UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE 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 May 12, 2005, the number of shares of common stock issued and
outstanding was 24,629,600 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
MARCH 31, 2005 JUNE 30, 2004
-------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash $ 978,412 $ 367,831
Accounts receivable 176,388 24,387
Inventories 250,050 115,859
Prepaid expenses 55,872 69,067
Retainers and deposits 34,530 5,000
----------- -----------
Total current assets 1,495,252 582,144
Oil & Gas properties - full cost 4,922,029 3,075,438
Oil & Gas properties - not amortized 95,510 105,225
Less: accumulated depletion (212,330) (55,509)
----------- -----------
Net oil and gas properties 4,805,209 3,125,154
Furniture, fixtures, and equipment, at cost 8,128 3,091
Less: accumulated depreciation (2,461) (1,159)
----------- -----------
Net furniture, fixtures, and equipment 5,667 1,932
Other Assets:
Restricted deposits 602,246 301,835
Other assets 304,103 0
----------- -----------
Net other assets 906,349 301,835
----------- -----------
Total assets 7,212,477 4,011,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 499,206 139,188
Accrued liabilities 98,192 50,073
Notes payable 16,774 776,235
Production taxes payable 48,837 0
----------- -----------
Total current liabilities 663,009 965,496
Long term Liabilities:
Notes payable 2,877,846 0
Deferred plugging and abandonment liabilities 321,374 311,442
----------- -----------
Total liabilities 3,862,229 1,276,938
Stockholders' Equity:
Common Stock, par value $0.001 per share; 23,409 22,945
100,000,000 shares authorized, 23,409,600 and 22,945,400
shares issued and outstanding as of March 31, 2005
and June 30, 2004, respectively
Subscription receivable 30 0
Additional paid-in capital 6,684,358 4,453,905
Deferred stock based compensation (310,187) (378,136)
Retained earnings (deficit) (3,047,362) (1,364,587)
----------- -----------
Total stockholders' equity 3,350,248 2,734,127
----------- -----------
Total liabilities and stockholders' equity $ 7,212,477 $ 4,011,065
=========== ===========
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS FOR THE PERIOD FROM
ENDED MARCH 31, SEPTEMBER 23, 2003
2005 (INCEPTION) TO
MARCH 31, 2004
------------ ------------
(unaudited) (unaudited)
Revenues:
Oil sales $ 723,625 $ 72,801
Gas sales $ 293,203 $ --
------------ ------------
Total revenues $ 1,016,828 $ 72,801
Expenses:
Operating costs $ 555,418 $ 134,929
Production taxes $ 44,773 $ 9,027
Depletion $ 158,123 $ 27,537
General and administrative $ 1,706,871 $ 509,783
------------ ------------
$ 2,465,185 $ 681,276
Loss from operations $ (1,448,357) $ (608,475)
Other income and expense:
Interest income $ 8,226 $ 3,413
Interest expense $ (201,698) $ (56,350)
Unrealized loss on financial instruments $ (40,946) $ --
------------ ------------
Total other income and expense $ (234,418) $ (52,937)
------------ ------------
Net Loss $ (1,682,775) $ (661,412)
============ ============
Loss per common share, basic and diluted $ (0.07) $ (0.03)
Weighted average number of common shares,
basic and diluted 23,299,719 20,948,744
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FOR THE PERIOD
MARCH 31, 2005 FROM SEPTEMBER 23,
2003 (INCEPTION)
TO MARCH 31, 2004
----------- -----------
(unaudited) (unaudited)
Operating activities:
Net loss $(1,682,775) $ (661,412)
Adjustments to reconcile net loss to net cash used by operating
activities:
Stock-based compensation 620,589 104,707
Depletion 156,821 27,537
Depreciation 1,302 773
Accretion of asset retirement obligation 9,932 0
Changes in assets and liabilities:
Accounts receivable (152,001) (73,625)
Retainers and deposits (29,530) (342,473)
Inventories (134,191) (119,908)
Accounts payable 360,018 109,397
Production taxes payable 48,837 0
Prepaid expenses 13,195 (11,413)
Accrued expenses 48,119 0
----------- -----------
Net cash used by operating activities (739,684) (966,417)
Investing activities:
Capital expenditures for oil and gas properties (1,836,876) (3,331,553)
Capital expenditures for furniture, fixtures and equipment (5,037) (3,092)
Other assets (344,811) 308,206
----------- -----------
Net cash used in investing activities (2,186,724) (3,026,439)
Financing activities:
Deferred financing fees (259,703) 0
Proceeds from notes payable 3,855,721 1,088,499
Payments on notes payable (1,737,336) 0
Proceeds from issuance of common stock 1,678,307 3,018,200
