Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
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Commission File Number: 0-33259
ENERGAS RESOURCES, INC.
----------------------------
(Exact Name of Issuer as Specified in Its Charter)
Delaware 73-1620724
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Northeast 63rd Street
Oklahoma City, OK 73105
------------------------------------------------- ----------
(Address of Issuer's Principal Executive Offices) (Zip Code)
Issuer's telephone number: (405) 879-1752
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) had been subject to such filing
requirements for the past 90 days. Yes __X__ No __
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes __ No __X__
Class of Stock No. Shares Outstanding Date
-------------- ---------------------- ----
Common 92,650,144 December 15, 2009
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2009 2009
----------- ----------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 8,025 $ 76,076
Restricted cash 25,488 25,049
Accounts receivable 49,015 54,539
Deposits 7,500 -
--------------- --------------
Total Current Assets 90,028 155,664
--------------- --------------
Property and Equipment
Oil and gas properties, using full cost
accounting
Proved properties 10,302,721 2,606,814
Unproved properties 251,352 162,012
Pipelines and gathering systems 60,000 -
--------------- --------------
10,614,073 2,768,826
Less accumulated depreciation, depletion,
and amortization, including impairment of
$1,505,656 and $1,505,656 (2,287,108) (2,249,545)
--------------- --------------
8,326,965 519,281
Other, net of accumulated depreciation of
$40,291 and $34,035 11,710 14,474
--------------- --------------
8,338,675 533,755
--------------- --------------
Goodwill 146,703 146,703
Accounts receivable - other 156,000 -
Investment in partnership - 39,000
Note Receivable, net of allowance of $0
and $1,162,020 - 950,000
--------------- --------------
Total Assets $ 8,731,406 $ 1,825,122
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 466,383 $ 219,791
Advanced drilling funds - 126,263
Due to related parties 24,900 40,431
Current portion of lease 1,665 1,444
Current asset retirement obligation 23,691 23,691
Note payable - 16,000
--------------- --------------
Total Current Liabilities 516,639 427,620
Asset Retirement Obligation 119,067 87,726
Long-term lease 4,441 5,720
Drilling commitment 156,000 156,000
--------------- --------------
Total Liabilities 796,147 677,066
--------------- --------------
Stockholders' Equity
Preferred stock, $0.0001 par value,
20,000,000 share authorized, 1,000,000
shares designated Series A, 1,000,000
shares issued and outstanding
October 31, 2009 100 -
Common stock, $.001 par value 100,000,000
shares authorized 92,650,144 and 90,700,144
shares issued and outstanding at October 31,
and January 31, 2009 92,650 90,700
Additional paid in capital 26,559,030 19,308,395
Retained (deficit) (18,716,521) (18,251,039)
--------------- --------------
Total Stockholders' Equity 7,935,259 1,148,056
--------------- --------------
Total Liabilities and Stockholders' Equity $ 8,731,406 $ 1,825,122
=============== ==============
See notes to the condensed consolidated financial statements.
1
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine Months Ended
October 31, October 31,
---------------------------------------------------
2009 2008 2009 2008
---------------------------------------------------
Revenue
Oil and gas sales $ 28,141 $ 52,786 $ 76,039 $ 251,090
Overhead and marketing revenue 5,212 - 32,853 -
Pipeline revenue 2,468 3,096 6,950 9,613
---------- ---------- ---------- ----------
Total Revenue 35,821 55,882 115,842 260,703
Operating Expenses
Lease operating expense 18,757 17,298 53,681 61,162
Pipeline and gathering expense 675 900 2,250 2,700
General and administrative expense 133,639 144,735 483,196 385,573
Bad debt expense 1,117,230 1,117,230
Depreciation, depletion and amortization 10,477 25,763 41,642 77,268
---------- ---------- ---------- ----------
Total Operating Expenses 163,548 1,305,926 580,769 1,643,933
---------- ---------- ---------- ----------
Operating (Loss) (127,727) (1,250,044) (464,927) (1,383,230)
---------- ---------- ---------- ----------
Other (Expenses) Income
Other income - - 61 -
Interest income 148 138,473 438 140,115
Gain on sale of subsidiary - - - 7,116
Interest expense (399) - (1,054) -
---------- ---------- ---------- ----------
Total Other (Expense) (251) 138,473 (555) 147,231
---------- ---------- ---------- ----------
Net (Loss) before Income Taxes (127,978) (1,111,571) (465,482) (1,235,999)
Provision for income taxes - - - -
---------- ---------- ---------- ----------
Net (Loss) $(127,978) $(1,111,571) $(465,482) $(1,235,999)
========== ============ ========== ============
Net (Loss) per Share, Basic and Diluted $ (0.00) $ (0.01) $ (0.01) $ (0.02)
========== ============ ========== ============
Weighted average of number of shares
outstanding 94,443,840 82,576,222 92,219,156 82,547,343
========== ============ ========== ============
See notes to the condensed consolidated financial statements.
2
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
---------------------------
2009 2008
---------------------------
Cash Flows From Operating Activities
Net (Loss) $ (465,482) $ (1,235,999)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation, depletion and amortization 41,642 77,267
Bad debt provision - 1,117,230
Common stock issued for services 52,500 41,000
(Increase) Decrease in
Restricted cash (439) -
Accounts receivable 5,524 35,357
Deposits (7,500) -
Increase (Decrease) in
Accounts payable and accrued expenses 246,592 (78,455)
Drilling advances (126,263) -
Asset retirement obligation 17,286 1,295
------------ ------------
Net Cash Flows Used By Operating Activities (236,140) (42,305)
Cash Flows From Investing Activities
(Investment in) oil and gas properties (765,322) (663,442)
Payments on note receivable 950,000 87,980
Sale of oil and gas properties - 590,400
------------ ------------
Net Cash Provided By Investing Activities 184,678 14,938
Cash Flows from Financing Activities
Advances from (Repayments to) related parties
and stockholders (15,531) 21,000
Payments on capital lease (1,058) -
------------ ------------
Net Cash Provided By (Used By) Financing
Activities (16,589) 21,000
Increase (Decrease) in Cash (68,051) (6,367)
Cash at Beginning of Period 76,076 28,904
------------ ------------
Cash at End of Period $ 8,025 $ 22,537
============ ============
Supplemental Information:
Interest Paid in Cash $ 1,054 $ -
============ ============
Income Taxes Paid $ - $ -
============ ============
Non-Cash Transactions:
Common stock issued for consulting services $ 22,500 $ -
============ ============
Common stock issued for engineering services $ 30,000 $ -
============ ============
Common Stock issued for purchase of $ 60,000 $ -
gathering system
============ ============
Common Stock issued for salaries $ - $ 41,000
============ ============
Preferred stock issued for oil and gas $ 7,124,185 $ -
properties
============ ============
See notes to the condensed consolidated financial statements.
