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SECURITIES AND EXCHANGE COMMISSION
------------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----------
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
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: 000-25717
[GRAPHIC OMITTED][GRAPHIC OMITTED]
BETA OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0876964
(State of Incorporation) (I.R.S. Employer Identification No.)
901 Dove Street, Suite 230, Newport Beach, CA 92660
(Address of principal executive offices) (Zip Code)
(949) 752-5212
(Registrant's telephone number, including area code)
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.
Yes No _X_
As of August 1, 1999, the Registrant had 8,982,982 shares of Common Stock, $.001
par value, outstanding.
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PART I
ITEM 1. FINANCIAL STATEMENTS
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 105,032 $ 198,043
Accounts receivable -
Oil and gas sales 24,732 -
Other 9,678 9,678
Debt issuance costs, net of
accumulated amortization of $35,054 at June 30, 1999 54,046 -
(unaudited)
Prepaid expenses 5,992 14,951
--------------- --------------
Total current assets 199,480 222,672
--------------- --------------
Oil and gas properties, at cost (full cost method):
Evaluated properties 7,078,553 3,387,300
Unevaluated properties 11,776,755 11,466,695
Less--accumulated depletion and impairments (1,713,826) (1,670,691)
--------------- --------------
Net oil and gas properties 17,141,482 13,183,304
--------------- --------------
Furniture, fixtures and equipment, at cost, less
Accumulated depreciation of $19,688 and $13,413 at
June 30, 1999 (unaudited) and December 31, 18,615 22,943
1998, respectively
Other assets 527,567 166,028
Deferred offering costs 119,181 23,524
-------------- -------------
$ 18,006,325 $ 13,618,471
=============== ==============
(Continued)
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1999 1998
--------------- ----------------
(Unaudited)
Current Liabilities:
Accounts payable, trade $ 2,244,686 $ 310,770
Payroll and payroll taxes payable 4,498 7,559
Accrued interest 61,917 -
Notes payable net of unamortized discount of $1,526,909
at June 30, 1999 (unaudited) 1,473,091 -
Other accrued expenses - 800
--------------- ----------------
Total current liabilities 3,784,192 319,129
--------------- ----------------
Shareholders' Equity:
Common stock, $.001 par value; 50,000,000 shares authorized;
7,517,492 and 7,029,492 shares issued and outstanding
at June 30, 1999 (unaudited) and December 31, 1998, respectively 7,518 7,029
Additional paid-in capital 18,593,001 15,878,386
Deficit accumulated during the development stage (4,378,386) (2,586,073)
--------------- ----------------
Total shareholders' equity 14,222,133 13,299,342
--------------- ----------------
-------------- ---------------
Total Liabilities and Shareholders' Equity $ 18,006,325 $ 13,618,471
=============== ================
The accompanying notes are an integral part of these condensed consolidated financial statements
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
The three The three The six The six Inception
months ended months ended months ended months (June 6,
June 30, 1999 June 30, June 30, ended 1997) to
1998 1999 June 30, June 30, 1999
1998
----------------- ---------------- ---------------- --------------- -----------------
Revenues
Oil and gas sales $ 91,599 $ - $ 121,263 $ - $ 121,263
----------------- ---------------- ---------------- --------------- ----------------
Costs and expenses:
Lease operating expense 2,916 - 11,951 - 11,951
General and administrative 224,142 179,775 482,387 383,827 1,474,608
Impairment expense 1,227 300,000 1,227 1,597,342 1,671,918
Depreciation and depletion
expense 35,768 2,835 48,183 5,670 61,596
----------------- ---------------- ---------------- --------------- ----------------
Total costs and expenses 264,053 482,610 543,748 1,986,839 3,220,073
----------------- ---------------- ---------------- --------------- ----------------
Loss from operations (172,454) (482,610) (422,485) (1,986,839) (3,098,810)
Other income and (expense):
Interest expense (907,434) - (1,373,782) - (1,373,782)
Interest income 1,679 7,205 3,954 28,907 94,206
---------------- ---------------- --------------- -------------- ----------------
Net loss $ (1,078,209) $ (475,405) $ (1,792,313) $ (1,957,932) $ (4,378,386)
================= ================ ================ =============== ================
Basic and diluted loss
per common share ($.14) ($.08) ($.24) ($.34)
================= ================ ================ ===============
Weighted average number of
Common shares outstanding 7,471,209 6,057,950 7,388,267 5,699,069
================= ================ ================ ===============
The accompanying notes are an integral part of these condensed consolidated financial statements
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
The six The six Cumulative
months months from
ended ended inception
June 30, June 30, (June 6,
1999 1998 1997) to
June 30,
1999
-------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,792,313) $(1,957,932) $ (4,378,386)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and depletion 48,183 5,670 61,596
Amortization of notes payable
discount and debt issuance costs 1,262,145 - 1,262,145
Impairment expense 1,227 1,597,342 1,671,918
Salary contributed to Beta 10,000 30,000 100,000
Changes in operating assets and liabilities:
Accounts receivable (24,732) - (34,410)
Prepaid expenses 8,959 (5,042) (5,992)
Accounts payable, trade 1,933,916 (692,710) 2,244,686
