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UNITED STATES
SECURITIES EXCHANGE COMMISSION
FORM 10-QSB
[x] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDING AUGUST 31, 2004 |
[ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to .
Commission File Number 0-30746
TBX RESOURCES, INC.
Texas | 75-2592165 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3030 LBJ Freeway, Suite 1320
Dallas, TX 75234
(Address of principal executive offices)
Issuer’s telephone number (972) 243-2610
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 such filing requirements for the past 90 days. |
Yes [X] NO [ ]
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 30,772,537 on October 14, 2004
Transitional Small Business Disclosure Format (check one) Yes [ ] No [x]
TBX Resources, Inc.
Index
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F-1 | ||||||||
F-2 | ||||||||
F-3 | ||||||||
F-4 | ||||||||
F-5 | ||||||||
1 | ||||||||
6 | ||||||||
6 | ||||||||
7 | ||||||||
Certification of CEO/CFO Pursuant to Section 302 | ||||||||
Certification of CEO/CFO Pursuant to Section 906 |
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PART I- FINANCIAL INFORMATION
TBX RESOURCES, INC.
(Unaudited)
ASSETS | ||||
Current Assets | ||||
Cash and equivalents | $ | 1,472 | ||
Trade accounts receivable | 25,688 | |||
Prepaid consulting fees and other | 100,000 | |||
Total current assets | 126,424 | |||
Equipment and Property | ||||
Office furniture, fixtures and equipment | 118,449 | |||
Oil and gas properties, using successful efforts accounting | ||||
Proved properties and related equipment | 1,784,727 | |||
1,903,176 | ||||
Less accumulated depreciation, depletion and amortization | 780,472 | |||
Total equipment and property | 1,122,704 | |||
Prepaid Consulting and Other | 156,211 | |||
Total Assets | $ | 1,405,339 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current Liabilities | ||||
Trade accounts payable | $ | 132,944 | ||
Loans from affiliates | 360,272 | |||
Taxes payable | 10,356 | |||
Accrued expenses | 30,445 | |||
Deferred income from joint ventures | 162,462 | |||
Total current liabilities | 696,479 | |||
Commitments and Contingencies | — | |||
Stockholders’ Equity | ||||
Preferred stock- $.01 par value; authorized 10,000,000 shares; no shares outstanding | — | |||
Common stock- $.01 par value; authorized 100,000,000 shares; 30,772,537 shares outstanding at August 31, 2004 | 307,725 | |||
Additional paid-in capital | 8,558,897 | |||
Accumulated deficit | (8,157,762 | ) | ||
Total stockholders’ equity | 708,860 | |||
Total Liabilities and Stockholders’ Equity | $ | 1,405,339 | ||
The accompanying notes are an integral part of these financial statements.
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TBX RESOURCES, INC.
For The Three Months Ended | For The Nine Months Ended | |||||||||||||||
Aug. 31, 2004 | Aug. 31, 2003 | Aug. 31, 2004 | Aug. 31, 2003 | |||||||||||||
Revenues: | ||||||||||||||||
Oil and gas sales | $ | 22,567 | $ | 33,444 | $ | 89,351 | $ | 147,539 | ||||||||
Joint venture management fees | 277,485 | 152,287 | 503,988 | 152,287 | ||||||||||||
Total revenues | 300,052 | 185,731 | 593,339 | 299,826 | ||||||||||||
Expenses: | ||||||||||||||||
Lease operating and taxes | 34,879 | 32,477 | 88,580 | 76,549 | ||||||||||||
Joint venture expenses | 94,456 | 89,098 | 277,508 | 89,098 | ||||||||||||
General and administrative | 56,848 | 130,993 | 243,935 | 452,191 | ||||||||||||
Loss on sale and abandonment of oil & gas properties | — | — | — | 671,197 | ||||||||||||
Depreciation, depletion and amortization | 89,849 | 81,543 | 214,097 | 245,285 | ||||||||||||
Total expenses | 276,032 | 334,111 | 824,120 | 1,534,320 | ||||||||||||
Operating Income (Loss) | 24,020 | (148,380 | ) | (230,781 | ) | (1,234,494 | ) | |||||||||
Other Income (Expense): | ||||||||||||||||
Interest and other | (3,659 | ) | 95 | (11,131 | ) | 488 | ||||||||||
Net Income (Loss) Before Provision for Income Taxes | 20,361 | (148,285 | ) | (241,912 | ) | (1,234,006 | ) | |||||||||
Provision for income taxes | — | — | — | — | ||||||||||||
Net Income (Loss) | $ | 20,361 | $ | (148,285 | ) | $ | (241,912 | ) | $ | (1,234,006 | ) | |||||
Net Income (Loss) Per Common Share, Basic and Diluted | $ | 0.00 | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.04 | ) | |||||
Weighted average common shares used in calculations: | ||||||||||||||||
Basic and diluted | 30,772,537 | 30,120,620 | 30,772,537 | 30,120,620 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
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TBX RESOURCES, INC.