3
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
1. NATURE OF OPERATIONS
Energas Resources, Inc. (the "Company") was originally incorporated in 1989 in
British Columbia, Canada as a public company listed on the Canadian Venture
Exchange. In 2001, the Company registered as a Delaware corporation becoming a
United States domestic corporation. In 2002, its registration statement filed
with the Securities and Exchange Commission became effective and its stock is
traded in the Over the Counter (OTC) market.
The Company is primarily engaged in the operation, development, production,
exploration and acquisition of petroleum and natural gas properties in the
United States through its wholly-owned subsidiary, A.T. Gas Gathering Systems,
Inc. ("AT GAS"). In addition, the Company owns and operates natural gas
gathering systems located in Oklahoma, which serve wells operated by the Company
for delivery to a mainline transmission system. The majority of the Company's
operations are maintained and occur through AT GAS. AT GAS is a company
incorporated in the state of Oklahoma.
On January 31, 2009 the Company purchased all the outstanding shares of Energas
Corporation ("Corp.") from George G. Shaw, the Company's president. Corp. is the
operator of all of the Company's wells. Corp. became a wholly owned subsidiary
of the Company as of the date of acquisition.
On January 31, 2009 the Company purchased all the outstanding shares of Energas
Pipeline ("Pipeline") from George G. Shaw, the Company's president. Pipeline
operates the natural gas gathering system to which the Company's four wells in
Atoka County, Oklahoma are connected. Pipeline became a wholly owned subsidiary
of the Company as of the date of acquisition.
2. GOING CONCERN
The Company is in the process of acquiring and developing petroleum and natural
gas properties with adequate production and reserves to operate profitably. As
of October 31, 2009, the Company had incurred losses for the nine months ended
October 31, 2009 and 2008 of $(465,482) and $(1,235,999), respectively. There is
substantial doubt as to the Company's ability to continue as a going concern and
this is dependent upon obtaining financing and achieving profitable levels of
operations. The Company is currently seeking additional funds and additional
mineral interests through private placements of equity and debt instruments.
There can be no assurance that its efforts will be successful.
The consolidated financial statements do not give effect to any adjustments that
might be necessary if the Company is unable to continue as a going concern.
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ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
3. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The unaudited consolidated condensed financial
statements included herein have been prepared in accordance with generally
accepted accounting principles for interim financial statements and with
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended October 31, 2009 are not necessarily
indicative of results that may be expected for the year ended January 31, 2010.
The consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended January 31, 2009. The January 31, 2009
consolidated condensed balance sheet was derived from audited financial
statements.
Basis of consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, AT Gas, Corp.,
Pipeline and TGC (through February 15, 2008). All significant inter-company
items have been eliminated in consolidation.
Use of estimates in the preparation of financial statements - The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The oil industry is subject, by its nature, to environmental hazards and cleanup
costs for which we carry liability insurance. At this time, we know of no
substantial costs from environmental accidents or events for which we may be
currently liable. In addition, our oil and gas business makes us vulnerable to
changes in wellhead prices of crude oil and natural gas. Such prices have been
volatile in the past and can be expected to be volatile in the future. By
definition, proved reserves are based on current oil and gas prices. Price
declines reduce the estimated proved reserves and increase annual amortization
expense (which is based on proved reserves).
Revenue recognition - Oil and natural gas revenue is recognized at the time
title is transferred to the customer. Pipeline revenue is earned as a gathering
fee at the time the gas is delivered to the customer.
Petroleum and natural gas properties - The Company employs the full cost method
of accounting for petroleum and natural gas properties whereby all costs
relating to exploration and development of reserves are capitalized. Such costs
include land acquisition costs, geological and geophysical costs, costs of
drilling both productive and non-productive wells, and related overhead.
5
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
Capitalized costs, excluding costs relating to unproven properties, are depleted
using the unit-of-production method based on estimated proven reserves, as
prepared by an independent engineer. For the purposes of the depletion
calculation, proven reserves are converted to a common unit of measure on the
basis of their approximate relative energy content. Investments in unproved
properties are not amortized until the proved reserves associated with the
projects can be determined or until impairment occurs. If an assessment of such
properties indicates that properties are impaired, the amount of impairment is
added to the capitalized cost base to be amortized.
Under the full cost method, the net book value of natural gas and oil
properties, less related deferred income taxes, may not exceed a calculated
"ceiling". The ceiling is the estimated after-tax future net revenue from proved
natural gas and oil properties, discounted at 10% per annum plus the lower of
cost or fair market value of unproved properties. In calculating future net
revenues, prices and costs in effect at the time of the calculation are held
constant indefinitely, except for changes that are fixed and determinable by
existing contracts. The net book value is compared to the ceiling on an annual
basis. The excess, if any, of the net book value above the ceiling is required
to be written off as an expense.
Proceeds on disposal of properties are normally applied as a reduction of the
capitalized costs without recognition of a gain or loss, unless such amounts
would significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case gain or loss would be recognized.
Abandonment of properties are accounted for as adjustments of capitalized costs
with no loss recognized, unless such adjustment would significantly alter the
relationship between capitalized costs and proved reserves of oil and gas
attributable to a cost center.
Long-lived assets - The Company reviews its long-lived assets for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of evaluating the recoverability of
long-lived assets, the recoverability test is performed using estimated
undiscounted net cash flows to be generated by the asset.