Commissions payable - (25,329) -
Interest payable 61,917 - 61,917
Accrued payroll (3,062) (23,638) 4,497
Other accrued expenses (800) (14,000) -
Net cash provided by (used in) -------------- ------------- ---------------
operating activities 1,505,440 (1,085,639) 987,971
-------------- ------------- ---------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property expenditures (4,001,313) (6,469,543) (18,830,308)
Change in other assets (361,539) - (527,567)
Acquisition of furniture, fixtures &
equipment (1,947) (2,761) (38,303)
-------------- ------------- ---------------
Net cash used in investing activities (4,364,799) (6,472,304) (19,396,178)
-------------- ------------- ---------------
(Continued)
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
Cumulative
from
The six The six inception
months ended months (June 6,
June 30, ended 1997) to
1999 June 30, June 30,
1998 1999
---------------- --------------- ----------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from sale of shares and
warrants, net - 3,719,407 15,770,415
Proceeds from exercise of warrants 70,000 - 70,000
Offering costs of previous private
placements (42,995) - (42,995)
Proceeds from issuance of bridge
notes, net 2,835,000 - 2,835,000
(Increase) in deferred offering costs (95,657) - (119,181)
---------------- --------------- ----------------
Net cash provided by financing activities 2,766,348 3,719,407 18,513,239
---------------- --------------- ----------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS: (93,011) (3,838,536) 105,032
CASH AND CASH EQUIVALENTS:
Beginning of period 198,043 3,985,599 -
---------------- --------------- ----------------
End of period $ 105,032 $ 147,063 $ 105,032
================ =============== ================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 49,720 $ - $ 49,720
================ =============== ================
Cash paid for income taxes $ 4,610 $ - $ 4,610
================ =============== ================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Cumulative
from
The six The six inception
months ended months ended (June 6,
June 30, 1999 June 30, 1997) to
1998 June 30, 1999
----------------- ---------------- -----------------
Fair market value of common stock issued for:
Oil and gas properties $ - $ 25,000 $ 25,000
Discount on notes payable $ 2,574,000 $ - $ 2,574,000
Interest on bridge notes 180,000 180,000
The accompanying notes are an integral part to these condensed consolidated
financial statements
PART I - ITEM 1 (CONTINUED)
FINANCIAL STATEMENTS
BETA OIL & GAS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. The accompanying condensed consolidated financial statements
of Beta Oil & Gas, Inc. and subsidiary ("Beta") have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions of Form 10-Q and Article 10 of Regulation S-X. The
balance sheet as of June 30, 1999, the statements of operations
for the three and six months ended June 30, 1999 and 1998 and
from inception (June 6,1997) to June 30, 1999, and the statements
of cash flows for the six months ended June 30, 1999 and 1998 and
from inception (June 6, 1997) to June 30, 1999 are unaudited but
include all adjustments (consisting of normal recurring
adjustments) which Beta considers necessary for a fair
presentation of the financial position at such dates and the
operating results and cash flows for those periods. Although Beta
believes that the disclosures in these financial statements are
adequate to make the information presented not misleading,
certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
the rules and regulation of the Securities and Exchange
Commission. The December 31, 1998 condensed consolidated balance
sheet were derived from audited financial statements but do not
include all disclosures required by generally accepted accounting
principles. The accompanying financial statements should be read
in conjunction with the financial statements as contained in
Beta's S-1 Registration Statement which was declared effective
July 1, 1999.
Note 2. The results of operations for the three and six months ended
June 30, 1999 may not necessarily be indicative of the results of
operations that may be incurred for the entire fiscal year.
Note 3. Basic earnings per share excludes dilution and computed
by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in
the earnings of the entity. All such securities or other
contracts were anti-dilutive for all periods presented and,
therefore, excluded from the computation of earnings per share.
Note 4. On July 30, 1999, Beta completed its initial public
offering of common stock. Beta sold 1,465,490 shares of common
stock at $6.00 per share out of the 1,500,000 maximum number of
shares offered pursuant to its S-1 Registration Statement which
was declared effective July 1, 1999. Beta intends to withdraw
from registration the 34,510 unsold shares, the 150,000 shares
registered to satisfy an "Over-Allotment Option," and a total of
31,878 shares issuable upon exercise of Selected Dealer Warrants
in connection with the unsold portion of the offering, including
the Over-allotment Option. Upon completion of the initial public
offering, Beta has 8,982,982 shares of common stock outstanding
and 2,477,193 shares of common stock reserved for issuance upon
exercise of warrants. Beta realized gross proceeds of $8,792,948
from the sale of its common stock in the initial public offering,
before deducting commissions and offering expenses. On July 7,
1999, Beta applied $3,070,000 of the proceeds from the offering
towards the full repayment of the bridge notes and accrued
interest.