----------- -----------
Net cash generated by financing activities 3,536,989 4,106,699
Net increase in cash 610,581 113,843
Cash and cash equivalents, beginning of period 367,831 0
Cash and cash equivalents, end of period 978,412 113,843
Supplemental Cash Flow Information:
Interest paid $ 168,475 $ --
Non-cash transactions:
Seller note issued to acquire properties, net of discount $ -- $ 1,407,049
Assumption of plugging and abandonment liability $ -- $ 301,835
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 petroleum company incorporated under the laws of the
State of Nevada, 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 March 31,
2005, 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 nine month period ended
March 31, 2005 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 period ended June 30, 2004
and Forms 10-QSB filed for the fiscal quarters ended September 30, 2004 and
December 31, 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 $798,907
after 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 is 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 was 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 the 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 overall operation. Each of these property
acquisitions, together and individually, are referred to as the "Tullos Field
Area."
As is common with the purchase of producing oil and gas properties, we assumed
an asset retirement obligation in connection with the acquisition of the fields
described above. 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 these obligations.
3. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
For the period
Nine months from September 23,
ended March 31, 2003 (inception)
2005 to March 31, 2004
------------ ----------------
Numerator:
Net loss applicable to common stockholders $ (1,682,775) $ (661,412)
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 $ (1,682,775) $ (661,412)
============ ================
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 23,299,719 20,948,744
Loss per common share:
basic and diluted $ (0.07) $ (0.03)
============ ================
4. LIQUIDITY
As of March 31, 2005, we had $978,412 of unrestricted cash and positive working
capital of $832,243, excluding $800,000 available for drawing under a facility
provided by Prospect Energy Corporation (the "Prospect Facility" or "Facility"),
which we have allowed to expire on May 3, 2005 as described in Note 5 below. We
incurred losses for the nine months ended March 31, 2005 of $1,682,775, of which
$620,589 were related to non-cash general and administrative charges associated
with compensatory stock expense (See Note 6). Our positive working capital of
$832,243 at March 31, 2005 was positively impacted by the $4,000,000 we received
under the Prospect Facility, the proceeds of which were used to pay off most of
our short-term debt and to replenish our working capital. See Note 5, Notes
Payable.
During the nine months ended March 31, 2005, the Chairman of our Board of
Directors, Laird Q. Cagan, loaned us, through a 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 Facility. Pursuant to the terms of the Prospect
Facility, 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 in full, 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 closed the Prospect Facility and drew down $3,000,000,
and on March 16, 2005 we drew down an additional $1,000,000 on the total of
$4,800,000 committed under the Facility. The draws were 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. We
allowed the remaining $800,000 commitment to expire on May 3, 2005. After taking
into account the effect of the completion of the February 2005 acquisition of
properties (see Note 2), the closing of the Prospect Facility and our recent
private placement of common stock described below, and before taking into
account the effect of any new projects or acquisitions, we believe that our
current liquidity 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.
Subsequent to the end of the quarter, on May 6, 2005, we closed a private
placement of 1,200,000 shares of common stock with a European institutional
investor at a $2.50 price per share. Our gross proceeds were $3,000,000 before
payment of a $240,000 placement fee to Chadbourn Securities and Laird Q. Cagan,
the Chairman of our Board of Directors, and our obligation to issue them
warrants to purchase up to 96,000 shares of our common stock at a price of $2.50
per share.