Equipment - Equipment is recorded at cost and depreciated on the straight-line
basis over the following periods:
Computer equipment 5-7 years
Truck 7 years
Office equipment 5-7 years
Computer software 5 years
Gathering systems 30 years
Asset Retirement Obligations - In accordance with accounting guidance the
Company records the fair value of its liability for asset retirement obligations
at the time a well is completed and ready for production and a corresponding
increase in the carrying amount of the related long live assets. Over time, the
6
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
liability is accreted to its present value at the end of each reporting period,
and the capitalized cost is depreciated over the useful life of the related
assets. Upon settlement of the liability, the Company will either settle the
obligation for its recorded amount or incur a gain or loss upon settlement. The
Company's asset retirement obligations relate to the plugging and abandonment of
its natural gas properties.
Accounts Receivable - Management periodically assesses the collectibility of the
Company's accounts receivable and notes receivable. Accounts determined to be
uncollectible are charged to operations when that determination is made.
Earnings per share - The Company follows accounting guidance for computing and
presenting earnings per share, which requires, among other things, dual
presentation of basic and diluted earnings per share on the face of the
statement of operations. Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities, options or warrants were exercised or converted into common shares
or resulted in the issuance of common shares that then share in the earnings of
the entity. For the three and nine months ended October 31, 2009 and 2008, no
options or warrants were considered common stock equivalents as their effect
would be anti-dilutive.
Stock-based compensation - Effective February 1, 2006 the Company adopted the
fair value recognition provisions of updated accounting guidance regarding
stock-based compensation, using the modified-prospective transition method.
Under this transition method, stock-based compensation expense will be
recognized in the consolidated financial statements for granted, modified, or
settled stock options. Compensation expense recognized included the estimated
expense for stock options granted on and subsequent to February 1, 2006, based
on the grant date fair value estimated in accordance with the provisions of the
updated accounting guidance, and the estimated expense for the portion vesting
in the period for options granted prior to, but not vested as of February 1,
2006, based on the grant date fair value estimated in accordance with the
original accounting guidance. Results for prior periods have not been restated,
as provided for under the modified-prospective method.
The updated accounting guidance requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. In the Company's pro forma information required
under the updated accounting guidance for the periods prior to fiscal 2007, the
Company accounted for forfeitures as they occurred.
The Company is using the Black-Scholes option-pricing model as its method of
valuation for share-based awards granted beginning in fiscal 2007. The Company's
determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Company's stock price as well
as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to the Company's expected stock
price volatility over the term of the awards, and certain other market variables
such as the risk free interest rate.
7
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
No options were granted, modified or settled during the three and nine months
ended October 31, 2009 and 2008, and there was no stock-based compensation
expense included in net income for these periods subject to the option pricing
considerations discussed above.
As discussed further in Note 18, the Company awarded 750,000 shares of common
stock to consultant and vendors during the nine months ended October 31, 2009.
Using the quoted market price on the date of the grant, the Company has
recognized stock based compensation of $68,500 during the nine months ended
October 31, 2009.
Cash and cash equivalents - For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Concentration of credit risk - The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is not exposed to
any significant risk.
Trade receivables consist of uncollateralized customer obligations due under
normal trade terms. The note receivable results from oil and gas properties and
a pipeline sold in a prior period. Management reviews the estimated
recoverability of trade and notes receivable and reduces their earning amount by
utilizing a valuation allowance that reflects management's best estimate of the
amount that may not be recoverable. Management believes all trade receivables to
be fully collectible at October 31, 2009 and January 31, 2009.
Financial Instruments - The carrying value of current assets and liabilities
reasonably approximates their fair value due to their short maturity periods.
Income taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future timing
differences between the financial statement carrying amounts and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered.
In July 2006, the Financial Accounting Standards Board (FASB) issued an
interpretation of accounting guidance regarding accounting for uncertainty in
income taxes. The interpretation is intended to clarify the accounting for
uncertainty in income taxes recognized in a company's financial statements and
prescribes the recognition and measurement of a tax position taken or expected
to be taken in a tax return. The interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
8
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
Under the interpretation, evaluation of a tax position is a two-step process.
The first step is to determine whether it is more-likely-than-not that a tax
position will be sustained upon examination, including the resolution of any
related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not
threshold to determine the amount of benefit to be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in
which the threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first
subsequent financial reporting period in which the threshold is no longer met.
The adoption of the interpretation at February 1, 2007 did not have a material
effect on the Company's financial position.
Segment Reporting - Accounting guidance requires a public entity to report
financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments.
The majority of the operations involve the operation, development and production
of oil and gas properties. An incidental amount of assets (less than 10%) are
associated with pipeline activities and the pipeline is operated solely to serve
specific properties. Therefore management does not consider the pipeline
activities to be separable from the oil and gas activities and the operations
are reported herein as a single operating segment.
Reclassifications - Certain prior period amounts have been reclassified to
conform to current period presentation.
New Accounting Pronouncements -
In June 2009 the FASB established the Accounting Standards Codification
("Codification" or "ASC") as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. Rules and
interpretive releases of the SEC issued under authority of federal securities
laws are also sources of GAAP for SEC registrants. Existing GAAP was not
intended to be changed as a result of the Codification, and accordingly the
change did not impact the Company's financial statements. The ASC does change
the way the guidance is organized and presented.
9
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
In December 2007, the Financial Accounting Standards Board, (FASB), issued new
accounting guidance regarding non-controlling interests in consolidated
financial statements. The new guidance establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. The new guidance is effective for fiscal years
beginning on or after December 15, 2008. Management adopted this guidance on
February 1, 2009 and the adoption of the guidance did not have a material impact
to the Company's financial position, results of operations, or cash flows.
In March 2008, the FASB issued updated accounting guidance regarding disclosures
about derivative instruments and hedging activities. The updated guidance
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for current accounting guidance and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. The updated guidance is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. Management adopted this updated guidance on February 1,
2009 and the adoption of the guidance did not have a material impact to the
Company's financial position, results of operations, or cash flows.
In December 2008, the FASB issued updated accounting guidance regarding
employers' disclosures about pensions and other postretirement benefits, to
provide guidance on an employer's disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about plan assets
required by the updated guidance are to be provided for fiscal years beginning
after December 15, 2009. The Company is currently assessing the impact of this
update guidance.