PART I (CONTINUED)
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion is to inform you about the financial position,
liquidity and capital resources of Beta as of June 30, 1999 and December 31,
1998 and the results of operations for the three and six month periods ended
June 30, 1999 and 1998.
Disclosure Regarding Forward-Looking Statements
Included in this report are 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. Although the company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations reflected in such forward-looking
statements will prove to have been correct.
All forward looking statements contained in this section are based on
assumptions believed to be reasonable.
These forward looking statements include statements regarding:
|_| Beta's financial position
|_| Proved or possible reserve quantities and net present values of those
reserves
|_| Business strategy
|_| Plans and objectives of management of Beta for future operations and
capital expenditures
Beta can give no assurance that such expectations and assumptions will
prove to be correct. Reserve estimates of oil and gas properties are generally
different from the quantities of oil and natural gas that are ultimately
recovered or found. This is particularly true for estimates applied to
exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond the control of
Beta. Such things may cause actual results, performance, achievements or
expectations to differ materially from the anticipated results, performance,
achievements or expectations.
Factors that may affect such forward-looking statements include, but are
not limited to:
|_| Beta's ability to generate additional capital to complete its
planned drilling and exploration activities
|_| Risks inherent in oil and gas acquisitions, exploration, drilling,
development and production; price volatility of oil and gas
|_| Competition from other oil and gas companies
|_| Shortages of equipment, services and supplies
|_| Government regulation
|_| Environmental matters
|_| Financial condition and operating performance of the other companies
participating in the exploration, development and production of oil and
gas ventures that Beta is involved in
In addition, since all of Beta's prospects are currently operated by third
parties, Beta may not be in a position to control costs, safety and timeliness
of work as well as other critical factors affecting a producing well or
exploration and development activities.
Beta is a Development Stage (Start-Up) Company
Beta has a limited operating history upon which an evaluation of Beta and
its prospects can be based. The risks, expense, and difficulties encountered by
early-stage companies must be considered when evaluating Beta's prospects. There
are significant risks inherent in a development stage company which is engaged
in high risk oil and gas exploration.
Financial Condition, Liquidity and Capital Resources
Beta's working capital was a deficit of ($3,584,712) at June 30, 1999
compared to a deficit of ($96,457) at December 31, 1998. Beta's working capital
decreased due primarily to investments in oil and gas properties and the
completion of a short term bridge note financing. In order to fund capital
expenditures in the first six months of 1999, Beta obtained short term debt
financing in the form of $3,000,000 in bridge note financing which is discussed
below under "Bridge Note." In order to repay the $3,000,000 in short term debt
financing and to address the working capital deficit as of June 30, 1999, Beta
completed an initial public offering in July 1999 which is discussed below under
"Subsequent Events."
Historical Cash Used In and Provided by Operating, Investing and Financing
Activities
Beta financed all of its business activities through December 31, 1998
through issuances of its common stock in private placements. Beta raised net
proceeds of $9,221,783 during 1997 and $6,548,632 during 1998 in these private
placements. During the six months ended June 30, 1999 Beta realized net proceeds
of $2,835,000 from a bridge note financing which is discussed below. Subsequent
to June 30, 1999, Beta completed an initial public offering which is discussed
below.
The net proceeds of the private placements and the bridge note financing
have been primarily invested in oil and gas properties totaling $4,001,313 and
$6,469,543 for the six months ended June 30, 1999 and 1998.
Beta's cash balance at June 30, 1999 was $105,032 compared to a cash balance
of $198,043 at December 31, 1998. The change in Beta's cash balance is
summarized as follows:
Cash balance at December 31, 1998 $ 198,043
Sources of cash:
Cash provided by operating activities 1,505,440
Cash provided by financing activities 2,766,348
----------------
Total sources of cash 4,271,788
Uses of cash:
Oil and gas property expenditures (4,001,313)
Other assets (increase in advances to industry partners) (361,539)
Furniture, fixtures and equipment (1,947)
----------------
(4,364,799)
----------------
Cash balance at June 30, 1999 $ 105,032
================
Long Term Liquidity and Capital Resources
The timing of most of Beta's capital expenditures is discretionary. Beta has
no material long-term commitments associated with its capital expenditure plans
or operating agreements. Consequently, Beta has a significant degree of
flexibility to adjust the level of such expenditures as circumstances warrant.
