UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 
 x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2010
 
 o
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
 
 For the transition period   to
 
 Commission File Number: 000-53260
 
 Best Energy Services, Inc.
 (Exact name of small business issuer as specified in its charter)
 
 Nevada
02-0789714(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 5433 Westheimer Road, Suite 825, Houston, Texas 77056
 (Address of Principal Executive Offices)  (Zip Code)
 (713) 933-2600
 (Issuer’s Telephone Number, including Area Code)
 
 Securities registered under Section 12(b) of the Exchange Act:None
 
 Securities registered under Section 12(g) of the Exchange Act:
 Common Stock, par value $0.001 per share
 (Title of Class)
 
 Check whether the issuer (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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 daysxYes   oNo
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ̈No ̈
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
  Large Accelerated filer o
Accelerated fileroNon-Accelerated filero (Do not check if a smaller reporting company)
Smaller Reporting Company x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YesoNox
 
 State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,075,209 common shares as of May 17, 2010.
  
 1
  BESTENERGY SERVICES, INC.
 
 
 Table of Contents
 
 PagePART I. FINANCIAL INFORMATIONItem 1.Unaudited Consolidated Financial Statements

3Unaudited Consolidated Balance Sheets as of March31, 2010 and December 31, 2009

3Unaudited Consolidated Statements of Operations for the Three  Months EndedMarch 31, 2010 and 2009

4Unaudited Consolidated Statements of Cash Flow for the Three  Months Ended March 31, 2010 and 2009

5Notes to Unaudited Consolidated Financial Statements

6Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations

24Item 3. Quantitative and Qualitative Disclosures About Market Risk

29Item 4. Controls and Procedures

29PART II. OTHER INFORMATIONItem 1. Legal Proceedings

31Item 1A. Risk Factors

31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

32Item 3. Defaults Upon Senior Securities

33Item 4. Submission of Matters to a Vote of Security Holders

33Item 5. Other Information

33Item 6. Exhibits

33Signatures

34
  2
 Table of Contents
 
 BestEnergy Services, Inc. and SubsidiariesUnaudited Consolidated Balance SheetsAs of March 31, 2010 and December 31, 2009March 31, 2010


December 31, 2009Current assetsCash

$
14,286


$
51,825Accounts receivable, net of allowance for doubtful accountsof $48,623 as of March 31, 2010 and December 31, 2009


726,452



489,866Prepaid and other current assets


56,451



20,000Total current assets


797,189



561,691Property and equipment, net


16,944,180



17,482,679Deferred financing costs, net


205,661



246,793Intangible assets


3,459



3,459Assets of discontinued operations


5,416,099



5,986,356TOTAL ASSETS

$
23,366,588


$
24,280,978LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)Current liabilitiesAccounts payable and accrued liabilities

$
1,231,872


$
1,076,660Accrued interest


404,098



283,807Bank overdraft


2,028



24,482Accrued officer compensation


290,000



245,000Preferred dividends payable


579,722



1,137,534Current portion of loans payable


19,709,293



4,367,145Total current liabilities


22,217,013



7,134,628Officer compensation, long-term portion


245,000



290,000Loans payable


18,506



16,473,338Convertible notes payable, net of discount of $507,087 and $540,016


580,913



547,984Deferred income taxes


5,124,160



5,269,691Liabilities related to discontinued operations


1,155,476



1,334,506TOTAL LIABILITIES


29,341,068



31,050,147STOCKHOLDERS' DEFICITStock payable


252,455



120,000Subscriptions receivable


(107,255
)


-Series A Preferred Stock, 2,250,000 shares authorized, 1,608,506 and 1,524,449 shares issued and outstanding as of March 31, 2010 and December 31, 2009, at redemption value of $10 per share.


16,085,060



15,244,490Common stock, $0.001 par value per share; 90,000,000 shares authorized; 32,837,709 and 21,060,109 shares issued and outstanding as of March 31, 2010 and December 31, 2009,


32,838



21,060Additional paid-in capital


4,525,941



3,429,928Retained deficit


(26,688,731
)


(25,519,309Non-controlling interest


(74,788
)


(65,338Total stockholders’ equity (deficit)


(5,974,480
)


(6,769,169TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$
23,366,588


$
24,280,978
 
 
 (See accompanying notes to consolidated financial statements.)
  3
 Table of Contents
  
 BestEnergy Services, Inc. and SubsidiariesUnaudited Consolidated Statements of OperationsFor the three months ended March 31, 2010 and 2009Three Months Ended


Three Months EndedMarch 31, 2010


March 31, 2009RevenuesWell service revenue

$
1,356,536


$
1,877,390Drilling service revenue


-Geological services


-Total revenue


1,356,536



1,877,390Costs and expenses:Direct cost of revenue


591,032



908,170Business unit operating expenses


430,656



419,384Depreciation and amortization


630,719



574,687Corporate General and administrative expenses


467,041



679,306Total operating costs and expenses


2,119,448



2,581,547Net operating loss


(762,912
)


(704,157
)Other income (expense):Other Income


124



751Interest expense


(506,206
)


(157,280
)Loss before provision for income taxes


(1,268,994
)


(860,686
)Deferred income tax benefit


145,531



88,947Net loss from continuing operations


(1,123,463
)


(771,739
)Loss from discontinued operations


(50,280
)


(375,439
)Total net loss including non-controlling interest


(1,173,743
)


(1,147,178
)Loss attributable to non-controlling interests


9,450



-Net loss attributable to Best


(1,164,293
)


(1,147,178
)Preferred stock dividend


(282,758
)


(255,254
)Deemed dividend


(5,129
)


-Net loss attributable to common shareholders

$
(1,452,180
)


(1,402,432
)Per common share data - basic and diluted:Loss from continuing operations

$
(0.06
)

$
(0.05
)Loss from discontinued operations

$
(0.00
)

$
(0.02
)Net loss


(0.06
)


(0.07
)Weighted Average Outstanding Shares - basic and diluted


22,549,402



20,942,971
  (See accompanying notes to consolidated financial statements.)
  4
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 Best Energy Services, Inc. and SubsidiariesUnaudited Consolidated Statements of Cash FlowFor the three months ended March 31, 2010 and 2009
  Three Months Ended


Three Months EndedMarch 31, 2010


March 31, 2009Net loss from continuing operations

$
(1,123,463
)

$
(771,739
)Net loss from discontinued operations, including non-controlling interest


(50,280
)


(375,439
)Total Net Loss


(1,173,743
)


(1,147,178
)Adjustments to reconcile net loss to net cashused for operating activities:Options issued for services


276,805



352,751Shares owed for services


25,200



-Non-cash interest expense


312,926



220,999Depreciation expense


630,719



934,017Loss on sale of fixed assets


4,830



-Deferred income tax benefit


(324,561
)


(138,947
)Changes in operating assets and liabilities:Accounts receivable


(236,586
)


1,651,656Prepaid expenses


(36,451
)


(35,030
)Accounts payable


(2,414
)


(408,730
)Accrued expenses


277,917



(35,000
)CASH PROVIDED (USED) FOR OPERATING ACTIVITIES


(245,358
)


1,394,538CASH FLOWS FROM INVESTING ACTIVITIESCash paid for purchase of fixed assets


(92,220
)


(2,851
)CASH USED FOR INVESTING ACTIVITIES


(92,220
)


(2,851
)CASH FLOWS FROM FINANCING ACTIVITIESNet borrowings on LOC


(81,116
)


(972,512
)Principal payments on debt


(466,151
)


(364,805
)Proceeds from issuance of stock


869,760



-Payment of deferred financing costs


-



(194,454
)Payment of bank overdraft


(22,454
)


-CASH PROVIDED (USED) BY FINANCING ACTIVITIES


300,039



(1,531,771
)NET DECREASE IN CASH


(37,539
)


(140,084
)CASH AT BEGINNING OF PERIOD


51,825



249,330CASH AT END OF PERIOD

$
14,286


$
109,246
      (See accompanying notes to consolidated financial statements.)
  5
 Table of Contents
 
 Best Energy Services, Inc. and SubsidiariesUnaudited Consolidated Statements of Cash Flow ContinuedFor the three months ended March 31, 2010 and 2009Cash paid for:Interest

$
273,880


$
2,073,323Taxes

$
-



-NON-CASH TRANSACTIONSCashless exercise of options

$
-


$
76Accrued stock dividends

$
282,758


$
255,253Proceeds from sales of fixed assets paid directly to noteholder

$
565,427


$
-Dividends declared for preferred stock paid in-kind

$
840,570


$
-Deemed dividend

$
5,129


$
  (See accompanying notes to consolidated financial statements.)
  6
 Table of Contents
  Best Energy Services, Inc. and Subsidiaries
 Unaudited Notes to the Consolidated Financial Statements
 
 Note 1 - Basis of Presentation
 
 The accompanying unaudited interim consolidated financial statements have been prepared pursuant to accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained on Form 10-K for the year ended December 31, 2009 filed with the SEC on April 27, 2010.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for the year ending December 31, 2009 have been omitted.  These unaudited interim consolidated financial statements include the accounts of Best Energy Services, Inc. (“Best Energy”) and its wholly-owned subsidiaries: Best Well Services, Inc. (“BWS”) and Bob Beeman Drilling, Inc. (“BBD”), and its 55% owned subsidiary Best Energy Ventures, LLC (BEV).  All significant inter-company balances and transactions have been eliminated.  Except as otherwise noted, all references herein to “Best Energy,” the “Company,” “we,” “us,” or “our” means Best Energy Services, Inc. and its consolidated subsidiaries.
 