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 properties. 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 as of the
dates indicated:
MARCH 31, JUNE 30,
BORROWING 2005 2004
--------- ---------- ----------
Delhi Mortgage Note $ -- $ 732,807
AICCO Insurance Premium Loan -- 43,428
Cananwill Insurance Premium Loan 16,774 --
Prospect Energy 5-Year Note 2,877,846 --
Bridge Loan by our Chairman of the Board -- --
Herlin Loan -- --
TOTAL OUTSTANDING $2,894,620 $ 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 our 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. At
March 31, 2005, there were no outstanding amounts owed under the Delhi Mortgage
Notes.
AICCO LOAN: In May 2004, we borrowed $49,490 to finance 70% of our Director and
Officer's liability insurance premiums. The loan required eight level
mortgage-amortizing payments in the amount of $6,350 per month, including 7%
interest per annum. At March 31, 2005, there were no outstanding amounts owed
under the AICCO Loan.
CANANWILL LOAN: In October 2004, we borrowed $33,186 to finance 80% of our
General Liability, Casualty and Well Control insurance premiums. The loan
requires ten level payments in the amount of $3,399 per month, including 5.25%
interest per annum. At March 31, 2005, $16,774 was owed under the Cananwill
Insurance Premium Loan.
BRIDGE LOAN: As described in Note 4, during the nine months ended March 31,
2005, we borrowed a total of $920,000 from Laird Q. Cagan, the Company's
Chairman and a major stockholder, secured by a pledge of all of our assets. On
February 15, 2005, we repaid the Bridge Loan in full.
HERLIN LOAN: During the nine months ended March 31, 2005, Mr. Herlin advanced us
$3,000 for working capital, with interest payable at 10% per annum. At March 31,
2005, Mr. Herlin's loan was included in accounts payable, which was paid in
April, 2005.
PROSPECT FACILITY: As described in Note 4, on February 3, 2005 we closed the
"Prospect Facility" (or "Facility"). Advances under the Prospect Facility can
aggregate up to $4,800,000 if funded on or prior to May 3, 2005. To date, we
have drawn $4,000,000 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. We have allowed the remaining $800,000 commitment to expire as of
May 4, 2005. At March 31, 2005, we owed $2,877,846 on the Prospect Facility,
including the accreted discount through such date. At maturity or, exclusive of
any prepayment penalty, on early prepayment, the total amount owed under the
Facility will be $4,000,000 due to accretion of the original issue discount.
Under the terms of the Prospect Facility, each advance requires us to issue two
securities, a debt security and an equity security (in the form of irrevocable
and revocable warrants) as follows:
(i) The debt securities issued under the Facility (the "Prospect Loan(s)")
were secured by all of our assets, bear an initial interest rate of 14%
per annum payable in arrears on the "face" (the par or matured amount of
the loan), mature on February 2, 2010 and do not require principal
payments until the end of the term. For each draw under the Facility, we
recorded a loan with an imputed discount equivalent to the value of the
Prospect Warrants described below. Through March 31, 2005, we had drawn
$4,000,000 under the Facility, crediting $2,850,992 (net of the discount
described below) to the Prospect Loan. The fair value of the Prospect
Warrants of $1,149,008 was recorded as a discount on the Prospect Loans
with a corresponding credit to additional paid-in capital for the Prospect
Warrants. The discount will be accreted as additional loan interest
expense using the interest rate method over the five-year life of the
loan, yielding an annual effective interest rate of 27.26% and 24.87% for
the first and second Prospect Loans, respectively.
(ii) The equity securities issued under the Facility consisted of irrevocable
and revocable warrants (the "Prospect Warrants"). An irrevocable warrant
to purchase one share of our common stock was issued to Prospect for each
$6.666667 drawn under the Facility, and a revocable warrant to purchase
one share of our common stock was issued for each $10 drawn under the
Facility. Through March 31, 2005 we had issued to Prospect Energy
irrevocable warrants to acquire up to 600,000 shares of common stock
exercisable over a five-year term at a price of $0.75 per common share,
and revocable warrants to acquire up to 400,000 shares of common stock on
the same terms, except that the revocable warrants will be automatically
canceled if we attain certain financial targets by the end of February
2006, and such revocable warrants cannot be exercised prior to such date.