For The Nine Months Ended | ||||||||
Aug. 31, 2004 | Aug. 31, 2003 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net loss | $ | (241,912 | ) | $ | (1,234,006 | ) | ||
Adjustments to reconcile net loss to net cash flow from operating activities: | ||||||||
Loss (gain) on the disposal of oil and gas interests | — | 671,197 | ||||||
Depreciation, depletion and amortization | 214,097 | 245,285 | ||||||
Non-cash consulting services | 71,544 | 96,469 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in: | ||||||||
Trade receivables | (7,716 | ) | (10,640 | ) | ||||
Affiliate receivables | — | 18,631 | ||||||
Other current assets | (4,352 | ) | 4,952 | |||||
Increase (decrease) in: | ||||||||
Accounts payable | 13,933 | (3,984 | ) | |||||
Loans from affiliates | 12,362 | (15,000 | ) | |||||
Taxes payable | 105 | 2,563 | ||||||
Accrued expenses | 30,445 | — | ||||||
Deferred income | 114,508 | 86,772 | ||||||
Net cash provided by (used) for operating activities | 203,014 | (137,761 | ) | |||||
Cash Flows From Investing Activities: | ||||||||
Cash used in the acquisition and development of properties | (208,980 | ) | (3,556 | ) | ||||
(208,980 | ) | (3,556 | ) | |||||
Cash Flows From Financing Activities: | ||||||||
Cash provided by the issuance of common stock | — | 107,568 | ||||||
— | 107,568 | |||||||
Net Increase (Decrease) In Cash | (5,966 | ) | (33,749 | ) | ||||
Cash at beginning of period | 7,438 | 34,317 | ||||||
Cash at end of period | $ | 1,472 | $ | 568 | ||||
The accompanying notes are an integral part of these financial statements. |
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TBX RESOURCES, INC.
Common Stock | Additional Paid-In | Accum- ulated | Total Stockholders’ | |||||||||||||||||
Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
Balance November 30, 2003 | 30,772,537 | $ | 307,725 | $ | 8,558,897 | $ | (7,915,850 | ) | $ | 950,772 | ||||||||||
Net loss for period | — | — | — | (241,912 | ) | (241,912 | ) | |||||||||||||
Balance August 31, 2004 | 30,772,537 | $ | 307,725 | $ | 8,558,897 | $ | (8,157,762 | ) | $ | 708,860 | ||||||||||
The accompanying notes are an integral part of these financial statements.
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TBX RESOURCES, INC.