 Going Concern
 
 The Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. At current levels, the Company’s established source of revenues is not sufficient to cover its operating costs, which raises substantial doubt about its ability to continue as a going concern.  In addition, the Company is currently in default under the Amended Credit Agreement (see discussion below), further exacerbating its ability to continue as a going concern.
 
 Reclassifications
 
 Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income, cash flows or stockholders’ deficit as a result of these reclassifications.
 
 Note 2 - Summary of Significant Accounting Policies
 
 Use of Estimates
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.
 
 Principles of Consolidation
 
 These consolidated financial statements include the accounts of Best Energy, its wholly owned subsidiaries Best Well Services, Inc. (BWS) and Bob Beeman Drilling Company (BBD), and its 55% owned subsidiary Best Energy Ventures, LLC (BEV).  All significant inter-company balances and transactions have been eliminated. All amounts are reported at gross on the consolidated statement of operations, with the loss attributable to the non-controlling members of BEV broken out on a separate line.
 
 Cash and Cash Equivalents
 
 We consider all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.  As of March 31, 2010 and December 31, 2009, we had no cash balances in excess of federally insured limits and no cash equivalents.
  7
 Table of Contents
  Accounts Receivable
 
 We provide for an allowance for doubtful accounts on trade receivables based on historical collection experience and a specific review of each customer’s trade receivable balance.  Based on these factors we have established an allowance for doubtful accounts of $48,623 at March 31, 2010 and December 31, 2009.
 
 Credit Risk
 
 We are subject to credit risk relative to our trade receivables. However, credit risk with respect to trade receivables is minimized due to the nature of our customer base.
 
 Property and Equipment
 
 Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the assets’ useful lives or lease terms.
 
 Classification
Estimated Useful LifeRigs and related equipment
10 yearsVehicles
5 yearsHeavy trucks and trailers
7 yearsLeasehold improvements
5 yearsOffice equipment
3 years
 
 The cost of asset additions and improvements that extend the useful lives of property and equipment are capitalized.  Routine maintenance and repair items are charged to current operations. The original cost and accumulated depreciation of asset dispositions are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition.
 
 
 Impairment of Long-Lived Assets
 
 Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.
 
 Deferred Financing Costs
 
 The Company capitalizes certain costs in connection with obtaining its borrowings, such as lender’s fees and related attorney’s fees. These costs are being amortized to interest expense using the effective interest method.
 
 Deferred financing costs were $205,661 and $246,793 net of accumulated amortization at March 31, 2010 and December 31, 2009, respectively. Amortization of deferred financing costs totaled $41,132 for the three months ended March 31, 2010 and zero three months ended March 31, 2009.
 
 Assets Held for Sale
 
 The Company classifies certain assets as held for sale, based on management having the authority and intent of entering into commitments for sale transactions expected to close in the next twelve months. When management identifies an asset held for sale, the Company estimates the net selling price of such an asset. If the net selling price is less than the carrying amount of the asset, a reserve for loss is established. Fair value is determined at prevailing market conditions, appraisals or current estimated net sales proceeds from pending offers. The Company identified $5,416,099 and $5,986,356 of assets held for sale at March 31, 2010 and December 31, 2009. These assets were part of the discontinued operations of BBD and BGS.
  8
 Table of Contents
  Financial Instruments
 
 The carrying value of our financial instruments, consisting of cash, accounts receivable, accounts payable and accrued liabilities, dividends payable and loans payable approximate their fair value due to the short maturity of such instruments.  Unless otherwise noted, it is management’s opinion that Best Energy is not exposed to significant interest, exchange or credit risks arising from these financial instruments.
 
 Best Energy follows FASB ASC Topic 480, “Distinguishing Liabilities from Equity” (“ASC Topic 480”). ASC Topic 480 establishes standards for issuers of financial instruments with characteristics of both liabilities and equity related to the classification and measurement of those instruments and Best Energy applies the provisions of this statement in the determination of whether its mandatorily redeemable preferred stock is properly classified as a liability or equity.
 
 Income Taxes
 
 Income taxes are accounted for in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC Topic 740”), Under ASC Topic 740, income taxes are recognized for the amount of taxes payable for the current year and deferred tax assets and liabilities for the future tax consequence of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. For those tax positions where it is not “more likely than not” that a tax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are also recorded.  Interest and penalties, if any, are recorded within the provision for income taxes in the Company’s Consolidated Statements of Income and are classified on the Consolidated Balance Sheets with the related liability for uncertain tax contingency liabilities. As of March 31, 2010 and December 31, 2009, the Company had no uncertain tax positions.
 
 Revenue Recognition
 
 We recognize service revenue based on rate agreements in effect with customers as the service is provided and realization is assured.  We recognize equipment sales revenue when risk of loss has transferred to the purchaser and collectability is reasonably assured.
 
 Operating Leases
 
 The Company’s activities are run out of leased premises in Liberal, Kansas and Houston, Texas.  All leases are classified as operating leases that expire over the next three years and are expensed straight line
 
 In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases.
 
 
 Stock-Based Compensation
 
 We account for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC Topic 718”), which establishes accounting for stock-based payment transactions for employee services and goods and services received from non-employees.  Under the provisions of ASC Topic 718, stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the award, and is recognized as expense over the employee’s or non-employee’s service period, which is generally the vesting period of the equity grant.
  9
 Table of Contents
  Income (Loss) per Share
 
 We report basic loss per share in accordance with FASB ASC Topic 260, “Earnings Per Share” (“ASC Topic 260”). Basic loss per share is computed using the weighted average number of shares outstanding during the period.  Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).  Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon Best Energy’s net income (loss) position at the calculation date.  Diluted loss per share has not been provided as it is anti-dilutive.
  Preferred Stock
 
 We accrue a 1.75% dividend on our preferred stock each quarter.  As dividends are declared either as payment in kind or in cash, we relieve the accrued liability.
 
 Recent Accounting Pronouncements
 
 In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have Vendor Specific Objective Evidence (“VSOE”) of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15, 2010 and early adoption is permitted. The adoption of the new standards will not have an impact on The Company’s consolidated financial position, results of operations and cash flows.
  In June 2009, the FASB issued guidance establishing the Codification as the source of authoritative U.S. Generally Accepted Accounting Principles (“U. S. GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to update the Codification, provide background information about the guidance and provide the basis for conclusions on changes in the Codification. All content in the Codification carries the same level of authority, and the U.S. GAAP hierarchy was modified to include only two levels of U.S. GAAP: authoritative and non-authoritative. The Codification is effective for the Company’s interim and annual periods beginning with the Company’s year ending December 31, 2009. Adoption of the Codification affected disclosures in the Consolidated Financial Statements by eliminating references to previously issued accounting literature, such as FASBs, EITFs and FSPs.
 
 In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards amend the evaluation criteria to identify the primary beneficiary of a variable interest entity and require ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. The adoption of the new standards will not have an impact on The Company’s consolidated financial position, results of operations and cash flows.
 
 In May 2009, the FASB issued guidance establishing general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and shall be applied to subsequent events not addressed in other applicable generally accepted accounting principles. This guidance, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The adoption of this guidance had no impact on the Company’s consolidated financial position, results of operations and cash flows.
  10
 Table of Contents
  Note 3 - Property and Equipment
 
 Property and equipment consists of the following at March 31, 2010 and December 31, 2009:
 
 March 31,2010


December 31,2009Rigs, pumps, compressors, rig houses and related equipment

$
19,892,715



19,810,104Vehicles


2,122,788



2,113,177Office and computer equipment


46,250



46,250Total property and equipment


22,061,753



21,969,531Less: accumulated depreciation


(5,117,573
)


(4,486,852
)Property and equipment, net

$
16,944,180


$
17,482,679
 
 Depreciation expense was $630,719 and $574,687 for the three months ended March 31, 2010 and 2009.
 
