Notes to Consolidated Financial Statements
September 30, 2021 and 2020
Note 1 - Nature of Operations and Summary of Significant Accounting Policies.
Nature of operations: Altex Industries, Inc., through its wholly-owned subsidiary, jointly referred to as “the Company,” owns non-working interests in productive oil and gas properties located in Utah and Wyoming. The Company’s revenues are generated from interest income from cash deposits and from sales of oil and gas production. The Company’s operations are significantly affected by changes in interest rates and oil and gas prices.
Principles of consolidation: The consolidated financial statements include the accounts of Altex Industries, Inc. and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain amounts in the prior year have been reclassified to conform to the current year presentation.
Property and equipment: The Company follows the successful efforts method of accounting for oil and gas operations, under which exploration costs, including geological and geophysical costs, annual delay rentals, and exploratory dry hole costs, are charged to expense as incurred. Costs to acquire unproved properties, to drill and to equip exploratory wells that find proved reserves, and to drill and to equip development wells are capitalized. Capitalized costs relating to proved oil and gas properties are depleted on the units-of-production method based on estimated quantities of proved reserves and estimated ARO. Upon the sale or retirement of property and equipment, the cost thereof and the accumulated depreciation, depletion, and valuation allowance are removed from the accounts, and the resulting gain or loss is credited or charged to operations.
Impairment of long-lived assets: The Company assesses long-lived assets for impairment when the carrying value of such assets may not be recoverable. This review compares the asset’s carrying value with management’s estimate of its undiscounted cash flows. If the estimated cash flows exceed the carrying value, no impairment is recognized. If the carrying value exceeds the estimated cash flows, an impairment equal to the excess of the carrying value over the estimated cash flows is recognized. No such impairment may be restored in the future. The Company’s proved oil and gas properties are assessed for impairment on an individual field basis.
Asset retirement obligations: If the Company acquires a working interest in an oil and gas property that is placed in service, it records a liability for its ARO. Subsequently, the ARO liability is accreted to its then-present value. Inherent in the estimation of ARO are numerous assumptions and judgments including ultimate settlement amounts, inflation rates, discount rates, timing of settlement, and changes in regulations. To the extent changes in these assumptions impact the estimate of the ARO, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Earnings (loss) per share: Basic earnings (loss) per share has been calculated based on the weighted average number of common shares outstanding. Under this method, the incremental number of shares used in computing diluted earnings per share (EPS) is the difference between the number of shares assumed issued and purchased using assumed proceeds. Diluted EPS amounts would include the effect of outstanding stock options, warrants, and other convertible securities if including such potential shares of common stock is dilutive. Basic and diluted earnings per
share are the same in the periods presented as there are no such outstanding instruments at September 30, 2021, or September 30, 2020.
Fair value measurements: “Fair value“ is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of fair value estimation, based on the observability of inputs: Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Level 2. Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3. Valuations based on inputs that are unobservable and significant to the overall fair value measurement. As of September 30, 2021 and 2020, the Company believes the amounts reported for the carrying value of cash, other current assets, accounts payable, accrued expenses (related parties), and other accrued expenses, as reflected in the consolidated balance sheets, approximate fair value, due to the short maturity of these instruments.
Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Income Taxes: The Company follows the asset and liability method of accounting for deferred income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial accounting and tax bases of assets and liabilities. The Company reports uncertainty in income taxes according to GAAP. There was no increase in liabilities for unrecognized tax benefits during the current year. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expense. There was neither interest nor penalty at September 30, 2021.
Concentrations of credit risk: The Company maintains significant amounts of cash and sometimes permits cash balances to exceed insured limits.
Revenue recognition: The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Substantially all the Company’s revenue is from sales of oil and gas production, interest income, and, occasionally, bonus payments for mineral leases. Revenue from oil and gas production is recognized based on sales date as reported to the Company by the operators of oil and gas production facilities in which the company has an interest. Interest income is recognized when earned. The Company accounts for mineral lease bonus payments in accordance with the guidance set forth in ASC 932, Extractive Activities – Oil and Gas, and it classifies such income as other income. The Company recognizes revenue from mineral lease bonus payments when it has received both an executed agreement and the bonus payment, and the Company has no obligation to refund any portion of the payment. The Company classifies mineral lease bonus payments as other income because the leasing of mineral interests is not a principal business activity of the Company, and material amounts of mineral lease bonus payments do not occur with any regularity.
Other Income: Other income is any income the Company receives that is neither oil and gas sales attributable to the current period nor interest income. Other income includes out-of-period sales revenue, various items of miscellaneous income as well as lease bonus payments.
