e10qsb
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2006
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-7914
BASIC EARTH SCIENCE SYSTEMS, INC.
1801 Broadway, Suite 620
Denver, Colorado 80202-3835
Telephone (303) 296-3076
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Incorporated in Delaware
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IRS ID# 84-0592823 |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
Yes þ No o
Check whether the issuer is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definitions in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Check whether the issuer is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Shares of common stock outstanding on November 6, 2006: 16,805,487
BASIC EARTH SCIENCE SYSTEMS, INC.
FORM 10-QSB
INDEX
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 1 of 2
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September 30 |
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March 31 |
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2006 |
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2006 |
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(Unaudited) |
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(Audited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
1,284,000 |
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$ |
78,000 |
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Accounts receivable |
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Oil and gas sales |
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908,000 |
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913,000 |
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Joint interest and other receivables |
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354,000 |
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472,000 |
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Less: Allowance for doubtful accounts |
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(70,000 |
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(70,000 |
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Other current assets |
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632,000 |
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297,000 |
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Total current assets |
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3,108,000 |
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1,690,000 |
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Property and equipment |
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Oil and gas property (full cost method) |
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27,743,000 |
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27,099,000 |
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Support equipment |
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378,000 |
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368,000 |
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28,121,000 |
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27,467,000 |
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Accumulated depreciation and depletion – Full cost pool |
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(17,512,000 |
) |
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(17,211,000 |
) |
Accumulated depreciation – Support equipment |
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(311,000 |
) |
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(314,000 |
) |
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Net property and equipment |
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10,298,000 |
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9,942,000 |
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Other non-current assets |
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206,000 |
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218,000 |
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Total non-current assets |
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10,504,000 |
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10,160,000 |
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Total Assets |
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$ |
13,612,000 |
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$ |
11,850,000 |
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See accompanying notes to consolidated financial statements.
3
Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
Page 2 of 2
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September 30 |
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March 31 |
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2006 |
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2006 |
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(Unaudited) |
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(Audited) |
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Liabilities |
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Current liabilities |
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Accounts payable |
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$ |
375,000 |
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$ |
389,000 |
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Accrued liabilities |
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1,394,000 |
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1,084,000 |
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Total current liabilities |
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1,769,000 |
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1,473,000 |
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Long-term liabilities |
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Long-term debt |
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— |
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445,000 |
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Deferred tax liability |
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613,000 |
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— |
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Asset retirement obligation |
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1,170,000 |
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1,372,000 |
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Total long-term liabilities |
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1,783,000 |
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1,817,000 |
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Shareholders’ Equity |
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Preferred stock, $.001 par value
Authorized - 3,000,000 shares
Issued - 0 shares |
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— |
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— |
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Common stock, $.001 par value
32,000,000 shares authorized;
17,154,752 shares issued at September 30
and 17,129,752 at March 31 |
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17,000 |
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17,000 |
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Additional paid-in capital |
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22,713,000 |
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22,710,000 |
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Accumulated deficit |
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(12,647,000 |
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(14,144,000 |
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Treasury stock (349,265 shares at September 30
and March 31); at cost |
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(23,000 |
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(23,000 |
) |
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Total shareholders’ equity |
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10,060,000 |
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8,560,000 |
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Total Liabilities and Shareholders’ Equity |
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$ |
13,612,000 |
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$ |
11,850,000 |
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See accompanying notes to consolidated financial statements.
4
Basic Earth Science Systems, Inc.