As described under the Prospect Loan above, the Prospect Warrants have
been credited to additional paid-in capital in the amount of $1,149,008.
The holder of the shares of common stock underlying the Prospect Warrants
are subject to a registration rights agreement, briefly described in Note
6, "Common Stock, Options and Warrants".
Among other restrictions and subject to certain exceptions, the Prospect
Facility restricts us from creating liens, entering into certain types of
mergers or consolidations, incurring additional indebtedness, changing the
character of our business, or engaging in certain types of transactions. The
Loan Agreement also requires us to maintain specified financial ratios
(including a 1.5:1 ratio of borrowing base to debt and, commencing with the
quarter ended September 30, 2005, a 2.0:1 ratio of operating cash flow to
interest). In order to satisfy certain of these ratios, we will need to
significantly increase our operating cash flow, of which there can be no
assurance.
6. COMMON STOCK, OPTIONS AND WARRANTS
Common Stock
During the nine months ended March, 31, 2005, we raised gross proceeds of
$1,728,876 from the sale of our common stock and warrants to purchase our common
stock. Of the total, $579,868 was received from the sale of 394,200 shares of
our common stock and 70,000 shares were issued upon the exercise of options
previously granted under the stock option plan. The remaining $1,149,008 was
allocated to the sale of the Prospect Warrants as described under "Options and
Warrants" in this footnote. 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 a total of 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
fees.
On May 6, 2005, we raised gross proceeds of $3,000,000 from the sale of common
stock from one institutional investor in a private placement. A placement fee of
$240,000 was paid to Chadbourn Securities and Laird Q. Cagan, and the Company is
obligated to issue them warrants to purchase 96,000 shares of common stock at a
price of $2.50 per share.
Options and Warrants
During the nine months ended March 31, 2005, we issued options to purchase
200,000 shares of our common stock, issued warrants to purchase 1,429,836 shares
of our common stock (including the warrants described under "Common Stock" in
this footnote), cancelled warrants to purchase 16,000 shares of our common stock
and honored the exercise of warrants to purchase 104,800 shares of our common
stock, as described below:
With respect to the 200,000 options, on October 22, 2004 we recorded 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 our two independent board
members, in error. In fact, the options were issued at an exercise price of
$1.27 per share, which was 85% of the market price at the time of the grant, the
minimum threshold allowed under the Stock Plan of 2004 (the "Plan"). In the
current fiscal quarter, an adjustment was made to accurately reflect the terms
of the grant.
As part of the $4,000,000 we have drawn under the Prospect Facility described in
Note 5, we have issued to Prospect Energy irrevocable warrants to acquire up to
600,000 shares of common stock exercisable over a five-year term at a price of
$0.75 per common share, and revocable warrants to acquire up to 400,000 shares
of common stock on the same terms, except that the revocable warrants will be
automatically canceled if we attain certain financial targets by the end of
February 2006. We also issued 5-year warrants to a third-party finder to acquire
up to 50,000 shares of our common stock at $2.00 per share.
The shares of common stock issuable upon exercise of the Prospect Warrants are
subject to a registration rights agreement, pursuant to which we have granted
the holder certain piggyback registration rights.
As of January 1, 2005, we issued fully vested warrants to Tatum Partners to
purchase up to 262,500 shares of our common stock at $.001 per share in exchange
for a re-negotiated contract for Tatum's services. Under the terms of our
original contract dated September 18, 2003, Tatum Partners agreed to provide the
services of Robert Herlin as our CEO and provide access to Tatum's network of
resources in exchange for a fee of $3,000 per month, a ten-year option to
purchase up to 250,000 shares of our common stock at an exercise price of $.001
per share and 25% of any bonus or stock compensation awarded to Mr. Herlin
during his service with us. As previously reported in our public filings, an
option for 250,000 shares had been awarded in the name of Mr. Herlin in
September of 2003 that was earmarked for transfer or reissuance to Tatum. Under
the re-negotiated Tatum agreement, our monthly fee has been reduced to $1,000
per month, a new warrant to purchase 262,500 shares of our common stock was
issued to Tatum, Tatum forfeited any interest in the original option to purchase
up to 250,000 shares and Tatum agreed that they hold no rights to earn any
additional amounts arising from Mr. Herlin's compensation, other than the
reduced fee of $1,000 per month for one year. During the quarter ending March
31, 2005, we charged $432,976 to expense, representing the fair value of the
warrants issued to Tatum. Tatum's warrants do not contain registration rights.
