oil and gas property (full cost method) 32,610,000 32,559,000
Furniture, fixtures and equipment 450,000 450,000
------------ ------------
33,060,000 33,009,000
Accumulated depletion (includes cumulative
ceiling limitation charges of $14,961,000) (31,328,000) (31,217,000)
Accumulated depreciation (380,000) (374,000)
------------ ------------
Net property and equipment 1,352,000 1,418,000
Other noncurrent assets 83,000 85,000
------------ ------------
Total noncurrent assets 1,435,000 1,503,000
------------ ------------
Total Assets $ 1,970,000 $ 1,984,000
============ ============
See accompanying notes.
3
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
June 30 March 31
1998 1998
------------ ------------
(Unaudited)
Liabilities
Current liabilities
Accounts payable $ 253,000 $ 324,000
Accrued liabilities 139,000 144,000
Current portion of long-term debt 330,000 234,000
------------ ------------
Total current liabilities 722,000 702,000
------------ ------------
Long-term debt, less current portion 330,000 390,000
------------ ------------
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;
16,879,752 shares outstanding at
June 30 and March 31 17,000 17,000
Additional paid-in capital 22,692,000 22,692,000
Accumulated deficit (21,768,000) (21,794,000)
Less treasury stock (349,265 shares
at June 30 and March 31); at cost (23,000) (23,000)
------------ ------------
Total shareholders' equity 918,000 892,000
------------ ------------
Total Liabilities & Shareholders' Equity $ 1,970,000 $ 1,984,000
============ ============
See accompanying notes.
4
<PAGE>
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Quarter Ended June 30
1998 1997
------------ ------------
Revenue
Oil and gas sales $ 444,000 $ 650,000
Well service revenue 8,000 1,000
------------ ------------
Total revenue 452,000 651,000
------------ ------------
Expenses
Oil and gas production 238,000 400,000
Production tax 12,000 63,000
Well service expenses 7,000 1,000
Depreciation, depletion and amortization 115,000 122,000
General and administrative 36,000 28,000
------------ ------------
Total operating expenses 408,000 614,000
------------ ------------
Income from operations 44,000 37,000
------------ ------------
Other income (expense)
Interest and other income 6,000 8,000
Interest expense (24,000) (11,000)
------------ ------------
Total other expense (18,000) (3,000)
------------ ------------
Income before income taxes 26,000 34,000
Income taxes -- --
------------ ------------
Net income $ 26,000 $ 34,000
============ ============
Basic and diluted weighted average number
of shares outstanding 16,530,487 16,580,487
============ ============
Basic and diluted net income per share $ .002 $ .002
============ ============
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended June 30
1998 1997
--------- ---------
Cash flows from operating activities
<S> <C> <C>
Net income $ 26,000 $ 34,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 115,000 122,000
Change in current assets and current liabilities:
Accounts receivable, net 29,000 65,000
Accounts payable and accrued liabilities (76,000) (208,000)
Other current assets (25,000) 118,000
Change in other noncurrent assets 2,000 2,000
Gain on sale of assets -- (7,000)
Other 2,000 4,000
--------- ---------
Net cash provided by operating activities 73,000 130,000
--------- ---------
Cash flows from investing activities
Capital expenditures
Oil and gas property (99,000) (54,000)
Proceeds from sale of property and equipment 48,000 --
--------- ---------
Net cash used in investing activities (51,000) (54,000)
--------- ---------
Cash flows from financing activities
Proceeds from borrowing 67,000 --
Long-term debt payments (31,000) (90,000)
--------- ---------
Net cash provided by (used in) financing activities 36,000 (90,000)
--------- ---------
Cash
Net increase (decrease) 58,000 (14,000)
Balance at beginning of period 52,000 97,000
--------- ---------
Balance at end of period $ 110,000 $ 83,000
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 18,000 $ 11,000
See accompanying notes.
6
</TABLE>
<PAGE>
Basic Earth Science Systems, Inc.
Notes to Financial Statements
June 30, 1998
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, 1998.
Forward-Looking Statements
- --------------------------
This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical fact
included in this Form 10-QSB, including, without limitation, the statements
under both "Notes To Financial Statements" and "Item 2. Management's Discussion
and Analysis or Plan of Operation" located elsewhere herein regarding the
Company's financial position and liquidity, the amount of and its ability to
make debt service payments, its strategies, financial instruments, and other
matters, are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed in this Form 10-QSB in conjunction with the
forward-looking statements included in this Form 10-QSB.
FASB 133
- --------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning June 15, 1999. Management
believes the adoption of this statement will not have a material impact on the
Company's financial statements.
Year 2000
- ---------
The "Year 2000" problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Speculation as to the impact of this issue
varies widely.
