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, 2000
___ 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8547 E. Arapahoe Road, #J-464, Greenwood Village, CO 80112
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(Address for principal executive offices) (Zip Code)
(303) 773-8000
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(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 11, 2000: 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, 2000
and March 31, 2000 ............................................ 3
Consolidated Statements of Operations - Quarters Ended
June 30, 2000 and June 30, 1999 ............................... 5
Consolidated Statements of Cash Flows - Quarters Ended
June 30, 2000 and June 30, 1999 ............................... 6
Notes to Consolidated Financial Statements .................... 7
Summary of Significant Accounting Policies .................... 8
Item 2. Management's Discussion and Analysis and 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
2
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PART I.
FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
----------------------------
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
June 30 March 31
2000 2000
------------ ------------
(Unaudited) (Audited)
Assets
Current assets
Cash and cash equivalents $ 268,000 $ 265,000
Accounts receivable:
Oil and gas sales 286,000 305,000
Joint interest and other receivables 281,000 286,000
Less: allowance for doubtful accounts (50,000) (50,000)
Other current assets 131,000 132,000
------------ ------------
Total current assets 916,000 938,000
------------ ------------
Property and equipment:
Oil and gas property (full cost method) 32,995,000 32,914,000
Furniture, fixtures and equipment 306,000 303,000
------------ ------------
33,301,000 33,217,000
Accumulated depletion (includes cumulative
ceiling limitation charges of $14,961,000) (31,723,000) (31,674,000)
Accumulated depreciation (266,000) (262,000)
------------ ------------
Net property and equipment 1,312,000 1,281,000
Other non-current assets 165,000 163,000
------------ ------------
Total non-current assets 1,477,000 1,444,000
------------ ------------
Total Assets $ 2,393,000 $ 2,382,000
============ ============
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
June 30 March 31
2000 2000
------------ -------------
(Unaudited) (Audited)
<S> <C> <C>
Liabilities
Current liabilities
Accounts payable $ 461,000 $ 484,000
Accrued liabilities 231,000 246,000
Current portion of long-term debt 240,000 240,000
------------ ------------
Total current liabilities 932,000 970,000
------------ ------------
Long-term debt, less current portion 161,000 221,000
------------ ------------
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 (21,386,000) (21,495,000)
Less treasury stock (349,265 shares at June 30
and March 31); at cost (23,000) (23,000)
------------ ------------
Total shareholders' equity 1,300,000 1,191,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 2,393,000 $ 2,382,000
============ ============
See accompanying notes to consolidated financial statements.
4
</TABLE>
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Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
Quarter Ended June 30
2000 1999
------------ ------------
Revenue
Oil and gas sales $ 625,000 $ 394,000
Well service revenue 10,000 --
------------ ------------
Total revenue 635,000 394,000
------------ ------------
Expenses
Oil and gas production 389,000 270,000
Production tax 46,000 35,000
Well service expenses 8,000 --
Depreciation, depletion and amortization 50,000 61,000
General and administrative 23,000 18,000
------------ ------------
Total operating expenses 516,000 384,000
------------ ------------
Income from operations 119,000 10,000
------------ ------------
Other income (expense)
Interest and other income 3,000 2,000
Interest expense (13,000) (14,000)
------------ ------------
Total other expense (10,000) (12,000)
------------ ------------
Income (loss) before income taxes 109,000 (2,000)
Income taxes -- --
------------ ------------
Net income (loss) $ 109,000 $ (2,000)
============ ============
Basic weighted average common shares outstanding 16,530,487 16,530,487
============ ============
Basic and diluted net income (loss) per share $ 0.007 $ --
============ ============
See accompanying notes to consolidated financial statements.