 Note 4 – Loans Payable
 
 Loan Agreement
 
 The following summary of the terms of our loan agreement with PNC Bank, N.A. reflects the cumulative effect of the nine amendments that have been entered into since February 14, 2008, the date we entered into the Revolving Credit, Term Loan and Security Agreement with PNC Bank, N.A. (as amended through the date of this Report, the “Loan Agreement”).
 
 Term Loan.The principal amount owed under the term loan as of March 31, 2010 was $16,949,850.  Principal and interest on the term loan are payable monthly with principal payments due as follows: (i) $98,500 per month from May 1, 2009 through December 31, 2009; (ii) $125,000 per month from January 1, 2010 through December 31, 2010; and (iii) $150,000 per month thereafter until maturity, except that the principal due on May 1, 2010 was $50,000.  The term loan matures on March 11, 2011. The term loan also requires an annual 25% recapture of the Company’s excess cash flow to be applied to the principal balance, where excess cash flow is defined as EBIDTA less cash tax payments, non-financed capital expenditures and payments of principal on the term loan and interest on indebtedness for borrowed money.  The term loan bears interest at a rate equal to either (i) the alternate base rate (which is generally the greater of the federal funds open rate plus 1⁄2%, PNC’s base commercial lending rate and the daily LIBOR rate)  plus  2.75% or (ii) the greater of the eurodollar rate or 2%  plus  4.00%.  The interest rate on the term loan at March 31, 2010 was 6.00%.
 
 Revolver. The principal amount owed under the revolver as of March 31, 2010 was $2,680,629.  The revolving line credit under the Loan Agreement may be borrowed and re-borrowed until maturity.  The amount available under the revolver is the lesser of (i) $4.0 million and (ii) the sum of (A) 85% of eligible receivables, (B) 100% of cash collateral account held by PNC Bank as additional security and (C) a special over advance amount less (D) any outstanding undrawn letters of credit and such reserves as PNC Bank deems proper and necessary.  At March 31, 2010, there was approximately $300,000 available to borrow under the revolver.  As of the date of this Report, the special over advance amount is equal to $1,750,000 less 65% of any net cash proceeds received from the Company from the issuance of any equity interests in the Company after the date of this Report and will remain in place until March 31, 2011 at which time it will reduce to zero.  The revolving line of credit matures on March 11, 2011.  The revolver bears interest at a rate equal to either (i) the alternate base rate (which is generally the greater of the federal funds open rate plus 1⁄2%, PNC’s base commercial lending rate and the daily LIBOR rate)  plus  2.50% or (ii) the greater of the eurodollar rate or 2%  plus  3.75%.  The interest rate on the revolver at March 31, 2010 was 5.75%.
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 Table of Contents
  Borrowings under the Loan Agreement are secured by all of the assets and equipment of the Company and all subsidiaries.  Any equipment and assets purchased in the future will, once acquired, also be subject to the security interest in favor of PNC Bank.
 
 Under the Loan Agreement, we are subject to customary covenants, including certain financial covenants and reporting requirements. Beginning on March 31, 2010, we are required to maintain a fixed charge coverage ratio (defined as the ratio of EBITDA minus capital expenditures (except capital expenditures financed by lenders other than under the Amended Credit Agreement) made during such period minus cash taxes paid during such period minus all dividends and distributions paid during such period (including, without limitation, all payments to the holders of the Series A Preferred Stock), to all senior debt payments as follows:
 
 Twelve Month Period Ending:
Fixed Coverage Ratio:March 31, 2010
No TestJune 30, 2010
No TestSeptember 30, 2010
No TestDecember 31, 2010
No TestMarch 31, 2011 and each fiscal quarter ending thereafter
1.00 to 1.0
 
  
 Under the Loan Agreement, we are required to maintain a minimum EBITDA as follows:
  Period:

Minimum EBITDA:Three months ended March 31, 2010

$
130,000Six months ended June 30, 2010


700,000Nine months ended September 30, 2010


1,400,000Twelve months ended December 31, 2010


2,200,000Twelve months ended March 31, 2011 and each twelve month period ending on the final day of each fiscal quarter thereafter

No Test
 
 Under the Loan Agreement, we may not pay cash dividends on our common stock or our preferred stock or redeem any shares of our common stock or preferred stock.
 
 Under the Loan Agreement, we are required to maintain a minimum rig utilization requirements set forth in the table below:
  Period
Minimum Rig

UtilizationThree months ended March 31, 2010
5,325 hoursSix months ended June 30, 2010
14,825 hoursNine months ended September 30, 2010
25,450 hoursTwelve months ended December 31, 2010
36,225 hoursTwelve months ended March 31, 2011 and each twelve month period ending on the final day of each fiscal quarter thereafter
47,125 hours
  12
 Table of Contents
 
 Under the Loan Agreement, we are required to make mandatory repayments of the term loan from the proceeds of sale of certain equipment used in our drilling operations (that have been discontinued) set forth in the table below:
 
 Period

Minimum

RepaymentsOne month ended March 31, 2010

$
375,000Three months ended May 31, 2010

$
975,000Five months ended July 31, 2010

$
1,575,000Seven months ended September 30, 2010

$
2,175,000Nine months ended November 30, 2010

$
2,775,000Eleven months ended January 31, 2010

$
3,375,000Thirteen months ended March 31, 2011

$
3,750,000
 
 In addition to the foregoing and other customary covenants, the Loan Agreement contains a number of covenants that, among other things, will restrict our ability to:
 
 ·incur or guarantee additional indebtedness;·transfer or sell assets;·create liens on assets;·engage in transactions with affiliates other than on an “arm’s-length” basis; and·make any change in the principal nature of our business.
 
 
 The Loan Agreement also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross acceleration to certain other indebtedness, bankruptcy, a change of control and material judgments and liabilities.
 
 As of March 31 and May 17, 2010, we are in default on certain non-financial covenants of our Credit Agreement and our working with our bank to remedy those defaults.
 
 Vehicle Notes
 
 We have entered into various note agreements for the purchase of vehicles used in our business.  The notes bear interest at rates between 1.90% and 9.10%, require monthly payments of principal and interest and are generally secured by the specific vehicle being financed.  The notes typically have original terms of three to four years.  The majority of these notes were assumed by us in the acquisition of BWS.
 
 Future minimum payments under existing notes payable are as follows:
 
 For the twelve months ending March 31,

Amount2011

$
20,290,2062012


18,506
  13
 Table of Contents
  Convertible Debt
 
 During June, July and August 2009, we had several preliminary closings of a private placement for a total of 1,088 Units and received gross proceeds of $1,088,000 (net proceeds of $843,355 after cash commission of $244,645). Each Unit consists of a subordinated convertible note payable of $1,000 and warrants to purchase 4,000 shares of common stock at an exercise price of $0.25 per share at any time until expiration on July 1, 2014.  A total of 4,352,000 warrants were issued resulting in a discount on debt of $348,895. The notes bear interest at a rate of 10% per annum, which is payable either in cash semi-annually in arrears on July 1 and January 2 each year, commencing on January 2, 2010 or in shares of common stock at a price of $0.25 per share. Under the terms of the Amended Credit Agreement, we may not pay cash interest on the notes.  The notes are convertible at the option of the note holder into common stock at the rate of $0.25 per share (the “Conversion Price”) and mature on July 1, 2011.  If we achieve certain earnings hurdles, we may force the noteholders to convert all or part of the then outstanding notes at the Conversion Price.  The notes are unsecured obligations and are subordinate in right of payment to all of our existing and future senior indebtedness.
 
 We evaluated the terms of the notes in accordance with the new standard issued by the FASB related to the disclosure of derivative instruments and hedging activities.  Best Energy determined that the conversion feature did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability.  We evaluated the conversion feature for a beneficial conversion feature.  The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of our common stock at the inception of the note. A beneficial conversion feature was recognized and gave rise to a debt discount of $237,113, which is amortized over the life of the loans through July 2011 using the effective-interest-rate method.
 
 In connection with the private placement, we issued warrants to the placement agent to purchase 435,200 shares of common stock at an exercise price of $0.25 per share at any time until expiration on July 1, 2014.  These warrants were valued at $71,264 and are being amortized over the life of the loans through July 2011 using the effective-interest-rate method.
 
 The amortized value of the warrants and the beneficial conversion feature was $507,087 and $540,016 as of March 31, 2010 and December 31, 2009.  Additionally, cash fees totaling $244,645 and warrants valued at $71,264 were amortized over the life of the loans through July 2011 using the straight-line method.  Their net amortized value on March 31, 2010 was $205,611, and on December 31, 2009, it was $246,793.
 