Recent Accounting Pronouncements:
In February 2016 the FASB issued ASU 2016-2, Leases (Topic 842), which requires lessees to recognize a lease liability and right-of-use asset for all leases, including operating leases, with a term greater than 12 months. The provisions of ASU 2016-2 also modify the definition of a lease and outline the requirements for recognition, measurement, presentation, and disclosure of leasing arrangements. ASU 2016-2 is effective for annual periods beginning after December 15, 2018. The Company adopted the provisions of ASU 2016-2 effective October 1, 2019.
In December 2019 the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740). The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not believe the adoption of ASU-2019-12 will have a material impact on the Company’s financial statements.
Note 2 - Income Taxes. At September 30, 2021, the Company had a depletion carryforward of $860,000 and a net operating loss carryforward of $2,557,000, of which $2,259,000 will expire in the years 2028 through 2037. The approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets at September 30, 2021, computed in accordance with the Income Tax Topic (Topic 740) of the Codification, is as follows:
|
Deferred Tax Assets
|
|
2021
|
|
2020
|
|
Depletion carryforward
|
$
|
181,000
|
|
181,000
|
|
Net operating loss carryforward
|
|
537,000
|
|
519,000
|
|
Accrued shareholder salary
|
|
215,000
|
|
215,000
|
|
Deletion and amortization
|
|
4,000
|
|
4,000
|
|
Total Net Deferred Tax Assets
|
|
937,000
|
|
919,000
|
|
Less valuation allowance
|
|
(937,000)
|
|
(919,000)
|
|
Net Deferred Tax Asset
|
$
|
-
|
|
-
|
A valuation allowance has been provided because of the uncertainty of future realization. Income tax expense is different from amounts computed by applying the statutory Federal income tax rate for the following reasons:
|
|
|
2021
|
2020
|
|
Tax benefit at 21% of net earnings
|
$
|
(17,000)
|
(27,000)
|
|
Impact of rate change effective January 1, 2018
|
|
-
|
-
|
|
Change in valuation allowance for net deferred tax assets
|
|
(17,000)
|
(27,000)
|
|
Income tax expense
|
$
|
-
|
-
|
As of September 30, 2021, the Company has no unrecognized tax benefit as a result of uncertain tax positions. As of September 30, 2021, the Company’s tax years that remain subject to examination are 2018 - 2021 (Federal jurisdiction) and 2017 - 2021 (state jurisdictions).
Note 3 - Related Party Transactions. Effective October 1, 2021, the Company renewed its employment agreement with its president. The agreement has an initial term of five years and provides an annual base salary equal to the maximum annual contribution to a Health Flexible Spending Arrangement (FSA) and an annual bonus of no less than 20% of the Company's earnings before tax, payable, at the president’s election, in either cash or common stock of the Company at then fair market value. The Company matches any contribution that the president makes to the Company’s FSA. The agreement contains provisions providing for payments to the president in the event of his disability or termination of his employment. At September 30, 2021, accrued expense, related party, includes $1,024,000 in salary payable to the Company’s president, pursuant to his employment agreement, that the president has elected to defer, as well as $49,000 in related accrued payroll tax. The Company’s president may require the Company to pay the unpaid salary and payroll tax liability at any time.
Effective October 1, 2016, the Company renewed its employment agreement with its president. The agreement had an initial term of five years and provided an annual base salary equal to the maximum annual contribution to a Health Flexible Spending Arrangement (FSA) and an annual bonus of no less than 20% of the Company's earnings before tax, payable, at the president’s election, in either cash or common stock of the Company at then fair market value. The Company matched the contributions that the president made to the Company’s FSA. The agreement contained provisions providing for payments to the president in the event of his disability or termination of his employment. At September 30, 2020, accrued expense, related party, includes $1,024,000 in salary payable to the Company’s president, pursuant to his employment agreement, that the president has elected to defer, as well as $49,000 in related accrued payroll tax. The Company’s president may require the Company to pay the unpaid salary and payroll tax liability at any time.
Note 4 - Major Customers. In 2021 the Company had three customers who individually accounted for 10% or more of the Company's oil and gas sales and who, in aggregate, accounted for 93% of oil and gas sales. In 2021 the three customers individually accounted for 63%, 17% and 13% of oil and gas sales. In 2020 the Company had three customers who individually accounted for 10% or more of the Company's oil and gas sales and who, in aggregate, accounted for 97% of oil and gas sales. In 2020 the three customers individually accounted for 43%, 41% and 13% of oil and gas sales.