Also during the nine months ended March 31, 2005, we issued warrants to purchase
up to 104,800 shares of our common stock at a nominal exercise price to
investors who purchased our common stock in a private placement, warrants to
purchase up to 50,000 shares at $2.00 per share to a third party finder in
connection with the Prospect Facility, and warrants to purchase up to 12,536
shares at an exercise price of $1.50 per share to Chadbourn Securities for
placement services related to sales of our common stock during the period.
During the nine months ended March 31, 2005, warrants to purchase 16,000 shares
of our common stock were cancelled and warrants to purchase 104,800 shares were
exercised.
We account for our employee 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. The following table
illustrates the effect on net income and earnings per share for the nine months
ended March 31, 2005, 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.
Nine Months
ended March
31, 2005
-------------
Pro forma impact of Fair Value Method (SFAS 148):
Net loss attributable to common stockholders, as reported $ (1,682,775)
Plus employee compensation expense determined under Intrinsic Value Method $ 11,000
Less employee compensation expense determined under Fair Value Method $ (51,046)
-------------
Pro forma net loss attributable to common stockholders $ (1,722,821)
Loss per share (basic & diluted):
As reported $ (0.07)
Pro Forma $ (0.07)
Weighted average Black-Schoales fair value assumptions:
Risk free interest rate 4.93%
Expected life 3 years
Expected volatility 103.6%
Expected dividend yield 0.0%
7. COMMODITY HEDGING
Pursuant to the terms of the Prospect Facility we closed on February 3, 2005, we
entered into financial instruments covering approximately 50% of our expected
oil and gas production from proved developed producing properties over the next
two years. We used reserve report data prepared by W. D. Von Gonten & Co., our
independent petroleum engineering firm, to estimate our future production for
hedging purposes. As we may elect under FAS 133, Accounting for Derivative
Instruments and Hedging Activities, we have designated our physical delivery
contracts as normal delivery sale contracts. For the puts we recently purchased,
we have not fulfilled the documentation requirements of FAS 133. As a result,
the unrealized losses from our put contracts are expensed in our statement of
operations. At March 31, 2005, we had the following financial instruments in
place:
(i) 2,100 Bbls of oil to be delivered monthly from March 2005 through
February 2006 to Plains Oil Marketing LLC, at $48.35 per barrel,
plus or minus changes in basis between: (a) the arithmetic daily
average of the prompt month "Light Sweet Crude Oil" contract
reported by the New York Mercantile Exchange, and (b) Louisiana
field posted price. This is accounted for as a normal delivery sales
contract.
(ii) 100 MCFD of natural gas at a fixed price of $6.21, delivered through
our Delhi Field sales tap into Gulf South's pipeline, for the
account of Texla for deliveries from March 2005 to May 2006. This is
accounted for as a normal delivery sales contract.
(iii) Purchase of a non-physical put contract (or price floor) at $38 per
barrel for 2,000 Bbls of crude oil production from March 2006
through February 2007. This is accounted for as a "mark-to-market"
derivative investment. Of the $72,000 premium we paid for the put
option, we charged $40,946 to expense for the difference between the
purchase price paid and the market value of the put at March 31,
2005.
Subsequent to the end of the quarter ended March 31, 2005, we extended the price
swap described in (i) above for an additional three months for the volume of
2,100 barrels of oil per month at a fixed price of $52.55 per barrel of oil.
