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, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________________
Commission File Number: 0-33259
ENERGAS RESOURCES, INC.
----------------------------------
(Exact Name of Issuer as Specified in Its Charter)
Delaware 73-1620724
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Northeast 63rd Street
Oklahoma City, OK 73105
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(Address of Issuer's Principal Executive Offices
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (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 96,485,096 December 15, 2010
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2010 2010
---------- ----------
(Unaudited)
ASSETS
Current Assets
Cash $ 15,482 $ 18,647
Restricted cash 25,908 25,637
Accounts receivable 27,826 87,563
Deposits 43,423 14,315
----------- -----------
Total Current Assets 112,639 146,162
----------- -----------
Property and Equipment
Oil and gas properties, using full cost
accounting
Proved properties 2,773,706 9,858,142
Unproved properties 251,352 251,352
Pipelines and gathering systems - -
----------- -----------
3,025,058 10,109,494
Less accumulated depreciation, depletion,
and amortization, including impairment of
$1,505,656 and $2,637,686 (2,291,194) (3,435,598)
----------- -----------
733,864 6,673,896
Other, net of accumulated depreciation of
$45,180 and $41,651 6,821 10,351
----------- -----------
740,685 6,684,247
Goodwill 146,703 146,703
Property held for resale 6,325,797 350,000
Drilling receivable 156,000 156,000
----------- -----------
Total Assets $ 7,481,824 $ 7,483,112
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 584,545 $ 550,457
Due to related parties 142,396 90,706
Drilling advances 174,375 -
Current portion of lease 2,011 1,746
Current asset retirement obligation 54,682 54,682
----------- -----------
Total Current Liabilities 958,009 697,591
Asset Retirement Obligation 78,141 109,828
Long-term lease 2,430 3,973
Drilling commitment 156,000 156,000
----------- -----------
Total Liabilities 1,194,580 967,392
----------- -----------
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, and January 31, 2010 100 100
Common stock, $.001 par value 100,000,000
shares authorized 96,485,096 and 94,150,144
shares issued and outstanding at October 31,
and January 31, 2010, respectively 96,640 94,150
Additional paid in capital 26,628,784 26,572,530
Retained (deficit) (20,438,280) (20,151,060)
----------- -----------
Total Stockholders' Equity 6,287,244 6,515,720
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,481,824 $ 7,483,112
============= ===========
See notes to the condensed consolidated financial statements.
F-1
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended Nine Months Ended
October 31, October 31,
----------------------- -----------------------
2010 2009 2010 2009
----------- ---------- ----------- ----------
Revenue
Oil and gas sales $ 46,289 $ 28,141 $ 130,993 $ 76,039
Overhead and marketing revenue 8,374 5,212 23,232 32,853
Pipeline revenue 3,796 2,468 10,314 6,950
----------- ---------- ----------- ---------
Total Revenue 58,459 35,821 164,539 115,842
Operating Expenses
Lease operating expense 10,065 18,757 32,897 53,681
Pipeline and gathering expense 675 675 2,025 2,250
General and administrative
expense 108,789 133,639 365,622 483,196
Depreciation, depletion and
amortization 18,875 10,477 50,014 41,642
Total Operating Expenses 138,404 163,548 450,558 580,769
----------- ---------- ----------- ---------
Operating (Loss) (79,945) (127,727) (286,019) (464,927)
----------- ---------- ----------- ---------
Other (Expenses) income
Other income - - - 61
Interest income 84 148 270 438
Interest expense (510) (399) (1,471) (1,054)
Gain on sale of assets - - - -
----------- ---------- ----------- ---------
Total Other (Expense) (426) (251) (1,201) (555)
----------- ---------- ----------- ---------
Net (Loss) before Income Taxes (80,371) (127,978) (287,220) (465,482)
Provision for income taxes - - - -
----------- ---------- ----------- ---------
Net (Loss) $ (80,371) $ (127,978) $ (287,220) $(465,482)
============ ========== =========== =========
Net (Loss) per Share,
Basic and Diluted $ (0.00) $ (0.00) $ (0.00) $ (0.01)
Weighted average number of
shares outstanding 96,485,096 94,443,840 95,085,473 92,219,156
============ ========== =========== ==========
See notes to the condensed consolidated financial statements.