The level of capital expenditures will vary in future periods depending on the
success it experiences on planned exploratory drilling activities in 1999, gas
and oil price conditions and other related economic factors. Accordingly, Beta
has not yet prepared an estimate of capital expenditures for the year 2000 or
future periods.
Bridge Note
During the six months ended June 30, 1999, Beta completed the private
placement of a $3,000,000 bridge note financing to three institutional investors
referred to as the "1999 bridge financing." Beta issued promissory notes having
a maturity date of one year and bearing an interest rate of 10%. In addition, a
total of 459,000 shares of Beta common stock was issued in connection with the
1999 bridge financing. The $3,000,000 in bridge notes was repaid in full with
accrued interest on July 7, 1999 from the proceeds of Beta's initial public
offering.
Beta received net cash proceeds of $2,835,000 from the bridge notes. The
estimated fair market value of 429,000 shares of common stock issued in
connection with the bridge note of $2,574,000 is treated as a discount and will
be amortized over the term of the promissory notes using the interest method.
The estimated fair market value of 30,000 additional shares of common stock
issued per the terms of the bridge note of $180,000 was immediately expensed as
interest during the three and six month periods ended June 30, 1999.
Accordingly, Beta will incur additional interest expense of $2,754,000 over the
term of the promissory notes which will represent a significant interest expense
charge in the year ending December 31, 1999. As of June 30, 1999 Beta has
amortized $1,047,091 of the note discount. The debt issuance costs of the 1999
bridge financing of $89,100 were capitalized as deferred loan costs and are
being amortized over the life of the bridge note. As with the discount, this
will represent a significant charge in 1999. As of June 30, 1999 Beta has
amortized $35,054 of the deferred loan costs. Current notes payable as of June
30, 1999 consists of the following:
Current notes payable, interest at 10% payable monthly
in arrears, secured by all of Beta's properties, $2,000,000
due January 20, 2000 and $1,000,000 due March 19, 2000 $ 3,000,000
Less unamortized discount (1,526,909)
===============
Net carrying value $ 1,473,091
===============
As discussed previously, Beta repaid the $3,000,000 in bridge notes plus
accrued interest in full on July 7, 1999. Upon repayment of the bridge loans,
Beta recorded additional interest expense of $54,046 associated with the
unamortized loan costs and $1,526,909 associated with the unamortized discount.
The additional interest expense will be reflected in the three and nine month
period ended September 30, 1999 and the year ended December 31, 1999.
Plan of Operation for 1999
In the opinion of Beta's management, the existing working capital
of Beta and the net proceeds of Beta's initial public offering completed on July
30, 1999 will be sufficient to fund the operations and projected capital
requirements of Beta until September 30, 1999. Beta is allocating its cash
resources from all sources, including the net proceeds of the initial public
offering, to the following categories of expenditures:
1) Repayment of $3,000,000 of bridge debt;
2) Drilling and completion costs for wells on Beta's prospects which are
estimated to be $5,800,000 for the period June 30 to December 31, 1999. It
is anticipated that as many as 38 test wells will be drilled in 1999 in
which Beta will have an interest participation ranging from 12.5% to 75%
and averaging 22%. While it is difficult to predict the exact timing of
when these wells will be proposed for drilling, Beta's operating
agreements generally provide a thirty day period in which to elect
participation in a proposed well. Generally funds must be advanced within
thirty days or less after the thirty day election period;
3) Leasehold acquisition costs estimated to be $460,000 for the period June
30 to December 31, 1999;
4) 3-D seismic acquisition costs only if funds are available; and
5) General and administrative overhead estimated to be $515,000 for the
period June 30 to December 31, 1999.
At such time as Beta has fully utilized the proceeds of the offering and
Beta's existing working capital, it will be necessary for Beta to raise
additional funds. It is anticipated that additional funds will be raised from
one or more of the following sources:
1) Beta has approximately 797,000 callable common stock purchase warrants
outstanding exercisable at a price of $5.00 per share. Beta is able to call
these warrants at any time on and after the date that its common stock is
traded on any exchange, including the Over-the-Counter Bulletin Board, at a
market price equal to or exceeding $7.00 per share for 10 consecutive days,
of which there can be no assurance that such a price level will occur. It
is Beta's intent to call all or a portion of these warrants at such time,
if and when, the market price of the stock is at a sufficient level to fund
capital requirements. Beta will receive proceeds equal to the exercise
price times the number of shares which are issued from the exercise of
warrants net of commission to the broker of record, if any. Beta could
realize net proceeds of approximately $3,800,000 from the exercise of these
warrants. There is no assurance that Beta will realize any proceeds from
the warrant calls.