5
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Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Quarter Ended June 30
2000 1999
--------- ---------
Cash flows from operating activities
Net income (loss) $ 109,000 $ (2,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 50,000 61,000
Change in:
Accounts receivable, net 24,000 (27,000)
Other assets 14,000 6,000
Accounts payable and accrued liabilities (38,000) 58,000
Loss on disposal of assets 1,000 1,000
Other 3,000 3,000
--------- ---------
Net cash provided by operating activities 163,000 100,000
--------- ---------
Cash flows from investing activities
Capital expenditures
Oil and gas property (117,000) (30,000)
Support equipment (3,000) --
Proceeds from sale of property and equipment 20,000 7,000
--------- ---------
Net cash used in investing activities (100,000) (23,000)
--------- ---------
Cash flows from financing activities
Proceeds from borrowing -- --
Bank debt payments (60,000) (40,000)
--------- ---------
Net cash used in financing activities (60,000) (40,000)
--------- ---------
Cash
Net increase 3,000 37,000
Balance at beginning of period 265,000 38,000
--------- ---------
Balance at end of period $ 268,000 $ 75,000
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 13,000 $ 14,000
See accompanying notes to consolidated financial statements.
6
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Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
June 30, 2000
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 for the year ended March 31, 2000.
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, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-QSB, including, without
limitation, the statements under both "Notes To Consolidated 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 1 QSB in conjunction with the forward-looking statements
included in this Form 10-QSB.
FASB 133
--------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 periods beginning after June 15, 1999. During the past year the
FASB adopted SFAS No. 137 that extended the effective date of SFAS No. 133 from
fiscal periods beginning after June 15, 1999 to fiscal periods beginning after
June 15, 2000. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
7
<PAGE>
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, 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.
Item 2.
Management's Discussion and Analysis and Plan of Operation 0-
Liquidity and Capital Resources
-------------------------------
LIQUIDITY. During the Company's first quarter ended June 30, 2000, current
assets decreased 2% from $938,000 at year ended March 31, 2000 (March 31) to
$916,000 at June 30, 2000 (June 30) and current liabilities decreased 4% from
$970,000 at March 31 to $932,000 at June 30. Consequently, the Company's current
ratio increased slightly from 0.97:1 at March 31 to 0.98:1 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,
2000, the Company was in compliance with all bank covenants and Basic's current
ratio was 1.32:1 as calculated per the provisions of the covenants.
The decline in current assets is mainly a result of a decrease in oil and gas
sales receivable. This decrease is primarily due to lower oil sales volume in
June 2000 relative to March 2000. As far as the decrease in current liabilities
is concerned, the continued strong cash flow fueled by the current level of oil
prices has allowed Basic the opportunity to begin to pay down some of its
liabilities.
DEBT. Under the terms of the loan agreement with its bank, at March 31, 2000 the
Company had a borrowing base of $461,000 with no remaining borrowing capacity.
Effective June 29, 2000 the loan agreement was amended such that Basic's
borrowing capacity was increased $120,000. The Company is still obligated to
make monthly principal payments of $20,000 through December 31, 2001 at which
time any remaining balance due is required to be paid in full. As of August 11,
2000 Basic had not utilized any of the additional available funds. As a result,
the outstanding principal balance was $381,000 with a borrowing capacity of
$501,000.
8
<PAGE>
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 will enable the Company
to meet its existing and normal recurring obligations as they become due in
fiscal year 2000. In addition, as mentioned in the "Debt" section above, Basic
has $120,000 available in additional borrowing capacity.
Strategy Implementation
-----------------------
GENERAL. The Company's long term plan of operation involving Development,
Acquisitions, Drilling and Divestitures/Abandonments is described below. The
Company may alter or vary this plan of operation based upon changes in
circumstances, unforeseen opportunities, inability to negotiate favorable
acquisition or loan terms, lack of funding and other events which the Company is
not able to anticipate.
DEVELOPMENT. The Company holds a number of properties that management believes
has the potential for increased cash flow and may have additional unproved
reserves that could be exploited. This exploitation may be realized by
conventional and unconventional petroleum engineering techniques and field
management practices. Management intends to pursue these potential opportunities
as long as oil prices remain at current levels and the exploitation costs can be
funded with cash flow from operations and/or any available borrowing capacity on
its revolving line of credit.
ACQUISITIONS. The Company continues to evaluate properties that are made
available for sale. However, there can be no assurances that funds will be
available to pursue such opportunities or that offers the Company submits may be
accepted. Effective June 1, 2000 Basic acquired various non-operated working
interests ranging from 12 to 25 percent in three oil wells in Billings County,
North Dakota and one oil well in Sheridan County, Montana. The total purchase
price was $12,000. These wells had no impact on the Company's operations for the
quarter ended June 30, 2000.
