UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 2008.
or
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________________
Commission File Number 0-32123
DESERT MINING, INC..
(Exact name of registrant as specified in its charter)
Nevada | 87-0664962 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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4328 Hwy. 66, Longmont, CO | 80504 |
(Address of principal executive offices) | (Zip Code) |
(970) 535-6213
(Registrant’s telephone number, including area code)
_______________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. S Yes £ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer£
Accelerated filer£
Non-accelerated filer£ (Do not check if a smaller reporting company)
Smaller reporting companyS
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes S No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. £ Yes £ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as ofMarch 31, 2008: 14,162,647
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2008 and 2007 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2007 audited financial statements. The results of operations for the periods ended March 31, 2008 and 2007 are not necessarily indicative of the operating results for the full year.
2
DESERT MINING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - unaudited
March 31, 2008
=========================================================================
ASSETS |
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CURRENT ASSETS |
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Cash | $ | 222,045 |
Accounts receivable |
| 27,750 |
Total Current Assets |
| 249,795 |
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FURNITURE & EQUIPMENT – net of depreciation |
| 47,719 |
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OTHER ASSETS |
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Undeveloped oil & gas leases |
| 470,472 |
Less valuation allowance |
| (323,570) |
Proved producing properties |
| 1,419,051 |
Less accumulated depletion |
| (66,857) |
Unevaluated Drilling Costs |
| 27,406 |
Deposits |
| 112,531 |
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| $ | 1,936,547 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Accounts payable | $ | 306,657 |
Severance and production taxes payable |
| 20,497 |
Note payable |
| 750,000 |
Accrued interest payable |
| 251,013 |
Total Current Liabilities |
| 1,328,167 |
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STOCKHOLDERS’ EQUITY |
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Common stock |
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100,000,000 shares authorized at $0.001 per value |
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14,162,647 shares issued and outstanding |
| 14,163 |
Capital in excess of par value |
| 4,257,192 |
Accumulated deficit |
| (3,662,975) |
Total Stockholders’ Equity |
| 608,380 |
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| $ | 1,936,547 |
The accompanying notes are an integral part of these financial statements.
3
DESERT MINING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS - unaudited
For the Three Months Ended March 31, 2008 and 2007
=========================================================================
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| March 31, |
| March 31, |
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| 2008 |
| 2007 |
REVENUE |
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Natural Gas Sales | $ | 67,444 | $ | 63,225 |
Compression & Operating Cost |
| (13,466) |
| (25,980) |
Severance & Production Taxes |
| (8,145) |
| (7,587) |
Gross Profit |
| 45,833 |
| 29,658 |
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EXPENSES |
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Annual lease payments |
| 640 |
| 5,678 |
Depreciation, Depletion & Value Allowance |
| 56,166 |
| 68,076 |
Administrative |
| 116,469 |
| 135,581 |
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| 173,275 |
| 209,335 |
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NET LOSS FROM OPERATIONS |
| (127,442) |
| (179,677) |
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OTHER EXPENSES |
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Gain from sale of oil & gas lease |
| 58,917 |
| - |
Interest expense |
| (33,657) |
| (33,288) |
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NET INCOME/(LOSS) | $ | (102,182) | $ | (212,965) |
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NET INCOME/(LOSS) PER COMMON SHARE |
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Basic and diluted | $ | (.01) | $ | (0.02) |
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AVERAGE OUTSTANDING SHARES – (stated in 1,000’s) |
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Basic |
| 14,163 |
| 14,123 |
Diluted |
| 14,163 |
| 14,623 |
The accompanying notes are an integral part of these financial statements.