Consolidated Statements of Operations
(Unaudited)
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Six Months Ended |
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Quarters Ended |
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September 30 |
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September 30 |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenue |
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Oil and gas sales |
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$ |
4,021,000 |
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$ |
3,158,000 |
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$ |
2,048,000 |
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$ |
1,633,000 |
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Well service revenue |
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25,000 |
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17,000 |
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14,000 |
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8,000 |
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Total revenue |
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4,046,000 |
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3,175,000 |
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2,062,000 |
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1,641,000 |
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Expenses |
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Oil and gas production |
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908,000 |
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1,113,000 |
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438,000 |
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601,000 |
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Production tax |
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265,000 |
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234,000 |
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143,000 |
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123,000 |
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Well service expenses |
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28,000 |
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19,000 |
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16,000 |
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9,000 |
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Depreciation and depletion |
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305,000 |
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295,000 |
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153,000 |
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101,000 |
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Accretion of asset retirement obligation |
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39,000 |
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25,000 |
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14,000 |
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11,000 |
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Asset retirement expense |
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94,000 |
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51,000 |
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80,000 |
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47,000 |
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General and administrative |
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273,000 |
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258,000 |
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123,000 |
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121,000 |
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Total operating expenses |
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1,912,000 |
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1,995,000 |
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967,000 |
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1,013,000 |
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Income from operations |
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2,134,000 |
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1,180,000 |
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1,095,000 |
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628,000 |
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Other income (expense) |
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Interest and other income |
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9,000 |
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24,000 |
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8,000 |
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16,000 |
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Interest and other expenses |
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(6,000 |
) |
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— |
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— |
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— |
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Total other income |
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3,000 |
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24,000 |
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8,000 |
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16,000 |
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Income before income taxes |
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2,137,000 |
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1,204,000 |
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1,103,000 |
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644,000 |
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Income tax expense |
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27,000 |
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13,000 |
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10,000 |
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— |
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Provision for deferred taxes (see Note 1) |
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613,000 |
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— |
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313,000 |
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— |
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Net income |
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$ |
1,497,000 |
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$ |
1,191,000 |
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$ |
780,000 |
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$ |
644,000 |
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Weighted average common shares outstanding: |
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Basic |
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16,789,913 |
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16,701,115 |
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16,799,237 |
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16,739,998 |
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Diluted |
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17,129,038 |
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17,121,445 |
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17,128,125 |
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17,127,407 |
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Per share amounts: |
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Basic |
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$ |
.089 |
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$ |
.071 |
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$ |
.046 |
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$ |
.038 |
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Diluted |
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$ |
.087 |
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$ |
.070 |
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$ |
.045 |
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$ |
.038 |
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See accompanying notes to consolidated financial statements.
5
Basic Earth Science Systems, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Six Months Ended |
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September 30 |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
1,497,000 |
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$ |
1,191,000 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and depletion |
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305,000 |
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295,000 |
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Deferred tax liability |
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613,000 |
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— |
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Accretion of asset retirement obligation |
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39,000 |
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25,000 |
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Change in: |
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Accounts receivable, net |
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123,000 |
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(331,000 |
) |
Other assets |
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(327,000 |
) |
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(15,000 |
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Accounts payable and accrued liabilities |
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55,000 |
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536,000 |
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Change in asset retirement obligation |
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— |
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(6,000 |
) |
Other |
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4,000 |
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3,000 |
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Net cash provided by operating activities |
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2,309,000 |
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1,698,000 |
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Cash flows from investing activities: |
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Capital expenditures |
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Oil and gas property |
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(808,000 |
) |
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(998,000 |
) |
Support equipment |
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(21,000 |
) |
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(5,000 |
) |
Purchase of lease and well equipment inventory |
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(5,000 |
) |
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(44,000 |
) |
Insurance settlement |
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161,000 |
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— |
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Proceeds from sale of oil and gas property and equipment |
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— |
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|
14,000 |
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Proceeds from sale of lease and well equipment inventory |
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12,000 |
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|
6,000 |
|
Proceeds from sale of support equipment |
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|
— |
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|
1,000 |
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Net cash used in investing activities |
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(661,000 |
) |
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(1,026,000 |
) |
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Cash flows from financing activities: |
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Proceeds from exercise of common stock options |
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3,000 |
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|
8,000 |
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Proceeds from borrowing |
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565,000 |
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|
— |
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Long-term debt payments |
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(1,010,000 |
) |
|
|
— |
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Net cash provided by (used in) financing activities |
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(442,000 |
) |
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|
8,000 |
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Cash and cash equivalents: |
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Net increase |
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1,206,000 |
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|
680,000 |
|
Balance at beginning of period |
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|
78,000 |
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|
892,000 |
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Balance at end of period |
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$ |
1,284,000 |
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$ |
1,572,000 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
|
$ |
6,000 |
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|
— |
|
See accompanying notes to consolidated financial statements.
