A summary of the activity under the Company’s stock option plans for the nine-month period ended September 30, 2007 is presented below:
Certain 2006 balances have been reclassified to conform to the 2007 presentation.
During the two years ended December 31, 2006, the Company took several steps which reduced its negative cash flow to some degree, including salary deferrals by its Chairman and President and deferrals of directors’ fees into its Deferred Stock Compensation Plans (the “DSC Plans”) and continuing suspension of the Company’s 100% matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan. Five private debt placements raised gross proceeds of $4,079,000 during such period and an additional $105,000 in the first quarter of 2007. In the first half of 2005 the Company borrowed $850,000 from a related party to finance most of the cost of a fertilizer plant in China. Starting in the fourth quarter of 2005, the Company borrowed $1,100,000 from the pond owner to begin constructing the plant for its coal fines recovery project in West Virginia. That funding had increased to more than $14,150,000 as of April 30, 2007, including $2,800,000 of equity provided by affiliates of the pond owner. In addition, the Company secured a $350,000 long-term bank credit facility in March of 2006. These financings were supplemented in 2007 by (i) a $150,000 short-term loan from a shareholder of a former affiliate, (ii) $191,000 of short-term loans from the Company’s Note holders, (iii) $105,000 of additional convertible notes discussed above, and (iv) a $1,500,000 long-term bank credit facility in June of 2007. $220,000 of the proceeds from this facility were used to retire the remaining principal balance under the earlier facility. In addition, the Coalition Managers Litigation has now been concluded, and we received approximately $96,000 from the defense fund in August of 2007. These measures enabled the
Company to continue operating until the events described below under Additional Details and Recent Developments had occurred or until they do occur.
The negative result of the above has been a substantial amount of dilution to the Company’s common equity. From January 1, 2005 through September 30, 2007, a total of 85,109 warrants were issued in connection with the private debt placements, and 391,000 Stock Units were accrued in the participants’ accounts as a result of salary and fee deferrals into two DSC Plans. During such period $4,184,000 of convertible notes were also issued which are convertible into 3,506,000 shares of common stock. Additional dilution also occurred due to an adjustment to the Preferred Stock conversion ratio resulting from the issuance of the warrants, the convertible notes and the salary deferrals. Termination of the 2003-2 DSC Plan resulted in the issuance of 218,000 common shares in November of 2005, 56,000 in January of 2006, 42,000 in June of 2006, 24,000 in June of 2007, and another 42,000 in July of 2007. In addition, 25,000 options were issued to a financial consultant in 2005 and 30,000 employee stock options were issued in 2006 (both figures net of forfeitures).
The Company’s working capital position has deteriorated by $1,893,000 since December 31, 2006 to $(2,164,000) at September 30, 2007. On June 8, 2007, however, the Company consummated a $1,500,000 long-term bank revolving reducing line of credit collateralized by a priority position in its interest in the McElmo Dome field. All of the parent’s then short-term debt and current maturities of its long-term debt, along with accrued interest, were eliminated. At September 30, 2007, $25,000 remained available under the line of credit. Initially, the Company could borrow up to $1,500,000 under the line but that limit began reducing by $50,000 per month starting on July 31, 2007 and is to be fully repaid by December 31, 2008. (See “Recent Developments” below). The line accrues interest at 1.5% above the Wall Street Journal Prime Rate which is currently 7.5%. Additionally, the Company paid $30,000, which the Company capitalized, to another note holder to subordinate his note to the new lender.
Additional Details
The Company’s principal business is coal reclamation, and this is where management’s operating attention is primarily focused. The Coal Segment had a signed contract to construct and operate a pond fines recovery project in West Virginia (the “Pinnacle Project”) and commenced construction on the project in September of 2005. The Company obtained commitments for (i) $2,800,000 of equity for the Pinnacle Project provided by a group of investors (the “Group”) who are affiliates of PinnOak Resources, LLC (“PinnOak”), the pond owner, in exchange for 50% ownership in the Pinnacle Project; and (ii) a $9,000,000 bank loan subject to obtaining a USDA guaranty of 70% of the loan amount. PinnOak committed to fund or to arrange the funding for the project if the guaranty was not obtained.
Due to cost over-runs of more than $3,000,000, the Group elected, effective October 1, 2006, to exercise their option to assume control of Beard Pinnacle, LLC (“BPLLC”), the limited liability company which owns the Pinnacle Project, and reduce the Company’s interest therein to 25%. As a result, the Company was precluded from obtaining the USDA-guaranteed financing for the Pinnacle Project and PinnOak became the permanent source of financing. Despite the fact that PinnOak was providing all of the financing for the Pinnacle Project, the Company was deemed to own 100% of the Pinnacle Project until the Group subscribed to their ownership effective September 30, 2006. Effective October 1, 2006 the Company’s ownership percentage was reduced to 25% and the Group took control of the Pinnacle Project. At that point BPLLC ceased to be a consolidated entity and all of its assets and liabilities were removed from the Company’s balance sheet.
The Pinnacle Project, which produced its first coal in October of 2006, achieved a low rate of production during the ramp-up period due to initial start-up problems with the plant. Effective May 11, 2007, the Company and the PinnOak parties agreed to terminate most of the agreements governing the Pinnacle Project. The Company gave up its remaining 25% interest in the Pinnacle Project while remaining as contract operator. As part of the agreement, the Company was relieved of the guaranty made by a Company subsidiary of loans made by PinnOak totaling more than $11,350,000 secured by the subsidiary’s 25% interest in the Pinnacle Project. In addition, the Company’s ownership percentage in the Pinnacle Project was reduced to zero.
Recent Developments
Meanwhile, the Coal Segment is actively pursuing a number other projects which it has under development. On October 11, 2007, the Company signed a purchase agreement and on October 31, 2007, it made a down payment on the site for a new project (the “Reichard Project”). A new subsidiary, Beard Reichard, LLC, has been formed to conduct the operations at this site, located near Pittsburgh, Pennsylvania. The Company is seeking partners to finance the Reichard Project, which is expected to commence operations in December of 2007. $280,000 of the $450,000 necessary to fund the Reichard Project had been committed as of November 16th. The timing of the other projects the Company is actively pursuing is uncertain and their continuing development, as well as that of the Reichard Project, is subject to obtaining the necessary financing. There is no assurance that the required financing will be obtained for the Reichard Project or that it or any of the other projects under development will materialize.
Page 12 of 31 Pages
To date the China fertilizer plant has not marketed sufficient product to reach its projected breakeven point. Several new marketing initiatives have been undertaken, but all were unsuccessful. The Company has engaged an investment banking firm to explore available alternatives including, but not limited to: sale of the plant, merger of the operation with a competitor, or bringing in a new partner. It is also exploring the possibility of manufacturing product for a Chinese company which currently produces liquid fertilizer and has announced its intention to expand into the granular fertilizer business. It presently appears that the sale of the plant is the most likely outcome. Meanwhile, the Company and its partner have advanced a total of $182,000 during the first nine months of 2007 to fund the plant’s operations. It is estimated that the Company may need to make additional advances of up to $50,000 while the exploratory efforts are being concluded.
Six developments have taken or are expected to take place subsequent to September 30, 2007, which have or are expected to significantly benefit the Company’s cash flow position:
(i) On October 11, 2007, the Company entered into a Change of Terms Agreement on its $1,500,000 bank credit facility whereby no principal reduction was required on the facility for the months of July through October of 2007, only a $25,000 reduction will be required in November and December of 2007, a $50,000 reduction in January and February of 2008, and a $75,000 reduction in March through December of 2008. This made $100,000 available under the line that had already been paid and eliminated by verbal agreement the need to pay the September payment. It also had the effect of deferring a portion of the principal reductions until (a) the Kinder Morgan matter (see below) is resolved, (b) the disposition of the China plant has been concluded, and (c) the Company transfers the balance of its CO2 production to a new purchaser, which will significantly improve the Company’s cash flow.
(ii) On October 31, 2007, the Company closed on the sale of its interest in the Bravo Dome CO2 Unit for $300,000. The sale, which was effective October 1st, added $285,000 to cash flow after payment of a $15,000 finder’s fee. The sale was also meaningful since there has been no market for the Company’s share of the production from the unit for the last 10 years, and it has received no income during such period while having to pay its share of the operating costs.