 
 Note 5 -Stock Options and Warrants
 
 Stock Options
 
 Incentive and non-qualified stock options issued to directors, officers, employees and consultants are issued at an exercise price equal to or greater than the fair market value of the stock at the date of grant.  The stock options vest immediately or over a period ten to twenty-four months, and expire five years from the date of grant. Compensation cost related to stock options is recognized on a straight-line basis over the vesting or service period.
 
 The fair value of each stock option granted is estimated on the date of grant using a Black-Scholes option pricing model and the following weighted average assumptions for the three months ended: .
 
 March 31, 2010


March 31, 2009Expected life (years)


4.50



2.50Risk-free interest rate


2.40
%


1.35
%Volatility


176.20
%


120.00
%Dividend yield


0.00
%


0.00
%
 
 The expected life of the options represents the period of time the options are expected to be outstanding.  The expected term of options granted was derived based on a weighting between the average midpoint between vesting and the contractual term.  Our expected volatility is based on the historical volatility of comparable companies for a period approximating the expected life, due to the limited trading history of our common stock.  The risk-free interest rate is based on the observed U.S. Treasury yield curve in effect at the time the options were granted.  The dividend yield is based on the fact that we do not anticipate paying any dividends on common stock in the near term.
  14
 Table of Contents
  A summary of our stock option activity and related information is presented below:
 
 Weighted


WeightedAverage


AverageNumber of


Exercise Price


ContractualOptions


Per Option


Life (Years)Outstanding at January 1, 2008


-


$
-Granted/Issued


2,995,000



0.31Exercised


-



-Forfeited


(900,000
)


0.39Outstanding at December 31, 2008


2,095,000



0.28Granted/Issued


2,520,000



0.34Exercised


(150,000
)


0.50Forfeited


(300,000
)


0.25Outstanding at December 31, 2009


4,165,000



0.31Granted/Issued


8,550,000



0.10Exercised


-



-Forfeited


(1,205,000
)


0.25Outstanding at March 31, 2010


11,510,000


$
0.16



4.56
 
 
 The weighted average grant-date fair value per share for options granted during the year ended March 31, 2010 and 2009 was $0.10 and $0.86, respectively. As of March 31, 2010, there was $654,266 unrecognized compensation cost related to non-vested stock options.  Stock option expense recognized in the three months ended March 31, 2010 and 2009 was $30,774 and $276,805. At both March 31, 2010 and December 31, 2009, the aggregate intrinsic value of stock options outstanding was zero.  The intrinsic value for stock options outstanding is calculated as the amount by which the quoted price of our common stock as of December 31, 2009 exceeds the exercise price of the option.
  On February 3, 2010, the Board of Directors of the Company approved 8,550,000 options, including 7,250,000 to officers and directors with a strike price of the Company, as described below:
 
 ·
David Voyticky, a Director, received options to acquire 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 ·
James Byrd, Jr., a Director, received options to acquire 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 ·
Joel Gold, a Director, received options to acquire 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 ·
Mark G. Harrington, Chairman and CEO, received options to acquire 3,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 ·
Eugene Allen, President and COO, received options to acquire 750,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
  15
 Table of Contents
  ·
Dennis Irwin, CFO, received options to acquire 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 
 These options will vest as follows: (i) one-third (1/3) immediately upon date of grant, (ii) one-third (1/3) on the date that that the Company first records EBITDA of at least $5 million for a fiscal year (as reflected in the filing of the Company Annual report on Form 10-K for that fiscal year) and (iii) one-third (1/3) on the date that that the Company next records EBITDA of at least $5 million for a fiscal year (as reflected in the filing of the Company Annual report on Form 10-K for that fiscal year).  These option grants are also subject to the following conditions: (i) the options will vest immediately upon the occurrence of a change in control of the Company or the holder’s termination without cause; (ii) the options will be forfeited immediately upon a holder’s termination for cause; (iii) the options will be exercisable for 90 days following the holder’s voluntary termination from the Company; (iv) the options were not issued under a shareholder approved plan and will be non-qualified stock options under applicable IRS rules; (v) the options will be “restricted securities” under federal securities laws; (vi) the options will be subject to the  Company’s ability to comply with applicable federal and state securities laws; (vii) the directors’ options are subject to cutbacks if necessary to provide additional authorized shares for the Company’s various needs; (viii) the Board will have the sole and absolute discretion to interpret the terms of the options, including vesting, change in control and terminations for cause, and such determinations shall be final and binding on the holders.
 
 The following table summarizes the grant date fair values of our stock option activity, for non-vested options, granted options, vested options and forfeited options during the years ended December 31, 2009 and 2008:
 
 WeightedAverageNumber of


Grant DateOptions


Fair ValueNon-vested at December 31, 2008


300,000


$
0.47Granted


2,520,000



0.34Exercised


(150,000
)


0.5Vested


(2,039,479
)


0.38Forfeited


(300,000
)


0.25Non-vested at December 31, 2009


330,521



0.25Granted


8,550,000



0.10Vested


(3,918,750
)


0.10Forfeited


(330,521
)


0.25Non-vested at March 31, 2010


4,631,250


$
0.10
  16
 Table of Contents
  Warrants
 
 Weighted








WeightedWeighted


Average





Weighted


AverageNumber of


Average


Remaining


Number of


Average


RemainingCommon


Exercise


Contractual


Preferred


Exercise


ContractualShares


Price


Life (Years)


Shares


Price


Life (Years)Outstanding at December 31, 2008


1,141,875


$
0.46






135,630


$
0.16Granted/Issued


7,523,600



0.26






-



-Exercised


-



-






-



-Forfeited


-



-






-



-Outstanding at December 31, 2009


8,665,475



0.29



4.44



135,630



0.16



3.98Granted/Issued


29,436,100



0.10



4.98



-



-Exercised


-



-







-



-Forfeited


(2,550,000
)


0.25



4.71



-



-Outstanding at March 31, 2010


35,551,575



0.14



4.86



135,630



0.16



3.98Exercisable at March 31, 2010


35,551,575


$
0.14



4.86



135,630


$
0.16



3.98
 
 The fair value of each warrant granted is estimated on the date of grant using a Black-Scholes option pricing model and the following weighted average assumptions:
 
 Three months ended


Year endedMarch 31, 2010


December 31, 2009Expected life (years)


4.98



5.00Risk-free interest rate


2.40 - 2.65
%


2.30 - 2.74
%Volatility


171.19 - 176.35
%


120.00 - 180.84
%Dividend yield


0
%


0
%
 
 At March 31, 2010 and December 31, 2009, the aggregate intrinsic value of the warrants outstanding and exercisable for common shares and preferred shares was $0, due to a higher exercise price for all outstanding and exercisable warrants than the March 31, 2010 and December 31, 2009 closing stock price.
 
 For the three months ended March 31, 2010 and 2009, we recognized expense of $130,243 and zero associated with warrants.
  17
 Table of Contents
  Note 6 - Stockholders’ Equity
 
 Private Placements
 
 From March 25 through March 31, 2010, the Company sold units of Company securities (the “Units”) at a price of $24,000 per Unit (the “Offering”), with each Unit consisting of (i) 240,000 shares of Common Stock, (ii) five-year warrants to acquire 240,000 shares of Common Stock at an exercise price of $0.10 per share (“Subscription Warrants”) and (iii), if investors in the Offering hold shares of the Company’s Series A Preferred Stock, par value $0.001 per share (“Preferred Stock”), additional five-year warrants to acquire shares of Common Stock at an exercise price of $0.10 per share (“Participation Warrants”).  The placement agent for the Offering (or its sub-agents) received the following compensation in connection with the Offering: (i) as a commission, an amount equal to seven percent (7%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share, plus (ii) as a management fee, an amount equal to three percent (3%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share, plus (iii) as a non-accountable expense allowance, an amount equal to three percent (3%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share.  In addition, the Company is obligated to issue to the placement agent, or its sub-agents: (i) warrants to purchase up to 10% of the shares of Common Stock issued to investors in connection with the Offering and (ii) ten percent (10%) of the Subscription Warrants issued.
 
 By March 31, 2010, the Company had received cash from the sale of just over 45 Units for gross cash proceeds of $1,080,880.   The cash portion of the placement agent’s fees and commissions in connection with the initial closing of the Offering totaled $96,850. We also paid legal expenses of $106,760 and escrow fees of $7,500.
 
 On March 31, 2010, there was $107,255 of subscriptions receivable from investors with funds in transit who had subscribed to purchase approximately six additional Units for additional gross cash proceeds of $123,750.  The cash portion of the placement agent’s fees and commissions in connection with the subsequent closings of the Offering totaled $16,088 and legal expenses totaled $407.  The shares were issued on April 5, 2010.
 
 Dividends
 
 On February 3, 2010 we declared Series A Preferred Stock dividend to be paid in kind with shares of Series A Preferred Stock at a rate of $10 per share.  The total amount of the dividend of $840,570 was paid by the issuance of 84,057 shares of Series A Preferred Stock.
 