6
Basic Earth Science Systems, Inc.
Notes to Consolidated Financial Statements
September 30, 2006
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,
2006.
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 10-QSB in conjunction with
the forward-looking statements included in this Form 10-QSB.
1. Summary of Significant Accounting Policies
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.
Income Taxes. The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes”. Accordingly, deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement and tax bases of assets and liabilities,
using enacted tax rates in effect for the year in which the differences are expected to reverse.
7
During the quarter ended September 30, 2006 the Company recorded income tax expense of $323,000.
This includes a current year expense of $10,000 and a deferred tax provision of $313,000.
Projections of future income taxes and their timing require significant estimates with respect to
future operating results. Accordingly, the net deferred tax liability is continually re-evaluated
and numerous estimates are revised over time. As such, the net deferred tax liability may change
significantly as more information and data is gathered with respect to such events as changes in
commodity prices, their effect on the estimate of oil and gas reserves, and the depletion of these
long-lived reserves.
Reclassifications. Certain prior year amounts may have been reclassified to conform to current
year presentation.
Item 2.
Management’s Discussion and Analysis and Plan of Operation
LIQUIDITY AND CAPITAL RESOURCES
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 sold, (b) the average realized prices for oil and gas sold, and (c) lifting costs.
In addition, as mentioned in the “Bank Debt” section below, Basic has $4,000,000 of borrowing
capacity as of November 6, 2006.
Working Capital. At September 30, 2006 the Company had a working capital surplus of $1,339,000 (a
current ratio of 1.76:1) compared to a working capital surplus at March 31, 2006 of $217,000 (a
current ratio of 1.15:1).
EBITDA. The Company’s earnings before interest, taxes, depreciation, depletion and amortization
(EBITDA) increased 63%, from $1,524,000 for the six months ended September 30, 2005 to $2,487,000
for the six months ended September 30, 2006. For the quarter ended September 30, 2006 EBITDA
increased 68%, from $756,000 in the 2005 period to $1,270,000 in 2006. EBITDA is not a GAAP
measure of operating performance. However, this non-GAAP performance measure can be used to
compare the Company’s performance with other companies in the industry that make a similar
disclosure. But, it should be noted that, because EBITDA is not a GAAP measure, it may not
necessarily be exactly comparable to similarly titled measures employed by other companies. In
addition, investors should not consider this measure in isolation or as a substitute for operating
income, or any other measure for determining the Company’s operating performance that is calculated
in accordance with GAAP. A reconciliation between EBITDA and net income is provided in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Quarters Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
1,497,000 |
|
|
$ |
1,191,000 |
|
|
$ |
780,000 |
|
|
$ |
644,000 |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Accretion of asset retirement obligation |
|
|
39,000 |
|
|
|
25,000 |
|
|
|
14,000 |
|
|
|
11,000 |
|
Depreciation and depletion |
|
|
305,000 |
|
|
|
295,000 |
|
|
|
153,000 |
|
|
|
101,000 |
|
Income tax expense and provision for
deferred taxes |
|
|
640,000 |
|
|
|
13,000 |
|
|
|
323,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
2,487,000 |
|
|
$ |
1,524,000 |
|
|
$ |
1,270,000 |
|
|
$ |
756,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Cash Flow. Net cash provided by operating activities rose 36% from $1,698,000 in the six months
ended September 30, 2005 (2005) to $2,309,000 in the six months ended September 30, 2006 (2006).
This increase was primarily due to a combination of improved oil and gas production, higher oil
prices and lower operating expenses.
Net cash used in investing activities decreased 36% from $1,026,000 in 2005 to $661,000 in 2006.
Capital expenditures related to oil and gas property investments declined 19% from $998,000 in 2005
to $808,000 in 2006.