F-2
ENERGAS RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
------------------------------
2010 2009
------- ------
Cash Flows From Operating Activities
Net (Loss) $ (287,220) $ (465,482)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation, depletion and amortization 50,014 41,642
Common stock issued for services 14,960 52,500
(Increase) Decrease in Restricted cash (271) (439)
Accounts receivable 59,737 5,524
Deposits (25,027) (7,500)
Increase (Decrease) in
Accounts payable and accrued expenses 34,088 246,592
Asset retirement obligations (6,052) 17,286
Drilling advances 174,375 (126,263)
---------- ----------
Net Cash Flows Used By Operating
Activities 14,604 (236,140)
Cash Flows From Investing Activities
Proceeds from sale of oil and gas properties 31,239 -
(Investment in) oil and gas properties (139,123) (765,322)
Payments on note receivable - 950,000
---------- ----------
Net Cash Provided By Investing
Activities (107,884) 184,678
Cash Flows from Financing Activities
Advances from related parties and
stockholders 96,893 -
Repayments to related parties and
stockholders (5,500) (15,531)
Payments on capital lease (1,278) (1,058)
---------- ----------
Net Cash Provided By (Used By) Financing
Activities 90,115 (16,589)
Increase (Decrease) in Cash (3,165) (68,051)
Cash at Beginning of Period 18,647 76,076
---------- ----------
Cash at End of Period $ 15,482 $ 8,025
========== ==========
Supplemental Information:
Non-Cash Transactions:
Common stock issued for consulting services $ 14,960 $ 22,500
========== ==========
Conversion of related party debt for
common stock $ 43,784 $ -
========== ==========
Common stock issued for engineering
services $ - $ 30,000
========== ==========
Common stock issued for purchase of
gathering system $ - $ 60,000
========== ==========
Preferred stock issued for oil and gas
properties $ - $7,124,185
========== ==========
See notes to the condensed consolidated financial statements.
F-3
ENERGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 31, 2010 AND 2009
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, 2010, the Company had incurred losses for the nine months ended
October 31, 2010 and 2009 of $(287,220) and $(465,482), respectively. The
Company's ability to continue as a going concern 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.
F-4
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 nine months ended October 31, 2010 are not necessarily
indicative of results that may be expected for the year ended January 31, 2011.
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, 2010. The January 31, 2010
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., and
Pipeline. 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.
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
F-5
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
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
F-6
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, 2010 and 2009, 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.
No options were granted, modified or settled during the three and nine months
ended October 31, 2010 and 2009, 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 11, the Company awarded 405,000 shares of common
stock to consultants and vendors during the three and nine months ended October
31, 2010. Using the quoted market price on the date of the grant, the Company
has recognized stock based compensation of $4,960 and $14,960 during the three
and nine months ended October 31, 2010, respectively.
F-7
As discussed further in Note 11, 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.
Goodwill - Goodwill represents the excess of cost over fair value of assets
acquired. Goodwill is not subject to amortization but is tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the asset might be impaired, as required by ASC Topic 350, "Intangibles -
Goodwill and Other".
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, 2010 and January 31, 2010.
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 October 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.
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.
F-8
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 January 2010 the FASB issued amended
accounting guidance improving disclosures about fair value measurements. The
amended guidance requires reporting entities to provide information about
movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy
established by ASC 820. The guidance is effective for any fiscal year that
begins after December 15, 2010 and should be used for quarterly and annual
filings. We are currently evaluating the impact on our financial statements of
adopting the amended guidance and cannot estimate the impact of adoption at this
time.
4. RELATED PARTY
The Company's offices are occupied under a month to month lease requiring rental
payments of $4,000 per month to George G. Shaw, the Company's President and
owner of the building. During the nine months ended October 31, 2010 and 2009,
the Company paid rent of $36,000 and $32,000, respectively, to the Company's
President.