4
DESERT MINING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2008 and 2007
=========================================================================
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| March 31, |
| March 31, |
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| 2008 |
| 2007 |
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CASH FLOWS FROM |
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OPERATING ACTIVITIES |
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Net income/(loss) | $ | (102,182) | $ | (212,965) |
Adjustments to reconcile net loss to |
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net cash provided by operating |
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activities |
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Depreciation, depletion & amortization |
| 56,166 |
| 68,076 |
Amortization warrant/conversion premium |
| - |
| - |
Changes in accounts receivable |
| (5,620) |
| 35,377 |
Changes in deposits |
| 10,000 |
| (20,000) |
Changes in notes and accounts payable |
| 72,169 |
| 90,136 |
Contributions to capital – expenses |
| - |
| - |
Issuance of capital stock for expenses |
| - |
| - |
Net Decrease in Cash From Operations |
| 30,533 |
| (39,376) |
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CASH FLOWS FROM INVESTING |
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ACTIVITIES |
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Purchase of office equipment |
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Proceeds from sale of oil & gas leases |
| 160,985 |
| - |
Cost of oil & gas leases sold |
| (102,068) |
| - |
Purchase/development of oil & gas leases |
| (15,711) |
| (41,478) |
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| 43,206 |
| (41,478) |
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CASH FLOWS FROM FINANCING |
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ACTIVITIES |
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Proceeds from note payable |
| - |
| - |
Proceeds from issuance of common stock |
| - |
| 20,000 |
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Net Increase/(Decrease) in Cash |
| 73,739 |
| (60,854) |
Cash at Beginning of Period |
| 148,306 |
| 109,757 |
Cash at End of Period | $ | 222,045 | $ | 48,903 |
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NON CASH FLOWS FROM OPERATING |
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ACTIVITIES |
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Issuance of 2,490,801 common shares for services – 2003-2005 |
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Issuance of 360,000 common shares for services 2006 |
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The accompanying notes are an integral part of these financial statements.
5
DESERT MINING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENT
March 31, 2008
1.
ORGANIZATION
The Company was incorporated under the laws of the state of Nevada on June 6, 1979 with the name Holidays of America, Inc. with authorized common stock of 2,500 shares at no par value. On November 28, 2000 the name was changed to Desert Mining, Inc. and the authorized common stock was increased to 100,000,000 shares with a par value of $0.001 in connection with a forward stock split of two hundred shares for each outstanding share.
This report has been prepared showing after stock split shares from inception with a par value of $0.001.
The Company is engaged in the activity of acquiring, exploring, developing and operating oil and gas leases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
The Company recognizes income and expenses based on the accrual method of accounting.
Dividend Policy
The Company has not yet adopted a policy regarding payment of dividends.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws that will be in effect, when the differences are expected to reverse. An allowance against deferred tax assets is recorded, when it is more likely than not, that such tax benefits will not be realized.
On March 31, 2008, the Company had a net operating loss available for carry forward of $2,814,975. The tax benefit of approximately $845,000 from the loss carry forward has been fully offset by a valuation reserve because the company has been unable to project a reliable estimated future. The net operating loss will expire starting in 2008 through 2028.
Financial and Concentrations Risk
The Company does not have any concentration or related financial credit risks except the Company maintains bank accounts over the insured amount of $100,000. However, they are maintained in banks with high quality.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share amounts are computed based on the weighted average number of shares actually outstanding. Diluted net income (loss) per share amounts are computed using the weighted average number of common shares and common equivalent shares outstanding as if shares had been issued on the exercise of any common share rights unless the exercise becomes antidilutive and then only the basic per share amounts are shown in the report.
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DESERT MINING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Statement of Cash Flows
For the purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company is in the business of exploring for, developing, producing and selling crude oil and natural gas. Crude oil revenue is recognized when the product is taken from the storage tanks on the lease and delivered to the purchaser. Natural gas revenues are recognized when the product is delivered into a third party pipeline downstream of the lease. Occasionally the Company may sell specific leases and the gain or loss associated with those transactions will be shown separately from the profit or loss from normal ongoing operations.
Advertising and Market Development
The company expenses advertising and market development costs as incurred.
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing these financial statements.
Financial Instruments
The carrying amounts of financial instruments are considered by management to be their estimated fair values due to their short term maturities.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiary from its inception. All significant intercompany accounts and balances have been eliminated in consolidation.
Recent Accounting Pronouncements
The Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.