Bank Debt. The Company’s current banking relationship is with American National Bank (the Bank),
located in Denver, Colorado. Basic currently has a $20,000,000 line of credit with a borrowing
base of $4,000,000. The Company is charged interest at prime plus one-quarter of one percent
(0.25%) and an Unused Commitment fee of one-half of one percent (0.50%) per annum. During the six
months ended September 30, 2006 Basic utilized the credit facility to fund its short-term working
capital needs.
Hedging. The Company did not hedge any of its production during the six months ended September 30,
2006 and at September 30, 2006 the Company had no contracts in place to hedge future production.
The Company does monitor the futures market and, in the future, may participate in hedging
opportunities that the Company views as favorable.
CAPITAL EXPENDITURES
During the quarter ended September 30, 2006, the Company spent approximately $217,000 on various
projects. When combined with first quarter investments, the Company has deployed $808,000 through
the first six months of the current fiscal year. This compares to $593,000 and $998,000 for the
quarter and six months ended September 30, 2005, respectively. In the current year, nearly 100
percent of expenditures have been dedicated to drilling or recompletions while in the prior year 40
percent was spent on leasehold and promotion costs with only 60 percent deployed on drilling and
recompletions.
Through the first two quarters of fiscal 2007, approximately $430,000 (53 percent) of expenditures
were dedicated to the Company’s Banks prospect in McKenzie County, North Dakota. Recompletion
efforts in Basic’s Indian Hills project accounted for an additional $128,000 (16%) while other
miscellaneous recompletion efforts – primarily on non-operated properties – consumed $100,000
(12%).
The Company is continually evaluating drilling and acquisition opportunities for possible
participation. Typically, at any one time, several opportunities are in various stages of due
diligence. The Company’s policy is to not disclose the specifics of a project or prospect, nor to
speculate on such ventures, until such time as those various opportunities are finalized and
undertaken. Basic cautions that the absence of news and/or press releases should not be
interpreted as a lack of development or activity.
Divestitures/Abandonments
During the quarter just ended the Company plugged and abandoned three shut-in or marginally
producing wells; two in Montana and one in Texas.
9
RESULTS OF OPERATIONS
Six Months Ended September 30, 2006 Compared to Six Months Ended September 30, 2005
Overview. Net income for the six months ended September 30, 2006 (2006) was $1,497,000 compared to
net income of $1,191,000 for the six months ended September 30, 2005 (2005), an increase of 26%.
In turn, EBITDA increased 63%, from $1,524,000 in 2005 to $2,487,000 in 2006. The dramatic
difference between the increases in net income and EBITDA was primarily due to a $613,000 provision
for deferred income taxes recorded in 2006.
Revenues. Oil and gas sales revenue increased $863,000 (27%) in 2006 over 2005. Oil sales revenue
increased $820,000 (31%) as a result of both higher sales volumes and prices. Gas sales revenue
increased $43,000 (9%) in 2006 over 2005. A positive variance from higher sales volumes was
reduced by a negative variance from lower natural gas prices.
Volumes and Prices. As a result of new production, oil sales volumes rose 10%, from 48,900 barrels
in 2005 to 54,000 barrels in 2006 while there was an 18% jump in the average price per barrel from
$54.72 in 2005 to $64.69 in 2006. Also because of new production, gas sales volumes increased 10%,
from 74.1 million cubic feet (MMcf) in 2005 to 81.6 MMcf in 2006, while the average price per Mcf
dropped 1%, from $6.55 in 2005 to $6.47 in 2006. On an equivalent barrel (BOE) basis, sales
volumes increased 10% from 61,200 BOE in 2005 to 67,600 BOE in 2006.
Expenses. Oil and gas production expense decreased $205,000 (18%) in 2006 from 2005. Oil and gas
production expense is comprised of two components: routine lease operating expenses and workovers.
Routine expenses typically include such items as daily well maintenance, utilities, fuel, water
disposal and minor surface equipment repairs. Workovers, on the other hand, which primarily
include downhole repairs, are generally random in nature. Although workovers are expected, they
can be much more frequent in some wells than others and their cost can be significant. Therefore,
workovers account for more dramatic fluctuations in oil and gas production expense from period to
period.