1. BUSINESS ACTIVITIES:
TBX Resources, Inc., a Texas Corporation, was organized on March 24, 1995. The Company’s principal business activity is acquiring and developing oil and gas properties. The Company owns 23 wells and operates another 7 wells located in East Texas. Of the 23 wells located in East Texas, 5 wells are currently producing oil and 2 wells have been designated as injection wells. The remaining 16 wells are either currently shut-in, scheduled to be brought back into production or are designated as injection wells. Also, the Company has an interest in 6 proven wells in Oklahoma. The Company’s philosophy is to acquire properties with the purpose of reworking existing wells and/or drilling development wells to make a profit. In addition, the Company has sponsored joint venture development partnerships for the purpose of developing oil and gas properties for profit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation– The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with instructions to Form 10-QSB of Regulation S-B. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The Company’s quarterly financial statements should be read in conjunction with the financial statements of the Company for the year ended November 30, 2003 (including the notes thereto) set forth in Form 10-KSB.
In the opinion of Management, all adjustments (which include normal recurring adjustments except as disclosed herein) necessary to present a fair statement of financial position as of August 31, 2004, results of operations, cash flows and stockholders’ equity for the nine months ended August 31, 2004 and 2003 have been made. Operating results for the nine months ended August 31, 2004 are not necessarily indicative of the operating results for the full fiscal year or any future period.
Net Loss Per Common Share- Stock options are excluded from the calculation of net loss per common share because they are antidilutive.
Recent Accounting Pronouncement –In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51”. Under the provisions of Interpretation No. 46, certain variable interest entities, often referred to as “Special Purpose Entities”, are required to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do no have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Interpretation No. 46 is effective for all entities created or acquired prior to February 1, 2003. The provisions of Interpretation No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes the adoption of SFAS Interpretation No. 46 will not have any impact on its financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The standard is effective for contracts entered into or modified after June 30, 2003. The Company does not have any derivative instruments as defined by SFAS No. 149. The Company’s adoption of SFAS No. 149 will not have any impact on its financial position or results of operations.
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In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 is effective for financial instruments entered into or modified after August 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 requires the classification as a liability of any financial instruments with a mandatory redemption feature, an obligation to repurchase equity shares, or a conditional obligation based on the issuance of a variable number of its equity shares. The Company does not have any financial instruments as defined by SFAS No. 150. The Company believes the adoption of SFAS No. 150 will not have any impact on its financial position or results of operations.
3. SIGNIFICANT TRANSACTIONS:
a. | During the last quarter of the previous fiscal year, the Company entered into a management contract with a company in which Mr. Burroughs is the sole shareholder. Under the agreement, the Company performs administrative and drilling supervision services on a well-by-well basis for an agreed upon fee. During the nine months ended August 31, 2004, the Company generated approximately $503,988 in revenues from joint venture management fees and incurred expenses of approximately $277,508. In addition, as of August 31, 2004, the Company recorded deferred income associated with this activity in the amount of $162,462. | |||
b. | During the current quarter, the Company completed reworking two East Texas wells at a cost of approximately $208,224. Initial monthly gross production from these wells is projected to be 500 barrels of oil. | |||
c. | During the previous fiscal year, the Company obtained operating loans from its president, Mr. Tim Burroughs. The loan balance as of August 31, 2004 is approximately $157,953 (included in loans from affiliates) and is payable on demand at an interest rate of 10% per annum. Interest accrued on the loan for the first nine months is $11,558. The loan is secured by the Company’s oil and gas properties. The Company expects to pay back this loan from operating revenue by the end of this fiscal year. | |||