7
<PAGE>
The Company cannot state that the Year 2000 problem will not pose material
operational problems. Nor, is the Company in control of the external forces that
could create these material impacts. The Company has not completed a
comprehensive assessment of the Company's Year 2000 problem, nor established any
written Year 2000 policies.
The vast majority of the Company's software are Microsoft Windows 95/Office 97
products and are not expected to be a problem. The software provider that
supports the Company's software program for its principal accounting system has
assured the Company that it will be Year 2000 compliant by March 1999. Since
modification of this program is included in the ongoing software support
contract, the Company does not expect to expend any significant amount of funds
to address resolving Year 2000 issues.
The Company is not dependent on any one vendor in a given area, and should not
be impacted by the failure of any one vendor to provide the Company with
necessary supplies and equipment.
The Company sells its primary product, oil, to a number of purchasers, and
sometimes to multiple purchasers in the same geographical area. Furthermore, for
the vast majority of the Company's product, the Company can switch purchasers
within 30 days. For these reasons, the Company has not contacted any of its
purchasers as to whether or not they are Year 2000 compliant, nor does
management believe it necessary at this time.
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Liquidity During the quarter just ended, current assets increased 11% from
$481,000 at year ended March 31, 1998 (March 31) to $535,000 at June 30, 1998
(June 30) and current liabilities increased 3% from $702,000 at March 31 to
$722,000 at June 30. Consequently, the Company's current ratio increased from
0.69:1 at March 31 to 0.74:1 at June 30. A specific Bank covenant requires the
maintenance of a current ratio of 1:1, after adjustment for the removal of the
current portion of long-term debt. At June 30, 1998, the Company was in
compliance with all Bank covenants and the Company's current ratio was 1.4:1 as
calculated per the provisions of the covenants.
Besides the increase in cash and cash equivalents, a significant part of the
rise in current assets was the increase in other current assets. As Basic
shut-in marginally producing wells, equipment was removed and transferred to
inventory to be either used on other properties or sold at market value. This
increase in inventory resulted in the increase in other current assets. Oil and
gas sales receivable declined due to lower oil sales volume and the decline in
oil prices. Joint interest and other receivables decreased due to the
curtailment of field activities in an effort to reduce oil and gas production
expense as discussed below in Results of Operations.
Debt During the quarter ended June 30, 1998, long-term debt increased as a
result of the Company drawing on its revolving line-of-credit. As of June 30,
1998, the Company did not have any remaining borrowing capacity. There were no
changes to the terms of the Company's debt facilities. Management is currently
in discussions with the bank to reduce and/or postpone scheduled principal
payments. Reference should be made to the Company's Form 10-KSB as of March 31,
1998 for disclosure regarding the Company's debt.
Hedging At June 30, 1998, the Company had 30 open options contracts to hedge
future deliveries with maturities ranging from August 1998 through December 1998
at prices ranging from $15.00 to $20.00 per barrel.
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 1999.
Strategy Implementation
- -----------------------
The Company's long term plan of operation involves the acquisition and
exploitation of producing properties. However, the Company has suspended this
plan pending the recovery of oil prices. In the interim, the Company is focusing
on reducing both lease operating and general and administrative expenses. In
addition, the Company plans to accelerate its plans to divest and/or abandon
marginal wells in an effort to generate additional cash from sales or the
salvage of leasehold equipment. The Company also hopes to reduce and/or postpone
scheduled principal payments. Basic may also alter or vary these plans pending
the recovery of oil prices based upon changes in circumstances, unforeseen
opportunities and other events which the Company is not able to anticipate.
9
<PAGE>
The Company holds a number of marginal wells which have been shut in due to low
oil prices. As mentioned above, Basic intends to accelerate its efforts to plug
or sell these wells in the current fiscal year. Management believes that the
salvage value of the associated equipment, net of plugging costs, will have a
positive impact on the Company's cash flow.
The Company also holds several major value properties (relative to the size of
its existing debt). If its various short-term efforts fail, and oil prices do
not recover, the Company may chose to sell one or several of these properties in
order to reduce or extinguish its existing debt.
If the current low oil prices should drop further, the impacts could be several.
The Company may incur further ceiling test limitations and be required to
further write down oil and gas properties. Moreover, even if the Company is
successful in any or all of its previously discussed efforts, there can be no
assurance that the Company will be able to continue to meet its existing
obligations as they become due in fiscal year 1999.
Results of Operations
- ---------------------
Quarter Ended June 30,1998 Compared to Quarter Ended June 30, 1997
- ------------------------------------------------------------------
Overview
- --------
Operations in the quarter ended June 30, 1998 (1998) resulted in net income of
$26,000 compared to net income of $34,000 in the same quarter in 1997 (1997).