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DESERT MINING, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
March 31, 2008
3. OIL & GAS LEASES
During 2003, 2004, and 2005 the Company purchased 32,734 net acres of oil and gas leases consisting of 19,799 acres from the State of Wyoming, 11,451 acres from the BLM and 1,484 net acres from private individuals. The terms of the BLM leases are for ten years and require yearly payments of $17,177 starting one year after the issuance of the leases. The terms of the State of Wyoming leases are for five years with yearly payments of $19,799 starting one year after the date of issuance of the leases. The private leases vary from 19 months to 52 months and do not require any annual payments. The required yearly payments are expensed as paid. The Company acquired an additional 2,856 BLM acres in the second quarter of 2007. Due to the short term remaining on the leases, no consideration was paid to the vendor but the vendor retained an overriding royalty on the leases. This transaction added $5,712 to our ann ual BLM obligations.
During 2004 the Company sold 240 net acres of State leases retaining an overriding royalty of 4.34% and reducing annual payments by $240. In June 2005, the Company sold 2,103 net BLM acres retaining a 2.5% overriding royalty and reducing annual payments by $3,155. In March 2006 the Company sold 640 State acres reducing the annual payments by $640 and in December 2006 the Company sold 640 State acres reducing annual payments by $640. In the first half of 2007, 1,278 acres of private leases were allowed to expire. In September 2007 the Company sold 6,045 BLM acres and retained a 5% overriding royalty interest. This reduced our annual BLM obligation by $9,068. In January 2008 we sold a total of 10,625 acres (4,826 BLM acres and 6,799 State acres) reducing our annual BLM payments by $7,239 and our annual State payments by $5,799. We retained an overriding royalty of 3.333% on the State leases and an overridi ng royalty of 7.5% on some of the BLM leases. We also retained a 3% working interest in 7,265 acres located in the Lieter area.
The Company intends to drill for oil and natural gas on their leases. Drilling costs will be treated as work in progress until such time as the well has been finished and its commercial potential evaluated.
The Company follows the successful efforts method of accounting and will capitalize successful wells and related leasehold costs. These costs will be amortized using the unit of production method. Dry hole and related leasehold costs will be expensed.
4. NOTE PAYABLE
The Company received $750,000 under a note payable dated October 19, 2004 which was due June 19, 2006 (subsequently extended) including interest at 6%. Additionally, the note provides for the interest rate to be increased to 18% after the initial term. The Company is currently negotiating with the note holder and believes the final interest rate will be lower than this but we have accrued at the full rate.
5. CONTINUING LIABILITIES
The Company is obligated under a two year office lease of $2,375 per month which expired September 30, 2006. The lease also includes two one year extensions and the Company has exercised the second year option.
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ITEM 2. PLAN OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENT NOTICE
This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competi tion from much larger competitors; technological advances and failure to successfully develop business relationships.
Description of Business.
Desert Mining is engaged in the activity of seeking developmental mineral properties. In particular Desert is focusing on the oil and gas industry and is actively pursuing oil and gas leases along with joint ventures or acquisitions to complement the intended business operation.
In 2005 we drilled the Smith 3-12 located in Campbell County Wyoming. The well was drilled to test the potential of the Spotted Horse prospect and we encountered gas during the drilling process. In the second quarter of 2006, the Company acquired two additional wells in the prospect and began installing gas gathering and water handling facilities. The facilities were completed in July and we achieved our first production on July 31. We began injecting produced water into the well on a full time basis in April 2007. We have contracted Baker Energy from Sheridan Wyoming to prepare the Plan of Development for an additional 14 wells on our Federal acreage adjacent to our current wells and expect to receive approval shortly. Separately, we have received two approved well permits for our Dripping Rock project and are currently evaluating development alternatives.
As a part of our planned operations, Desert is actively seeking to develop joint ventures or acquire businesses with current operations in the oil and gas production areas.
Description of Property.
We have approximately 2,720 Federal acres, 12,480 State acres and 187 private acres of oil and gas leases. In addition to our leases, we have minimal office equipment, vehicles and no other assets.
