UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF SECURITIES
EXCHANGE ACT OF 1934
For the transition period ____________ to _____________
Commission File Number 000-27862
NATURAL GAS SYSTEMS, INC.
(Exact name of registrant as specified in charter)
Nevada 41-1781991
------ ----------
(State or other jurisdiction (I.R.S. employer identification
of incorporation or
Organization)
820 Gessner, Suite 1340, Houston, Texas 77024
---------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 935-0122
--------------
As of January 31, 2005, the number of shares of common stock outstanding was
23,389,600 shares.
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes: _X_ No ___
Transitional Small Business Format (Check One): Yes ___ No: _X_
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31 JUNE 30
2004 2004
----------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 91,563 $ 367,831
Accounts Receivable 89,128 24,387
Inventories 163,713 115,859
Prepaid expenses 81,869 69,067
Retainers and deposits 5,000 5,000
----------------------------
Total current assets 431,273 582,144
Oil & Gas Properties - Full Cost 3,993,224 3,075,438
Oil & Gas Properties - Not Amortized 59,752 105,225
Less: accumulated depletion (156,601) (55,509)
----------------------------
Net oil & gas properties 3,896,376 3,125,154
Furniture, fixtures and equipment, at cost 3,091 3,091
Less: accumulated depreciation (1,932) (1,159)
----------------------------
Net furniture, fixtures and equipment 1,159 1,932
Other assets 368,407 301,835
----------------------------
Total assets 4,697,214 4,011,065
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 623,878 139,188
Accrued liabilities 178,442 50,073
Notes Payable 978,136 776,235
Production taxes payable 132 --
----------------------------
Total current liabilities 1,780,588 965,496
Deferred plugging and abandonment liability 318,023 311,442
Stockholder's Equity:
Common Stock, par value $0.001 per share; 100,000,000 authorized,
23,389,600 and 22,945,400 shares issued and outstanding as
of December 31, 2004 and June 30, 2004, respectively 23,389 22,945
Subscription Receivable (50)
Additional paid in capital 5,082,710 4,453,905
Deferred stock based compensation (367,015) (378,136)
Retained earnings (deficit) (2,140,431) (1,364,587)
----------------------------
Total stockholder's equity 2,598,603 2,734,127
----------------------------
Total liabilities and stockholders' equity $ 4,697,214 $ 4,011,065
============================
CONDENSED CONSOLIDTED STATEMENTS OF OPERATIONS
FOR THE
PERIOD FROM
SIX MONTHS SEPTEMBER 23, 2003
ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2004 2003
----------------------------------
(unaudited)
Revenues:
Oil Sales $ 415,454 $ 24,229
Gas Sales 181,481 --
------------------------------
Total revenues 596,935 24,229
Expenses:
Operating costs 331,217 76,303
Production taxes 28,494 3,002
Depletion 101,092 13,960
General and administrative 851,704 239,093
------------------------------
1,312,507 332,358
Loss from operations (715,572) (308,129)
Other revenues and expenses:
Interest Income 6,097 1,148
Interest Expense (66,368) (29,924)
------------------------------
Total other revenues and expenses (60,271) (28,776)
------------------------------
Net Loss $ (775,843) $ (336,905)
==============================
Income (Loss) per common share, Basic and Diluted $ (0.03) $ (0.02)
Weighted Average Number of Common shares,
Basic and Diluted 23,334,443 20,091,720
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
PERIOD FROM
SIX MONTHS SEPTEMBER 23, 2003
ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2004 2003
---------------------------------
(unaudited)
Operating activities:
Net Loss $ (775,843) $ (336,905)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depletion 101,092 13,960
Depreciation 772 386
Stock-based compensation 111,120 50,400
Accretion of debt discount -- 29,924
Changes in assets and liabilities:
Accretion of deferred plugging liability 6,581 3,169
Accounts Receivable (64,741) (28,762)
Inventory (47,855) (109,216)
Accounts Payable 484,690 114,188
Other current liabilities 128,501 41,783
Prepaid expenses (12,772) (25,930)
Retainers and deposits -- (210,000)
----------------------------
Net cash provided (used) by operating activities (68,455) (457,003)
Investing activities:
Capital expenditures for oil and gas properties (885,660) (1,290,560)
Capital expenditures for furniture, fixtures and equipment -- (3,090)
Other assets (53,255) (301,835)
----------------------------
Net cash used in investing activities (938,915) (1,595,485)
Financing activities:
Payments on notes payable (775,972) --
Proceeds from notes payable 977,875 --
Proceeds from issuance of common stock 529,199 2,882,800
----------------------------
Net Cash Generated By Financing Activities 731,102 2,882,800
----------------------------
Net increase (decrease) in cash (276,268) 830,312
Cash and cash equivalents, beginning of period 367,831 --
----------------------------
Cash and cash equivalents, end of period 91,563 830,312
============================
Supplemental Cash Flow Information:
Interest paid $ 18,452 $ --
Taxes paid -- --
Non-cash transactions:
Seller note issued to acquire properties, net of discount $ -- $ 1,407,049
Assumption of plugging and abandonment liability $ -- $ 301,835
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(Unaudited)
NATURAL GAS SYSTEMS, INC. AND SUBSIDIARIES
1. NATURE OF BUSINESS, ORGANIZATION AND BASIS OF PREPARATION AND
PRESENTATION
Headquartered in Houston, Texas, Natural Gas Systems, Inc. (the
"Company", "NGS", "we" or "us") is a development stage company
incorporated under the laws of the state of Nevada. NGS is a petroleum
company engaged primarily in the acquisition, exploitation and
development of properties for the production of crude oil and natural
gas from underground reservoirs. The Company acquires established oil
and gas properties and exploits them through the application of
conventional and specialized technology to increase production,
ultimate recoveries, or both. At December 31, 2004, NGS conducted
operations through its 100% working interests in the Delhi, Tullos
Urania, Crossroads and Colgrade fields located in Louisiana.
The condensed consolidated financial statements for the three month
period ended December 31, 2004 have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnotes normally
prepared in accordance with accounting principles generally accepted in
the United States of America have been omitted or condensed. However,
in management's opinion, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position
and results of operations of the Company have been made.
The condensed consolidated financial statements provided herein should
be read in conjunction with the financial statements and their
accompanying notes included in the Company's Form 10-KSB filed for the
fiscal year ended June 30, 2004 and Form 10-QSB filed for the quarter
ended September 30, 2004.
2. ACQUISITIONS
On February 3, 2005, we completed the purchase of a 100% working
interest in certain leases with approximately 65 producing oil wells, 9
salt water disposal wells and 56 shut-in wells located in the Tullos
Urania and Colgrade Fields in La Salle and Winn Parishes, Louisiana.
Four of the 56 shut-in wells will require a new lease prior to
restoration of production. The purchase price was $812,733 less
post-closing adjustments to reflect an effective date of December 1,
2004, paid in cash. The acquisition was accounted for under the
purchase method of accounting. No goodwill arose from the purchase.
Revenue and expense from the property will be recognized beginning
February 1, 2005.
We believe that the foregoing acquisition is consistent with our
strategic business plan to acquire established oil and gas properties
in order to exploit them through the application of conventional and
specialized technology to increase production, ultimate recoveries, or
both. At the purchase date, the field's production capacity is
estimated to average approximately 70 barrels of oil per day. Following
the closing, we initiated a program of restoring shut-in wells to
production, increasing overall production per well by addition of
incremental water disposal capacity and utilizing gas production to
replace purchased power for pumps.
In September 2004, we purchased approximately 140 wells in the same
fields from another operator. Those leases and wells directly offset
(i.e. are geographically and geologically adjacent to) the wells
purchased in February 2005, and NGS anticipates that the combination of
operations will result in a more efficient and effective operation.