2) Beta may seek bank or other debt financing at such time that cash flow from
operations is established. Beta is not able to predict when, if ever, such
financing will be available. When Beta has cash flow from producing wells
to cover Beta's general and administrative expenses and service debt, Beta
will seek bank financing of $2,000,000 to $5,000,000 in the fourth quarter
of 1999 or first quarter of 2000.
3) Beta may seek mezzanine financing, if available, on terms acceptable to
Beta. Mezzanine financing usually involves debt with a higher cost of
capital as compared to conventional bank financing. As with bank financing,
Beta will seek mezzanine financing in the range of $2,000,000 to $5,000,000
if sufficient cash flow is available from wells to cover Beta's general and
administrative expenses and service debt.
4) Beta may realize cash flow from oil and gas wells, if found to be
productive. Beta owns a working interest in three wells that are currently
producing and in 5 wells which are presently being completed and equipped
for production.
The net proceeds of the public offering combined with Beta's existing
working capital will probably not be sufficient to fund Beta's capital
expenditures that are projected for 1999. If the above additional sources of
cash are insufficient or are unavailable on terms acceptable to Beta, Beta will
be compelled to reduce the scope of its business activities. If Beta is unable
to fund planned expenditures within a thirty to sixty day period after a well is
proposed for drilling, it may be necessary to:
1) Forfeit its interest in wells that are proposed to be drilled;
2) Farm-out its interest in proposed wells;
3) Sell a portion of its interest in proposed wells and use the sale proceeds
to fund its participation for a lesser interest; and
4) Reduce general and administrative expenses.
As stated above, Beta believes it has sufficient working capital to fund its
capital expenditure requirements until September 30, 1999. In the event that
Beta cannot raise additional capital , it may be necessary for Beta to curtail
its business activities until other financing is available.
These are forward looking statements that are based on assumptions which in
the future may not prove to be accurate. Although Beta's management believes
that the expectations reflected in such forward looking statements are based on
reasonable assumptions, it can give no assurance that its expectations will be
achieved.
Comparison of Results of Operations for the Six Months Ended June 30, 1999 and
1998 (unaudited)
During the six months ended June 30, 1999 Beta had oil and gas revenues of
$121,263. Beta's net production was 62,279 mcf at an average price of $1.95 per
mcf. During the six months ended June 30, 1998 Beta generated no revenues.
During the six months ended June 30, 1999 Beta incurred lease operating
expenses of $11,951. Beta's average lifting cost for this period was $.19 per
mcf equivalent. During the six months ended June 30, 1998 Beta incurred no lease
operating expense.
General and administrative expenses for the six months ended June 30, 1999
were $482,387 compared to $383,827 for the six months ended June 30, 1998. This
represents a $99,000 or a 26% increase over the prior year period. The primary
reasons for the increase were due to:
(1) An increase in operational activities in 1999 versus 1998;
(2) An increase in the number of employees from four in 1998 to six in 1999;
and
(3) Costs related to Beta's initial public offering and filing the S-1
registration statement.
Loss from operations totaled $(422,485) for the six months ended June 30,
1999 compared to $(1,986,839) for the six months ended June 30, 1998. The
primary reason for the decrease in the loss was due to an impairment expense of
$1,597,342 recorded in 1998 associated with the unsuccessful drilling of two
wells in Australia compared to only $1,227 impairment expense in the same period
in 1999.
Other income for the six months ended June 30, 1999 consisted of interest
income in the amount of $3,954. Beta realized $28,907 of interest income for the
six month period in 1998. The reason for the decrease was lower average cash and
cash equivalents balances for the 1999 period as compared to the 1998 period.
During the six months ended June 30, 1999, Beta incurred interest expense
of $1,373,782 relating to the bridge notes. Interest expense for the 1999 period
consists of the following:
Cash interest expense $ 111,637
Amortization of note discount and fair market value of 30,000 shares 1,227,091
Amortization of deferred loan costs 35,054
===============
Total interest expense for the six months ended June 30, 1999 $ 1,373,782
===============
During the six months ended June 30, 1998, Beta incurred no interest
expense.
Net loss for the six months ended June 30, 1999 was $(1,792,313) compared
to $(1,957,932) for the six months ended June 30, 1998. The decrease in net loss
was primarily due to a significant impairment write-down of oil and gas
properties in the prior year period.
Comparison of Results of Operations for the Three Months ended June 30, 1999 and
1998 (unaudited)
During the three months ended June 30, 1999 Beta had gas revenues of
$91,599. Beta's net production was 43,824 mcf at an average price of $2.09 per
mcf. During the three months ended June 30, 1998 Beta generated no revenues.