As of October 31, 2010 and January 31, 2010 the Company has advances from the
Company's Officers and stockholders of $142,396 and $90,706, respectively. These
advances have no stated interest and are due on demand.
5. PROPERTY HELD FOR RESALE
As of October 31, 2010 the Company has reclassified the 85% working interest in
the Conoco Federal #22-1 well as available for sale due to management's intent
to either sell the property or transfer the property back to a preferred
stockholder. Depending on the structure of the transaction, this could result in
unwinding the original transaction resulting in returning the Company's
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preferred stock plus cash consideration for the ownership interest in the
property. The carrying amount of $5,975,797, which consists of the original
purchase cost of $7,166,685 reduced by the associated impairment of $1,132,030
and accumulated depletion of $58,858, has been transferred from proved
properties to property held for sale in the condensed consolidated financial
statements.
The Company is also in negotiations to sell its Texas properties, which are now
carried in property held for sale at $350,000.
6. INCOME TAXES
As of October 31, 2010, the Company has approximately $14,868,000 of net
operating losses expiring through 2030 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
$5,947,000; 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 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 2001 to 2009 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.
F-10
No penalty and interest on any tax positions have been computed and the Company
does not anticipate there will be a charge in the uncertain tax position in the
next 12 months.
7. 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, 2010 and 2009:
2010 2009
--------- ---------
Basic (loss) per share computation
Numerator:
Net loss $ (80,371) $ (127,978)
Denominator:
Weighted average common shares outstanding 96,485,096 94,443,840
Basic (loss) per share $ (0.00) $ (0.00)
Diluted (loss) per share
Numerator:
Net loss $ (80,371) $ (127,978
Denominator:
Weighted average common shares outstanding 96,485,096 94,443,840
Diluted (loss) per share $ (0.00) $ (0.00)
The following reconciles the components of the EPS computation for the nine
months ended October 31, 2010 and 2009:
2010 2009
------------ ------------
Basic (loss) per share computation
Numerator:
Net loss $ (287,220) $ (465,482)
Denominator:
Weighted average common shares outstanding 95,085,473 92,219,156
Basic (loss) per share $ (0.00) $ (0.00)
Diluted (loss) per share
Numerator:
Net loss $ (287,220) $ (465,482)
Denominator:
Weighted average common shares outstanding 95,085,473 92,219,156
Diluted (loss) per share $ (0.00) $ (0.00)
8. ASSET RETIREMENT OBLIGATION
The following table provides a roll forward of the asset retirement obligations:
Nine months
Nine months Ended Ended
October 31, 2010 October 31, 2009
----------------- ----------------
Asset retirement obligation beginning
balance $ 164,510 $ 111,417
Liabilities incurred 39,604 14,055
Revisions (77,068) --
Accretion expense 5,777 17,286
----------- -----------
F-11
Asset retirement obligation ending balance 132,823 142,758
Less current portion (54,682) (23,691)
----------- -----------
Asset retirement obligation, long-term $ 78,141 $ 119,067
=========== ===========
9. 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:
October 31, 2010 January 31,2010
---------------- ----------------
Remaining lease payments $ 5,375 $ 7,391
Imputed interest (934) (1,672)
Z --------- ---------
Copier lease balance 4,441 $ 5,719
Less current portion (2,011) (1,746)
Z --------- ---------
Copier lease, long-term $ 2,430 $ 3,973
========= =========
Future principal payments over the next five years are as follows: 2011 - $468;
2012 - $2,109; 2013 - $1,864.
10. 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, 2010 under
non-cancellable leases is as follows: 2011 - $488; 2012 - $1,953; 2013 - $1,953;
2014 - $814.
11. STOCK-BASED COMPENSATION
On August 20, 2010, the Company issued 155,000 shares of common stock valued at
$4,960, based on the quoted closing price on that date of $0.032 per share, for
services from consultants and vendors.
On July 19, 2010 the Company issued 250,000 shares of common stock valued at
$10,000, based on the quoted closing price on that date of $0.04 per share, for
services from consultants and vendors.
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.