DRILLING. While drilling is no longer the major focus of the Company's strategy,
Basic may participate in high quality development or exploratory prospects which
management believes are capable of increasing reserves and cash flow with
reasonable risk.
DIVESTITURES/ABANDONMENTS. The Company holds a number of marginal, operated and
non-operated properties in several states. Basic intends to continue its efforts
to plug or sell these wells. 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.
9
<PAGE>
Results of Operations
---------------------
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
-------------------------------------------------------------------
Overview
--------
Operations in the quarter ended June 30, 2000 (2000) resulted in net income of
$109,000 compared to a net loss of $2,000 in the quarter ended June 30, 1999
(1999).
Revenues
--------
Oil and gas sales revenue increased $231,000 (59%) in 2000 from 1999. Oil sales
revenue increased $223,000 (65%). Of this amount, slightly higher oil sales
volume contributed $12,000 while a significant increase in the average price per
barrel in 2000 over 1999 added $211,000. Oil sales revenue in 2000 was
negatively impacted by hedging losses of $47,000 compared to a $3,000 hedging
loss in 1999. In September 1999 Basic employed a "Zero-Cost Collar" hedge that
contributed $39,000 to the hedging losses in 2000. This hedge expires August 31,
2000. At that time Basic will have no further hedging instruments in place. This
event should not be construed as a change in Company policy. Rather, it reflects
the high level of backwardation in the current futures market and, as a result,
the high cost/inability to hedge future sales at current prices. Basic intends
to monitor the futures market in an effort to identify, and participate in,
hedging opportunities that the Company views as favorable.
Gas sales revenue increased $8,000 (15%) in 2000 from 1999. A decrease in gas
sales volume accounted for a negative variance of $15,000. However, this
decrease was more than offset by a gain of $23,000 resulting from a sharp
increase in the average price per Mcf in 2000 over 1999.
Volumes and Prices
------------------
Total liquid sales increased 4%, from 22,500 barrels in 1999 to 23,400 barrels
in 2000 while there was a 60% jump in the average price per barrel from $15.16
in 1999 to $24.21 in 2000. The hedging losses mentioned above reduced the
average price per barrel $2.03 in 2000 while the effect of the hedging loss in
1999 was negligible. Concerning the increase in sales volume, normal production
decline and a loss of sales from shut-in wells were offset by a gain in sales
volume generated from three sources. First, six new wells that were purchased
subsequent to June 30, 1999 contributed 1,800 barrels to 2000 sales. Second, the
recompletions of two wells added 3,900 barrels. And finally, Basic realized an
additional 700 barrels from two wells that were shut in during 1999 due to low
oil prices and placed back on production subsequent to June 30, 1999. With
respect to the loss of sales from shut-in wells, sales volume in 2000 decreased
2,800 barrels as a result of three wells that management elected to shut in
pending further evaluation.
Total gas sales decreased 28%, from 31,300 Mcf in 1999 to 22,500 Mcf in 2000,
while the average price per Mcf rose 60%, from $1.68 in 1999 to $2.68 in 2000.
Along with normal production decline, gas sales volumes were down in 2000 from
the prior year due to the loss of sales from non-operated, marginal properties
that contributed to production in 1999, were subsequently sold, and thus did not
contribute to sales volumes in 2000. This is in line with the Company's
previously stated strategy to divest and/or abandon marginal wells.
10
<PAGE>
Expenses
--------
Oil and gas production expense increased $119,000 (44%) in 2000 over 1999. The
main sources of the increase are the same wells that had a positive impact on
oil sales volumes in 2000 mentioned above. The six new wells purchased
subsequent to June 30, 1999 added $29,000 of production expense in 2000. The
necessary start up costs and expenses incurred to establish peak production
associated with the two recompletions contributed an additional $71,000. It is
management's belief that once operations on these two properties are stabilized,
the monthly expenses to operate these wells should decrease from present levels.