d. | In October of 2002, the Company formed and is acting as the general partner for the “Grasslands I, Limited Partnership”. The purpose of the partnership is to acquire leases for oil and gas development in the Barnett Shale play in the Fort Worth Basin of Wise County, Texas. The Company is to be reimbursed on a turnkey basis for organization and offering cost, lease acquisition costs and administrative expenses. Revenue earned to date is $88,477 offset by expenses of $49,233. As of August 31, 2004 the Partnership advanced the Company approximately $195,000 which it used to fund operations and is included in loans from affiliates. The Company expects to repay the advance from operating revenue by the end of this fiscal year. | |||
e. | During the second quarter of the previous fiscal year, the Company wrote-off most of its investment in the Talco Field property in East Texas. The Company wrote-off 75% of the costs of the acreage, wells and related depreciation, depletion and amortization and recorded a loss on the property of approximately $484,424. This was a non-producing property; accordingly there were no income or expense items associated with this property during the previous fiscal year. In addition, the Company abandoned its Union City prospect in Oklahoma. In this regard the Company wrote-off the costs of the acreage, wells and related depreciation, depletion and amortization and recorded a loss on abandonment of approximately $191,511. Union City was a non-producing property; accordingly there were no income or expense items associated with this property during the previous fiscal year. |
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f. | The Company executed an Employment Agreement for three years effective December 1, 1999 with Mr. Tim Burroughs, President. Under the terms of the agreement, Mr. Burroughs received stock options good for five years from the date of issuance to purchase up to 500,000 shares of the Company’s common stock a year for five years at a price which shall not be greater than 50% of the average bid price for the shares during the previous quarter in which the options are exercised. The options are cumulative thus allowing Mr. Burroughs to exercise the options through November 30, 2004 for a total of 2,500,000 shares. As of November 30, 2003, Mr. Burroughs has the option to purchase 2,000,000 shares of the Company’s common stock. The fair value of the options will be recorded as compensation expense when a reasonable estimate of such costs are available or the amount Mr. Burroughs has to pay is known. Based on the formula for calculating the purchase price, material charges to compensation expense may be recorded in future years. The current management contract has been extended until a new contract can be arranged. |
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Item 2. Management’s Discussion and Analysis and Results of Operation |
CAUTIONARY STATEMENT
Statements in this report which are not purely historical facts, including statements regarding the Company’s anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Act of 1934, as amended. All forward-looking statements in this report are based upon information available to us on the date of the report. Any forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from events or results described in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
RECENT DEVELOPMENTS
During the previous fiscal year, the Company abandoned its Talco Field property in East Texas. The Company wrote-off the costs of the acreage, wells and related deprecation, depletion and amortization and recorded a loss on abandonment of approximately $0.6 million. Management is of the opinion that the estimated cost of $1 million to re-work and develop the property will not yield an adequate return on its investment given its limited resources. By abandoning the property, the Company was able to avoid a remedial liability estimated to be approximately $0.2 million. The property was shut-in; accordingly there were no income or expense items associated with this property during the previous fiscal year. The property is currently being leased by a company in which our president, Tim Burroughs is the sole shareholder. The Company will own a 25% working interest in the property after it is developed. Thus, the Company will participate in the potential increased production from this property without incurring any development costs. Management is of the opinion the 25% interest in the developed property may yield net after expense income of approximately $0.4 million in the first full year of production and declining thereafter.
DESCRIPTION OF PROPERTIES
GENERAL: The following is information concerning production from our oil and gas wells, and our productive wells and acreage and undeveloped acreage. Our oil and gas properties are located within the northern part of the east Texas salt basin. The earliest exploration in this area dates back to the early 1920s and 1930s, when frontier oil producers were exploring areas adjacent to the famous “East Texas field” located near the town of Kilgore, Texas. We have leasehold rights in three oil and gas fields located in Gregg, Hopkins, Franklin, Panola, and Wood Counties, Texas. We also acquired several wells and acreages in Oklahoma, which are described below after the Texas properties.
RESERVES REPORTED TO OTHER AGENCIES. We are not required and do not file any estimates of total, proved net oil or gas reserves with reports to any federal authority or agency.