Routine lease operating expense increased $97,000 (15%) from $628,000 in 2005 to $725,000 in 2006
while workover expense dropped $302,000 (62%) from $485,000 in 2005 to $183,000 in 2006. Routine
lease operating expense per BOE increased 4% from $10.26 in 2005 to $10.72 in 2006 while workover
expense per BOE declined 66% from $7.91 in 2005 to $2.72 in 2006.
Production taxes, which are generally a percentage of sales revenue, increased $31,000 (13%) in
2006 over 2005. Production taxes, as a percent of sales revenue actually declined from 7.4 percent
in 2005 to 6.6 percent in 2006. This percentage drop can be attributed to Montana tax incentives
applicable to new production. The overall lifting cost per BOE declined 21% from $22.00 in 2005 to
$17.36 in 2006.
Depreciation and depletion expense increased $10,000 (3%) in 2006 over 2005. The 2005 period was
negatively impacted by an $85,000 ceiling limitation impairment charge applicable to the Company’s
Canadian operations.
General and administrative expense increased $15,000 (6%) in 2006 over 2005 primarily as a result
of an increase in consulting fees. Due to the increase in BOE sales volumes, G&A expense per BOE
decreased 4% from $4.23 in 2005 to $4.05 in 2006. As a percent of total sales revenue, G&A expense dropped from
8.2% in 2005 to 6.8% in 2006.
10
Quarter Ended September 30, 2006 Compared to Quarter Ended September 30, 2005
Overview. Net income for the quarter ended September 30, 2006 (2006) was $780,000 compared to net
income of $644,000 for the quarter ended September 30, 2005 (2005), an increase of 21%. In turn,
EBITDA increased 68%, from $756,000 in 2005 to $1,270,000 in 2006. The difference between the
increases in net income and EBITDA was primarily due to a $313,000 provision for deferred income
taxes recorded in 2006.
Revenues. Oil and gas sales revenue increased $415,000 (25%) in 2006 over 2005. Oil sales revenue
increased $376,000 (27%) as a result of both higher sales volumes and prices. Gas sales revenue
increased $39,000 (16%) in 2006 over 2005. Again, a positive variance from higher sales volumes
was reduced by a negative variance from lower natural gas prices.
Volumes and Prices. As a result of new production, oil sales volumes rose 16%, from 23,100 barrels
in 2005 to 26,900 barrels in 2006 while there was a 9% increase in the average price per barrel
from $60.14 in 2005 to $65.56 in 2006. Also because of new production, gas sales volumes increased
24%, from 35.6 MMcf in 2005 to 44.1 MMcf in 2006, while the average price per Mcf dropped 6%, from
$6.94 in 2005 to $6.49 in 2006. On an equivalent barrel (BOE) basis, sales volumes increased 18%
from 29,000 BOE in 2005 to 34,200 BOE in 2006.
Expenses. Oil and gas production expense decreased $163,000 (27%) in 2006 from 2005. Routine
lease operating expense increased $37,000 (11%) from $322,000 in 2005 to $359,000 in 2006 while
workover expense dropped $200,000 (72%) from $279,000 in 2005 to $79,000 in 2006. Again as a
result of an increase in BOE sales volumes, routine lease operating expense per BOE decreased 5%
from $11.09 in 2005 to $10.49 in 2006 while workover expense per BOE declined 76% from $9.61 in
2005 to $2.30 in 2006.
Production taxes, which are typically a percentage of sales revenue, increased $20,000 (16%) in
2006 over 2005. Production taxes, as a percent of sales revenue declined from 7.5 percent in 2005
to 7.0 percent in 2006. The overall lifting cost per BOE dropped 32% from $24.93 in 2005 to $16.98
in 2006.
Depreciation and depletion expense increased $52,000 (51%) in 2006 over 2005 as a result of an
increases in the full cost pool and the depletion rate.