 At March 31, 2010 and 2009, there was $579,722 and $1,137,534 of accrued and unpaid dividends.
 
 We have not paid or declared any dividends on our common stock and currently intend to retain earnings to redeem the Series A Preferred Stock and to fund our working capital needs and growth opportunities. Any future dividends on common stock will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and the restrictions Nevada and other applicable laws and our credit facilities then impose. Our debt arrangements include provisions that generally prohibit us from paying dividends, other than dividends in kind, on our preferred stock.
 
 Shares Issued as Compensation
 
 On January 2, 2010, we issued 217,600 shares of common stock as paid-in-kind interest on convertible debt. The accrued interest owing was $56,425 and we valued the stock at $26,112 according to the share price on the date the shares were issued.
 
 On April 15, 2010, we agreed to issue James Byrd, director, 360,000 shares of stock as compensation for consulting services he provides to the Company from May 2009 through April 2010. The expense was recognized in the three months ending March 31, 2010.
 
 On March 31, 2010, the Company agreed to reduce the exercise price on the warrants held by certain investors in BEV from $0.25 per share to $0.10.  The original warrants contained a provision that exercise price would be reduced to equal that of any closings that took place within 60 days of the agreement to purchase membership interest in BEV, which was signed December 16, 2009.  Although the Offering did not close until more than 60 days after the agreement, the Company reduced the exercise price in good faith with its investors.  The Company recognized a deemed dividend of $5,129 in association with the reduction of the exercise price, using the Black-Scholes method, a volatility of 171.19%, a remaining life of 4.71 years and a market price of stock of $0.08 per share.
  18
 Table of Contents
  On February 8, 2010, in settlement of certain claims made by a party that previously provided bridge financing to the Company, the Company issued 750,000 shares of the Company’s common stock to such party.  The shares were valued at $82,500, based on the market price of the shares on the date of issuance.
  Note 7 - Related Party Transactions
 
 Larry Hargrave, our former CEO and a current director of the Company, was awarded a bonus of $1,000,000 to be paid $15,000 per month beginning in March 2008.  As of March 31, 2010 and December 31, 2009, $535,000 remained unpaid.  During 2009, we renegotiated the payment of the remaining bonus to be paid as follows:
 
 ·
We agreed to issue 600,000 shares of common stock and reduce the cash payment of deferred compensation by $300,000.  The shares were valued at $606,000 based on the closing price of the stock on the date of the agreement.  This stock has not yet been issued; however it is shown as issued and outstanding in these consolidated financial statements.
 
 ·
We agreed repay the money owed to Mr. Hargrave, subject to availability of cash, at the discretion of the Board of Directors.
 
 As a result of this modification, we recorded additional compensation expense of $306,000 in 2008.
 
 In addition, we agreed to issue 75,000 shares of common stock to Mr. Hargrave as a part of his severance agreement.  These shares were issued in lieu of $37,500 of cash payments due under Mr. Hargrave’s prior employment agreement.  We valued these shares at $75,750 based on the fair value of the shares on the date of the agreement and recorded them in 2008.
 
 On February 14, 2008, we leased certain real property from Mr. Tony Bruce, who was at the time our director and President, for a period of three years for $3,500 per month in base rent.
 
 On February 22, 2008, we leased real property necessary to run our rig housing operations from Mr. Larry Hargrave, who was at the time our CEO and a director, for a period of three years for $6,000 per month in base rent.
  In 2010, we paid Andrew Garrett as our placement agent a total of $112,938 in fees. We also issued warrants to purchase 2,347,500 shares.
 
 On April 15, 2010, we agreed to issue James Byrd, director, 360,000 shares of stock as compensation for consulting services he provides to the Company from May 2009 through April 2010. The expense was recognized in the three months ending March 31, 2010.
 
 Note 8 –Fair Value Measurement
  19
 Table of Contents
  The Company determines fair value measurements used in its consolidated financial statements based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs, as determined by either the principal market or the most advantageous market. The principal market is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure fair value, the Company has used the most advantageous market, which is the market in which the Company would receive the highest selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when using the most advantageous market, transaction costs are only considered to determine which market is the most advantageous and these costs are then excluded when applying a fair value measurement.
 
 Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
 
 Level 1: Quoted prices in active markets for identical assets or liabilities.
 Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
 
 Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
 
 The following tables provides a summary of the recognized assets and liabilities that are measured at fair value on a non-recurring basis.
 
 March 31, 2010


Quoted Prices in Active Markets for Identical Assets / Liabilities


Significant Other Observable Inputs


Significant Unobservable InputsAssets:Assets held for sale


5,416,099



-



-



5,416,099Liabilities:Convertible debt


580,913



-



-



580,913
   December 31, 2009


Quoted Prices in Active Markets for Identical Assets / Liabilities


Significant Other Observable Inputs


Significant Unobservable InputsAssets:Assets held for sale


5,986,356



-



-



5,986,356Liabilities:Convertible debt


547,984



-



-



547,984
 
 The fair value measurements of assets held for sale are calculated based on the expected realization from selling those assets.
  20
 Table of Contents
  The fair value measurements of assets held for sale are calculated based on the expected realization from selling those assets.
 
 The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable, and accrued expenses approximate fair value based on the short maturities of these instruments. At December 31, 2009, the fair value of the secured debt was equal to the carrying value.
 
 
 Note 9 –Discontinued Operations
 
 On or about October 8, 2009, the Company discontinued the operations of BBD, due to lack of profitability.  The discontinuation of operations resulted in a 100 percent impairment of the goodwill associated with the purchase of the BBD.  The related assets are now being held for sale. Due to the current depressed market for assets in the drilling industry, an impairment of their value was recorded in 2009, which reduced their value to $4,873,256 as of December 31, 2009. During the three months ended March 31, 2010, the total net income associated with discontinued operations was $11,382, including operating income of $6,437, allocated interest expense of $169,255, a gain on deferred taxes associated with the sale of assets of $179,030 and a loss on the sale of equipment of $4,830.
 
 The assets and liabilities of items held for sale associated with discontinued operations are as follows as of March 31, 2010 and December 31, 2009:
 
 March 31,

2010


December 31,

2009ASSETS:Fixed assets

$
4,302,999


$
4,873,256Goodwill


-



-LIABILITIES:Deferred tax liability

$
1,322,016


$
1,501,046
 
 On or about December 31, 2009, the Company discontinued the operations of BGS, due to lack of profitability.  The related assets are now being held for sale. Due to the condition of the assets and current depressed market for assets in the rig-housing industry, impairment was recorded in 2009, which reduced their value to $1,113,100.  As a result of the write-down of the fixed assets, the Company recognized a deferred tax asset of $169,540, calculated on the difference between the taxable basis of the assets and their value for the Company. During the three months ended March 31, 2010, the total loss associated with discontinued operations was $61,662, including a loss from operations of $26,165 and allocated interest expense of $35,497.
 
 The assets and liabilities of items held for sale associated with discontinued operations are as follows as of March 31, 2010 and December 31, 2009:
 
 March 31,

2010


December 31,

2009ASSETS:Fixed assets

$
1,113,100


$
1,113,100Deferred tax asset*

$
169,540


$
169,540Total assets

$
1,282,640


$
1,282,640
 
 *  This asset is offset against liabilities at the consolidated level and, therefore, is not subject to a valuation allowance.
 
  21
 Table of Contents
  Included in the losses from BGS are operations of Best Energy Ventures, LLC (BEV), which was formed in 2009 to rejuvenate oil wells for the production of natural gas. We purchased rights to develop one such well, but, due to lack of capital, did not commence operations within the terms of the lease. In connection with the sale of membership interest in Best Energy Ventures, LLC, we issued warrants to the members to purchase 1,800,000 shares of common stock at an exercise price of $0.25 per share at any time until expiration on December 16, 2014.  We valued these warrants using the Black-Scholes option pricing model with the following assumptions: stock prices on the grant date of $0.20, lives of five years, expected volatility of 179.43%, risk-free interest rate of 2.34%, and expected dividend rate of 0.00%. These warrants were valued at $267,366 and were expensed on the discontinuance of the operation in 2009. On March 31, 2010, we reduced the strike price on the warrants to equal that of the strike price on the warrants issued with the private placement and recognized a deemed dividend of $5,129. Also in connection with the sale of BEV, we offered 1,000,000 shares to certain investors if we did not commence work on the rig within 90 days of the date of their investment. We did not begin that work and a related stock payable of $120,000 was recorded as of December 31, 2009. The payable was valued based on the trading market price of the shares on December 31, 2009.
 
 Note 10 – Going Concern
 
 The Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business.  In 2009, our cash expenses exceeded our cash revenues, which raises substantial doubt about our ability to continue as a going concern.
 