PROPERTIES. The following is a breakdown of our properties:
Gross Producing | Net Producing Well | |||||||
Name of Field | Well Count | Count | ||||||
East Texas Field | 0 | 0 | ||||||
Mitchell Creek & Talco Field (1) | 1 | 1 | ||||||
Manziel & Quitman Field (1) | 4 | 4 |
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The following information pertains to our properties as of August 31, 2004:
PROVED | PROVED | PERCENTAGE OF | ||||||||||||||||||||||||||
PROVED | PROVED | DEVELOPED | DEVELOPED | CURRENT | RESERVES IN FIELD | |||||||||||||||||||||||
RESERVES: | RESERVES: | RESERVES: | RESERVES: | PRODUCTION | TO TOTAL RESERVES | |||||||||||||||||||||||
NAME OF | OIL | GAS | OIL | GAS | OIL: | HELD BY THE | ||||||||||||||||||||||
FIELD | (bbls) | (mcf) | (bbls) | (mcf) | (bbls) (1) | COMPANY | ||||||||||||||||||||||
East Texas Field | 6,407 | 0 | 6,407 | 0 | 0 | oil | 6.2 | |||||||||||||||||||||
gas | 0 | |||||||||||||||||||||||||||
Mitchell Creek & Talco Field | 33,681 | 0 | 33,681 | 0 | 228 | oil | 32.7 | |||||||||||||||||||||
gas | 0 | |||||||||||||||||||||||||||
Manziel & Quitman Field | 62,874 | 0 | 62,874 | 0 | 481 | oil | 61.1 | |||||||||||||||||||||
gas | 0 |
(1) | The current production figure specified above is for the production for the month of August 2004. |
PRODUCTIVE WELLS AND ACREAGE
Net | Total Gross | Net | ||||||||||||||||||||||
Total Gross | Productive | Total Gross | Net Productive | Developed | Developed | |||||||||||||||||||
Geographic Area | Oil Wells | Oil Wells | Gas Wells | Gas Wells | Acres | Acres | ||||||||||||||||||
East Texas Region | 21 | 21 | 0 | 0 | 843.2 | 838.34 |
Notes:
1. Total Gross Oil Wells were calculated by subtracting 2 wells designated as Injection Wells from the 23 wells owned and/or operated by TBX Resources, Inc as of August 31, 2004.
2. Net Productive Oil Wells were calculated by multiplying the working interest held by TBX Resources, Inc. in each of the 21 Gross Oil Wells and adding the resulting products.
3. Total Gross Developed Acres is equal to the total surface acres of the properties in which TBX Resources, Inc. holds an Interest.
4. Net Developed Acres is equal to the Total Gross Developed Acres multiplied by the percentage of the total working interest held by TBX Resources, Inc. in the respective properties.
5. All acreage in which we hold a working interest as of August 31, 2004 had existing wells located thereon; thus all acreage leased by TBX Resources, Inc. may be classified as developed.
Geographic Area | Gross Acres | Net Acres | ||||||
East Texas Region | 843.2 | 838.34 |
Note:
1. Acreage that has existing wells and may be classified as developed may also have additional development potential based on the number of producible zones beneath the surface acreage. A more comprehensive study of all properties currently leased by us would be required to determine precise development potential.
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ANADARKO BASIN- WESTERN OKLAHOMA
No additional working interests were purchased in the current fiscal year. Four of the six wells we currently hold an interest in are producing gas. Although the wells are currently producing natural gas there can be no assurance that they will continue to do so.
In addition to the above described wells we own working interests in two lease tracts; one located in Ellis County, Oklahoma with a gross acreage interest of 27.5% in 1,505 acres and the second located in Canadian County, Oklahoma, constituting a gross acreage interest of 20% in 240 acres. The leases were purchased for the sum of $83,700 and $19,200, respectively. The Company also has a 3% interest in 640 acres in Beckham County, Oklahoma.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the audited financial statements included on Form 10-KSB for the year ended November 30, 2003 as filed with the United States Securities and Exchange Commission. Management believes that the application of these policies on a consistent basis enables the Company to provide useful and reliable financial information about our operating results and financial condition.
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
RESULTS OF OPERATIONS
The Company incurred an operating loss of $230,781 for the nine months ended August 31, 2004 as compared to an operating loss of. $1,234,494 for the nine months ended August 31, 2003. The decrease in the operating loss of $1,003,713, 81.3%, is discussed below.
Revenues– Revenues generated from oil and gas sales and the joint venture management fees increased $293,513, 97.9%, from $299,826 for the nine months ended August 31, 2003 to $593,339 for the nine months ended August 31, 2004.