F-12
12. MAJOR PURCHASERS
The Company's natural gas and oil production is sold under contracts with
various purchasers. Natural gas sales to one purchaser approximated 49% and 52%
of total natural gas and oil revenues for the three and nine months ended
October 31, 2010, respectively. Oil sales to one purchaser approximated 51% and
48% of total natural gas and oil revenues for the three and nine months ended
October 31, 2010.
13. FINANCIAL INSTRUMENTS
The carrying amounts on the accompanying consolidated balance sheet for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
are carried at cost, which approximates market value.
The Company has no assets that the fair value of assets and liabilities are
measured on a recurring basis at October 31, 2010.
14. 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.
15. 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, 2010 for a total accrued commitment of $156,000 as of October 31,
2010 and 2009.
16. Subsequent Event
The Company has entered into negotiations with a preferred stock shareholder
regarding the Conoco Federal #22-1 and the potential redemption of preferred
stock and cash consideration for the Company's ownership interest in the
property. Negotiations are ongoing and no formal agreement has been reached as
of this date.
F-13
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 December 15, 2010 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 December 15, 2010 was shut in.
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.
On July 29, 2009, the Company acquired an 85% working interest (62.7598%
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 placeStateDelaware law.
The Company has reclassified its well in Utah from the full cost pool to
Properties held for resale. The Company has entered into negotiations with a
preferred stock shareholder regarding the potential redemption of preferred
stock and cash consideration for the Company's ownership interest in the well.
Negotiations are ongoing and no formal agreement has been reached as of this
date.
In July, 2010 the Company began drilling a well on the Lake Devore
Prospect in eastern Colorado. The well, which was drilled to a depth of 5200
feet, was plugged and abandoned in August 2010. The Company's share of the costs
of drilling the well was approximately $140,000.
RESULTS OF OPERATIONS
Material changes of certain items in the Company's Statement of Operations
for the three and nine months ended October 31, 2010.
Increase (I)
Item or Decrease (D) Reason
Oil and gas sales I Increases in production and prices
Lease operating expenses D Lease operating expenses decreased
because of a decrease in operating
expenses on the Wyoming wells as
compared to prior year.
General and administrative D Decrease in employees and legal and
expenses accounting fees.
2
Depreciation, depletion I Depletion increased due to increases in
and amortization production and the addition of
additional properties in the full cost
pool as compared to prior year.
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.
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.
3
CAPITAL RESOURCES AND LIQUIDITY
The Company's material sources and (uses) of cash during the nine months
ended October 31, 2010 were:
2010 2009
Cash provided (used) in operations $14,604 $(236,140)
Proceeds from sale of oil and gas properties 31,239 --
Acquisition and development of oil and gas
properties (139,123) (765,322)
Payments received with respect to note receivable -- 950,000
Advances from related parties 96,893 --
Repayments to related parties (5,500) (15,531)
Capital lease payments (1,278) (1,058)
Cash on hand at beginning of period 3,165 68,051
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, 2010, 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, 2010 are as follows:
Total 2011 2012 2013 Thereafter
----- ---- ---- ---- ----------
Office equipment leases$ 9,648 $ 956 $ 4,061 $3,817 $814
Drilling obligation $156,000 -- $156,000 -- --
Significant and Critical Accounting Policies/New Account Pronouncements
See Note 3 to the financial statements included as part of this report.
4
ITEM 4. CONTROLS AND PROCEDURES
George G. Shaw, the Company's Chief Executive 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 were effective.
There were no changes in the Company's internal controls over financial
reporting that occurred during the fiscal quarter ended October 31, 2010 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.
Dolton filed an answer to the Company's complaint, as well as a
counterclaim against the Company alleging the Company made fraudulent
representations to Dolton in connection with the two option agreements. In
Company counsel's opinion, Dolton's counterclaims against the Company are
without merit.
ITEM 6. EXHIBITS
Exhibit
Number Description of Exhibits
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
5
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 20, 2010
By: /s/ George G. Shaw
-------------------------------------
George G. Shaw, Principal Executive,
Financial and Accounting Officer