Revenues
- --------
Oil and gas sales revenue decreased $206,000 (32%) in 1998 from 1997. Oil sales
revenue saw a decline of $220,000 (-37%). Of this amount, lower oil sales
accounted for a negative variance of -$94,000 (-43%) while the decline in oil
prices resulted in a variance of -$126,000 (-57%). On the other hand, gas sales
revenue increased $14,000 (22%) in 1998 over 1997. Gas volume increases
accounted for a positive variance of $6,000 (43%) and the remaining variance of
$8,000 (57%) was attributable to gas price increases.
Volumes and Prices
- ------------------
Total liquid sales decreased 16%, from 32,400 barrels in 1997 to 27,200 barrels
in 1998 while there was a 25% drop in the average price per barrel from $18.09
in 1997 to $13.50 in 1998. Total gas sales increased 9%, from 39,900 MCF in 1997
to 43,600 MCF in 1998, and the average price per MCF rose 11%, from $1.58 in
1997 to $1.76 in 1998. Along with normal production decline, liquid sales were
adversely impacted by the sharp decline in oil prices. With lower oil prices the
Company has been forced to shut-in marginally producing wells in order to reduce
expenses so as to maintain a positive cash flow.
10
<PAGE>
Expenses
- --------
Oil and gas production expense decreased $162,000 (41%) in 1998 from 1997
primarily as a result of the curtailment of field activities. As noted in the
preceding paragraph, marginally producing wells have been shut-in due to lower
oil prices. In addition, the Company has scaled back its workovers on many
properties pending some recovery in oil prices.
Production taxes decreased $51,000 (81%) as a result of two factors. First, the
drop in oil and gas sales revenue directly resulted in a decline in production
taxes. Second, Basic received the benefit of a $23,000 refund of severance taxes
in 1998. As a result of the decreases in both oil and gas production expense and
production taxes, the overall lifting cost per equivalent barrel decreased 39%
from $11.84 in 1997 to $7.25 in 1998.
Depreciation, depletion and amortization expense decreased $7,000 (6%) in 1998
from 1997. An increase in the depletion rate from 4.8% in 1997 to 7.7% in 1998
was more than offset by the significant reduction of the depletable base (full
cost pool) due to the ceiling limitation writedown at March 31, 1998. However,
because of the drop in oil sales volume, the depletion rate per equivalent
barrel increased from $3.16 in 1997 to $3.23 in 1998.
Gross general and administrative expense increased only $1,000 (1%), in 1998
over 1997. However, net general and administrative expense increased $8,000
(29%) as a direct result of the drop in oil prices. As Basic shut in some of the
marginally producing wells that it operated, it reduced the amount of general
and administrative overhead that the Company is allowed to recover from outside
interests in these wells. Consequently, as a result of this overall increase,
and in conjunction with decreased sales volumes, net general and administrative
expense per equivalent barrel increased from $.72 in 1997 to $1.04 in 1998.
(Intentionally Left Blank)
11
<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.
1998 1997
---- ----
Sales volume
Oil (barrels) 27,200 32,400
Gas (mcf) 43,600 39,900
Revenue
Oil $367,000 $587,000
Gas 77,000 63,000
--------- ---------
Total 444,000 650,000
Total production expense1 250,000 463,000
--------- ---------
Gross profit $194,000 $187,000
========= =========
Depletion expense $112,000 $119,000
Depletion expense per BOE3 $3.23 $3.16
Average production expense2,3 $7.25 $11.84
Average sales price3
Oil (per barrel) $13.50 $18.09
Gas (per mcf) $1.76 $1.58
- ----------------------------
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
12
<PAGE>
PART II.
OTHER INFORMATION
-----------------
(Cumulative from March 31, 1998)
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, 1998, 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
- ------------------------
Ray Singleton
President and Principal Accounting Officer
Date: November 16, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 110,000
<SECURITIES> 0
<RECEIVABLES> 228,000
<ALLOWANCES> (54,000)
<INVENTORY> 251,000<F1>
<CURRENT-ASSETS> 535,000
<PP&E> 33,060,000
<DEPRECIATION> (31,708,000)
<TOTAL-ASSETS> 1,970,000
<CURRENT-LIABILITIES> 722,000
<BONDS> 0
0
0
<COMMON> 17,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,970,000
<SALES> 444,000
<TOTAL-REVENUES> 452,000
<CGS> 408,000<F2>
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,000
<INCOME-PRETAX> 26,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,000
<EPS-PRIMARY> .002
<EPS-DILUTED> .002
<FN>
<F1>And other current assets
<F2>Operating expenses
</FN>
</TABLE>