Revenues generated from joint venture management fees increased $351,701, 230.9%, from $152,287 for the nine months ended August 31, 2003 to $503,988 for the nine months ended August 31, 2004. The work is generated from a company in which our president. Mr. Burroughs is the sole shareholder. The Company’s joint venture operations began in the current quarter of the previous fiscal year.
During the nine months ended August 31, 2003, the Company generated approximately $147,539 in revenue from oil and gas sales as compared to $89,351 for the nine months ended August 31, 2004. The $58,188, 39.4%, decrease is primarily due to the payment of prior years oil runs for the correction of an error by one of the Company’s oil purchasers. During the past nine months, oil sales on the Texas properties were approximately the same as last year. The Company completed re-working two East Texas wells and anticipates that these wells will be brought on-line during the fourth quarter of current fiscal year. The Company anticipates that monthly production from these wells will approximate 500 barrels of oil. The majority of the Texas wells remain shut-in awaiting re-work or the designation as injection wells. Revenue from the Company’s Oklahoma properties is minimal as a result of previous sales of the Company’s interest in the properties and production declines.
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Expenses– Total expenses decreased $710,200, 46.3%, from $1,534,320 for the nine months ended August 31, 2003 to $824,120 for the nine months ended August 31, 2004.
Lease operating and taxes increased $12,031, 15.7%, from $76,549 for the nine months ended August 31, 2003 to $88,580 for the nine months ended August 31, 2004. The increase is primarily the result of recurring expenses for the Texas oil wells.
Joint venture expenses increased $188,410, 211.5%, from $89,098 for the nine months ended August 31, 2003 to $277,508 for the nine months ended August 31, 2004. The work is generated from a company in which our president. Mr. Burroughs is the sole shareholder. The Company’s joint venture operations began in the current quarter of the previous fiscal year.
General and administrative expenses decreased approximately $208,256, 46.1%, from $452,191 for the nine months ended August 31, 2003 to $243,935 for the nine months ended August 31, 2004. The decrease is primarily due to the allocation of $207,197 of general and administrative expenses to joint venture expenses and higher compensation and employee related costs, and general expenses offset by lower consulting fees, professional fees, public relations and contract labor expenses.
Loss from the expiration of oil and gas leases on the Talco Field property in East Texas was $671,197 for the nine months ended August 31, 2003. The Company wrote-off the costs of the acreage, wells and related depreciation, depletion and amortization and recorded a loss on abandonment of approximately $479,686. Management is of the opinion that the estimated cost of $1 million to re-work and develop the property will not yield an adequate return on its investment given its limited resources. In addition, the Company plugged and abandoned its Union City prospect that was located in Oklahoma. In this regard the Company wrote-off the costs of the acreage, wells and related depreciation, depletion and amortization and recorded a loss on abandonment of approximately $191,511. There were no comparable losses for the same period this year.
Depreciation, depletion and amortization decreased $31,188, 12.7%, from $245,285 for the nine months ended August 31, 2003 to $214,097 for the nine months ended August 31, 2004. The decrease is due to the decrease in Company owned oil and gas properties and a change in the estimate of future lives of our properties. Future charges to depreciation, depletion, and amortization may be substantially higher as a result of increased production or changes in reserve prices and/or quantities.
Other Income (Expense)- Other income and (expense) decreased from $488 for the nine months ended August 31, 2003 to ($11,131) for the nine months ended August 31, 2004. The $11,619 decrease is primarily attributable to interest charged on the Company’s approximately $157,952 operating loan from our president, Mr. Tim Burroughs.
Provision for Income Taxes –There are no recorded tax benefits for the nine months ended August 31, 2004 and for the same period last fiscal year.
Net loss –The Company’s net loss decreased approximately $992,094, 80.4%, from $1,234,006 for the nine months ended August 31, 2003 to $241,912 for the nine months ended August 31, 2004. The decrease in the loss is primarily attributable to the abandonment of the Company’s Talco and Union City properties and to a lesser extent in consulting fees, professional fees, public relations and contract labor offset by higher compensation and employee related costs, and general expenses.