As is common with the purchase of producing oil and gas properties, we
assumed an asset retirement obligation. In accordance with FAS 143,
management is making an assessment as to the amount of liability to be
recorded in the Company's financial statements as a result of our
assumption of this obligation. Due to the current high price for steel
tubular goods and wellhead equipment installed on the wells, we believe
the retirement obligation, net of salvage, will not be significant and
will not materially impact our balance sheet or income statement,
prospectively or in the future.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share:
FOR THE PERIOD FROM
SEPTEMBER 23, 2003
SIX MONTHS ENDED (INCEPTION) TO
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -------------------
Numerator:
Net loss applicable to common stockholders $ (775,843) $ (336,905)
Plus income impact of assumed conversions:
Preferred stock dividends N/A N/A
Interest on convertible subordinated notes N/A N/A
---------- ----------
Net loss applicable to common stockholders plus assumed
Conversions $ (775,843) $ (336,905)
========== ==========
Denominator:
Affect of potentially dilutive common shares:
Warrants N/A N/A
Employee and director stock options N/A N/A
Convertible preferred stock N/A N/A
Convertible subordinated notes N/A N/A
Redeemable preferred stock N/A N/A
Denominator for dilutive earnings per share -
weighted-average shares
Outstanding and assumed conversions 23,334,443 20,091,720
Loss per common share:
Basic and diluted $ (0.03) $ (0.02)
========== ==========
4. LIQUIDITY
As of December 31, 2004, we had $91,563 of unrestricted cash and
negative working capital of $1,349,315. We incurred losses for the six
months ended December 31, 2004 of $738,343. Our negative working
capital of $1,349,315 was adversely impacted by an aggregate $941,688
of short-term secured notes we owed our Chairman on the Bridge Loan,
the short-term note owed to our CEO, the Cananwill insurance policy
loan and the AICCO insurance policy loan, all described in Note 5,
Notes Payable.
During the six months ended December 31, 2004, our Chairman loaned us,
through series of advances, $920,000, pursuant to a secured promissory
note bearing interest at 10% per annum (the "Bridge Loan") earmarked
for our purchase of working interests in the Tullos Urania Field in
Louisiana, working capital and certain costs related to the closing of
the Prospect Loan (as described below). Pursuant to the Prospect Loan
and Prospect Energy Corporation's written approval of substantial
compliance with the hedging requirements, we were permitted to repay in
full the Bridge Loan following satisfaction of certain requirements,
including the acquisition of oil and gas price hedges for at least 50%
of current net production for a two year period. On February 15, 2005,
we paid off the Bridge Loan, including accrued interest thereon, in the
amount of $953,589. As of February 22, 2005 we had entered into
contracts to hedge in excess of 50% of our estimated production from
existing proved developed producing reserves covering a two year
period.
On February 3, 2005, we completed a financing with Prospect Energy and
drew down $3,000,000 of a $4,800,000 secured mezzanine loan facility
(the "Prospect Loan"). The initial draw was used to fund the February
2005 acquisition of properties in Louisiana, costs of the financing,
funding of a debt service reserve fund, repayment of the Bridge Loan,
immediate re-development of our existing properties and for working
capital purposes. After repayment of the Bridge Loan on February 15,
2005, we had unrestricted cash on hand of approximately $500,000 and
the ability to draw down the remaining $1,800,000 commitment on or
before May 4, 2005.
After taking into account the effect of the completion of the February
2005 acquisition of properties (see Note 2) and the Prospect Loan, and
before taking into account the effect of any new projects or
acquisitions, we believe that our current liquidity, credit
availability and anticipated operating cash flows will be sufficient to
meet our near-term operating expense and capital expenditure needs,
absent unanticipated reductions of revenue or increases in expenses due
to factors including but not limited to drops in product prices,
unanticipated shut downs, bad weather and unforeseen expenses.
In accordance with our business objectives, we plan to continue
expending considerable time and effort to secure additional capital in
order to acquire additional oil and gas property. There can be no
assurance that we will be able to secure such additional financing on
terms satisfactory to us or at all, or that we will be able to identify
acquisitions that meet our strategic objectives.