 Note 11 – Subsequent Events
 
 On March 31, 2010, there was $107,255 of subscriptions receivable with such funds in transit from investors who had subscribed to purchase approximately six additional Units for additional gross cash proceeds of $123,750.  The cash portion of the placement agent’s fees and commissions in connection with the subsequent closings of the Offering totaled $16,088 and legal expenses totaled $407.  The shares were issued on April 5, 2010.
 
 On May 7, 2010, the Company and PNC entered into Amendment No. 10 to the Credit Agreement. It amended the Credit Agreement such that the principal payment for May 3, 2010 was reduced from $125,000 to $50,000. In consideration of the Tenth Amendment, the Company will (i) pay to its lenders a fee of $5,000 payable on the date of the Amendment and (ii) issue to PNC a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share.
 
 On April 12, 2010 the Board of Directors of the Company authorized the Company to enter into employment agreements with Mark Harrington, its Chairman and Chief Executive Officer, Dennis Irwin, its Chief Financial Officer, and Eugene Allen, its President and Chief Operating Officer.  In addition, on such date, the Board approved a compensation agreement with James Byrd, Jr., its Vice-Chairman.
 
 On April 15, 2010, we agreed to issue James Byrd, director, 360,000 shares of stock as compensation for consulting services he provides to the Company from May 2009 through April 2010. The expense was recognized in the three months ending March 31, 2010.
 
 Note 12 – Legal Matters
 
 We are from time to time subject to litigation arising in the normal course of business. As of the date of this Form 10-Q, there are no pending or threatened proceedings which are currently anticipated to have a material adverse effect on our business, financial condition or results of operations.
 
 In 2008, Acer Capital Group (“Acer”) sued Best Energy, American Rig Housing, and Larry Hargrave for breach of contract and fraud.  The contract claims arise from an agreement entered into between American Rig Housing and Acer (the "Acer Agreement") concerning a going public transaction and certain alleged agreements concerning bridge financing for the going public transaction between American Rig Housing and Pipeline Capital ("Pipeline"), which subsequently assigned those alleged contracts to Acer Capital.  Under the Acer Agreement, Acer was to assist with taking American Rig Housing public in return for certain equity considerations in the new company.  The agreement also purports to contemplate a fee (the "Break-up Fee") to be paid to Acer in the event the going public transaction was not consummated.  Acer claimed it was owed the Break-up Fee.  The defendants in the case alleged that neither Acer nor Pipeline had performed its obligations under the Acer Agreement and that the Break-up Fee was not owed.  Acer also alleged fraud against each of the defendants, including Best Energy, claiming that the defendants made representations to it and Pipeline that were knowingly false in order to induce them to enter into the Acer Agreement and Pipeline Agreements.  The defendants disputed that they made any false representations.  Acer subsequently amended its complaint to add Andrew Garrett, Inc. and Mark Harrington as defendants and to assert new claims for tortious interference with contract and prospective business relations and conspiracy.  All parties to the lawsuit participated in court-ordered mediation in Houston on July 22, 2009.  All legal claims brought in the suit were settled at the mediation.  Pursuant to the terms of the settlement agreement, the Company is not required to make any payments in connection with the settlement and will receive a full release by Acer of any claims that Acer had, now has, or may have in the future against the Company based on or related to the subject matter of the lawsuit. On March 26, 2010, the court entered a final judgment pursuant to which Acer’s motion to enforce the settlement agreement was granted. Under the terms of the asset Purchase Agreement entered into on February 14, 2008, Mr. Hargrave fully indemnified Best and related parties on this matter.
  22
 Table of Contents
  On or about April 7, 2010, the Company was served with a petition captioned Larry W. Hargrave and American Rig Housing, Inc. v. Best Energy Services, Inc. that was filed in the 234th Judicial District Court of Harris County, Texas (Cause Number 201021424).  Mr. Hargrave is the former CEO of the Company. The lawsuit asserts the following breach of contract claims: (1) failure to issue and deliver to American Rig Housing, Inc. (“ARH”) 1,465,625 shares of the Company’s common stock as required under the acquisition agreement pursuant to which the Company purchased certain assets of ARH in February 2008, (2) failure to issue 75,000 shares of the Company’s common stock as required under a severance agreement entered into with Mr. Hargrave, the former CEO of the Company (the “Severance Agreement”), (3) failure to reimburse Mr. Hargrave for certain unspecified verified out-of-pocket expenses incurred in the performance of his duties as CEO of the Company, (4) failure to issue 600,000 shares of the Company’s common stock, as deferred compensation, as required under the Severance Agreement, (5) failure to make the monthly cash payments due to Mr. Hargrave under the Severance Agreement, which consist of (i) $15,000 per month for the first four months beginning in January 2009 and (ii) $10,000 per months for the next forty-nine (49) months, (6) failure to make certain unspecified payments, including expense reimbursements, under a consulting agreement alleged to have been entered into in January 2009 and (7) failure to reimburse Mr. Hargrave for certain unspecified payments made by the plaintiffs to vendors of the Company.  The relief requested by the plaintiffs includes actual damages, specific performance and costs and attorneys’ fees.  The Company plans to contest the lawsuit vigorously. As of March 31, 2010, the stock had not been issued in certificate form, but has been recorded. Further, the deferred compensation of $535,000 has been accrued, which is equal to the amounts in the severance agreement less the $15,000 payment that was made in January 2009.
  23
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  ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 Statements we make in the following discussion that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling and well service industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, the availability, terms and deployment of capital, the availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to the environment. We have discussed many of these factors elsewhere in this Report, including under the headings “Disclosure Regarding Forward-Looking Statements” below, in this Item 2. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements. We advise our shareholders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.
 
 
 Company Overview
 
 We are an energy production equipment and services company engaged in well service and related complementary activities.   We own a total of 25 workover rigs in Liberal Kansas. We were incorporated on October 31, 2006 as Hybrook Resources Corp. under the laws of the state of Nevada.  From inception through our fiscal year ended January 31, 2008, Hybrook was a development stage company with an option to purchase an 85% interest in a mineral claim in British Columbia.  Hybrook did not exercise its option and no minerals were discovered.  As a result of the acquisitions discussed below, all mineral exploration activities were discontinued.
 
 In February 2008, Best Energy acquired two companies and certain assets from three other companies, all of which are engaged in well servicing, drilling and related complementary services for the oil and gas, water and minerals industries.  Concurrent with these acquisitions, we abandoned our prior business plan and changed our name to “Best Energy Services, Inc.” and changed our fiscal year to match the calendar year of the acquired companies.  In 2009, we discontinued all operations except those related to well service.
 
 In the Well Service Division, our acquisition of Best Well Service, Inc., or BWS, brought us a strong footprint in the hydrocarbon rich Hugoton Basin. BWS operates 25 well service rigs in the Mid-Continent region of the United States.  BWS has distinguished itself over the years in its service to both major oil companies and large independents, as well as an employee retention history that we believe is among the best in the industry. BWS also has complete in-house safety certifications and we rank extremely high within our regional peer group.
 
 The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of March 31, 2010.
 
 Our principal executive offices are located at 5433 Westheimer Road, Suite 825, Houston, Texas 77056.
 
 
 Business Strategy Going Forward
 
 Our overreaching goal for 2010 is to increase the level and predictability of our revenues in the well services business. To accomplish this objective we are focused on three distinct growth avenues as discussed below.
 
 Basin-Centered Opportunities.  In early 2009, workover activity industry-wide witnessed a severe contraction. At BWS, activity decreased in a matter of weeks from 25 active rigs to as few as three. In the wake of that decline, BWS was able to restore its activity level to between 40-60% of available rigs by capturing a larger market share of available work in the Hugoton Basin. Best now estimates that BWS’s share of the local market is roughly 80% versus 30-35% in 2008. Best believes this higher market share is directly attributable to the following:
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  Ø
More customer-friendly pricing practices. In 2008, based on available information, competitors of Best were charging as much as $340-$360 per hour for the same services for which BWS was charging $240 per hour. Following the early 2009 downturn, BWS reduced the price of its services by an additional 10-15%.  Based on available information, BWS’s competitors reduced their prices more in an attempt to remain competitive with BWS’s pricing, and in many cases after failing to do so, withdrew from the Hugoton Basin.
 
 Ø
Safety record. BWS has an active in-house safety program, which it also tailors to fit its customers’ needs when requested. Best believes that BWS’s safety record ranks superior to that of its local competitors.
 
 Ø
Reputation and performance. BWS began operations in the Hugoton Basin in 1991. The reputation and performance of BWS over that time has been consistent and always customer-focused. In addition, several of our key employees, including our President and COO, Eugene Allen, have been with BWS for many years, in Mr. Allen’s case since 1994. In addition, BWS’s low historical employee turnover rate of less than 5% in recent years is unsurpassed in the Hugoton Basin.
 