(iii) In May of 2006 the Company signed an Authorization for Expenditure to participate for its 0.54469% working interest (“WI”) share of the $100,000,000 costs of the Goodman Point expansion (the “Expansion”) of the McElmo Dome Unit. In February of 2007 Kinder Morgan (“KM”), the operator, belatedly advised the Company that Exxon Mobil had elected not to participate and that the Company must carry its share of their costs, increasing its interest in the Expansion to 0.968564% of the costs. The Company, together with a number of the small share WI owners strongly objected to this arrangement, resulting in a meeting of KM with all of the WI owners on June 30, 2007. As a result of the meeting KM sent a letter in late October giving the parties the option to either (a) carry Exxon Mobil for their share of such costs, or (b) opt out of the Expansion and be carried along with Exxon Mobil (paying 12% interest until payout of such costs out of production from the Expansion). Meanwhile, during all of 2007, KM has been billing the Company for its expanded 0.968564% interest in the Unit. Due to the Company’s illiquid cash position, it has not paid any of such costs since April of this year, and they have suspended the Company’s runs, which had been in excess of $100,000 per month, since that time. This has caused the Company irreparable harm and has severely impacted its cash flow. The Company has now elected option (b) and has been advised that KM will release the cash which they have arbitrarily suspended prior to year-end. The Company estimates that the amount owed to it, ignoring interest, as of the end of September totaled $381,000, and additional sums are owed to it for the month of October.
(iv) In May of 2007 the Company committed the approximately 30% of its McElmo Dome production which had been selling at the lowest prices to a new purchaser which began taking such production August 1. The price the Company receives under this contract tracks the price of crude oil. Negotiations are currently underway for new contracts covering the balance of the Company’s production, again geared to the price of crude oil.
(v) If the Company is successful in funding the Reichard Project (see above), it anticipates that such project will provide most of the cash flow needed to make the Coal Segment self-sustaining for the next 18 months. However, there is no assurance that the required financing will be obtained.
(vi) If the Company is successful in disposing of its fertilizer plant in China, this will eliminate the burden of supporting such operation in the future.
The Company expects to generate cash of at least $50,000 from the disposition of the remaining assets from two of its discontinued segments, and expects to arrange short-term loans, if necessary, to satisfy its liquidity needs until the disposition of the China plant, the release of funds by KM and the finalization of new production sales contracts at McElmo Dome have
Page 13 of 31 Pages
been concluded. The Company also believes that it will be successful in securing the necessary funds for the Reichard Project. If these objectives are achieved, the cash flow drain from the China Segment would be eliminated and the Coal Segment would shortly thereafter be expected to become self-sustaining. The Company also believes there is a chance of receiving an award in connection with the binding arbitration the Plaintiffs in the McElmo Dome Litigation lost in August of 2006. An appeal concerning the decision reached on the arbitration was filed in November of 2006.
(3) Discontinued Operations
BE/IM Segment
In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets. The joint venture was dissolved in 2000 and the Company took over certain remaining assets and liabilities. The Company recorded no revenues for this segment for either the three or nine-month periods ended September 30, 2007 or September 30, 2006. The Company recorded $2,000 and $1,000 in losses for this segment for the nine-month periods ended September 30, 2007 and September 30, 2006, respectively. As of September 30, 2007, the significant assets related to the segment’s operations consisted primarily of equipment with no estimated net realizable value. The segment had no significant liabilities at September 30, 2007. The Company is actively pursuing opportunities to sell the segment’s few remaining assets and expects the disposition to be completed by December 31, 2008.
WS Segment
In 2001, the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. The bulk of the segment’s assets were sold in 2001. The segment recorded no revenues for either the first nine months of 2007 or 2006. The Company recorded a loss of $28,000 for the first quarter of 2006 as a result of moving certain assets to a location near its headquarters to facilitate their sale. This loss was partially offset by a gain of $3,000 in the second quarter of 2006, resulting in a loss for the six and nine-month periods of $25,000. The segment recorded a loss of less than $1,000 for the first nine months of 2007. The Company is actively pursuing the sale of the remaining assets and expects to have them sold or otherwise disposed of by December 31, 2008. As of September 30, 2007, the significant assets of the WS Segment were fixed assets totaling $20,000. The significant liabilities of the segment consisted of trade accounts payable and other accrued expenses totaling $40,000. The Company anticipates that all of the liabilities of the segment will be paid prior to December 31, 2008.
(4) Convertible Preferred Stock
Effective January 1, 2003, the Company’s preferred stock became convertible into Beard common stock. Each share of Beard preferred stock was convertible into 10.64163303 shares on September 30, 2007 (total of 296,241 shares). The conversion ratio will be adjusted if additional warrants or convertible notes are issued or if additional shares of stock are credited to the accounts of the Company’s Chairman or President in the Company’s Deferred Stock Compensation Plan, in each case at an exercise, conversion or grant price below $1.38308329 per share. Fractional shares will not be issued, and cash will be paid in redemption thereof.
(5) Loss Per Share
Basic earnings (loss) per share data is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Included in the weighted average number of common shares outstanding are the shares issuable according to the terms of the 2005 DSC Plan. The shares in the 2005 DSC Plan are considered common stock equivalents because the covered individuals may resign their positions at will which would also terminate their participation in the DSC Plan resulting in the issuance of the shares. In the fourth quarter of 2005 four of the five participants in the 2003-2 DSC Plan elected, irrevocably, to receive a portion of their shares in such Plan over periods ranging from two to 10 years. Those shares were included in the calculation of the common stock equivalents up to the date of those elections in 2005 but are excluded from the 2006 computation except for 42,370 shares which were distributed in the second quarter of 2006. In the first nine months of 2007, the computation includes 23,765 shares which were distributed in June of 2007 and 42,370 shares which were distributed in July of 2007. As the remaining shares are distributed in future years, they will then be included in the computation of shares outstanding. 415,408 of such shares from the 2003-2 DSC Plan remain to be distributed in the years 2008 through 2014. Diluted earnings per share reflect the potential dilution that could occur if the Company’s outstanding options and warrants were exercised (calculated using the treasury stock method) and if the Company’s preferred stock and convertible notes were converted to common stock.
Diluted loss per share from continuing operations in the statements of operations for the three and six-month periods ended September 30, 2007 and 2006 exclude all potential common shares issuable upon conversion of convertible preferred stock, convertible notes or exercise of options and warrants as the effect would be anti-dilutive due to the Company’s losses from continuing operations.
Page 14 of 31 Pages
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, 2007 | September 30, 2006 | | September 30, 2007 | September 30, 2006 |
Basic and Diluted EPS: | | | | | |
Weighted average common shares outstanding | 5,645,971 | 5,591,580 | | 5,612,129 | 5,555,379 |
Weighted average shares in 2005 deferred stock compensation plan treated as common stock equivalents | 267,219 | 80,595 | | 210,379 | 53,312 |
Weighted average shares in 2003-2 deferred stock compensation plan treated as common stock equivalents | 11,744 | - | | 45,586 | 28,106 |
| 5,924,934 | 5,672,175 | | 5,868,094 | 5,636,797 |
(6) Income Taxes
In accordance with the provisions of the Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” ("SFAS No. 109"), the Company's net deferred tax asset is being carried at zero book value, which reflects the uncertainties of the Company's utilization of the future net deductible amounts. The Company recorded no provisions for income taxes for either of the three or nine-month periods ended September 30, 2007 or September 30, 2006.