G&A expense increased $2,000 (2%) in 2006 over 2005. As a result of the increase in BOE sales
volumes, G&A expense per BOE decreased 14% from $4.19 in 2005 to $3.60 in 2006. G&A expense as a
percent of total sales revenue dropped from 7.4% in 2005 to 6.0% in 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles
requires Company 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. Management bases its estimates on historical experience
and on various other assumptions it believes to be reasonable under the circumstances. Although
actual results may differ from these estimates under different assumptions or conditions,
management believes that its estimates are reasonable and that actual results will not vary
significantly from the estimated amounts. The Company believes the following accounting policies
and estimates are critical in the preparation of its consolidated financial statements: the
carrying value of its oil and gas property, the accounting for oil and gas reserves, the estimate
of its asset retirement obligations, and the estimate of deferred income taxes.
11
Oil and Gas Property. Basic utilizes the full cost method of accounting for costs related to its
oil and gas property. Capitalized costs included in the full cost pool are depleted on an
aggregate basis over the estimated lives of the properties using the units-of-production method.
These capitalized costs are subject to a ceiling test that limits such pooled costs to the
aggregate of the present value of future net revenues attributable to proved oil and gas reserves
discounted at 10 percent plus the lower of cost or market value of unproved properties less any
associated tax effects. If the full cost pool of capitalized oil and gas property costs exceeds
the ceiling, Basic will record a ceiling test write-down to the extent of such excess. This
write-down is a non-cash charge to earnings. If required, it reduces earnings and impacts
shareholders’ equity in the period of occurrence and results in lower depreciation and depletion in
future periods. The write-down may not be reversed in future periods, even though higher oil and
gas prices may subsequently increase the ceiling.
Oil and Gas Reserves. The determination of depreciation and depletion expense as well as ceiling
test write-downs, if any, related to the recorded value of the Company’s oil and gas properties are
highly dependent on the estimates of the proved oil and gas reserves attributable to these
properties. Oil and gas reserves include proved reserves that represent estimated quantities of
crude oil and natural gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing economic and
operating conditions. There are numerous uncertainties inherent in estimating oil and gas
reserves and their values, including many factors beyond Basic’s control. Accordingly, reserve
estimates are often different from the quantities of oil and gas ultimately recovered and the
corresponding lifting costs associated with the recovery of these reserves. Ninety-three percent
of Basic’s reported oil and gas reserves at March 31, 2006 and September 30, 2006 are based on
estimates prepared by an independent petroleum engineering firm. The remaining seven percent of
the Company’s oil and gas reserves were prepared in-house.
Asset Retirement Obligations. The Company has significant obligations related to the plugging and
abandonment of its oil and gas wells, the removal of equipment and facilities, and returning the
land to its original condition. SFAS No. 143, “Accounting for Asset Retirement Obligations”
requires that Basic estimate the future cost of this obligation, discount this cost to its present
value, and record a corresponding asset and liability in its Consolidated Balance Sheets. The
values ultimately derived are based on many significant estimates, including the ultimate expected
cost of the obligation, the expected future date of the required cash expenditures, and inflation
rates. The nature of these estimates requires management to make judgments based on historical
experience and future expectations related to timing. The Company reviews the estimate of its
future asset retirement obligations quarterly. These quarterly reviews may require revisions to
these estimates based on such things as changes to cost estimates or the timing of future cash
outlays. Any such changes that result in upward or downward revisions in the estimated obligation
will result in an adjustment to the related capitalized asset and corresponding liability on a
prospective basis.
Deferred Taxes. Deferred income taxes have been determined in accordance with Statement of
Financial Accounting Standards No. 109, “Accounting for Income Taxes.” During the quarter ended
September 30, 2006 Basic recorded income tax expense comprised of a $10,000 current expense and a
deferred tax provision of $313,000. Projections of future income taxes and their timing require
significant estimates with respect to future operating results. Accordingly, the net deferred tax
liability is continually re-evaluated and numerous estimates are revised over time. As such, the
net deferred tax liability may change significantly as more information and data is gathered with
respect to such events as changes in commodity prices, their effect on the estimate of oil and gas
reserves, and the depletion of these long-lived reserves.