During the three months ended June 30, 1999 Beta incurred lease operating
expenses of $2,916. Beta's average lifting cost for this period was $.07 per mcf
equivalent. During the three months ended June 30, 1998 Beta incurred no lease
operating expense.
General and administrative expenses for the three months ended June 30,
1999 were $224,142 compared to $179,775 for the three months ended June 30,
1998, representing a $44,000 or 25% increase over the prior year. The primary
reasons for the increase were due to:
(1) An increase in operational activities in 1999 versus 1998;
(2) An increase in the number of employees from four in 1998 to six in 1999;
and
(3) Costs related to Beta's initial public offering and filing the S-1
registration statement.
Loss from operations totaled $(172,454) for the three months ended June 30,
1999 compared to $(482,610) for the three months ended June 30, 1998. The
primary reason for the decrease in the loss was due to the $300,000 impairment
write-down recorded in the 1998 period which was associated with the drilling of
two dry holes in Australia.
Other income for the three months ended June 30, 1999 consisted of interest
income in the amount of $1,679. Beta realized $7,205 of interest income for the
three month period in 1998. The reason for the decrease was lower average cash
and cash equivalents balances for the 1999 period as compared to the 1998
period.
During the three months ended June 30, 1999, Beta incurred interest
expense of $907,434 relating to the bridge notes. The interest expense consisted
of the following:
Cash interest expense $ 74,794
Amortization of discount 821,737
Amortization of debt issuance cost 10,903
--------
Total interest expense $907,434
========
During the three months ended June 30, 1998, Beta incurred no interest
expense.
Net loss for the three months ended June 30, 1999 was $(1,078,209) compared
to $(475,405) for the three months ended June 30, 1998. The increase in net loss
was primarily due to the significant interest expense associated with the 1999
bridge financing in the 1999 period.
Income Taxes
As of December 31, 1998, Beta had available, to reduce future taxable
income, a tax net operating loss carryforward of approximately $4,003,000 which
expires in the years 2012 through 2018. As of December 31, 1998, Beta has a
deferred tax asset of approximately $1,110,000 which is fully reserved for with
a valuation allowance. The deferred tax asset consists entirely of the net
operating loss carryforward. Utilization of the tax net operating loss
carryforward may be limited in the event a 50% or more change of ownership
occurs within a three year period. The tax net operating loss carryforward may
be limited by other factors as well.
Cancellation of Warrants
On June 21, 1999, certain warrant holders agreed to cancel 87,296 warrants
to purchase common stock consisting of 20,000 warrants exercisable at $5.00 per
share and 67,296 warrants exercisable at $7.00 per share. All of the cancelled
warrants were non-callable with expiration dates on March 12, 2003. The warrants
were cancelled for no consideration pursuant to a request by the National
Association of Securities Dealers, the "NASD". The warrant holders were certain
NASD member firms and their employees who participated in Beta's 1998 private
placement, as well as Beta's legal counsel. The cancellation request was made
and complied with because the NASD determined that these warrants could be
deemed "underwriter's compensation" and the continued existence of these
warrants could result in the compensation for this offering exceeding the NASD
guidelines. Therefore, all such warrants which could be deemed "underwriter's
compensation" in excess of NASD guidelines have been cancelled for no
consideration.
Drilling Activity
During the six months ended June 30, 1999, Beta participated in the
drilling of ten exploratory wells. Of the ten wells drilled, three were
completed as dry-holes and seven are in various stages of completion for
production. The wells are summarized as follows:
Estimated First
Working Completion Date of
Well Name Location Interest % Status Production
1. Cobra Stream #1 Onshore Louisiana 15% Dry-hole N/A
2. Shark Prospect #1 Offshore Louisiana 15% Dry-hole N/A
3. Schluter #1 Jackson Co., TX 20% Dry-hole N/A
-----------------
Total 50%
=================
1. Redfish #1 Offshore Louisiana 15% Awaiting production facility 9/99
2. Stingray #1 Offshore Louisiana 15% Awaiting production facility 9/99
3. Minkfish #2 Offshore Louisiana 9.4% Awaiting production facility 9/99
4. Minkfish #3 Offshore Louisiana 9.4% Awaiting production facility 9/99
5. Pressley #1 Jackson Co., TX 12.5% On production N/A
6. Wilbeck #1 Jackson Co., TX 12.5% On production N/A
7. Alamo Realty #1 Jackson Co., TX 20% Being completed 9/99
=================
Total 93.8%
=================
Subsequent Events
On July 30, 1999, Beta completed its initial public offering of common
stock. Beta sold 1,465,490 shares of common stock at $6.00 per share out of the
1,500,000 maximum number of shares offered pursuant to its S-1 Registration
Statement which was declared effective July 1, 1999. Beta intends to withdraw
from registration the 34,510 unsold shares, the 150,000 shares registered to
satisfy an "Over-Allotment Option," and a total of 31,878 shares issuable upon
exercise of Selected Dealer Warrants in connection with the unsold portion of
the offering, including the Over-allotment Option.