At September 30, 2007, the Company estimates that it had the following income tax carryforwards available for both income tax and financial reporting purposes (in thousands):
| | Expiration Date | Amount | |
| Federal regular tax operating loss carryforwards | 2007-2008 | $ 41,100 | |
| Federal regular tax operating loss carryforwards | 2021-2027 | $ 5,100 | |
| Tax depletion carryforward | Indefinite | $ 3,000 | |
Effective January 1, 2007, the Company adopted Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate tax authorities before any tax benefit can be recorded in the financial statements. It also provides guidance on the recognition, measurement, classification and disclosure in the financial statements for uncertain tax positions taken or expected to be taken in a tax return. The Company files numerous consolidated and separate returns in the United States federal and state jurisdictions and in China. The statute of limitations for the tax years 1992-1993 and 2001-2002 are closed except as to the proper amount of net operating loss carryover to open years. The statute of limitations for the tax years 2003–2006 remain open to examination by the federal and most state authorities in which the Company has transacted business. No income tax returns are currently under audit and no extensions of statutes of limitations have been granted. The Company’s historical operating losses raise considerable doubt as to when, if ever, any of the deferred tax assets will be realized. As a result, management has provided a full valuation allowance for the net deferred tax assets. In the event it is determined that the Company will realize sufficient future taxable income and a portion or all of the previously recorded valuation allowance is no longer needed, the Company will reduce the valuation allowance by providing an income tax benefit in the period that such a determination is made. Based upon its ongoing assessment, management has concluded that the adoption of FIN 48 had no impact on the Company’s consolidated financial statements. The Company’s policy is to record interest on tax assessments, if any, as interest expense and penalties, if any, as a component of general and administrative expenses.
(7) Commitments and Contingencies
In the normal course of business various actions and claims have been brought or asserted against the Company. Management does not consider them to be material to the Company’s financial position, liquidity or results of operations.
Page 15 of 31 Pages
(8) Business Segment Information
The Company manages its business by products and services and by geographic location (by country). The Company evaluates its operating segments’ performance based on earnings or loss from operations before income taxes. The Company had five reportable segments in the first nine months of 2007 and 2006. The segments are Coal, Carbon Dioxide, China, e-Commerce and Oil & Gas.
The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment manufactures fertilizer in China. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage the subsidiary’s intellectual property portfolio of Internet payment methods and security technologies. The Oil & Gas Segment consists of the production of oil and gas.
The following is certain financial information regarding the Company’s reportable segments (presented in thousands of dollars).
General corporate assets and expenses are not allocated (except for $15,000 per month of “Other” expenses charged to the China Segment beginning in December 2006) to any of the Company’s operating segments; therefore, they are included as a reconciling item to consolidated total assets and loss from continuing operations before income taxes reported in the Company’s accompanying financial statements.
| | | | | | |
Three months ended September 30, 2007 | | | | | | |
Revenues from external customers | $ - | $ 401 | $ 50 | $ - | $ 14 | $ 465 |
Segment profit (loss) | (105) | 279 | (237) | (30) | 7 | (86) |
| | | | | | |
Three months ended September 30, 2006 | | | | | | |
Revenues from external customers | $ 12 | $ 428 | $ 103 | $ - | $ 28 | $ 571 |
Segment profit (loss) | (80) | 382 | (224) | (15) | 20 | 83 |
| | | | | | |
Nine months ended September 30, 2007 | | | | | | |
Revenues from external customers | $ - | $ 1,007 | $ 166 | $ 5 | $ 51 | $ 1,229 |
Segment profit (loss) | (385) | 691 | (764) | (82) | 25 | (515) |
Segment assets | 239 | 1,052 | 540 | 18 | 321 | 2,170 |
| | | | | | |
Nine months ended September 30, 2006 | | | | | | |
Revenues from external customers | $ 25 | $ 1,124 | $ 284 | $ 5 | $ 124 | $ 1,562 |
Segment profit (loss) | (632) | 963 | (675) | (62) | 103 | (303) |
Segment assets | 12,777 | 552 | 704 | 18 | 350 | 14,401 |
Reconciliation of total reportable segment loss to consolidated earnings (loss) from continuing operations before income taxes is as follows for the three and nine-month periods ended September 30, 2007 and 2006 (in thousands):
Page 16 of 31 Pages
| For the Three Months Ended | | | For the Nine Months Ended | | |
| September 30, 2007 | | September 30, 2006 | | September 30, 2007 | | September 30, 2006 | |
| | | | | | | | |
Total earnings (loss) for reportable segments | $ (86) | | $ 83 | | $ (515) | | $ (303) | |
Net corporate costs not allocated to segments | (360) | | (474) | | (1,113) | | (1,360) | |
Total consolidated loss from continuing operations before income taxes | $ (446) | | $ (391) | | $ (1,628) | | $ (1,663) | |
Page 17 of 31 Pages
THE BEARD COMPANY AND SUBSIDIARIES
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT 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 FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “MAY,” “WILL,” “EXPECT,” “INTEND,” “PROJECT,” “ESTIMATE,” “ANTICIPATE,” “BELIEVE,” OR “CONTINUE” OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS (“CAUTIONARY STATEMENTS”) ARE DISCLOSED UNDER “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND ELSEWHERE IN THIS REPORT. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US, OR PERSONS ACTING ON OUR BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. WE ASSUME NO DUTY TO UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion focuses on material changes in our financial condition since December 31, 2006 and results of operations for the quarter ended September 30, 2007, compared to the prior year third quarter and the nine months ended September 30, 2007 compared to the prior year nine months. Such discussion should be read in conjunction with our financial statements including the related footnotes.
In preparing the discussion and analysis, we have presumed readers have read or have access to the discussion and analysis of the prior year's results of operations, liquidity and capital resources as contained in our 2006 Form 10-K.
Overview
The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The China Segment is in the business of manufacturing fertilizer in China. The e-Commerce Segment is engaged in a strategy to develop business opportunities to leverage the subsidiary’s intellectual property portfolio of Internet payment methods and security technologies. The Oil & Gas Segment consists of the production of oil and gas.
Our revenues from continuing operations have been on an uptrend, increasing in each of the last three fiscal years. Most of the increase was attributable to the CO2 Segment where the implementation of the McElmo Dome settlement agreement resulted in increased production and better pricing. There was a reversal of this trend in the first nine months of 2007, which is believed to be a temporary aberration. The Oil & Gas Segment reflected disappointing results in the first three quarters of 2007 as both production and prices were down sharply. Anticipated production increases from the Pinnacle Plant in the Coal Segment and from our China fertilizer plant failed to materialize due to (i) the deconsolidation of Beard Pinnacle and (ii) the failure of the China plant to meet its targeted sales and production goals.
Material changes in financial condition – September 30, 2007 as compared with December 31, 2006.
The following table reflects changes in the Company's financial condition during the periods indicated:
Page 18 of 31 Pages
| September 30, | December 31, | Increase |
| | | |
| | | |
Cash and cash equivalents | $ 21,000 | $ 270,000 | $ (249,000) |
| | | |
Working capital | $ (2,164,000) | $ (271,000) | $ (1,893,000) |
| | | |
Current ratio | 0.19 to 1 | 0.76 to 1 | |
Our working capital position has deteriorated by $1,893,000 since December 31, 2006 to $(2,164,000) at September 30, 2007. During the first nine months of 2007, net proceeds from term notes and related party debt provided $1,868,000 to fund operations and to pay off certain debt amounts. We used $845,000 of those proceeds to pay down debt. Proceeds from the sale of assets were $21,000 and collections on notes receivables provided another $35,000. Our CO2 Segment provided working capital of $739,000. We utilized $396,000 to help fund operations of the Coal Segment and another $742,000 in connection with the fertilizer operations in China. Also, we used $82,000 to fund the activities of the e-Commerce Segment. We utilized the majority of the remainder of the working capital to fund other operations.