8. RELATED PARTY TRANSACTIONS
Laird Q. Cagan, Chairman of our Board, is a Managing Director and co-owner of
Cagan McAfee Capital Partners, LLC ("CMCP"). CMCP performs financial advisory
services to us pursuant to a written agreement, earning a monthly retainer of
$15,000. At March 31, 2005, CMCP's fees for March 2004 through January, 2005,
totaling $180,000, were accrued, but unpaid. Mr. Cagan is a registered
representative of Chadbourn Securities, Inc. ("Chadbourn"), our 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 nine months
ended March 31, 2005.
During the nine month period ended March 31, 2005, we charged $17,840 to
stockholder's equity as a reduction of the proceeds from common stock sales
placed by Chadbourn Securities and Mr. Cagan, and were issued warrants to
purchase up to a total of 12,536 shares of our common stock to Chadbourn
Securities and Mr. 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
ours, has served as Vice Chairman of the Board of Verdisys, Inc., the provider
of certain horizontal drilling services to us. 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 us 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 fiscal 2003 and $25,960
during fiscal 2004 for horizontal drilling services.
During the nine months ended March 31, 2005, Mr. Cagan loaned us $920,000 under
the Bridge Loan. We paid off the loan in the amount of $953,589, including
accrued interest, on February 15, 2005. See Note 5, Notes Payable, for a further
explanation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had $978,412 of unrestricted cash and positive working
capital of $832,243, excluding $800,000 available for drawing under a facility
provided by Prospect Energy Corporation (the "Prospect Facility" or "Facility"),
which we have allowed to expire on May 3, 2005 as described in Note 5 of the
Financial Statements. We incurred losses for the nine months ended March 31,
2005 of $1,682,775, of which $620,589 were related to non-cash general and
administrative charges associated with compensatory stock expense (See Note 6 to
the Financial Statements). Our positive working capital of $832,243 at March 31,
2005 was positively impacted by the $4,000,000 we received under the Prospect
Facility, the proceeds of which were used to pay off most of our short-term debt
and to replenish our working capital. See Note 5, Notes Payable, to the
Financial Statements.
During the nine months ended March 31, 2005, the Chairman of our Board of
Directors, Laird Q. Cagan, loaned us, through a 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 Facility. Pursuant to the terms of the Prospect
Facility, 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 in full, 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 closed the Prospect Facility and drew down $3,000,000,
and on March 16, 2005 we drew down an additional $1,000,000 on the total of
$4,800,000 committed under the Facility. The draws were 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. We
allowed the remaining $800,000 commitment to expire on May 3, 2005. After taking
into account the effect of the completion of the February 2005 acquisition of
properties (see Note 2 to the Financial Statements), the closing of the Prospect
Facility and our recent private placement of common stock described below, and
before taking into account the effect of any new projects or acquisitions, we
believe that our current liquidity 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.
Subsequent to the end of the quarter, on May 6, 2005, we closed a private
placement of 1,200,000 shares of common stock with a European institutional
investor at a $2.50 price per share. Our gross proceeds were $3,000,000 before
payment of a $240,000 placement fee to Chadbourn Securities and Laird Q. Cagan,
the Chairman of our Board of Directors, and our obligation to issue them
warrants to purchase up to 96,000 shares of our common stock at a price of $2.50
per share.
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 properties. 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.
ADDITIONAL SALES OF COMMON STOCK AND DEBT INCURRENCE:
During the nine months ended March, 31, 2005, we raised gross proceeds of
$1,728,876 from the sale of our common stock and warrants to purchase our common
stock. Of the total, $579,868 was received from the sale of 394,200 shares of
our common stock and exercise of options for 70,000 shares were issued upon the
exercise of options previously granted under the Company's stock option plan.
The remaining $1,149,008 was allocated to the sale of the Prospect Warrants as
described under "Options and Warrants" in Note 6 to the Financial Statements.
Also during the nine months ended March 31, 2005, we increased our debt, net of
repayments, by $2,118,385, and replaced short-term debt with long-term debt and
equity under the Prospect Facility.