Note 5 - Leases. The Company rents office space under an operating lease that terminates on June 30, 2025. The Company may cancel the lease upon 30 days’ notice and the payment of a $4,000 termination fee. If the landlord sells the premises to an unrelated third party, the new landlord may reduce the term to one year from the date of purchase. The Company incurred lease cost of $27,000 in 2021 and $26,000 in 2020. The landlord may increase annual rent no more than CPI. On October 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) ASC 842, “Leases.” The Company adopted ASC 842 using the optional modified retrospective transition method. Under this transition method, the Company did not recast the prior period financial statements. The adoption of ASC 842 resulted in the recognition of a right-of-use asset and a corresponding lease liability of $118,000 at September 30, 2020.
|
Future minimum lease payments as of September 30
|
|
2022
|
27,000
|
|
2023
|
28,000
|
|
2024
|
28,000
|
|
2025
|
22,000
|
|
Total
|
105,000
|
Note 6 - Oil and Natural Gas Properties. Oil and natural gas properties consist of the following:
|
|
|
September 30
|
|
|
|
2021
|
|
2020
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
Proved, developed properties
|
|
$
|
333,000
|
|
$
|
333,000
|
|
Less: accumulated depreciation, depletion and impairment
|
|
|
(290,000)
|
|
|
(283,000)
|
|
Total oil and natural gas properties
|
|
$
|
43,000
|
|
$
|
50,000
|
As the Company does not own working interests, it is not liable for the cost of well abandonment or surface restoration, so no ARO liability was recorded at September 30, 2021 and 2020.
Note 7 - Equity and treasury stock transactions. In the year ended September 30, 2021, the Company purchased 130,000 shares of its common stock for an average price of $0.15 per share and retired the shares. In the year ended September 30, 2020, the Company purchased 44,008 shares of its common stock for an average price of $0.09 per share and retired the shares.
Note 8 – Other Income. In the year ended September 30, 2021, other income consisted of $56,000 of out-of-period oil and gas sales that, unbeknownst to the Company, an operator had held in suspense and that was received in 2021, and $1,000 of other out-of-period oil and gas sales received in 2021. In the year ended September 30, 2020, other income consisted of $1,000 of out-of-period oil and gas sales received in 2020.
Note 9 – Subsequent events. The Company has evaluated all transactions from September 30, 2021, through the financial statement issuance date for subsequent event disclosure consideration and noted no significant subsequent event that needs to be disclosed.
Note 10 - Supplemental Financial Data - Oil and Gas Producing Activities (Unaudited). The Company's operations are confined to the continental United States, and all the Company's reserves are proved, developed.
I. Capitalized Costs. Capitalized costs include the cost of properties, excluding any asset retirement obligations.
|
|
|
September 30, 2021
|
|
Proved properties
|
|
$333,000
|
|
Accumulated depreciation, depletion, amortization and valuation allowance
|
|
(290,000)
|
|
Net capitalized cost
|
|
$43,000
|
II. Estimated Quantities of Reserves. Reed W. Ferrill & Associates, Inc., an independent engineering firm, prepared the Company’s estimate of reserves, future production, and income. The estimated reserves include only those quantities that are expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulations and with conventional operating methods. Proved, developed reserves represent only those reserves expected to be recovered from existing wells.
|
|
|
Oil in Barrels
|
|
Balance at September 30, 2019
|
|
2,400
|
|
Revisions of previous estimates
|
|
(700)
|
|
Production
|
|
(600)
|
|
Balance at September 30, 2020
|
|
1,100
|
|
Revisions of previous estimates
|
|
700
|
|
Production
|
|
(800)
|
|
Balance at September 30, 2021
|
|
1,000
|
III. Standardized Measure of Discounted Cash Flows. The standardized measure of discounted cash flows from the Company’s oil and gas reserves is summarized below. Cash flows are discounted at an annual rate of 10%. This does not result in an estimate of fair market or present value. Prices are the average of the NYMEX settlement price on the first day of each month of the year, corrected to received price. Cash flows are computed by applying that price to estimated production, less estimated expenditures incurred in estimated production. Income tax expense is not included because of the anticipated utilization of net operating loss and depletion carryforwards. The estimation of reserves is complex and subjective, and reserve estimates fluctuate in light of new production data.
|
|
At September 30
|
|
|
2021
|
2020
|
|
Estimated future revenue
|
$51,000
|
$33,000
|
|
Estimated future expenditures
|
(6,000)
|
(2,000)
|
|
Estimated future net revenue
|
45,000
|
31,000
|
|
10% annual discount of estimated future net revenue
|
(12,000)
|
(8,000)
|
|
Present value of estimated future net revenue
|
$33,000
|
$23,000
|
IV. Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
|
|
Year ended September 30
|
|
|
2021
|
2020
|
|
Present value of estimated future net revenue, beginning of year
|
$23,000
|
$58,000
|
|
Sales, net of production costs
|
(41,000)
|
(30,000)
|
|
Net change in prices and cost of future production
|
18,000
|
(7,000)
|
|
Revisions of quantity estimates
|
27,000
|
(16,000)
|
|
Accretion of discount
|
3,000
|
6,000
|
|
Change in production rates and other
|
3,000
|
12,000
|
|
Present value of estimated future net revenue, end of year
|
$33,000
|
$23,000
|