In April 2009, the FASB issued updated accounting guidance to amend and clarify
the initial recognition and measurement, subsequent measurement and accounting,
and related disclosures arising from contingencies in a business combination.
Under the new guidance, assets acquired and liabilities assumed in a business
combination that arise from contingencies should be recognized at fair value on
the acquisition date if fair value can be determined during the measurement
period. If fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. We will adopt updated
guidance along with prior amended guidance in the first quarter of fiscal 2010
and we do not expect the adoption will have a material effect on our financial
position or results of operations.
In April 2009, the FASB issued amended accounting guidance regarding fair value
disclosures of financial instruments in interim financial statements. The
amended guidance will require disclosures about fair value of financial
instruments in financial statements for interim reporting periods and in annual
financial statements of publicly-traded companies. This amended guidance also
will require entities to disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments in financial statements on
an interim and annual basis and to highlight any changes from prior periods.
Management adopted this amended guidance on May 1, 2009 and the adoption of
10
amended guidance did not have a material impact to the Company's financial
position, results of operations, or cash flows.
In April 2009, the FASB issued amended accounting guidance regarding recognition
and presentation of other-than-temporary impairments. The guidance amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. Management
adopted this amended guidance on May 1, 2009 and the adoption of amended
guidance did not have a material impact to the Company's financial position,
results of operations, or cash flows.
In April 2009, the FASB issued additional accounting guidance for estimating
fair value when the market activity for an asset or liability has declined
significantly. Management adopted this additional guidance on May 1, 2009 and
the adoption additional guidance did not have a material impact to the Company's
financial position, results of operations, or cash flows.
In May 2009, the FASB issued new accounting guidance regarding subsequent
events, which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. We have adopted the provisions of the
new guidance, which became effective for interim and annual reporting periods
ending after June 15, 2009. Subsequent events have been evaluated through the
date and time the financial statements were issued on December 15, 2009.
In June 2009, the FASB issued amended accounting guidance to address the
elimination of the concept of a qualifying special purpose entity. The amended
guidance also replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, the amended guidance provides more timely and useful information
about an enterprise's involvement with a variable interest entity. The amended
guidance will become effective in the first quarter of 2010. The Company is
currently evaluating whether this amended guidance will have an impact on the
Company consolidated financial statements.
4. PURCHASE OF GATHERING SYSTEM
On April 14, 2009 the Company issued 1,000,000 shares of common stock valued at
$60,000, based on the closing quoted market price of $0.06, for a gas gathering
system in Callahan County, Texas. The gas gathering system had not been placed
into service as of October 31, 2009.
11
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
5. NOTE RECEIVABLE
On February 27, 2009 the Company sold the note receivable for $950,000 less
expenses of $28,909.
6. SALE OF TGC
On February 15, 2008 the Company sold all the outstanding stock in its
subsidiary, TGC, for $10,000. The Company retained outstanding liabilities of
approximately $75,000 some of which are disputed. This sale resulted in the
recognition of a $7,116 gain for financial reporting purposes.
7. PURCHASE OF UINTAH COUNTY, UTAH WELL
On July 29, 2009 the Company purchased an 85% working interest, 73.835% net
revenue interest, in the Conoco Federal #22-1 well in Uintah County, Utah for
$7,164,185. The company paid $40,000 in cash and 1,000,000 shares of the
Company's Series A preferred stock valued at $7,124,185. The fair value of the
well was determined by the present value discounted at ten percent (10%) of cash
flows from an independent reserve report on the well conducted as of July 1,
2009.
The Company also committed to connect the Conoco Federal #22-1 well to a
gathering system within nine months of the purchase of the well. The connection
expense is estimated to be $355,475.
The Series A preferred shares are entitled to receive quarterly dividends based
upon ten percent of the net profits derived from the Conoco Federal #22-1 well.
8. PURCHASE OF ENERGAS CORPORATION
On January 30, 2009 the Company issued 4,872,500 shares of restricted common
stock valued at $197,238 to George G. Shaw, the Company's President, for 100% of
the outstanding shares of Energas Corporation. The shares were valued at 88% of
the closing stock price on the day the acquisition. The purchase price was
determined by third party valuation of the projected cash flows of Corp. Corp.
became a wholly owned subsidiary of the Company as of the date of acquisition.
The purchase price was allocated to the assets of Corp. as follows:
Cash $ 64,182
Restricted cash 25,049
Receivables 236,114
Payables (222,393)
Goodwill 94,286
--------------
$ 197,238
==============
12
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
During the nine months ended October 31, 2009 acquisition costs of $19,186
related to the purchase were recorded in general and administrative expenses.
9. PURCHASE OF ENERGAS PIPELINE
On January 30, 2009 the Company issued 1,294,900 shares of restricted common
stock valued at $52,417 to George G. Shaw, the Company's President, for 100% of
the outstanding shares of Energas Pipeline. The shares were valued at 88% of the
closing stock price on the day the acquisition. The purchase price was
determined by third party valuation of the projected cash flows of Pipeline.
Pipeline became a wholly owned subsidiary of the Company as of the date of
acquisition. The purchase price was allocated to the assets of Pipeline as
follows:
Receivable $ 19,227
Payables (19,227)
Goodwill 52,417
-----------
$ 52,417
===========
10. RELATED PARTY
Until January 30, 2009, George G. Shaw, the Company's President, owned Energas
Corporation which operates the Company's wells in Oklahoma and Wyoming. Corp.
billed the Company a total of $185,806 and $698,212 for the three and nine
months ended October 31, 2008, respectively, for drilling costs, lease operating
expenses and overhead. Of the amounts received overhead fees were $2,817 and
$9,319 for the three and nine months ended October 31, 2008, respectively, for
operation of the wells.
Until January 30, 2009, George G. Shaw, the Company's President, owned Energas
Pipeline Company (Pipeline) that operates the natural gas gathering system to
which the Company's four wells in Atoka County, Oklahoma are connected. The
Company sells gas from these wells to Pipeline, these sales were approximately
$24,400 and $133,700 during three and nine months ended October 31, 2008,
respectively. The price the Company receives for the gas sold is the market
price less a marketing and transportation fee of $0.10 per mcf that is deducted
from the sales price. During the three and nine months ended October 31, 2008
Energas Pipeline Company received $580 and $1,800, respectively, in marketing
and transportation fees.