These debt and equity issuances have allowed us to:
o Better match our long-term asset base with a longer term debt structure,
while also relieving our liquidity issues. This is in sharp contrast to
our previous debt structure that was comprised entirely of short-term
debt.
o Close the acquisition of additional oil and gas properties in the Tullos
Urania, Colgrade and Crossroads field area where we already own existing
offset production acquired in September 2004 (together, the "Tullos Field
Area"), thus potentially increasing our cash flow from operations through
both increased production and synergies with our existing properties.
o Initiate further development of our existing oil and gas properties in
accordance with our business plan to exploit known petroleum resources.
o Continue to seek additional acquisition candidates in accordance with our
business plan.
For a summary of the terms of the Prospect Facility, the Prospect Loans and the
Prospect Warrants, see Note 5, Notes Payable, and Note 6, Common Stock, Options
and Warrants to the Financial Statements.
Subsequent to the end of the quarter, on May 6, 2005, we closed a private
placement of 1,200,000 shares of common stock with a European institutional
investor at a $2.50 price per share. Our gross proceeds were $3,000,000 before
payment of a $240,000 placement fee to Chadbourn Securities and Laird Q. Cagan,
the Chairman of our Board of Directors, and our obligation to issue them
warrants to purchase up to 96,000 shares of our common stock at a price of $2.50
per share.
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,
our comparative results are limited.
During the nine months ended March 31, 2005, we generated revenues of
$1,016,828, as compared to $72,801 for the period from our inception (September
23, 2003) through March 31, 2004 (herein referred to as "the six months ended
March 31, 2004"). Of significance in the nine months ended March 31, 2005, we
began our first natural gas sales from our Delhi Field in July 2004, began
recognizing revenues from our first property acquisition in the Tullos Field
Area in September 2004 and began recognizing revenues from our second
acquisition in our Tullos Field Area during February 2005.
Although our revenues have continued to increase substantially each quarter, our
most disappointing result for the current fiscal quarter is that revenues did
not increase more dramatically, despite the fact that our most recent
acquisition in the Tullos Field Area generated revenues for two of the latest
three month period. Specifically, our operating results for the three months
ended March 31, 2005 were adversely impacted by the following events:
o What appears to be our most significant oil well to date, a re-completion
of the Delhi Ut. #87-2, did not begin production until April 2005.
o Our second most significant oil well, the Delhi Ut. #197-2, continued to
experience reduced production and numerous non-production days due to sand
production.
o A major constraint on our revenues was caused by heavy rains that
prevented our crude oil purchaser from loading oil at many of our tank
batteries. Therefore, our oil sales during the quarter were substantially
less than our production, causing our crude oil inventories to increase
materially, thus reducing our recognized revenues. In the Tullos Field
Area, our ending inventories in storage tanks were approximately 5,600
gross barrels of oil (which is not recorded on our balance sheet),
approximately 4,300 of which are salable under ordinary operating
conditions. Oil produced and stored and not sold due to inaccessibility
represents potential future revenues to be recognized in subsequent
periods.
o Extended rains also prevented most development work in all of our fields
as roads could not be built for new locations and existing roads could not
be maintained. The heavy rains also severely limited ongoing maintenance
and repair work in the Tullos area fields, causing a loss in production
from wells shut-in for repairs.
o The high industry demand for workover service rigs led to our not having
access to equipment during most of March. As our wells in the Tullos Field
Area require a high level of maintenance and repair, more active wells
were not producing for a portion of those months than is normal.
The following remedial actions have been or are expected to be taken:
o We are aggressively taking action to establish steady production for the
Delhi Ut. #87-2 re-completion, as we believe it has the potential to
substantially increase our production and results from operations,
beginning with the quarter ended June 30, 2005. Initial test production
from the well was approximately 90 barrels of oil per day (90 BOD) and 30
thousand cubic feet of gas per day (30 MCFD). The well free-flowed at
virgin pressure, indicating a lack of previous depletion. Our completion
activities caused a packer leak that began constraining production, thus
requiring us to shut-in the well for remedial service at the end of April.
We anticipate the well will be returned to production in the near future
o We are evaluating a switch to a progressive cavity pump for the Delhi Ut.