12
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Quarters Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sales volume |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (barrels) |
|
|
54,000 |
|
|
|
48,900 |
|
|
|
26,900 |
|
|
|
23,100 |
|
Gas (mcf) |
|
|
81,600 |
|
|
|
74,100 |
|
|
|
44,100 |
|
|
|
35,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil |
|
$ |
3,493,000 |
|
|
$ |
2,673,000 |
|
|
$ |
1,762,000 |
|
|
$ |
1,386,000 |
|
Gas |
|
|
528,000 |
|
|
|
485,000 |
|
|
|
286,000 |
|
|
|
247,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,021,000 |
|
|
|
3,158,000 |
|
|
|
2,048,000 |
|
|
|
1,633,000 |
|
Total production expense1 |
|
|
1,173,000 |
|
|
|
1,347,000 |
|
|
|
581,000 |
|
|
|
724,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
2,848,000 |
|
|
$ |
1,811,000 |
|
|
$ |
1,467,000 |
|
|
$ |
909,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion expense4 |
|
$ |
301,000 |
|
|
$ |
206,000 |
|
|
$ |
151,000 |
|
|
$ |
99,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per barrel) |
|
$ |
64.69 |
|
|
$ |
54.72 |
|
|
$ |
65.56 |
|
|
$ |
60.14 |
|
Gas (per mcf) |
|
$ |
6.47 |
|
|
$ |
6.55 |
|
|
$ |
6.49 |
|
|
$ |
6.94 |
|
Average production expense1,2,3 |
|
$ |
17.36 |
|
|
$ |
22.00 |
|
|
$ |
16.98 |
|
|
$ |
24.93 |
|
Average gross profit2,3 |
|
$ |
42.13 |
|
|
$ |
29.61 |
|
|
$ |
42.87 |
|
|
$ |
31.43 |
|
Average depletion expense2,3 |
|
$ |
4.45 |
|
|
$ |
3.36 |
|
|
$ |
4.41 |
|
|
$ |
3.42 |
|
Average general and administrative expense2,3 |
|
$ |
4.05 |
|
|
$ |
4.23 |
|
|
$ |
3.60 |
|
|
$ |
4.19 |
|
|
|
|
1 |
|
Operating expenses, including production tax |
|
2 |
|
Averages calculated based upon non-rounded figures |
|
3 |
|
Per equivalent barrel (6 Mcf of gas is equivalent to 1 barrel of oil) |
|
4 |
|
Excluding impairment expense related to Canadian full cost pool ceiling limitation |
13
ITEM 3.
Controls and Procedures
The Company maintains a system of disclosure controls and procedures that are designed for the
purpose of ensuring that information required to be disclosed in its SEC reports is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to the Company’s management, including
the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosures.
As of September 30, 2006 Basic carried out an evaluation, under the supervision and with the
participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures.
Based upon that evaluation, it was concluded that the Company’s disclosure controls and procedures
are effective for the purposes discussed above.
There have been no changes in the Company’s internal control over financial reporting that occurred
during the Company’s second quarter of the current fiscal year that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II.
OTHER INFORMATION
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 quarter ended September 30, 2006 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.
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
|
|
|
Exhibit No. |
|
Document |
|
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray Singleton,
Chief Executive Officer). |
|
|
|
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (David Flake,
Chief Financial Officer). |
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive Officer). |
|
|
|
32.2
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (David Flake, Chief Financial Officer). |
Other exhibits and schedules are omitted because they are not applicable, not required or the
information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K
|
|
|
Date |
|
Document |
|
September 13, 2006
|
|
The Company announced that it had commenced drilling
operations on the Table Top Unit #1, the first well in
the Christmas Meadows prospect in Summit County, Utah. |
|
|
|
September 29, 2006
|
|
The Company reported plans to re-enter the State #16-1H
well in McKenzie County, North Dakota in order to drill
two horizontal laterals in the Rival formation. |
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 |
|
|
|
|
|
/s/ David Flake
David Flake
|
|
|
Chief Financial Officer and |
|
|
Principal Accounting Officer |
|
|
Date: November 6, 2006 |
|
|
15
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Document |
|
|
|
31.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray Singleton,
Chief Executive Officer). |
|
|
|
31.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (David Flake,
Chief Financial Officer). |
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32.1
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Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive Officer). |
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32.2
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Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (David Flake, Chief Financial Officer). |