The Company's offices are occupied under a one year lease beginning April 1,
2008, requiring rental payments of $4,000 per month to George G. Shaw, the
Company's President and owner of the building. During the three months ended
October 31, 2009 and 2008 the Company paid rent of $8,000 and $12,000,
respectively, to the Company's President. During the nine months ended October
31, 2009 and 2008 the Company paid rent of $32,000 and $35,600, respectively, to
the Company's President.
13
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
As of October 31, 2009, the Company had loans outstanding from shareholders of
$24,900. These loans are unsecured and are due on demand. Subsequent to October
31, 2009, the loan balances increased to $71,900 as of December 14, 2009.
11. INCOME TAXES
As of October 31, 2009, the Company has approximately $14,455,000 of net
operating losses expiring through 2029 that may be used to offset future taxable
income but are subject to various limitations imposed by rules and regulations
of the Internal Revenue Service. The net operating losses are limited each year
to offset future taxable income, if any, due to the change of ownership in the
Company's outstanding shares of common stock. These net operating loss
carry-forwards may result in future income tax benefits of approximately
$5,782,000; however, because realization is uncertain at this time, a valuation
reserve in the same amount has been established. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes.
The ability of the Company to utilize NOL carryforwards to reduce future federal
taxable income and federal income tax of the Company is subject to various
limitations under the Internal Revenue Code of 1986, as amended. The utilization
of such carryforwards may be limited upon the occurrence of certain ownership
changes, including the issuance or exercise of rights to acquire stock, the
purchase or sale of stock by 5% stockholders, as defined in the Treasury
regulations, and the offering of stock by the Company during any three-year
period resulting in an aggregate change of more than 50% in the beneficial
ownership of the Company.
The Company is delinquent in filing tax returns with the Internal Revenue
service and state taxing authorities. The Company is in the process of
completing and filing these delinquent returns. The filing of these returns
could result in changes to the net operating loss (NOL) carry forwards as
currently estimated.
Effective February 1, 2007 the Company adopted accounting guidance which
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement to a tax position taken or expected to be taken in a tax return.
This guidance also provides guidance on derecognition of income tax income tax
assets and liabilities, classification of current and deferred income tax assets
and liabilities, accounting for income taxes in interim periods and income tax
disclosures.
The Company is subject to examination in the U.S. federal and state tax
jurisdiction of the 2000 to 2008 tax years. There are not current examinations
of the Company's prior tax returns. The Company has not filed any U.S or state
income tax returns since 2001. The penalty and interest charges on the
delinquent returns is estimated to be minimal due to net operating losses
incurred in each year of operations.
14
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
No penalty and interest on any tax positions have been computed and the Company
does not anticipate there will be a change in the accounting guidance position
in the next 12 months.
12. EARNINGS PER SHARE
Accounting guidance requires a reconciliation of the numerator and denominator
of the basic and diluted earnings per share (EPS) computations.
The following reconciles the components of the EPS computation for the three
months ended October 31, 2009 and 2008:
2009 2008
---- ----
Basic (loss) per share computation Numerator:
Net loss $ (127,978) $ (1,111,571)
Denominator:
Weighted average common shares outstanding 94,443,840 82,576,222
Basic (loss) per share $ (0.00) $ (0.01)
Diluted (loss) per share Numerator:
Net loss $ (127,978) $ (1,111,571)
Denominator:
Weighted average common shares outstanding 94,443,840 82,576,222
Diluted (loss) per share $ (0.00) $ (0.01)
The following reconciles the components of the EPS computation for the nine
months ended October 31, 2009 and 2008:
2009 2008
---- ----
Basic (loss) per share computation Numerator:
Net loss $ (465,482) $ (1,235,999)
Denominator:
Weighted average common shares outstanding 92,219,156 82,547,343
Basic (loss) per share $ (0.01) $ (0.02)
Diluted (loss) per share Numerator:
Net loss $ (465,482) $ (1,235,999)
15
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
Denominator:
Weighted average common shares outstanding 92,219,156 82,547,343
Diluted (loss) per share $ (0.01) $ (0.02)
13. ASSET RETIREMENT OBLIGATION
The following table provides a roll forward of the asset retirement obligations:
Nine Months Ended Year Ended
October 31, 2009 January 31, 2008
---------------- ----------------
Asset retirement obligation beginning
balance $ 111,417 $ 41,627
Liabilities incurred 14,055 68,293
Liabilities settled -- (17,890)
Accretion expense 17,286 19,387
------------- -----------
Asset retirement obligation ending balance 142,758 111,417
Less current portion (23,691) (23,691)
------------- ------------
Asset retirement obligation, long-term $ 119,067 $ 87,726
============= ============
14. CAPITAL LEASE
The Company has a lease on a copier through October, 2012. This lease has been
classified as a capital lease as the lease term is more than 75% of the
estimated economic life of the copier. The balances on the lease are as follows:
Nine Months Ended Year Ended
October 31, 2009 January 31, 2009
----------------- ----------------
Remaining lease payments $ 8,063 $ 9,855
Imputed interest (1,957) (2,691)
-------------- --------------
Copier lease balance 6,106 $ 7,164
Less current portion (1,665) (1,444)
-------------- --------------
Copier lease, long-term $ 4,441 $ 5,720
============== ==============
Future principal payments over the next five years are as follows: 2010 -$387;
2011 - $1,746; 2012 - $2,109; 2013 - $1,864.
16
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
15. OPERATING LEASES
The Company has one operating lease for office equipment requiring payment
through October 2012. All leases are warranted with full maintenance.
The minimum annual rental commitment as of October 31, 2009 under
non-cancellable leases is as follows: 2009 - $1,581; 2010 - $3,596; 2011 -
$2,688; 2012 - $2,688.
16. MAJOR PURCHASERS
The Company's natural gas and oil production is sold under contracts with
various purchasers. Natural gas sales to one purchaser approximated 57% and 71%
of total natural gas and oil revenues for the three and nine months ended
October 31, 2009, respectively.