#197-2 that is more resistant to sand production.
o We are planning to sell our 4,300 gross barrels of excess inventory at
Tullos, thus increasing our results from operations.
o We plan to start a program of improving the roads in the Tullos Field Area
and we are evaluating the movement of certain tank batteries to locations
more resistant to rain.
o We are considering the replacement of high maintenance beam pumps with
submersible pumps in the Tullos Field Area, potentially reducing
maintenance expense and production downtime.
o We have arranged for a local well service company to activate and dedicate
a service rig to our priority use in the Tullos Field Area.
Following is a summary of the progress we have made in both production and
revenue, net to our interest:
THREE MONTHS ENDED
-----------------------------------------------------------------
Net to NGS: Units 12-31-03 3-31-04 6-30-04 9-30-04 12-31-04 3-31-05
Oil & Gas Revenue $ $24,249 $48,572 $69,586 $231,167 $365,768 $419,893
Oil Volumes Sold BO 857 1,498 1,934 3,955 5,234 6,545
Gas Volumes Sold MCF - - 110 11,252 15,679 16,378
Barrels of Oil Equivalent Sold BOE 857 1,498 1,952 5,830 7,847 9,275
Oil Price $/BBL $28.29 $32.43 $ 35.64 $42.66 $47.94 $47.61
Gas Price $/MCF - - $5.90 $5.55 $7.32 $6.71
Operating cost BOE $92.54 $43.20 $43.17 $26.38 $24.14 $25.97
DD&A BOE $16.29 $9.06 $14.33 $6.88 $6.88 $6.01
Highlights of our performance, as shown in the table above:
o Increasing revenues for each quarter since we began our operations in
September of 2003.
o Increasing volumes sold for each quarter since inception, with average
daily sales increasing from 9 BOEPD during the three months ended December
31, 2003 to 103 BOEPD, net to our interest.
o Decreasing operating costs per BOE for almost all quarters since
inception. The exception being the most recent fiscal quarter, caused by
constrained oil sales due to purchaser's inability to gain access to
storage tanks because of heavy rain.
o Decreasing DD&A, due to lower acquisition costs per BOE on recent field
purchases.
Average daily sales were 103 BOEPD for the three months ended March 31, 2005
compared to 16 BOEPD during the three months ended March 31, 2004.
General and administrative expenses increased for the nine months ended March
31, 2005 to $1,706,871, from $509,783 for the six months ended March 31, 2004.
Of the $1,706,871 incurred in the most recent nine month period, $620,589 was
due to non-cash charges for stock compensation expense (mostly attributable to
the Tatum contract re-negotiation), versus $104,707 of similar non-cash charges
for the six months ended March 31, 2004. Also included in general and
administrative expenses for the nine month period ended March 31, 2005, are
significant costs of being a public company. Such costs include additional
audit, tax, legal, printing, stock transfer, annual proxy statement preparation,
public merger expenses and similar costs incurred by public companies. We were
not a public company during the six months ended March 31, 2004.
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 our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we file or submit
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 February 8, 2005, and March
21, 2005.
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 February 8, 2005
Current Report on Form 8K filed March 21, 2005
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: May 16, 2005
EXHIBIT 31.1
CERTIFICATION
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: May 16, 2005
/s/ Robert S. Herlin
------------------------
Robert S. Herlin
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
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 May 16, 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 March 31, 2005 (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
16th day of May, 2005.
/s/ Robert S. Herlin
--------------------------
Robert S. Herlin
Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to Natural Gas Systems, Inc. and will be retained by Natural Gas
Systems, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request. The foregoing certificate is being furnished to the
Securities and Exchange Commission as an exhibit to this Form 10QSB and shall
not be considered filed as part of the Form 10QSB.
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 March 31, 2005 (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
16th day of May 2005.
/s/ Sterling H. McDonald
---------------------------
Sterling H. McDonald
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Natural Gas Systems, Inc. and will be retained by Natural Gas
Systems, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request. The foregoing certificate is being furnished to the
Securities and Exchange Commission as an exhibit to this Form 10QSB and shall
not be considered filed as part of the Form 10QSB.