5. NOTES PAYABLE
The following table sets forth the Company's notes payable balances
BORROWING DECEMBER 31, 2004 JUNE 30, 2004
--------- ----------------- -------------
Delhi Mortgage Notes $ -- $732,807
AICCO Insurance Premium Loan 6,784 43,428
Bridge Loan 941,688 --
Cananwill Insurance Premium Loan 26,664 --
Robert Herlin 3,000 --
TOTAL OUTSTANDING $978,136 $776,235
DELHI MORTGAGE NOTES: In September 2003, we issued $1,500,000 of notes
payable in connection with our acquisition of the Delhi Field. The
notes were collateralized by a first mortgage on the Company's Delhi
field and were payable to the sellers in twelve equal monthly
installments beginning on January 30, 2004. Although the notes bear no
interest, the Company imputed interest at 8% per annum, thus resulting
in an initial recorded principal amount of $1,407,049.
AICCO LOAN: In May 2004, we borrowed $49,490 to finance 70% of our
Director and Officer's liability insurance premiums. The note requires
eight level mortgage-amortizing payments in the amount of $6,350 per
month, including 7% interest per annum.
CANANWILL LOAN: In October 2004, we borrowed $33,186 to finance 80% of
our General Liability, Casualty and Well Control insurance premiums.
The note requires ten level payments in the amount of $3,399 per month,
including 5.25% interest per annum.
BRIDGE LOAN: During the six months ended December 31, 2004, we borrowed
$920,000 under a short-term secured promissory note (the "Bridge Loan")
held by Laird Q. Cagan, the Company's Chairman and a major stockholder,
secured by a pledge of all of our assets. The loans were earmarked as
partial bridge financing for our September 2, 2004 purchase of the
Tullos Urania Field properties for $725,000, prior to post closing
adjustments, on working capital and certain costs related to the
closing of the Prospect Loan. On February 15, 2005, we paid off the
Bridge Loan to Mr. Cagan, totaling $953,589, including accrued interest
at 10% per annum as specified in the Bridge Loan.
HERLIN LOAN: During the six months ended December 31, 2004 Mr. Herlin
advanced us $3,000 for working capital.
PROSPECT ENERGY LOAN: As described in Note 4, on February 3, 2005 we
completed a financing from Prospect Energy. To date, we have drawn
$3,000,000 under the facility in order to pay fees and expenses related
to the financing, to fund the debt service reserve account, to fund the
purchase of additional oil producing properties in the Tullos Urania
and Colgrade Fields in Louisiana, to pay off the Bridge Loan to Mr.
Cagan, to fund working capital and to fund the immediate re-development
of our existing properties. An additional $1.8 million may be drawn on
the Prospect Loan within 90 days of closing. The loan bears an initial
interest rate of 14% per annum payable in arrears, has a term of five
years and does not require principal payments until the end of the
term. Irrevocable and revocable warrants were also granted to Prospect
as described in Note 6, Common Stock and Options. The Prospect Loan
Agreement requires us to meet certain financial covenants including a
1.5:1 ratio of borrowing base to debt and, commencing with the quarter
ended September 30, 2005, 2.0:1 ratio of EBITDA to interest. We have
the ability to incur senior secured debt if certain conditions are met.
6. COMMON STOCK AND STOCK OPTIONS
Common Stock
From July 1 through December, 31, 2004, we raised gross proceeds of
$579,848 from the sale of 394,200 shares of our common stock in
addition to 50,000 shares that were exercised under the Company's stock
option plan. In connection with these issuances, we incurred placement
fees to Chadbourn Securities and Laird Q. Cagan, our Chairman, in the
aggregate amount of $17,840 and were obligated to issue them warrants
to purchase up to 12,536 shares of our common stock at an exercise
price of $1.50 per share. We also paid $32,659 to unrelated third
parties as finder's fee.