Six developments have taken place or are expected to take place which have or will significantly benefit our cash flow position going forward:
| • | On October 11, 2007, we entered into a Change of Terms Agreement on our $1,500,000 bank credit facility whereby no principal reduction was required on the facility for the months of July through October of 2007, only a $25,000 reduction will be required in November and December of 2007, a $50,000 reduction in January and February of 2008, and a $75,000 reduction in March through December of 2008. This made $100,000 available under the line that had already been paid and eliminated by verbal agreement the need to pay the September payment. It also had the effect of deferring a portion of the principal reductions until (i) the Kinder Morgan matter (see below) is resolved, (ii) the disposition of the China plant has been concluded, and (iii) we transfer the balance of our CO2 production to a new purchaser, which will significantly improve our cash flow. |
| • | On October 31, 2007, we closed on the sale of our interest in the Bravo Dome CO2 Unit for $300,000. The sale, which was effective October 1st, added $285,000 to our cash flow after payment of a $15,000 finder’s fee. The sale was also meaningful since there has been no market for our share of the production from the unit for the last 10 years, and we had received no income during such period while having to pay our share of the operating costs. |
| • | In May of 2006 we signed an Authorization for Expenditure to participate for our 0.54469% working interest (“WI”) share of the $100,000,000 costs of the Goodman Point expansion (the “Expansion”) of the McElmo Dome Unit. In February of 2007 Kinder Morgan (“KM”), the operator, belatedly advised us that Exxon Mobil had elected not to participate and that we must bear our proportionate share of Exxon Mobil’s share of the costs of the Expansion. This resulted in our WI percentage in the Expansion being increased from 0.54469% to 0.968564%. We, together with a number of the small share WI owners, strongly objected to this arrangement resulting in a meeting of KM with all of the WI owners on June 30, 2007. As a result of the meeting KM sent a letter in late October giving the parties the option to either (a) carry Exxon Mobil for their share of such costs, or (b) opt out of the Expansion and be carried along with Exxon Mobil (being charged 12% interest until payout of such costs out of production from the Expansion). Meanwhile, during all of 2007, KM has been billing us for our expanded 0.968564% interest in the Unit. Due to our illiquid cash position, we have not paid any of such costs since April of this year, and they have suspended our runs, which had been in excess of $100,000 per month, since that time. This has caused us irreparable harm and has severely impacted our cash flow. We have now elected option (b) and have been advised that KM will release the cash which they have arbitrarily suspended prior to year-end. We estimate that the amount owed to us, ignoring interest, as of the end of September amounted to $381,000, and additional sums are owed to us for the month of October. |
| • | In May of 2007 we committed the approximately 30% of our McElmo Dome production that had been selling at the lowest prices to a new purchaser which began taking such production August 1. The price we |
Page 19 of 31 Pages
receive under this contract tracks the price of crude oil. Negotiations are currently underway for new contracts covering the balance of our production, again geared to the price of crude oil.
| • | On October 11, 2007, we signed a purchase agreement and, on October 31, 2007, we made a down payment on the site for a new project (the “Reichard Project”). We have formed a new subsidiary, Beard Reichard, LLC, to conduct the operations at this site, located near Pittsburgh, Pennsylvania. We are currently seeking partners to finance the Reichard Project, which is expected to commence operations in December of 2007. $280,000 of the $450,000 necessary to fund the Reichard Project had been committed as of November 16th. If we are successful, we anticipate that such project will provide most of the cash flow needed to make the Coal Segment self-sustaining for the next 18 months. The timing of the Reichard Project as well as other coal projects we are actively pursuing is uncertain and their continuing development, as well as that of the Reichard Project, is subject to obtaining the necessary financing. There is no assurance that the required financing will be obtained for the Reichard Project or that it or any of the other projects under development will materialize. |
| • | We also expect to finalize prior to year-end the disposition of our fertilizer plant in China. If we are successful, this will eliminate the burden of supporting this operation in the future. |
Liquidity will continue to be constrained until (i) we receive the funds owed to us by KM, (ii) the new contracts for the sale of our CO2 production from McElmo Dome have been finalized, and (iii) the developments in the Coal and China Segments have taken place. Meanwhile, we expect to arrange short-term loans, if necessary, to satisfy our liquidity needs.
Our principal business is coal reclamation, and this is where management’s operating attention is primarily focused. Since the deconsolidation of Beard Pinnacle the Coal Segment has been diligently pursuing new projects and has several in various stages of development. As discussed above, we are already moving forward on the Reichard Project and are actively pursuing other projects; however, there is no assurance that the required financing will be obtained or that any of the projects will materialize.
As discussed in our 2006 Form 10-K, sales at our fertilizer manufacturing plant in China have developed more slowly than anticipated, and this has necessitated that both we and our 50% partner loan additional funds to support the operations until the plant starts generating positive cash flow. We have engaged an investment banking firm to explore available alternatives including, but not limited to: sale of the plant, merger of the operation with a competitor, or bringing in a new partner. We are also exploring the possibility of manufacturing product for a Chinese company which currently produces liquid fertilizer and has announced its intention to expand into the granular fertilizer business. It presently appears that the sale of the plant is the most likely outcome. Meanwhile, we and our partner have advanced a total of $182,000 during the first nine months of 2007 to fund the plant’s operations. It is estimated that we may need to make additional advances of up to $50,000 while the exploratory efforts are being concluded.
The Company expects to generate cash of at least $50,000 from the disposition of the remaining assets from two of its discontinued segments and is continuing to pursue such disposition. We also believe there is a chance of receiving an award in connection with the binding arbitration the Plaintiffs in the McElmo Dome Litigation lost in August of 2006. An appeal concerning the decision reached on the arbitration was filed in November of 2006. (See “PART II. Item 1. Legal Proceedings. McElmo Dome Litigation.”).
Material changes in results of operations - Quarter ended September 30, 2007 as compared with the Quarter ended September 30, 2006.
The net loss for the third quarter of 2007 was $446,000 compared to $375,000 for the 2006 third quarter. Continuing operations posted a net loss of $445,000, after a tax benefit of $1,000 compared to a net loss from continuing operations of $374,000 after a tax benefit of $17,000 for the same period in 2006. In addition, the Company’s discontinued operations had losses of $1,000 for the third quarter of both 2006 and 2007.
The Coal Segment’s revenues decreased $12,000 to none for the third quarter of 2007 compared to the third quarter of 2006. This decrease in revenues along with an increase in operating and SG&A expenses of $35,000 accounted for the decrease in the segment’s operating loss which amounted to $105,000 in the third quarter of 2007 versus $79,000 in the 2006 third quarter. These increased expenses were partially offset by a decrease in depreciation expenses in the segment. The operating profit in the CO2 Segment decreased $103,000 to $279,000
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compared to $382,000 a year earlier. The China Segment’s loss for the third quarter of 2007 totaled $221,000 compared to $209,000 for the same period in 2006. The e-Commerce Segment incurred operating losses of $30,000 for the third quarter of 2007 compared to $15,000 in the third quarter of 2006. The operating income in the Oil & Gas Segment decreased $14,000 to $7,000 for the third quarter of 2007 compared to $21,000 for the same period in 2006. The operating loss in Other activities for the third quarter of 2007 decreased $14,000 compared to the same period in 2006. As a result, the operating loss for the current quarter increased $156,000 to $292,000 versus $136,000 in the corresponding quarter of the prior year.
Operating results of the Company’s primary operating Segments are reflected below:
| | 2007 | 2006 | |
| Operating profit (loss): | | | |
| Coal reclamation | $ (105,000) | $ (79,000) | |
| Carbon dioxide | 279,000 | 382,000 | |
| China | (221,000) | (209,000) | |
| e-Commerce | (30,000) | (15,000) | |
| Oil & gas | 7,000 | 21,000 | |
| Subtotal | (70,000) | 100,000 | |
| Other | (222,000) | (236,000) | |
| Total | $ (292,000) | $ (136,000) | |
The “Other” in the above table reflects primarily general and corporate activities, as well as other activities of the Company.
Coal reclamation
The segment recorded less than $1,000 in revenues in the third quarter of 2007 compared to $12,000 for the third quarter of 2006 as a result of performing fewer consulting and coring jobs in the 2007 period. Operating costs increased $35,000 to $103,000 for the third quarter of 2007 compared to $68,000 for the same period in 2006. The segment had capitalized $291,000 of expenses associated with the construction of the Pinnacle Project in the third quarter of 2006. Effective October 1, 2006, however, the LLC operating the Pinnacle Project ceased to be a consolidated entity and as a result there were no comparable expenses for the remainder of 2006 or the first nine months of 2007. Depreciation and amortization expenses decreased $21,000 for the segment when comparing the third quarter of 2006 to the same period in 2007.