Finally, the three wells that were placed back on production subsequent to June
30, 1999 added $9,000 to production expense in 2000. In addition, an increase in
workovers/repairs on other properties was only partially offset by an $8,000
decrease in oil and gas production expense realized from the sale of properties
subsequent to June 30, 1999.
Production taxes increased $11,000 (31%) in 2000 over 1999 primarily as a result
of the increase in oil and gas sales revenue. However, production taxes did not
increase at the same rate as sales revenue. In 1999 production taxes were 9.0%
of oil and gas sales revenue while in 2000 the rate was 7.3%. This difference
was primarily due to a reduction in Montana severance tax rates in 2000. Montana
oil production is approximately 35% of the Company's total oil sales.
As a result of the increases in both oil and gas production expense and
production taxes and a slight decrease in equivalent barrel sales volume, the
overall lifting cost per equivalent barrel increased 45% from $11.02 in 1999 to
$16.02 in 2000. Management cautions that this cost per equivalent barrel is not
indicative of all wells, and that certain high cost wells could once again be
shut in should oil prices drop significantly.
Depreciation, depletion and amortization expense decreased $11,000 (18%) in 2000
from 1999. Production levels and changes in reserve estimates affect
depreciation, depletion and amortization rates. The decline in equivalent barrel
production in 2000 relative to 1999 combined with an increase in estimated oil
and gas reserves at year end March 31, 2000 over March 31, 1999 caused the
depletion rate (the ratio of production for the year divided by the estimated
reserves at the beginning of the year) to drop from 5.0% in 1999 to 3.6% in
2000. Despite the decrease in sales volume, the depletion rate per equivalent
barrel decreased from $2.17 in 1999 to $1.80 in 2000.
Gross general and administrative (G&A) expense increased $19,000 (30%), in 2000
from 1999 while net G&A increased $5,000 (28%). Gross G&A expense differs from
net G&A expense in that the Company is allowed to recover an overhead fee on
wells that it operates. This fee is applied against, and serves to reduce, gross
G&A expense. The increase in gross G&A expense was primarily due to three
factors. First, was the reinstatement of the Company president's salary that had
been voluntarily reduced 50% in 1999 to improve cash flow during the period of
depressed oil prices. As prices recovered and showed signs of stabilizing in the
$20-$30 per barrel range, his salary was restored in December 1999 to its
original level. The second factor was the additional expenses incurred with
respect to Basic's change in independent auditors for the year ended March 31,
2000 and the previous auditor's review of the Company's Form 10-KSB. And the
last factor was the increased use of financial consulting services in 2000
relative to 1999. The percentage of gross general and administrative expense
that Basic was able to charge to Company-operated wells was 69% in 2000 compared
to 68% in 1999. Net general and administrative expense per equivalent barrel
increased from $0.66 in 1999 to $0.86 in 2000.
11
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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.
2000 1999
-------- --------
Sales volume:
Oil (barrels) 23,400 22,500
Gas (mcf) 22,500 31,300
Revenue:
Oil $565,000 $342,000
Gas 60,000 52,000
-------- --------
Total 625,000 394,000
Total production expense(1) 435,000 305,000
-------- --------
Gross profit $190,000 $ 89,000
======== ========
Depletion expense $ 49,000 $ 60,000
Average sales price:
Oil (per barrel) $ 24.21 $ 15.16
Gas (per mcf) $ 2.68 $ 1.68
Average production expense(1,2,3) $ 16.02 $ 11.02
Average gross profit(2,3) $ 7.06 $ 3.19
Average depletion expense(2,3) $ 1.80 $ 2.17
Average general and administrative expense(2,3) $ 0.86 $ 0.66
-----------------
(1) Operating costs, including production tax
(2) Per equivalent barrel (6 mcf of gas is equivalent to 1 barrel of oil)
(3) Averages calculated based upon non-rounded figures
12
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PART II.
OTHER INFORMATION
-----------------
(Cumulative from March 31, 2000)
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 ended June 30, 2000, 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 person on behalf of Basic.
BASIC EARTH SCIENCE SYSTEMS, INC.
/s/ Ray Singleton
-----------------
Ray Singleton
President and Acting Accounting Officer
Date: August 11, 2000