 In addition to continuing growth in our traditional Hugoton Basin market area, our business plan calls for growth through two additional efforts- New Basin Opportunities and HBFP.
 
 New Basin Opportunities. We believe the strength of BWS’s reputation in the Hugoton Basin is an important asset for Best. Fueling that reputation is our intense focus on the needs of our customers, including the need for value-oriented pricing and strong safety programs. Best is exploring opportunities to redeploy some of BWS’s equipment into more active basins, in particular where there are high levels of activity in emerging shale-based plays. Several of BWS’s customers in the Hugoton Basin are also active in emerging shale plays. In addition, we believe there are other potential customers not active in the Hugoton Basin that would be prepared to employ our very competitively priced equipment and services.
 
 HBFP.During 2009, a much repeated reason our customers gave for not having more active workover programs was that capital was not being made available from their corporate decision makers. In recognition of the customer’s needs for capital, Best is in the process of establishing Hugoton Basin Financing Partners, or “HBFP,” a joint undertaking with an oil and gas focused private equity group based in New York. Under the arrangement as currently contemplated, BWS would source candidates for HBFP that require capital to finance their workover projects. HBFP would take capital advanced to it by the private equity Fund and, on certain undisclosed terms, provide financing to the customer in return for a preferential return from production from the wells, plus a premium and a residual back-in after payout. Customers of HBFP would be required to use BWS to provide their workover services. In addition, BWS would be retained to bundle certain additional services for the HBFP customer, with BWS being compensated for such services by the vendor. The HBFP non-binding indicative term sheet calls for up to $5 million of capital being made available to potential BWS customers. The HBFP transaction is subject to negotiation of a definitive agreement between the Fund and Best.  Best believes there may be a substantial market for this style of financing, not only in the Hugoton Basin, but in other basins as well.
 
 
 Significant Developments
 
 New Management
 
 On January 25, 2010, Larry Hargrave resigned from his position as a Director of Best Energy Services, Inc. (the “Company”).  On January 27, 2010, Tony Bruce resigned from his position as a Director of the Company and from his position as the President and Chief Operating Officer of the Company.  Effective as of January 29, 2010, the Board of Directors of the Company (the “Board”) filled the vacancy created by Mr. Bruce’s resignation by appointing Eugene Allen to serve as the Company’s President and Chief Operating Officer.  Effective as of January 29, 2010, the Board filled the Board vacancy created by Mr. Hargrave’s resignation by electing David Voyticky to serve as a Director of the Company.  Also, on February 3, 2010, the Board reduced the number of directors constituting the entire Board from five (5) to four (4) in order to eliminate the vacancy created by Mr. Bruce’s resignation.
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  On April 12, 2010 the Board of Directors of the Company authorized the Company to enter into employment agreements with Mark Harrington, its Chairman and Chief Executive Officer, Dennis Irwin, its Chief Financial Officer, and Eugene Allen, its President and Chief Operating Officer.  In addition, on such date, the Board approved a compensation agreement with James Byrd, Jr., its Vice-Chairman.  Also, on February 3, 2010, the Board of Directors approved stock option grants to certain directors and executives of the Company.  A summary of these employment agreements and stock option grants are discussed in “Item 9.B Other Information.”
 
 Market Conditions in Our Industry
 
 The United States oil field services industry is highly cyclical. Volatility in oil and natural gas prices can produce wide swings in the levels of overall drilling activity in the markets we now serve and affect the demand for our drilling services and the day rates we can charge for our rigs. This volatility also affects the demand for other oil field services we provide, such as portable rig housing and mud logging. The availability of financing sources, past trends in oil and natural gas prices and the outlook for future oil and natural gas prices strongly influence the number of wells oil and natural gas exploration and production companies decide to drill.
 
 Results of Operations
 
 Three Months Ended March 31, 2010 compared with the Three Months Ended March 31, 2009
 
 Revenues were $1.4 million for the three months ended March 31, 2010 compared with revenues of $1.9 million for the three months ended March 31, 2009. The decrease of $0.5 million was primarily the result of a severe downturn in drilling and workover activity caused by low oil and gas prices that began in January 2009. Since reaching a low point in the second quarter of 2009, revenues have improved each of the last four quarters.
 
 Operating Expenses were $1.0 million for the three months ended March 31, 2010 compared with $1.3 million for the three months ended March 31, 2009, resulting in a decrease of $0.3 million.  This decrease was a result of decreases in business unit operating expenses consequent to declining rig activity.  Although Best reduced its prices for well servicing by roughly 10% late in the first quarter, resultant from our stringent cost containment measures our gross margin increased from 52 percent in the first three months of 2009 to 56 percent in the first quarter of 2010.
 
 Net Loss from Operations was $0.8 million for the three months ended March 31, 2010 compared with $0.7 million for the three months ended March 31, 2009, resulting in an increased loss of $0.1 million. The increased loss resulted from lower sales.
 
 General and Administrative Expenses were $467,041 for the three-month period ended March 31, 2010 compared with $679,306 for the three months ended March 31, 2009. Management has made a concerted effort in 2009 to reduce cash corporate overhead through downsizing office space, reduction in corporate staff and other overhead expenses. Management expects cash G&A costs to now be under $1 million per year going forward. Included in G&A was stock based compensation expense of $302,005 and $352,751 for the first quarters of 2010 and 2009.
 
 Interest Expensewas $0.4 million for the three month period ended March 31, 2010 compared with $0.2 million for the three month period ended March 31, 2009.  This increase was primarily a result of non-cash interest expenses, such as warrants issued to our bank and amortization related to convertible debt.  The Company’s term loan with PNC Credit bears interest at prime + 2%.
  Net Loss was $1.4 million, or $0.06, per common share after accrued preferred dividends and deemed dividends for the three months ended March 31, 2010 compared with a net loss of $1.4 million, or $0.07, per common share for the three months ended March 31, 2009 resulting in an essentially equal loss for both years.  The higher margins and lower general and administrative expense of first quarter 2010 were offset by higher interest costs and lower gross sales.
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  Liquidity and Capital Resources
  Historical Cash Flows
 
 The following table summarizes our cash flows for the three months ended March 31, 2010 and March 31, 2009:
 
 Three Months EndedMarch 31, 2010


March 31, 2009Net cash provided by  (used in) operating activities

$
(245,358
)

$
1,394,538Net cash used in investing activities:Capital expenditures, net


(92,220
)


(2,851
)Cash provided by (used in) financing activities:Decrease in bank overdraft


(22,454
)


-Repayments of long-term debt


(466,151
)


(364,805
)Net borrowings under revolving advances


(81,116
)


(972,512
)Payment of deferred financing costs


-



-Proceeds from issuance of units in private placement


869,760



-Payment of deferred financing costs






(194,454
)Net increase (decrease) in cash and cash equivalents

$
(37,539
)

$
(140,084
)
 
 Operating activities during the three months ended March 31, 2010, 2009 used $0.2 million of cash compared to providing $1.4 million in the three months ended March 31, 2009.  The decrease in cash from operations resulted mainly from accounts receivable earned in 2008 but paid in the first three months of 2009, while in the first three months of 2010, accounts receivable grew.
 
 Financing activities contributed cash of $0.3 million for the three months ended March 31, 2010 compared to using of $1.5 million for the three months ended March 31, 2009.  The primary source of cash from financing activities in the first three moths of 2010 was the issuance of stock.
 
 We have no current commitment from our officers and directors or any of our stockholders to supplement our operations or provide us with financing in the future. If we are unable to increase revenues from operations, to raise additional capital from conventional sources and/or additional sales of stock in the future, and/or if we are unable to extend or repay our line of credit with PNC Bank, we may be forced to curtail or cease our operations. In the future, we may be required to seek additional capital by selling debt or equity securities. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then stockholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.
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  Working Capital Deficit
 
 At March 31, 2010, our current liabilities of $22.2 million exceeded our current assets of $0.8 million resulting in a working capital deficit of $21.4 million.  This compares to a working capital deficit of $6.6 million at December 31, 2009.  The deterioration in the working capital deficit is primarily the result the reclassification of the majority of our loans payable to current as a result the March 31, 2011 due date for the term loan.  Current liabilities at March 31, 2010, include preferred stock dividends payable of $0.6 million, current portion of loans payable of $19.7 million and accounts payable of $1.2 million.  Preferred stock dividends are not expected to be paid in cash.  We expect these dividends to be paid in-kind through the issuance of additional shares of preferred stock or common stock.
 