Carbon dioxide
Third quarter 2007 operations reflected an operating profit of $279,000 compared to $382,000 for the 2006 third quarter. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of the Company’s carbon dioxide producing unit in Colorado. Operating revenues in this segment decreased $27,000 to $401,000 for the third quarter of 2007 compared to $428,000 for the same period in 2006. The reduction in revenue for the current quarter was due primarily to decreased production as the paid volumes to the Company’s interest were approximately 23 mmcf less for the third quarter of 2007 than the same period in the prior year. Lifting costs increased $71,000 for the third quarter of 2007 compared to the same period in 2006. Higher accounting, severance and ad valorem taxes accounted for the majority of the increase in lifting costs. Depreciation expense increased to $19,000 for the third quarter of 2007 compared to $12,000 for the same period in 2006.
China
The China Segment incurred an operating loss of $221,000 for the third quarter of 2007 compared to $209,000 for the same period in 2006. The segment recorded revenues of $50,000 for the third quarter of 2007 compared to $103,000 for the same period in 2006. Although operating and SG&A costs decreased $41,000 to a total of $262,000 for the third quarter of 2007 compared to $303,000 for the same period in 2006, reflecting costs associated with the plant start-up, they were more than offset by the $53,000 revenue decrease, resulting in the net $12,000 increase in operating losses for the third quarter of 2007 compared to the same period in 2006.
e-Commerce
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The e-Commerce Segment incurred an operating loss of $30,000 for the third quarter of 2007 versus an operating loss of $15,000 in the prior year quarter. The segment recorded no revenue for either the third quarter of 2007 or 2006. Under the segment’s patent license agreement, the provision for an annual license fee of $25,000 terminated at the end of the first quarter of 2005. The segment will continue to receive royalty fee income according to the terms of the agreement. The segment incurred $14,000 more in SG&A costs in the 2007 third quarter than it did in the comparable 2006 quarter. Because of the snail’s pace at which the Visa lawsuit was progressing, we granted the request of Marc Messner, the managing member of starpay, to spend a portion of his time, from February through September of 2006, assisting his wife in her newly purchased business. Accordingly, he received only half his normal salary during such period. Increased salary and related expenses accounted for $11,000 of the increase and increased legal fees accounted for the remaining $3,000 of the total $14,000 increase.
Oil & Gas
Our newest segment, Oil & Gas, is a familiar one to management. In recent years we have acquired federal and state oil and gas leases in several states. Through a farmout arrangement with another entity, eight gas wells were drilled on one of these leases in Colorado and placed in production in the fourth quarter of 2005. We have a 22.5% working interest in seven of these wells and a 3.6% override until payout and a 22.5% working interest after payout in the other well. We also have overriding royalty interests in four wells located in Wyoming which began production in 2005. The segment recorded $14,000 in revenues for the third quarter of 2007 compared to $28,000 for the same period in 2006 due to decreases in both price and production. Operating costs totaled $4,000 and $5,000 for the third quarter of 2007 and the third quarter of 2006, respectively. As a result, the segment contributed $7,000 of operating profit for the third quarter of 2007 compared to $21,000 for the same period in the prior year.
Other corporate activities
Other corporate activities include general and corporate activities, as well as assets unrelated to our operating segments or held for investment. These activities generated operating losses of $222,000 for the third quarter of 2007 compared to $236,000 for the same period of 2006. This $14,000 decrease in operating losses was due primarily to the Company’s practice, begun in the latter part of 2006, of charging related entities for certain overhead items pertaining to their operations and incurred by the Company. Such charges amounted to $57,000 in the third quarter of 2007. This reduction was offset by a $38,000 increase in salaries and associated expenses and legal and accounting expenses for the third quarter of 2007 compared to the same period in 2006.
Selling, general and administrative expenses
Our selling, general and administrative expenses (“SG&A”) in the current quarter decreased $20,000 to $195,000 compared to $215,000 for the third quarter of 2006. There were numerous minor increases and decreases in SG&A accounts resulting in the net decrease. The primary reason for the decrease is the practice, which we began in late 2006, of charging related entities for accounting and other overhead type items that the parent provides. See “Other corporate activities” above.
Depreciation, depletion and amortization expenses
DD&A expense decreased $8,000 from $67,000 in the third quarter of 2006 to $59,000 in the same period of 2007. DD&A expenses in the Coal Segment decreased $21,000 for the third quarter of 2007 compared to the same period in 2006 due to the deconsolidation of the entity owning the Pinnacle Project in the fourth quarter of 2006. DD&A expenses in the CO2 Segment increased $7,000 for the three-month period in 2007 compared to the same period in 2006 because of the expansion project in the McElmo Dome field.
Other income and expenses
Other income and expenses for the third quarter of 2007 netted to a loss of $154,000 compared to a loss of $255,000 for the third quarter of 2006. Interest income increased $1,000 for the third quarter of 2007 versus the same period in 2006. Interest expense was $1,000 less for the same periods. We received a $96,000 distribution from the defense fund associated with the Coalition Managers Litigation. Such income had not been accrued in prior periods as the exact amount and timing of the distribution had not been assured.
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Income taxes
The Company recorded a refund for federal alternative minimum taxes of $17,000 in the third quarter of 2006 compared to $1,000 for the same period in 2007. We have not recorded any financial benefit attributable to our various tax carryforwards due to uncertainty regarding their utilization and realization.
Discontinued operations
Our financial results for the 2007 and 2006 third quarters realized losses of $1,000 each as a result of activities in two of our four discontinued segments. Both the third quarters of 2007 and 2006 posted a loss of $1,000 associated with our discontinued iodine manufacturing segment. As of September 30, 2007, assets of discontinued operations held for resale totaled $20,000 and liabilities of discontinued operations totaled $40,000. We believe that all of the assets of the discontinued segments have been written down to their realizable value. We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by December 31, 2008.
Material changes in results of operations - Nine months ended September 30, 2007 as compared with the Nine months ended September 30, 2006.
The Company recorded a loss of $1,630,000 for the first nine months of 2007 compared to a loss of $1,673,000 for the first nine months of 2006. Continuing operations reflected losses of $1,627,000 compared to $1,646,000 for the same period in 2006. In addition, the Company had losses from discontinued operations of $3,000 for the first nine months of 2007 compared to $27,000 for the same period in 2006.
Operating results of the Company’s primary operating segments are reflected below:
| | 2007 | 2006 | |
| Operating profit (loss): | | | |
| Coal reclamation | $ (386,000) | $ (630,000) | |
| Carbon dioxide | 691,000 | 963,000 | |
| China | (713,000) | (640,000) | |
| e-Commerce | (82,000) | (62,000) | |
| Oil & gas | 23,000 | 95,000 | |
| Subtotal | (467,000) | (274,000) | |
| Other | (582,000) | (707,000) | |
| Total | $ (1,049,000) | $ (981,000) | |
The “Other” in the above table reflects primarily general and corporate activities, as well as our other activities and investments.
Coal reclamation
Revenues decreased $25,000 to less than $1,000 for the first nine months of 2007 compared to the same period in 2006 as the result of fewer consulting and coring jobs in the current year. Operating costs decreased $241,000 to $379,000 for the first nine months of 2007 compared to $620,000 for the same period in 2006 as a result of decreased labor, expendable supplies, advertising, travel and other costs. The results of operations for the first nine months of 2006 included losses totaling $199,000 associated with the coal project in West Virginia that was disposed of in the fourth quarter of 2006. The first nine months of 2007 included no such costs. As a result, the operating loss for the first nine months of 2007 decreased $244,000 to $386,000 compared to $630,000 in the first nine months of 2006.
Carbon dioxide
Operations for the first nine months of 2007 resulted in an operating profit of $691,000 compared to a $963,000 operating profit for the nine months ended September 30, 2006. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of our carbon dioxide producing unit in Colorado. Segment operating revenues decreased $117,000 or 11% to $1,007,000 for the first nine months of 2007 compared to $1,124,000 for the same period in 2006. We recorded an additional $142,000 in operating costs
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associated with our properties in the first three quarters of 2007 compared to the same period in 2006. Severance taxes accounted for $68,000 of the increase. Beginning in August of 2007, the Company entered into an arrangement to take a portion of its share of the production from the McElmo Dome field and market these volumes through an LLC set up for this purpose. There were increased costs associated with this arrangement which accounted for the remainder of the increase in the operating expenses. The decrease in revenue for the current nine months was due to lower volumes to our interest accompanied by a decrease in pricing. We received an average of $0.70 per mcf sold in the first nine months of 2007 versus $0.76 per mcf in the year earlier period. Paid volumes were down 35 mmcf in the current nine months versus a year ago.