Options
During the six months ended December 31, 2004, the Board approved the
grant of options to purchase up to an aggregate total of 200,000 shares
of common stock with an exercise price of $1.00 per share, to each of
our two independent board members, Messrs. Gene Stoever and Jed DiPaolo
(100,000 shares each). The options vest over a two-year period
beginning May 26, 2004, the date of the directors' election to the
Board of Directors.
As part of the Prospect Loan completed on February 3, 2005, we issued
Prospect Energy a warrant to acquire up to 450,000 shares of common
stock exercisable over a ten-year term at a price of $0.75 per common
share. We also issued Prospect Energy a revocable warrant to acquire up
to 300,000 shares of common stock on the same terms; however, this
warrant will be automatically revoked if we attain certain financial
targets by the end of February 2006.
We account for our stock option plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
During the six months period ended December 31, 2004, we issued options
to two Board members to purchase up to 100,000 shares each, exercisable
at $1.00 per share.
The following table illustrates the effect on net income and earnings
per share for the six months ended December 31, 2004, as if the Company
had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure,
issued in December 2002.
Six Months Ended
December 31, 2004
-----------------
(in thousands)
Pro forma impact of fair value method (SFAS 148):
Net loss attributable to common stockholders, as reported $(775,843)
Plus compensation expense determined under the Intrinsic Value Method 111,120
Less compensation expense determined under the Fair Value Method (157,298)
---------
Pro forma net loss attributable to common stockholders $(822,021)
Loss per share (basic & diluted):
As reported $ (0.03)
Pro forma $ (0.04)
Weighted average Black-Scholes fair value assumptions:
Risk free interest rate 4.93%
Expected life 3 years
Expected volatility 104%
Expected dividend yield 0.0%
7. RELATED PARTY TRANSACTIONS
Laird Q. Cagan, Chairman of the Board of the Company, is a Managing
Director of Cagan McAfee Capital Partners, LLC ("CMCP"). CMCP performs
financial advisory services to the Company pursuant to a written
agreement, earning a monthly retainer of $15,000. At December 31, 2004,
Mr Cagan's fees for March through December, 2004, totaling $150,000,
were accrued, but unpaid. In addition, Mr. Cagan is a registered
representative of Chadbourn Securities, Inc. ("Chadbourn"), the
Company's placement agent in private equity financings. Mr. Cagan and
Chadbourn Securities earned $17,840 for the placement of 394,200 shares
of our common stock during the six months ended December 31, 2004.
Also during the six month period ended December 31, 2004 we charged
$17,840 to stockholder's equity as a reduction of the proceeds from
common stock sales placed by Chadbourn Securities and Laird Q. Cagan
and were obligated to issue warrants to purchase up to a total of
12,536 shares of Common Stock to Chadbourn Securities and Laird Q.
Cagan in connection with the placement of our common shares. These
warrants have a $1.50 exercise price and a seven-year term.
John Pimentel, a member of our Board of Directors, is a principal at
CMCP.
Eric McAfee, also a Managing Director of CMCP and a significant
shareholder of the Company, has served as Vice Chairman of the Board of
Verdisys, Inc., the provider of certain horizontal drilling services to
the Company. During 2004, Mr. McAfee resigned from the Board of
Directors of Verdisys, but continues to hold shares in both companies.
Mr. McAfee has represented to the Company that he is also a 50% owner
of Berg McAfee Companies, LLC, which owns approximately 30% of the
outstanding shares of Verdisys, Inc. NGS paid $130,000 to Verdisys
during 2003 and $25,960 during 2004 for horizontal drilling services.
During the six months ended December 31, 2004, Laird Cagan, Chairman of
the Board of the Company, loaned us $920,000 under the Bridge Loan. See
Note 5, Notes Payable, for a further explanation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, we had $91,563 of unrestricted cash and
negative working capital of $1,349,345. We incurred losses for the six
months ended December 31, 2004 of $738,343. Our negative working
capital of $1,349,345 was adversely impacted by an aggregate $941,688
of short-term secured notes we owed our Chairman on the Bridge Loan,
the short-term note owed to our CEO, the Cananwill insurance policy
loan and the AICCO insurance policy loan, all described in Note 5,
Notes Payable.