The Company sold gas to Energas Pipeline Company, which was owned by George G.
Shaw, the Company's President during the three and nine months ended October 31,
2008. These sales were approximately $24,400 and $133,70 during the three and
nine months ended October 31, 2008, respectively.
17. CONVERSION OF DEBT
On February 11, 2009 the Company issued 200,000 shares of common stock for the
settlement of $16,000 in notes payable and related interest.
18. CONTINGENCIES
In the normal course of its operations, the Company may, from time to time, be
named in legal actions seeking monetary damages. While the outcome of these
matters cannot be estimated with certainty, management does not expect, based
upon consultation with legal counsel, that they will have a material effect on
the Company's business or financial condition or results of operations.
19. STOCK-BASED COMPENSATION
Incentive Stock Option Plan. The Company's Incentive Stock Option Plan
authorizes the issuance of up to 2,000,000 shares of the Company's common stock
to persons that exercise options granted pursuant to the Plan. Only Company
employees may be granted options pursuant to the Incentive Stock Option Plan.
The option exercise price is determined by the Company's Board of Directors but
cannot be less than the market price of the Company's common stock on the date
the option is granted.
17
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
Non-Qualified Stock Option Plan. The Company's Non-Qualified Stock Option Plan
authorizes the issuance of up to 1,000,000 shares of the Company's common stock
to persons that exercise options granted pursuant to the Plans. The Company's
employees, directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plans, provided however that bona fide services
must be rendered by such consultants or advisors and such services must not be
in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Company's Board of
Directors.
Stock Bonus Plan. The Company's Stock Bonus Plan allows for the issuance of up
to 4,000,000 shares of common stock. Such shares may consist, in whole or in
part, of authorized but unissued shares, or treasury shares. Under the Stock
Bonus Plan, the Company's employees, directors, officers, consultants and
advisors are eligible to receive a grant of the Company's shares, provided
however that bona fide services must be rendered by consultants or advisors and
such services must not be in connection with the offer or sale of securities in
a capital-raising transaction.
The following table shows the weighted average exercise price of the outstanding
options granted pursuant to the Company's Incentive and Non-Qualified Stock
Option Plans as of October 31, 2009. The Company's Incentive and Non-Qualified
Stock Option Plans were not approved by the Company's shareholders.
Number of
Securities
Remaining
Available For
Future Issuance
Number of Under Equity
Securities to be Compensation Plans
Issued Upon (Excluding
Exercise of Weighted-Average Securities
Outstanding Exercise Price of Reflected in
Plan Category Options [a] Outstanding options column [a]
--------------------------------------------------------------------------------
Incentive Stock
Option Plan -- -- 2,000,000
Non-Qualified Stock
Option Plan -- -- 750,000
The following table provides information as of October 31, 2009 concerning the
stock options and stock bonuses granted by the Company pursuant to the Plans.
Each option represents the right to purchase one share of the Company's common
stock.
18
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
Shares
Total Shares Reserved for Remaining
Reserved Under Outstanding Shares Issued Options/Shares
Name of Plan Plans Options As Stock Bonus Under Plans
--------------------------------------------------------------------------------
Incentive Stock
Option Plan 2,000,000 -- N/A 2,000,000
Non-Qualified
Stock Option Plan 1,000,000 -- N/A 750,000
Stock Bonus Plan 4,000,000 -- 2,036,981 1,963,019
The following table summarizes the options and stock bonuses granted pursuant to
the Plans as of October 31, 2009:
Incentive Stock Options
-----------------------
Options
Exercised
as of
Shares Subject to Expiration October 31,
Option Exercise Price Date of Grant Date of Option 2009
--------------------------------------------------------------------------------
None -- -- -- --
Non-Qualified Stock Options
---------------------------
Options
Exercised
as of
Shares Subject to Expiration October 31,
Option Exercise Price Date of Grant Date of Option 2009
--------------------------------------------------------------------------------
250,000 $0.32 6-30-03 7-15-05 250,000
Stock Bonus Plan
----------------
Shares Issued as Stock
Name Bonus (1)(2) Date Issued
--------------------------------------------------------------------------------
George Shaw 100,000 10/30/03
Scott Shaw 100,000 10/30/03
Employees and consultants 1,836,981 Various dates
---------
2,036,981
=========
19
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2009 AND 2008
(1) In October 2006 the Company issued 150,000 shares of its restricted
common stock to George Shaw and 150,000 shares to Scott Shaw for
services rendered. However the shares issued in October 2006 were not
issued pursuant to the Company's Stock Bonus Plan. Shares were valued
at market price on the date of grant.
(2) In October 2008 the Company issued 750,000 shares of its restricted
common stock to George Shaw and 750,000 shares to Scott Shaw for
services rendered. However the shares issued in October 2008 were not
issued pursuant to the Company's Stock Bonus Plan. Shares were valued
at market price on the date of grant.
On February 23, 2009 the Company issued 220,000 shares of common stock valued at
$19,800, based on the quoted closing price on that date of $0.09 per share, for
services from consultants and vendors.
On March 2, 2009 the Company issued 30,000 shares of common stock valued at
$2,700, based on the quoted closing price on that date of $0.09 per share, for
services from consultants and vendors.
On March 14, 2009 the Company issued 500,000 shares of common stock valued at
$30,000, based on the quoted closing price on that date of $0.06 per share, for
services from an engineer.
20. DRILLING COMMITMENT
On November 24, 2008, Corp. acquired a working interest pursuant to a joint
development agreement. The agreement requires the drilling of a total of five
wells at a price of $39,000 per well. Four payments remain outstanding as of
October 31, 2009 for a total accrued commitment of $156,000 as of October 31,
2009.
21. ACCOUNTS RECEIVABLE - OTHER
On March 3, 2009 the Company paid $161,000 to acquire an interest in a joint
development agreement. A portion of this interest is entitled to receive four
payments of $39,000 totaling $156,000 related to the drilling commitment
described in Note 20. This receivable has been included as a non-current asset
due to the unknown timetable for the drilling activities associated with the
joint development agreement.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
The following discussion of financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
notes to the consolidated financial statements, which are included elsewhere in
this report.