China
The China Segment incurred an operating loss of $713,000 for the first nine months of 2007 compared to $640,000 for the same period in 2006. Revenues decreased $118,000 from $284,000 for the first three quarters of 2006 to $166,000 for the same period in 2007 as the segment reduced prices for its products to meet market competition. Expenses were reduced $46,000 to $851,000 for the first nine months of 2007 compared to $897,000 for the same period in 2006. The plant recorded its first production and sales in October of 2005.
e-Commerce
The e-Commerce Segment incurred an operating loss of $82,000 for the first three quarters of 2007 versus an operating loss of $62,000 in the prior year period. The segment recorded revenues of $5,000 of royalty fee income for both the nine-month periods ended September 30, 2007 and 2006. Under the segment’s patent license agreement, the provision for an annual license fee of $25,000 terminated at the end of the first quarter of 2005. The segment will continue to receive royalty fee income according to the terms of the agreement. Because of the snail’s pace at which the Visa lawsuit was progressing, we granted the request of Marc Messner, the managing member of starpay, to spend a portion of his time, from February through September of 2006, assisting his wife in her newly purchased business. Accordingly, he received only half his normal salary during such period. An $11,000 decrease in legal fees accounted for the majority of the remaining change as the segment continued its suit against Visa.
Oil & Gas
Our newest segment, Oil & Gas, is a familiar one to management. In recent years we have acquired federal and state oil and gas leases in several states. Through a farmout arrangement with another entity, eight gas wells were drilled on one of these leases in Colorado and placed in production in the fourth quarter of 2005. We have a 22.5% working interest in seven of these wells and a 3.6% override until payout and a 22.5% working interest after payout in the other well. We also have overriding royalty interests in four wells located in Wyoming which began production in 2005. The segment recorded $51,000 in revenues for the first nine months of 2007 compared to $124,000 for the same period in 2006. The revenue decline was attributable to decreases in both price and in production. Operating costs totaled $17,000 and $19,000 for the first nine months of 2007 and 2006, respectively. As a result, the segment contributed $23,000 of operating profit for the first three quarters of 2007 compared to $95,000 for the same period in the prior year.
Other corporate activities
Other corporate activities include general and corporate operations, as well as assets unrelated to the Company’s operating segments or held for investment. These activities generated operating losses of $582,000 for the first nine months of 2007 as compared to $707,000 in the same period of 2006. The $125,000 decrease in operating losses was due primarily to our practice, begun in the latter part of 2006, of charging related entities for certain overhead items incurred by us that pertain to their operations. Such charges amounted to $168,000 for the first three quarters of 2007. We charged $4,000 more in DD&A costs for the nine-month period in 2007 compared to the same period in 2006 because of the amortization of capitalized costs associated with the issuance of the $1.5MM reducing credit facility obtained in June of 2007. We also incurred several smaller increases in numerous other expense accounts.
Selling, general and administrative expenses
Our selling, general and administrative expenses (“SG&A”) in the first nine months of 2007 decreased $131,000 to $520,000 from $651,000 for the 2006 nine months. The primary reason for the decrease is the practice, which we
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began in late 2006, of charging related entities for accounting and other overhead type items that the parent provides. See “Other corporate activities” above.
Depreciation, depletion and amortization expenses
DD&A expense decreased $7,000 from $163,000 for the nine months ended September 30, 2006 to $156,000 for the same period in 2007. The nine months ended September 30, 2006 included $19,000 of DD&A associated with the Pinnacle Project which was deconsolidated effective October 1, 2006. The nine months ended September 30, 2007 included $11,000 of additional amortization associated with the capitalized costs relating to the Company’s revolving credit facility with a local bank. These two items accounted for the majority of the decrease.
Other income and expense
The other income and expenses for the first nine months of 2007 netted to a loss of $579,000 compared to $682,000 for the same period in 2006. Interest income was $7,000 for the first nine months of 2007 compared to $6,000 for the first nine months of 2006. Interest expense for the first nine months of 2007 was $706,000 compared to $751,000 for the same period in 2006. We realized gains on sale of assets for the first nine months of 2007 totaling $2,000 compared to $7,000 in the prior year period. We realized an $8,000 reduction in expenses attributable to our operations in China during the first nine months of 2006 compared to none for the same period in 2007 as a result of the 50% minority interest held by our investor in the start-up LLC included as a consolidated subsidiary in these financial statements. We also received a $96,000 distribution from the defense fund associated with the Coalition Managers Litigation. Such income had not been accrued in prior periods as the exact amount, timing and actual receipt of the distribution had not been assured.
Our equity in earnings of unconsolidated affiliates reflected no earnings or losses for the first nine months of 2007 compared to $51,000 for the same period in 2006. We recorded $51,000 in 2006 as our share of earnings from our investment in Cibola Corporation compared to none in the current year nine months. While we owned 80% of the common stock of Cibola, we did not have financial or operating control of this gas marketing subsidiary. The majority of the amount received in the first nine months of 2006 was the result of a negotiated settlement with the minority common shareholders regarding the termination of the ownership agreement effective December 1, 2006.
Income taxes
The Company recorded a refund of $1,000 for the first nine months of 2007 compared to $17,000 for the same period in 2006 for federal alternative minimum taxes.
Discontinued operations
Our financial results for the nine months ended in 2007 and 2006 were impacted by losses of $3,000 and $27,000, respectively, as a result of activities in two of our four discontinued segments. The majority of the loss for the first three quarters of 2007 related to rental expense for equipment storage associated with one of our discontinued segments. The first nine months of 2006 benefited from the disposition of assets which generated gains of $3,000. These gains were offset by expenses totaling $30,000 for the nine-month period ending September 30, 2006. As of September 30, 2007, assets of discontinued operations held for resale totaled $20,000 and liabilities of discontinued operations totaled $40,000. We believe that all of the assets of the discontinued segments have been written down to their realizable value. We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by December 31, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At September 30, 2007, we had total debt of $10,542,000 which included $597,000 of accrued interest to a related party which was treated as a long-term obligation. Included in the remaining $9,945,000 of debt was $8,331,000 of long-term debt which had fixed interest rates and $214,000 of short-term debt; therefore, our interest expense and operating results would not be affected by an increase in market interest rates for this portion of the debt. The remaining $1,400,000 of debt is accruing interest at Wall Street Journal Prime plus 1.5%, or 9.25%, at September 30, 2007. At September 30, 2007, a 10% increase in market interest rates would have reduced the fair value of our debt by $97,000.
We have no other market risk sensitive instruments.
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Item 4. Controls and Procedures.
It is the responsibility of our principal executive officer and principal financial officer to ensure that we maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer to allow timely decisions regarding required disclosure. Based on their evaluation of those controls and procedures as of a date within 90 days of the date of this filing, our CEO and CFO determined that our disclosure controls and procedures currently in place are effective as of the end of the period covered by this report. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer and chief financial officer completed their evaluation.
PART II. | OTHER INFORMATION. |
Item 1. Legal Proceedings.
McElmo Dome Litigation. In 1996 we joined with other Plaintiffs in filing in U.S. District Court for the District of Colorado a suit against Shell Oil Company, Shell Western E & P, Inc., Mobil Producing Texas and New Mexico, Inc. and Cortez Pipeline Company, a partnership (collectively, the “Defendants”). Plaintiffs’ complaint alleged damages caused by Defendants’ wrongful determination of the value of CO2 produced from the McElmo Dome Field (the “Field”---see “Carbon Dioxide Operations” at pages 9-11 of our Form 10-K) and the corresponding wrongful underpayment to Plaintiffs. A Settlement Agreement was signed in 2001 (the "Settlement") which became final in 2003.