On February 3, 2005, we completed a financing with Prospect Energy and
drew down $3,000,000 of a $4,800,000 secured mezzanine loan facility
(the "Prospect Loan"). The initial draw was used to fund the February
2005 acquisition of properties in Louisiana for $812,733 less an
adjustment for December income, $96,0000 origination fee paid to
Prospect, funding of a $225,000 debt service reserve fund, repayment of
the Bridge Loan in the amount of $953,586, immediate re-development of
our existing properties and replenishment of working capital. After
payments of these amounts, we had unrestricted cash on hand of
approximately $500,000 and the ability to draw down the remaining
$1,800,000 commitment on or before May 4, 2005, the 90th day following
the closing of the facility.
After completion of the February 2005 acquisition of properties, we
believe that our current liquidity, credit availability and operating
cash flows will be sufficient to meet the near-term operating expense
and capital expenditure needs of NGS as budgeted, excluding any new
projects or acquisitions, absent unanticipated reductions of revenue or
increases in expenses due factors such as a drop in product prices,
unanticipated shut downs, bad weather, unforeseen expenses and the
like.
ADDITIONAL SALES OF COMMON STOCK: From July 1 through December 31, 2004
we raised $579,848 of gross cash proceeds from the private sale of
394,200 shares of our common stock, before commissions. We plan to
continue to raise funds through additional sales of equity securities
in private transactions.
INCREASE IN OPERATING CASHFLOWS: We continue to work on increasing cash
flow from operations through our Delhi, Tullos Urania, Colgrade and
Crossroads Fields, thereby spreading our overhead, including
significant expenses of being a public company, over a larger revenue
base. We also expect to continue evaluating additional acquisition
candidates that would increase our cash flows from operations.
RESULTS OF OPERATIONS
We did not commence our oil and gas operations until October 2003. Accordingly,
quarter-by-quarter comparisons of our results of operations would not be
meaningful and are therefore not presented. Instead, we provide a brief overview
of our operations to date and indicate the progress we have made with respect to
our operations as compared to the last calendar quarter of 2003.
During the three months ended December 31, 2004, we generated revenues of
$365,768, as compared to $24,249 for the period from our inception (September
23, 2003) through December 31, 2003 (herein referred to as "the quarter ended
December 31, 2004"). Of significance in the current fiscal period, we reported
our first full fiscal quarter of natural gas sales from our Delhi Field and
revenues from our first acquisition of producing oil wells in the Tullos Urania,
Colgrade and Crossroads Fields.
Our operating results for the three months ended December 31, 2004 were
adversely impacted by the following events:
o Our most significant oil well, the Delhi Ut. #197-2, sanded up on two
occasions, causing loss of its 25+ barrels of oil per day and
approximately 50,000 cubic feet of gas per day for 29 total days and
reduced production for a number of additional days.
o Our leased gas dehydrator at the Delhi Field ceased to work, resulting
in an 11 day shut down of gas sales prior to replacement of the unit
by a new dehydrator purchased by the Company.
o Severe cold weather beginning in late November and extending into late
December caused our gas treating plant, thus our gas sales, to be shut
-in for 22 days.
o The seller of the first assets purchased in September 2004 in the
Tullos Urania, Crossroads and Colgrade Fields, and who remained as a
contract operator following the sale, shut in our oil production for 7
days at the end of December and the first 5 days of January 2005 due
to a disagreement with us over the time required to effect the
regulatory change in operator of the purchased wells from the seller
to our subsidiary, Four Star Development Corporation.
The following remedial actions have been taken:
o We made changes to our gas treating plant to reduce our exposure to
cold weather induced shut-downs.
o We replaced the defective leased dehydrator with a new, purchased
dehydrator.
o We adopted a new procedure for desanding the 197-2 well, which we
believe will reduce similar losses of production in the future.
o We completed the change in operator filings with the State of
Louisiana, and our subsidiary is now the listed operator in full
control of our acquired Tullos Field operations.