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LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2004, we have total assets of $1,405,339 of which net oil and gas properties amount to $1,093,967 or 77.8% of the total assets. The Company’s accumulated losses through August 31, 2004 totaled $8,157,762. At August 31, 2004, we have $1,472 in cash. Our ratio of current assets to current liabilities is 0.2:1; we have no long-term debt. As of August 31, 2004, our shareholders equity was a positive $708,860.
We have funded operations from cash generated from the sale of common stock, the sale of oil and gas properties, joint venture management fees and loans from affiliates. The Company’s cash provided for operating activities totaled $203,014 for the nine months ended August 31, 2004 while cash used for operating activities totaled $137,761 during the nine months ended August 31, 2003. The Company’s capital investments totaled $208,980 and $3,556 for the nine months ended August 31, 2004 and 2003, respectively. Cash provided by the issuance of common stock totaled $107,568 for the nine months ended August 31, 2003. We did not sell any common stock during the nine months ended August 31, 2004.
PLAN OF OPERATION FOR THE FUTURE.
We want to manage more joint venture limited partnerships. As manager of these drilling programs, we should receive sufficient fees to earn a profit on our work. We expect that fees from this activity will be our primary source of funds in the near future. Also, the Company reworked three East Texas wells. We estimate that these wells may generate net income of approximately $10,000 per month; however, there can be no assurance that such level of production will continue now or in the future, as the well is a new well and current data may prove to be unreliable.
In October of 2002 we formed “The Grasslands I, Texas Limited Partnership” in which we are acting as the General Partner for the purpose of acquiring the Wise County acreage for development drilling. The Company has a 20% interest in the Partnership and is reimbursed on a turnkey basis for 100% of the organization and offering costs, lease acquisition costs and administrative expenses. In addition, we plan to re-work 8 of our East Texas wells in the coming year which may increase revenue by approximately $300,000 to $360,000 a year. However, there can be no assurance that our planned and projected level of production will materialize in the future.
We expect that the principal use of funds in the near future will be from joint venture management fees and oil and gas revenues and developing our oil and gas properties and/or the acquisition of new properties. Based on the aforementioned plans management expects to reduce its losses and generate positive cash flows from operations. However, there can be no assurance that such plans will materialize. In addition, actual results may vary from management’s plans and the amount may be material.
We may purchase new oil and gas properties or additional equipment to operate same. Any such additional purchases will be done on an “as needed” basis and will only be done in those instances in which we believe such additional expenditures will increase our profitability. Our ability to acquire additional properties or equipment is strictly contingent upon our ability to locate adequate financing to pay for these additional properties or equipment. There can be no assurance that we will be able to obtain the opportunity to buy properties or equipment that are suitable for our investment or that we may be able to obtain financing to pay for the costs of these additional properties or equipment at terms that are acceptable to us. Additionally, if economic conditions justify the same, we may hire additional employees although we do not currently have any definite plans to make additional hires.
The oil and gas industry is subject to various trends. In particular, at times crude oil prices increase in the summer, during the heavy travel months, and are relatively less expensive in the winter. Of course, the prices obtained for crude oil are dependent upon numerous other factors, including the availability of other sources of crude oil, interest rates, and the overall health of the economy. We are not aware of any specific trends that are unusual to our company, as compared to the rest of the oil and gas industry.
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Item 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our President/Chief Financial Officer conducted an evaluation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-14(c)) within 90 days of the filing date of this Quarterly Report on Form 10-QSB (the “Evaluation Date”). Based on the evaluation, our President/Chief Financial Officer has concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that all material information required to be filed in this Quarterly Report on Form 10-QSB has been made known to them in a timely fashion.
Changes in Internal Controls
There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date set forth above.
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 SECURITIES HOLDERS:
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the period covered by this Form 10-QSB.
EXHIBITS:
31.1 Certification of Chief Executive Officer/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer/Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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