Subsequent to the Settlement several issues arose concerning implementation of the Settlement Agreement. A mediation in March of 2005 was unsuccessful. In July of 2005, an advisory opinion rendered by an expert on the merits of several issues in dispute concerning the Settlement Agreement failed to resolve the matter. In October of 2005 the parties agreed to proceed to binding arbitration. In August of 2006 we were advised that the Plaintiffs had lost the arbitration. The Plaintiffs filed an appeal in November of 2006 which has also now been lost. Accordingly, this matter is now closed.
Coalition Managers Litigation. In April of 2002 a suit was filed in the U.S. District Court of Colorado (Harry Ptasynski v. John M. Cogswell, et al---Case No. 02-WM-0830 (OES) against the attorneys and managers (including our Chairman) of the CO2 Claims Coalition, LLC (the “Coalition”). Reference is made to the material developments in this case reported in our Form 10-Q’s for the periods ended March 31 and June 30 of this year. As indicated in our filing for the second quarter, the case is now closed and the only open item was the distribution of the defense fund. On August 30, 2007, we received $96,000 as our share of the fund.
Visa Litigation. In May of 2003 our 71%-owned subsidiary, starpay.com, l.l.c., along with VIMachine, Inc. filed a suit in the U. S. District Court for the Northern District of Texas, Dallas Division against Visa International Service Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L). VIMachine is the holder of U.S. Patent No. 5,903,878 (the “VIMachine Patent”) that covers, among other things, an improved method of authenticating the cardholder involved in an Internet payment transaction. In July of 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages and injunctive relief (i) related to Visa’s infringement of the VIMachine Patent; (ii) related to Visa’s breach of certain confidentiality agreements express or implied; (iii) for alleged fraud on the Patent Office based on Visa’s pending patent application; and (iv) under California’s common law and statutory doctrines of unfair trade practices, misappropriation and/or theft of starpay’s intellectual property and/or trade secrets. In addition, Plaintiffs are seeking attorney fees and costs related to the foregoing claims. If willfulness can be shown, Plaintiffs will seek treble damages.
In August of 2003 the Defendants filed a motion to dismiss the second, third and fourth claims. Despite objections to such motion by the Plaintiffs, the Judge in February of 2004 granted Defendants’ motion to dismiss the second and third causes of action, and denied the motion insofar as it sought to dismiss the fourth cause of action.
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Accordingly, Plaintiffs’ fourth claim (misappropriation and/or theft of intellectual property and/or trade secrets) will continue to move forward.
In February of 2004 Defendants filed an Answer to Plaintiffs’ Amended Complaint. In such filing Visa denied each allegation relevant to claim four. Visa asked that the VIMachine Patent be declared invalid, and, even if it is found valid, Visa asked that they be found not to infringe the VIMachine Patent. Visa asked for other related relief based on these two allegations.
In April and May 2004, Plaintiffs filed their Patent Infringement Contentions and a supplement thereto detailing Visa’s alleged infringement of the majority of the patent claims depicted in the VIMachine Patent. Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions requesting the VIMachine Patent be found invalid.
From May through October 2004, the Plaintiffs and Defendants submitted numerous filings related to interpretation of the terms and phrases set out in the VIMachine Patent claims. A hearing regarding patent claim construction (a “Markman hearing”) was held in October of 2004, allowing both parties to present oral arguments before the Court regarding the claim construction issues. On January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation of the United States Magistrate Judge addressing his findings and recommendations with respect to the claim constructions to be applied to the VIMachine Patent. Judge Sanderson found that 24 of the 28 claims asserted by the Plaintiffs were valid. Both parties have pursued modifications of the Magistrate’s recommendations in the form of an appeal to District Judge Lindsey and are awaiting the Court’s final ruling on claim construction issues.
In July of 2005 the Federal Circuit Court of Appeals issued an en banc decision in the patent case of Phillips v. AWH Corp. (the “Phillips Case”). Subsequent to the Federal Circuit’s decision in July, Defendants requested and the Court ordered supplemental briefs to the Court addressing Magistrate Judge Sanderson’s Report and Recommendation respective to the Markman hearing in light of the Federal Circuit’s en banc decision in the Phillips Case. Both parties filed their supplemental briefs in August 2005. Oral arguments regarding these issues were held in November of 2005. On January 19, 2006, Magistrate Judge Sanderson filed his final Report and Recommendation on the Markman issues to District Judge Lindsay. In his report Judge Sanderson found no reason to change any portions of his recommendations filed on January 4, 2005, in light of the Federal Circuit’s decision in the Phillips Case. In mid-September District Judge Lindsey issued his final ruling on the Markman hearing. He adopted nine of the 14 claim constructions previously suggested by Magistrate Sanderson and modified five other claim constructions. Judge Lindsey did not modify Magistrate Sanderson’s previous finding that 24 of the 28 claims asserted by the Plaintiffs were valid.
This ruling allows the patent infringement action to proceed immediately as no appeal is allowed from this intermediate ruling. Noteworthy among the changes is the definition of a “unique transaction identifier” or UTID. Visa had asked that the UTID be defined as a globally unique data string, and Judge Lindsey refused to adopt that construction, construing the UTID more broadly in a manner more favorable to Plaintiffs’ patent infringement claims. Based on the ruling, Plaintiffs anticipate filing a motion for summary judgment asking the Court to rule in their favor as a matter of law, and Plaintiffs anticipate that Visa will also file a summary judgment motion.
During the first quarter of 2000 starpay’s trade secrets were relayed to Visa verbally in face-to-face conferences and telephone calls, as well as in correspondence by post and electronic mail. After receiving starpay’s technology and ideas, Visa filed a series of provisional patent applications beginning in April of 2000 using starpay’s trade secrets. At the same time, Visa wrongfully incorporated starpay’s trade secrets in to its Visa Payer Authentication Service, also known as Verified by Visa (“VPAS”). VPAS infringes the VIMachine Patent. From early 2000 until recently, starpay tried on several occasions to enter into meaningful negotiations with Visa to resolve their intellectual property concerns. Visa has continually denied their infringement of the VIMachine Patent and starpay’s assertion that Visa has appropriated starpay’s trade secrets.
In November of 2000 Visa publicly announced that it was testing VPAS. In September of 2001 Visa stated that, once rolled out globally, it expected VPAS to reduce Internet payment disputes by at least 50%. In an October 2004, news release, Visa depicted Verified by Visa as “the leading security standard for authentication of Internet transactions.” In this release Visa announced that Verified by Visa had “recorded an increase of close to 200% in the number of transactions for the quarter ending in September 2004,” and that “total Verified by Visa card volume for the first nine months of 2004 was $5.4 billion.” In April of 2005 Visa announced that “transaction volume during the first quarter of 2005 had increased more than 230% over last year.” Towards the end of 2005 Visa announced that Verified by Visa had “$7 billion in volume during the first half of the year......a 194% year-over-year increase.”
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Since late 2005, Plaintiffs have not seen or received public information bearing on the transaction volume within the Verified by Visa system. However, Visa’s current Verified by Visa Fact Sheet touts that “more than 110,000 merchants have adopted Verified by Visa and 10,000 banks have made the service available to over 395 million consumers globally” through implementation in more than 65 countries representing 99% of global e-commerce volume. Other Visa documents state that “since Verified by Visa was implemented in 2003, there has been a 75% reduction in chargebacks on Verified by Visa compared with non-Verified by Visa transactions.”
The parties are currently negotiating a proposed scheduling order. It is anticipated that both sides' summary judgment motions will be fully briefed by early to mid-2008. Upon resolution of the summary judgment motions, Plaintiffs will push for trial as quickly as possible, possibly toward the end of 2008.
Item 1A. Risk Factors.
Only the Risk Factors enumerated below have changed since the Form 10-K:
Lack of Profitable Operations in Recent Periods. Although we were profitable in 2004 as a result of the McElmo Dome Settlement (see “Item 1. Legal Proceedings---McElmo Dome Litigation” above for complete details), we have suffered net operating losses during each of the last seven years, and recorded additional operating losses during the first nine months of 2006. Until we can demonstrate the ability to generate positive cash flow from operations, this shortcoming will impede our ability to borrow funds and may impact our ability to achieve profitability in the future.