Following is a summary of the progress we've made in both production and
revenue, net to our interest:
THREE MONTHS ENDED THREE MONTHS ENDED
NET TO NGS: 12-31-03 12-31-04
- -------------------------- ------------------ ------------------
Oil & Gas Revenue $24,249 $365,768
Oil Volumes Sold 857 BO 5,234 BO
Gas Volumes Sold 0 MCF 15,679 MCF
Barrels of Oil Equivalent 857 BOE 7,847 BOE
Oil Price per Barrel $28,29 $47.94
Gas Price per MCF N/A $7.32
Operating Cost per BOE $92.54 $24.14
DD&A per BOE $16.29 $6.88
Average daily production was 85 BOEPD for the three months period ended December
31, 2004 compared to 9 BOEPD during the three months period ended December 31,
2003. Three factors were primary in causing our production to increase over the
prior year's period.
o The startup of gas sales from our Delhi Field;
o The restoration to production of several wells, particularly the 197-2
and 204-2 and the re-completion of other wells, particularly the
184-2;
o The purchase of our interest in the Tullos Urania, Colgrade and
Crossroads Fields. On a BOE basis, operating expenses declined to
$24.14 BOE ($189,405) for the three months ended December 31, 2004
from $92.54 per BOE ($79,305), for the three months ended December 31,
2003. Operating expenses for both periods are still high, but we
believe our plan to increase production will prove successful.
General and Administrative expenses increased for the three months ended
December 31, 2004 to $503,069, from $239,093 for the three months ended December
31, 2003. Of the $503,069 incurred in the quarter ended December, 2004, $50,000
was accrued for year-end bonuses and approximately $162,000 of G&A expenses were
incurred for audit, tax, legal, printing, stock transfer and similar services
required to file our annual proxy statement, tax work related to the merger and
increased expenses as a result of being a public company.,
ITEM 3. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures, as of the end of the period covered by this report. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
As reported in our current reports on Form 8-K filed October 26, 2004, and
November 17, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 2002 Included
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 2002 Included
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Included
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Included
(b) REPORTS ON FORM 8K
Current Report on Form 8K filed October 26, 2004
Amended Current Report on Form 8K filed November 17, 2004
Current Report on Form 8K filed November 17, 2004
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATURAL GAS SYSTEMS, INC.
By: /s/ Sterling H. McDonald
----------------------------
Sterling H. McDonald
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: February_____, 2005
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert S. Herlin, Chief Executive Officer of Natural Gas Systems, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Natural Gas Systems,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: February __, 2005
/s/ Robert S. Herlin
------------------------
Robert S. Herlin
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sterling H. McDonald, Chief Financial Officer of Natural Gas Systems, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Natural Gas Systems,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date February __, 2005
/s/ Sterling H. McDonald
---------------------------
Sterling H. McDonald
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. 1350)
The undersigned, Robert S. Herlin, President and Chief Executive Officer of
Natural Gas Systems, Inc. (the "Company"), certifies in connection with the
filing with the Securities and Exchange Commission of the Company's Quarterly
Report on Form 10-QSB for the quarter ended December 31, 2004 (the "Report")")
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002, to his knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company as of
and for the periods covered in the Report.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
___ day of February, 2005.
/s/ Robert S. Herlin
- --------------------------
Robert S. Herlin
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. 1350)
The undersigned, Sterling H. McDonald, Chief Financial Officer of Natural Gas
Systems, Inc. (the "Company"), certifies in connection with the filing with the
Securities and Exchange Commission of the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2004 (the "Report")") pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley
Act of 2002, to his knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company as of
and for the periods covered in the Report.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
___day of February 2005.
/s/ Sterling H. McDonald
- ---------------------------
Sterling H. McDonald
Chief Financial Officer