Upon completion of the initial public offering, Beta has 8,982,982 shares of
common stock outstanding and 2,477,193 shares of common stock reserved for
issuance upon exercise of warrants.
Beta realized gross proceeds of $8,792,948 from the sale of its common
stock in the initial public offering, before deducting commissions and offering
expenses. On July 7, 1999, Beta applied $3,070,000 of the proceeds from the
offering towards the full repayment of the bridge notes and accrued interest.
Impact of Recently Issued Standards
Beta intends to adopt SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," issued in June 1998 effective with its fiscal year
beginning January 1, 2000 as required by the Statement. Due to Beta's current
and anticipated limited use of derivative instruments, management anticipates
that adoption of SFAS 133 will not have any significant impact on Beta's
financial position or results of operations. SFAS 132, "Employees' Disclosures
about Pensions and other Postretirement Benefits," and SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" were issued in 1998 and are not
expected to impact Beta regarding future financial statement disclosures,
results of operations and financial position.
Year 2000 "Y2K" Problem
Beta has begun to address possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The Y2K
problem can affect any modern technology used by a business in the course of its
day. Any machine that uses embedded computer technology is susceptible to this
problem, including for example, telephone systems, postage meters and scales,
and of course, computers. The impact on a company is determined to a large
extent by the company's dependence on these technologies to perform their day to
day operations.
Internally, Beta has begun reviewing all such equipment and has determined
that many of its systems are Y2K compliant. This includes our telephone systems,
postage equipment and some of our software. We anticipate that all systems and
software will be fully reviewed and brought into compliance by November 1999. If
certain systems are not brought up to Y2K compliance by the end of November
1999, then the non-compliant technology will be disabled so as not to have an
impact on the systems that are compliant. Any such events would not have a
serious impact on our day to day operations, nor would any valuable information
be lost. Our company backs up all computer systems daily to protect us against
data loss and we have a system that utilizes 10 rotating back-up tapes as a
safeguard against having a tape that is unreadable. The costs of bringing our
company technology up to Y2K compliance is expected to be less than $5,000. This
is because the majority of the "patches" or programs designed to make software
Y2K compliant can be obtained over the internet from manufacturers for little or
no cost and we do not expect to rely heavily on outside consultants to upgrade
our systems as most of the work can be performed in-house.
Externally, the Year 2000 problem may impact other entities with which Beta
transacts business, and Beta cannot predict the effect of the Year 2000 problem
on such entities or Beta. With regard to those companies that we do business
with on a daily basis, we cannot guarantee that they will be vigilant about
their Y2K plan of action. We have, however, started mailing out a simple
questionnaire to these companies, requesting that they advise us of their Y2K
readiness. Should any of our oil and gas well operators experience a disruption
due to the Year 2000 problem, the most significant impact may be a delay in the
progress of drilling operations and/or interruption of production and revenue on
a producing well. In a worst case scenario, the former may ultimately cause Beta
to incur drilling cost overruns, while the latter may cause us to have an
interruption in revenues for several months. We have also assessed the
possibility of personal injury, loss of life, property damage and accidental
pollution resulting from equipment malfunctions. Although we believe these to be
a remote possibility, we have undertaken investigations to determine possible
problem areas and will communicate our findings, if any, to the project
operators.
In these unlikely events, Beta's plan of action is to have on hand a cash
reserve at December 31, 1999 to cover both the additional well costs and the
Company's overhead expenses until production resumes. We have not yet determined
the amount or source of such funds. We are contacting our insurance carriers to
determine the extent of insurance coverage, if any, in the event Y2K problems
affect any of Beta's project areas. In the event that Beta does experience Y2K
problems, it could result in a suspension of Beta's revenues. A suspension of
revenues could result in material losses from operations and a reduction in
Beta's working capital. Management is unable at this time to quantify the impact
that the Y2K problem could have on Beta's results of operations and financial
condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
To the best of knowledge of management there are no legal proceedings pending or
threatened against Beta which would have a materially adverse effect on its
financial condition or results of operations.
Item 2. Changes in Securities
(a) (b) and (d); not applicable
(c) Recent sales of unregistered securities. Beta issued and sold the following
securities without registration under the Securities Act of 1933, as
amended ("Securities Act"), during the first half of 1999 and through the
date of this report:
1. In connection with the January 20, 1999 bridge financing, Beta issued
300,000 shares of common stock to the note holders and issued an
additional 29,000 shares as commissions in connection with the January
bridge financing. The certificates representing the shares issued bear
a restrictive legend prohibiting transfer without registration under
the Securities Act or the availability of an exemption from
registration and "stop transfer" instructions have been issued to the
transfer agent. The shares were issued subject to a "registration
rights" agreement, requiring among other things, that Beta file a
registration statement to register the shares under the Securities Act
180 days after the closing of Beta's initial public offering, which was
July 30, 1999.