We are obligated to a two year office lease of $2,375 per month which expired September 30, 2006. The lease also includes two one year extension options and we exercised both the first and second year options. We have approximately 4,500 square feet of office space and believe this will be sufficient to support our operations.
Plan of Operation
We intend to drill for oil and natural gas on our leases. Drilling costs will be treated as work in progress until such time as the well has been finished and its commercial potential evaluated.
Results of Operations – Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
For the three months ended March 31, 2008 we had revenue from natural gas sales of $67,444 with compression and operating costs of $13,466 and severance and production taxes of $8,145 resulting in a gross profit of $45,833, compared to $63,225 in revenue from natural gas sales of $63,225 with compression and operating costs of $25,980 and severance and production taxes of $7,587 resulting in a gross profit of $29,658 for the three months ended March 31, 2007.
9
For the three months ended March 31, 2008 our expenses consisted of $640 in annual lease payments, $56,166 in depreciation, depletion and amortization and $116,469 in administrative expenses, a gain from sale of oil and gas lease of $58,917 and interest expense of $33,657 which resulted in a net loss of $102,182 or $(0.007) per share, compared to expenses of $5,678 in annual lease payments, $68.076 in depreciation, depletion and amortization and $135,581 in administrative expenses and $33,288 in interest expense for a net loss for the corresponding period of 2007 of $(212,965) or $(0.015) per share.
Capital Resources and Liquidity
As of March 31, 2008, we had total assets of $1,936,547 and liabilities of $1,328,167. Our assets consist of $222,045 in cash, $27,750 in accounts receivable, $47,719 in furniture and equipment, net of depreciation, undeveloped oil and gas leases of $470,472 less accumulated amortization and valuation allowance of $323,570, proved producing properties of $1,419,051 less accumulated depletion of $66,857, unevaluated drilling costs of $27,206 and deposits of $112,531.
Our liabilities consist of $306,657 in accounts payable, $20,497 in severance and production taxes payable, $750,000 note payable and $251,013 in accrued interest payable.
In January 2008, we sold a total of 10,625 acres (4,826 BLM acres and 6,799 States acres) reducing our annual BLM payments by $7,239 and our annual State payments by $5,799. We retained an overriding royalty of 3.333% on the States leases and an overriding royalty of 7.5% on some of the BLM leases.
We have a note payable of $750,000 plus accrued interest at 6%. The note became due June 19, 2006 and was subsequently extended. The note provides for the interest rate to be increased to 18% after the initial term. The Company is currently negotiating with the note holder and believes the final interest rate will be lower than this but we have accrued at the full rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required by smaller reporting companies.
ITEM 4T. CONTROLS AND PROCEDURES.
(a)
Evaluation of Disclosure Controls and Procedures. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2008.
This quarterly report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this quarterly report.
(b)
Changes in Internal Control over Financial Reporting. There were no changes in the Company's internal controls over financial reporting, known to the chief executive officer or the chief financial officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
10
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company was named in a complaint dated July 27, 2007 which was filed in the State of Wyoming, County of Campbell, District Court, Sixth Judicial District with Civil No. 28144. The complaint was brought by Cammeran Petroleum, Inc., an Oklahoma corporation and named Desert Mining, Inc. and its subsidiary, 44 Mag Production, Inc. among other parties. The complaint relates to mining leases and royalties in Wyoming and the plaintiff is requesting the Court to quiet title on the properties in dispute. The Company has attempted to settle the dispute amicably and now intends to fully defend its position. The can be no assurance of a positive outcome and any negative outcome could have an adverse affect on the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company did not sell or issue any securities during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the period covered by this report to a vote of security holders.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.
Exhibit No. | Title of Document | Location |
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31.1 | Certification of the Principal Executive Officer/ Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Attached |
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32.1 | Certification of the Principal Executive Officer/ Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | Attached |
(b) Reports on Form 8-K
None
*
The Exhibit attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
DESERT MINING, INC.
Date: May 8, 2008
By:/s/ Gabriel Holt
Gabriel Holt, President and
Chief Financial Officer
12