There is no certainty that we will be able to achieve or sustain profitability or positive cash flows from operating activities in the future.
Our Financial Position. Our net worth became negative as of December 31, 2001, and the deficiency increased to ($5,333,000) at year-end 2003. Receipt of additional installments of the Settlement reduced the deficiency to ($4,144,000) at year-end 2004. Such deficiency increased to ($8,849,000) at September 30, 2007, and will continue to increase until we are able to achieve profitability in our Coal and China Segments. Our business will continue to require substantial expenditures. Our inability to generate positive cash flow from operations has limited our ability to borrow funds and impacted our ability to achieve profitability. We must achieve a turnaround in our Coal Segment during the first half of next year and complete the disposition of our China Segment by year-end. If a turnaround is not successful or is only partially successful, we will need to pursue additional outside financing which would likely involve further dilution to our shareholders. We cannot assure that we will be able to obtain additional financing on terms that we deem acceptable, or at all.
We have substantial indebtedness and may not have enough revenues to pay our debts. As of September 30, 2007, we had $10,542,000 of total debt outstanding, including $597,000 of accrued interest to an affiliate of the Chairman. While only $2,000 of the total debt is due to be repaid in 2007, another $2,770,000 of the total currently outstanding is due to be repaid by December 31, 2008. We or our subsidiaries may become further indebted. This much debt could pose substantial risks to our business. The indebtedness may require us to use available funds for payment of principal and interest instead of funding our operations. The debt could also inhibit our ability to raise additional capital. It is possible that we will not have enough cash flow from our operations to pay the principal and interest on our debt. This would have a material adverse effect on us.
Limited Liquidity. Our common stock trades on the Over-The-Counter Bulletin Board. Although we currently have 10 firms making a market in our stock, the volume of trading has been relatively low and fairly sporadic. Approximately 57.0% of our 5,658,000outstanding shares are held by management and another 8.3% are held by a long-term institutional holder. In addition, at September 30, 2006, there is substantial potential dilution, with preferred shares convertible into 296,000 shares, presently exercisable warrants and stock options totaling 670,000 shares, notes convertible into 3,506,000 shares and a total of 721,000 shares in two DSC Plans scheduled for distribution in 2007 and future years.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 31, 2007, we exchanged $79,000 aggregate principal amount of 12% notes due February 29, 2008 (the “S-T Notes”), for interest payments due to holders of our 12% Convertible Subordinated Notes due August 31, 2009. On September 17, 2007, we sold $50,000 of S-T Notes due March 17, 2008, for cash. In connection with the exchange or sale of the S-T notes we issued two-year warrants (the “2007 Warrants”) to purchase a total of 12,869 shares of our common stock at $0.80 per share. On October 11, 2007, one of the S-T Notes in the principal amount
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of $24,000 was prepaid in order to secure a consent from the holder of such note to the Change in Terms Agreement in connection with our $1,500,000 bank credit facility.
None of the 2007 Warrants or the Underlying Common Stock which may be issued in connection with the 2007 Warrants are registered under the Securities Act of 1933, as amended (the “Securities Act”). The 2007 Warrants and the Underlying Common Stock were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act for “transactions by the issuer not involving a public offering,” in transactions that fell within the safe harbor provided by Rule 506 of Regulation D of the Securities Act.
Item 3. Default Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Commencing on June 5, 2007, proxies were solicited on behalf of the Board of Directors of the Company in connection with the Annual Meeting of Stockholders.
(a) The annual meeting was held on July 11, 2007.
(b) The business of the meeting included the election of Harlon E. Martin, Jr. and Herb Mee, Jr. to serve as directors for three-year terms or until their successors have been elected and qualified.
In addition, the following persons continue to serve as directors for terms expiring on the dates indicated or until their successors have been elected and qualified:
| W.M. Beard | (2008) | | | |
| Allan R. Hallock | (2009) | | | |
| Ford C. Price | (2009) | | | |
To date the preferred stockholder has not elected to fill the vacancy created by the resignation of Michael E. Carr who resigned effective February 1, 2002.
The table below sets forth the voting for election of directors:
| Name of Nominee | Votes For | Votes Against | Votes Withheld | Abstentions | Broker Non-Votes | |
| | | | | | | |
| Harlon E. Martin, Jr. | 4,461,928 | -0- | 6,302 | 296,275 | 827,075 | |
| Ford C Price | 4,462,404 | -0- | 5,826 | 296,275 | 827,075 | |
(c) At the meeting the stockholders also voted to approve the adoption of The Beard Company 2005 Deferred Stock Compensation Plan, as amended. The table below sets forth the voting for such proposal:
| Votes For | Votes Against | Abstentions | Broker Non-Votes | |
| | | | | |
| 3.603,561 | 20,154 | 317,305 | 1,650,560 | |
(d) At the meeting the stockholders also voted to ratify the appointment of Cole & Reed, P.C. as our independent auditors for fiscal year 2007. The table below sets forth the voting for such proposal:
| Votes For | Votes Against | Abstentions | Broker Non-Votes | |
| | | | | |
| 4,462,557 | 1,073 | 300,875 | 827,075 | |
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
(a) The following exhibits are filed with this Form 10-Q and are identified by the numbers indicated:
3.1 | Restated Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on September 20, 2000. (This Exhibit has been previously filed as Exhibit 3(i) to Registrant’s Form 10-Q for the period ended September 30, 2000, filed on November 20, 2000, and same is incorporated herein by reference). |
| |
3.2 | Amended Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on July 20, 2004, effective on the close of business August 6, 2004. (This Exhibit has been previously filed as Exhibit 3.2 to Registrant’s Form 10-K for the period ended December 31, 2005, filed on April 17, 2006, and same is incorporated herein by reference). |
| |
3.3 | Registrant’s By-Laws as currently in effect. (This Exhibit has been previously filed as Exhibit 3(ii) to Registrant’s Form 10-K for the period ended December 31, 1997, filed on March 31, 1998, and same is incorporated herein by reference). |
| |
4 | Instruments defining the rights of security holders: |
| |
4.1 | Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant. (This Exhibit has been previously filed as Exhibit 3(c) to Amendment No. 2, filed on September 17, 1993 to Registrant's Registration Statement on Form S-4, File No. 33-66598, and same is incorporated herein by reference). |
| |
31 | Rule 13a-14(a)/15d-14(a) Certifications: |
| |
31.1 | Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
| |
31.2 | Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a). |
| |
32 | Section 1350 Certifications: |
| |
32.1 | Chief Executive Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| |
32.2 | Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
* Compensatory plans or arrangements.
The Company will furnish to any shareholder a copy of any of the above exhibits upon the payment of $.25 per page. Any request should be sent to The Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112.
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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.
| THE BEARD COMPANY
(Registrant) | |
| | |
November 19, 2007 | /s/ Herb Mee, Jr.
Herb Mee, Jr., President and Chief Financial Officer | |
| | |
November 19, 2007 | /s/ Jack A. Martine
Jack A. Martine, Controller and Chief Accounting Officer | |
Exhibit Index |
| | |
Exhibit No. | Description | Method of Filing |
| | |
3.1 | Restated Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on September 20, 2000 | Incorporated herein by reference |
| | |
3.2 | Amended Certificate of Incorporation of Registrant as filed with the Secretary of State of Oklahoma on July 20, 2004, effective on the close of business August 6, 2004 | Incorporated herein by reference |
| | |
3.3 | Registrant’s By-Laws as currently in effect | Incorporated herein by reference |
| | |
4 | Instruments defining the rights of security holders: | |
| | |
4.1 | Certificate of Designations, Powers, Preferences and Relative, Participating, Option and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of the Series A Convertible Voting Preferred Stock of the Registrant | Incorporated herein by reference |
| | |
31 | Rule 13a-14(a)/15d-14(a) Certifications: | |
| | |
31.1 | Chief Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) | Filed herewith electronically |
| | |
31.2 | Chief Financial Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a) | Filed herewith electronically |
| | |
32 | Section 1350 Certifications: | |
| | |
32.1 | Chief Executive Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code | Filed herewith electronically |
| | |
32.2 | Chief Financial Officer Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code | Filed herewith electronically |
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