2. In connection with the March 19, 1999 bridge financing, Beta issued
100,000 shares of common stock to the note holders on March 19 and
issued the note holders an additional 30,000 shares as follows:
April 19, 1999 10,000 additional shares
May 19, 1999 10,000 additional shares
June 19, 1999 10,000 additional shares
The certificates representing the shares issued bear a restrictive
legend prohibiting transfer without registration under the Securities
Act or the availability of an exemption from registration and "stop
transfer" instructions have been issued to the transfer agent. The
shares were issued subject to a "registration rights" agreement,
requiring among other things, that Beta file a registration statement
to register the shares under the Securities Act 180 days after the
closing of Beta's initial public offering, which was July 30, 1999.
3. On April 2, 1999 Beta issued 4,000 shares upon the exercise of warrants
to purchase common stock. The certificates representing the shares
issued bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an
exemption from registration and "stop transfer" instructions were
issued to the transfer agent. The shares issued upon exercise of the
warrants were registered by Beta for resale by the holders in
Registration No. 333-68381.
4. On May 14, 1999 Beta issued 25,000 shares upon the exercise of warrants
to purchase common stock. The certificates representing the shares
issued bear a restrictive legend prohibiting transfer without
registration under the Securities Act or the availability of an
exemption from registration and "stop transfer" instructions were
issued to the transfer agent. The shares issued upon exercise of the
warrants were registered by Beta for resale by the holders in
Registration No. 333-68381.
In connection with the issuance of the above noted securities, Beta relied
upon Section 4(2) of the Securities Act in claiming exemption for the
registration requirement of the Securities Act. All of the persons to whom
the securities were issued had full information concerning the business
affairs of Beta and acquired the shares for investment purposes. The
certificates representing the shares issued bear a restrictive legend
prohibiting transfer without registration under the Securities Act or the
availability of an exemption from registration and "stop transfer"
instructions were issued to the transfer agent.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Beta's annual meeting of shareholders was held at Tornino's Banquets, 5080 N.
Blackstone, Fresno, California on Friday, June 25, 1999, at 12:00 P.M. Pacific
Daylight Time. The matters submitted to a vote of Beta's shareholders as well as
the results of the votes cast are as follows:
1. Matters voted upon by holders of common Stock:
Election of directors. A summary of the votes cast is as follows:
% of % of
Number out-standing Number out-standing
shares shares
Steve Antry 4,808,776 64% 0 0%
R. Thomas Fetters 4,808,776 64% 0 0%
J. Chris Steinhauser 4,808,776 64% 0 0%
Joe C. Richardson, Jr. 4,808,776 64% 0 0%
Lawrence W. Horwitz 4,808,776 64% 0 0%
John P. Tatum 4,808,776 64% 0 0%
As a result of the voting, Steve Antry, R. Thomas Fetters, J. Chris Steinhauser,
Joe C. Richardson, Jr., Lawrence W. Horwitz and John P. Tatum were elected as
directors of Beta to serve in that capacity until the annual meeting of
shareholders in 2000.
Item 5. Other Information
On March 16, 1999, the directors of Beta appointed John P. Tatum to the
board of directors of Beta. Mr. Tatum will serve as an independent director and
has been appointed to the Compensation and Audit Committees of the board.
Mr. Tatum has worked in the oil and gas industry since 1962, holding
successive positions with Skelly Oil Company, Placid Oil Company, Hunt
International Company and Hunt Energy Company. From 1980 to 1996, Mr. Tatum was
employed with Triton Energy Corporation as Vice President (1980-82), Senior Vice
President (1982-1991) and Executive Vice President (1991-96). As Senior Vice
President for Triton Energy Corporation, Mr. Tatum was responsible for directing
Triton's operations in Colombia, Thailand, New Zealand, Nepal, Gabor, Cote
D'Ivoire and Argentina. Since 1996, Mr. Tatum has worked as an international oil
& gas consultant. Mr. Tatum received his B.B.A. from the University of Texas in
1956 and conducted graduate studies at the Louisiana State University Graduate
Business School.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27-1, "Financial Data Schedule" - for the quarter ended
June 30, 1999
(b) There were no reports filed on Form 8-K during the quarter ended June 30,
1999.
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 who is duly authorized.
BETA OIL & GAS, INC.
Date: August 14, 1999 By /s/ J. Chris Steinhauser
------------------------
J. Chris Steinhauser
Chief Financial Officer,
Principal Accounting Officer
and Director