The Company is involved in the exploration and development of oil and gas.
The Company's activities are primarily dependent upon available financial
resources to fund the costs of drilling and completing wells.
The Company principally operates in the Arkoma Basin in Oklahoma, the
Powder River Basin in Wyoming, Uintah County, Utah and in Callahan County,
Texas.
On January 1, 2008 the Company sold its remaining oil and gas properties
in Kentucky, as well as its gathering systems, pipelines and equipment, for
$2,300,000. For the sale of these assets, the Company received a $100,000
deposit and a non-recourse promissory note for $2,200,000. In December 2008 the
maker of the non-recourse note filed a petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code. On February 27, 2009 the Company sold the
non-recourse note to an unrelated third party for $950,000.
In April 2008 the Company sold its interest in the Ainsworth #1-33 well,
located in Pittsburgh County, OK, for $615,000 and incurred sales expenses of
$24,600.
During the year ended January 31, 2009 the Company advanced $660,826 to a
third party for drilling and completing a well in Niobrara County, Wyoming. As
of August 31, 2009 this well was shut-in.
In November 2008 the Company entered into an agreement with Excalibur,
Inc., an unrelated third party, for the exploration and development of oil and
gas leases covering 1,560 acres in Callahan County, Texas. The Agreement
provides that the Company will pay the costs to drill and complete five wells on
the leased acreage.
If any of the five wells are completed as a producing well, Excalibur will
receive a 12.5% working interest in the well. When the Company has received net
proceeds from the sale of production from a completed well equal to the cost of
drilling, completing, equipping, testing and operating the well, in addition to
leasehold costs of $39,000, Excalibur will receive an additional 12.5% working
interest in the well.
The Company has drilled one well on the leases (the Maurice Snyder #1-141)
which as of August 31, 2009 was in the process of completion.
Subsequent to January 31, 2009 the Company acquired a 2% overriding
royalty interests in the leases held by an unrelated third party for $161,000,
subject to the retention by the third party of a 2% overriding royalty interest
in the Maurice Snyder #1-141 well.
1
In January 2009 the Company acquired Energas Pipeline Company and Energas
Corp. from George Shaw, the Company's President, for 6,167,400 shares of the
Company's common stock. Energas Pipeline Company operates the natural gas
gathering system which is connected to the Company's three wells in Atoka
County, Oklahoma. Energas Corp. operates all of the Company's wells and holds
the bonds required by state oil and gas regulatory authorities.
In March 2009 the Company acquired a 14 mile natural gas gathering system
in exchange for 1,000,000 shares of the Company's common stock. The gathering
system, located in Callahan County, Texas, will be used to transport any gas,
produced from wells which may be drilled on the Company's leases in Texas to the
Enbridge Gas Company pipeline.
In July 2009, the Company exercised an option to acquire an 85% working
interest (73.835% net revenue interest) in an oil and gas well located in Utah
for $40,000 in cash and 1,000,000 shares of its Series A Preferred stock. See
Part II, Item 2 of this report for more information concerning the terms of the
Series A Preferred shares.
RESULTS OF OPERATIONS
Material changes of certain items in the Company's Statement of Operations
for the three months ended October 31, 2009 and 2008.
Increase (I)
Item or Decrease (D) Reason
---- --------------- ------
Oil and gas sales D Sale of Company's Kentucky oil and gas
properties, sale of Ainsworth #1-33 well,
and decrease in production.
Lease operating expense I Proceedings before the Oklahoma
Corporation Commission regarding
decreasing well spacing in areas close to
Company's wells.
General and administrative D Decrease in legal fees, accounting fees
Expense and contract services.
Depreciation, depletion D For the nine months ended October 31,
and amortization 2009, sale of Company's Kentucky oil
and gas properties and sale of Ainsworth
#1-33 well.
Material changes of certain items in the Company's Statement of Operations
for the nine months ended October 31, 2009 and 2008.
Increase (I)
Item or Decrease (D) Reason
---- --------------- ------
Oil and gas sales D Sale of Company's Kentucky oil and gas
properties, sale of Ainsworth #1-33 well,
and decrease in production.
2
Lease operating expense D Sale of Company's Kentucky oil and gas
properties, sale of Ainsworth #1-33 well,
and decrease in production.
General and administrative I Expense associated with shares issued for
Expense consulting services
Depreciation, depletion D For the nine months ended October 31,
and amortization 2009, sale of Company's Kentucky oil and
gas properties and sale of Ainsworth
#1-33 well.
OIL AND GAS PRICE FLUCTUATIONS
Fluctuations in crude oil and natural gas prices have significantly
affected the Company's operations and the value of its assets. As a result of
the instability and volatility of crude oil and natural gas prices and at times
the market conditions within the oil and gas industry, financial institutions
are selective in the energy lending area and have reduced the percentage of
existing reserves that may qualify for the borrowing base to support energy
loans.
The Company's principal source of cash flow is the production and sale of
its crude oil and natural gas reserves which are depleting assets. Cash flow
from oil and gas production sales depends upon the quantity of production and
the price obtained for such production. An increase in prices permits the
Company to finance its operations to a greater extent with internally generated
funds, may allow the Company to obtain equity financing more easily or on better
terms, and lessens the difficulty of attracting financing from industry partners
and non-industry investors. However, price increases heighten the competition
for Leases and Prospects, increase the costs of exploration and development
activities, and, because of potential price declines, increase the risks
associated with the purchase of Producing Properties during times that prices
are at higher levels.
A decline in oil and gas prices (i) reduces the cash flow internally
generated by the Company which in turn reduces the funds available for servicing
debt and exploring for and replacing oil and gas reserves, (ii) increases the
difficulty of obtaining equity and debt financing and worsens the terms on which
such financing may be obtained, (iii) reduces the number of Leases and Prospects
which have reasonable economic terms, (iv) may cause the Company to permit
Leases to expire based upon the value of potential oil and gas reserves in
relation to the costs of exploration, (v) results in marginally productive oil
and gas wells being abandoned as non-commercial, and (vi) increases the
difficulty of attracting financing from industry partners and non-industry
investors. However, price declines reduce the competition for Leases and
Prospects and correspondingly reduce the prices paid for Leases and Prospects.
Furthermore, exploration and production costs generally decline, although the
decline may not be at the same rate as that of oil and gas prices.
The Company's results of operations are somewhat seasonal due to seasonal
fluctuations in the sales prices for natural gas. Although in recent years crude
oil prices have been generally higher in the third and fourth fiscal quarters,
these fluctuations are not believed to be seasonal. Natural gas prices have been
generally higher in the fourth fiscal quarter.
3
Other than the foregoing the Company does not know of any trends, events
or uncertainties that have had or are reasonably expected to have a material
impact on the Company's net sales, revenues or expenses.
CAPITAL RESOURCES AND LIQUIDITY
The Company's material sources and (uses) of cash during the nine months
ended October 31, 2009 and 2008 were:
2009 2008
---- ----
Cash used in operations $ (236,140) $ (42,305)
Acquisition and development of oil and
gas properties (765,322) (663,442)
Payments on note receivable 950,000 87,980
Sale of oil and gas properties -- 590,400
(Payments to) advances from related parties (15,531) 21,000
Other (1,058) --
Cash supplied from cash on hand at beginning of
nine month period 68,051 6,367
As a result of the Company's continued losses and lack of cash there is
substantial doubt as to the Company's ability to continue operations. The
Company plans to generate profits by drilling productive oil or gas wells.
However, the Company will need to raise the funds required to drill new wells
from third parties willing to pay the Company's share of drilling and completing
the wells. The Company may also attempt to raise needed capital through the
private sale of its securities or by borrowing from third parties. The Company
may not be successful in raising the capital needed to drill oil or gas wells.
In addition, any future wells which may be drilled by the Company may not be
productive of oil or gas. The inability of the Company to generate profits may
force the Company to curtail or cease operations.
Contractual Obligations
-----------------------
Except as shown in the following table, as of October 31, 2009, the
Company did not have any material capital commitments, other than funding its
operating losses and repaying outstanding debt. It is anticipated that any
capital commitments that may occur will be financed principally through
borrowings from institutional and private lenders (although such additional
financing has not been arranged) and the sale of shares of the Company's common
stock or other equity securities. However, there can be no assurance that
additional capital resources and financings will be available to the Company on
a timely basis, or if available, on acceptable terms.
Future payments due on the Company's contractual obligations as of October
31, 2009 are as follows:
Total 2009 2010 2011 2012 Thereafter
----- ---- ---- ---- ---- ----------
Office equipment
leases $ 10,553 $1,581 $3,596 $2,688 $2,688 --
Drilling obligation $ 156,000 -- -- $156,000 -- --
4
Critical Accounting Policies
----------------------------
See Note 3 to the financial statements included as part of this report.
ITEM 4T. CONTROLS AND PROCEDURES
George G. Shaw, the Company's Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934) as of the end of the period covered by this report, and in his
opinion Energas' disclosure controls and procedures are not effective at the
reasonable assurance level to ensure that information is adequately disclosed.
The Company has a material weakness in its lack of monitoring controls to ensure
that information generated for financial reporting purposes is complete and
accurate.
There were no changes in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended October 31, 2009 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting as discussed above.
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2009 the Company entered into two option agreements with Lex
Dolton. The first option was exercised in July 2009. The second agreement
provided the Company with the option to acquire a 50% working interest in oil
and gas leases in Utah in exchange for the issuance of 2,000,000 shares of the
Company's Series C preferred stock. Each Series C preferred share would be
entitled to a quarterly dividend based on the amount received from the sale of
oil or gas produced from any wells drilled on the leased acreage.
In August 2009, the Company notified Dolton that it had elected to
exercise the second option and was prepared to issue the Series C preferred
stock pursuant to the agreement. Nevertheless, Dolton refused to assign the
working interest to the Company.
On November 16, 2009, as a result of Dolton's failure to assign the
working interest pursuant to the second option agreement, the Company filed suit
against Dolton in the District Court of Arapahoe County, Colorado. In its
complaint, the Company seeks damages for breach of contract and a mandatory
injunction requiring Dolton to assign the working interest.
On October 20, 2009, Dolton filed suit against the Company in the Eighth
Judicial District Court, Clark County, Nevada. In his complaint, Dolton alleges
that the Company failed to connect a well to a gathering system within the time
required pursuant to the first option agreement and that the Company falsely
represented its financial condition to Dolton. Dolton seeks damages of at least
$10,000 for breach of contract, breach of covenants of good faith and fair
dealing, and fraud.
The Company plans to file a motion to dismiss the suit based on the Nevada
court's lack of jurisdiction.
5
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
On July 29, 2009, the Company acquired an 85% working interest (73.835%
net revenue interest) in an oil and gas well located in Uintah County, Utah for
$40,000 in cash and 1,000,000 shares of its Series A Preferred stock. The Series
A Preferred shares will collectively be entitled to a dividend, payable
quarterly, based upon 10% of the Company's net profits derived from the sale of
any oil or gas produced from the well. For purposes of the Series A shares, net
profits is defined as 10% of the Company's share of the gross revenues derived
from the sale of any oil or gas produced from the well, less the Company's share
of all costs and expenses associated with drilling, completing, reworking or
operating the well. The Series A Preferred shares do not have any voting rights
except as provided by Delaware law.
The well acquired in the transaction is presently shut-in. The Company
estimates that it will spend approximately $355,000 in efforts to return the
well to production.
The Company relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 in connection with the sale of these securities. The
person who acquired the shares and warrants was a sophisticated investor and was
provided full information regarding the Company. There was no general
solicitation in connection with the offer or sale of the securities. The person
who acquired these securities acquired them for his own account. The
certificates representing these securities will bear a restricted legend
providing that they cannot be sold except pursuant to an effective registration
statement or an exemption from registration. No commission or other form of
remuneration was given to any person in connection with the issuance of these
securities.
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibits
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENERGAS RESOURCES, INC.
Date: December 9, 2009
By: /s/ George G. Shaw
-----------------------------------
George G. Shaw, Principal Executive,
Financial and Accounting Officer
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