 Sources of Liquidity
 
 Our sources of liquidity include our current cash and cash equivalents, availability under the revolving portion of the Amended Credit Agreement, and internally generated cash flows from operations.  We continue to explore other sources of financing that are available to us including possible sales of stock or issuance of subordinated debt.
 
 Our availability under the Amended Credit Agreement as of March 31, 2010 was $0.3 million.
 
 Off-Balance Sheet Arrangements
 
 As of March 31, 2010, we had no transactions, agreements or other contractual arrangements with unconsolidated entities or financial partnerships, often referred to as special purpose entities, which generally are established for the purpose of facilitating off-balance sheet arrangements.
 
 Contractual Obligations
 
 Tabular Disclosure of Contractual Obligations
 
 Over the NextFive Years


12 MonthsNotes Payable

$
20,815,799


$
19,709,293Operating Leases


243,900



126,400Employment/Consultant Contracts


1,194,000



482,000Total

$
22,253,699


$
20,317,693
 
 Subject to the limitations set forth in the Amended Credit Agreement, our Series A Preferred Stock must be redeemed using not less than 25% of our net income after tax each year.  For the three months ended March 31, 2010, we did not have positive net income after tax and did not redeem any outstanding shares of Series A Preferred Stock.
 
 Disclosure Regarding Forward-Looking Statements
 
 We caution that this document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements, other than statements of historical facts, included in or incorporated by reference into this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements.  The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts,” “plans” and similar expressions, or the negative thereof, are also intended to identify forward-looking statements.  In particular, statements, expressed or implied, concerning future operating results, the ability to increase utilization or redeploy rigs, or the ability to generate income or cash flows are by nature, forward-looking statements.  These statements are based on certain assumptions and analyses made by management in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances.  However, forward-looking statements are not guarantees of performance and no assurance can be given that these expectations will be achieved.
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  Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but are not limited to any of the following:  the timing and extent of changes in commodity prices for crude oil, natural gas and related products, interest rates, inflation, the availability of goods and services, operational risks, availability of capital resources, legislative or regulatory changes, political developments, and acts of war and terrorism.  A more detailed discussion on risks relating to the oilfield services industry and to us is included in our Annual Report on Form 10-K for the eleven months ended December 31, 2008.
 
 In light of these risks, uncertainties and assumptions, we caution the reader that these forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which could cause actual events or results to differ materially from those expressed or implied by the statements.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements.  We undertake no obligations to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.
 
 Item3. Quantitative and Qualitative Disclosures about Market Risk
 
 Not required for smaller reporting companies.
 
 Item4. Controls and Procedures
  (a)
Evaluation of Disclosure Controls and Procedures
 
 We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2010 (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In particular, we found control weaknesses in segregation of duties in the field and home offices. As recently acquired operations are assimilated, we intend to address these weaknesses by centrally locating payables, check writing, and implementing controls regarding segregation of duties related to cash management.  We plan to have these controls in place by year end.  In the interim, management has been reviewing all disbursements and cash account activity.
 
 As previously disclosed in the December 31, 2009 Form 10-K filed on April 27, 2010, we identified several material weaknesses to our system of internal control as of December 31, 2008.  Those weaknesses still existed as of December 31, 2009 and are identified as follows:
 
 As of March 31, 2010, we did not maintain effective controls over the control environment.
 Specifically, we had not extended our written code of business conduct and ethics to include non-officers.
 ·
This has resulted in inconsistent practices.  Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
 
 ·
As of March 31, 2010, we did not maintain effective controls over financial statement disclosure.  Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
 ·
As of March 31, 2010, we did not maintain effective controls over equity transactions.  Specifically, controls were not designed and in place to ensure that equity transactions were properly reflected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
 
 ·
March 31, 2010, we did not maintain effective internal control over our document control over all Company agreements. Specifically, controls were not designed and in place to ensure that documents were readily available at our place of business related to all agreements still in effect today. Management has determined that this control deficiency constitutes a material weakness.
 
 Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of December  31, 2009, based on the criteria established in "Internal Control-Integrated Framework" issued by the COSO.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
 This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
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 (b) Changes in Internal Control over Financial Reporting
 
 There were no changes in internal control over financial reporting during the quarter ended March 31, 2010.
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  PART II
  
 Item1. Legal Proceedings
 
 We are from time to time subject to litigation arising in the normal course of business. As of the date of this Form 10-Q, there are no pending or threatened proceedings which are currently anticipated to have a material adverse effect on our business, financial condition or results of operations.
 
 In 2008, Acer Capital Group (“Acer”) sued Best Energy, American Rig Housing, and Larry Hargrave for breach of contract and fraud.  The contract claims arise from an agreement entered into between American Rig Housing and Acer (the "Acer Agreement") concerning a going public transaction and certain alleged agreements concerning bridge financing for the going public transaction between American Rig Housing and Pipeline Capital ("Pipeline"), which subsequently assigned those alleged contracts to Acer Capital.  Under the Acer Agreement, Acer was to assist with taking American Rig Housing public in return for certain equity considerations in the new company.  The agreement also purports to contemplate a fee (the "Break-up Fee") to be paid to Acer in the event the going public transaction was not consummated.  Acer claimed it was owed the Break-up Fee.  The defendants in the case alleged that neither Acer nor Pipeline had performed its obligations under the Acer Agreement and that the Break-up Fee was not owed.  Acer also alleged fraud against each of the defendants, including Best Energy, claiming that the defendants made representations to it and Pipeline that were knowingly false in order to induce them to enter into the Acer Agreement and Pipeline Agreements.  The defendants disputed that they made any false representations.  Acer subsequently amended its complaint to add Andrew Garrett, Inc. and Mark Harrington as defendants and to assert new claims for tortious interference with contract and prospective business relations and conspiracy.  All parties to the lawsuit participated in court-ordered mediation in Houston on July 22, 2009.  All legal claims brought in the suit were settled at the mediation.  Pursuant to the terms of the settlement agreement, the Company is not required to make any payments in connection with the settlement and will receive a full release by Acer of any claims that Acer had, now has, or may have in the future against the Company based on or related to the subject matter of the lawsuit. On March 26, 2010, the court entered a final judgment pursuant to which Acer’s motion to enforce the settlement agreement was granted. Under the terms of the asset Purchase Agreement entered into on February 14, 2008, Mr. Hargrave fully indemnified Best and related parties on this matter.
 
 On or about April 7, 2010, the Company was served with a petition captioned Larry W. Hargrave and American Rig Housing, Inc. v. Best Energy Services, Inc. that was filed in the 234th Judicial District Court of Harris County, Texas (Cause Number 201021424).  Mr. Hargrave is the former CEO of the Company. The lawsuit asserts the following breach of contract claims: (1) failure to issue and deliver to American Rig Housing, Inc. (“ARH”) 1,465,625 shares of the Company’s common stock as required under the acquisition agreement pursuant to which the Company purchased certain assets of ARH in February 2008, (2) failure to issue 75,000 shares of the Company’s common stock as required under a severance agreement entered into with Mr. Hargrave, the former CEO of the Company (the “Severance Agreement”), (3) failure to reimburse Mr. Hargrave for certain unspecified verified out-of-pocket expenses incurred in the performance of his duties as CEO of the Company, (4) failure to issue 600,000 shares of the Company’s common stock, as deferred compensation, as required under the Severance Agreement, (5) failure to make the monthly cash payments due to Mr. Hargrave under the Severance Agreement, which consist of (i) $15,000 per month for the first four months beginning in January 2009 and (ii) $10,000 per months for the next forty-nine (49) months, (6) failure to make certain unspecified payments, including expense reimbursements, under a consulting agreement alleged to have been entered into in January 2009 and (7) failure to reimburse Mr. Hargrave for certain unspecified payments made by the plaintiffs to vendors of the Company.  The relief requested by the plaintiffs includes actual damages, specific performance and costs and attorneys’ fees.  The Company plans to contest the lawsuit vigorously. As of March 31, 2010, the stock had not been issued in certificate form, but has been recorded. Further, the deferred compensation of $535,000 has been accrued, which is equal to the amounts in the severance agreement less the $15,000 payment that was made in January 2009.
 
 
 Item1A. Risk Factors
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  Not required for smaller reporting companies.
 
 Item2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 During June, July and August 2009, we had several preliminary closings of a private placement for a total of 1,088 Units and received gross proceeds of $1,088,000 (net proceeds of $946,560 after cash commission of $141,440). Each Unit consists of a subordinated convertible note payable of $1,000 and warrants to purchase 4,000 shares of common stock at an exercise price of $0.25 at any time until expiration on July 1, 2014.  The notes bear interest at a rate of 10% per annum, which is payable either in cash semi-annually in arrears on July 1 and January 2 each year, commencing on January 2, 2010 or in shares of common stock at a price of $0.25 per share. Under the terms of our credit facility, we may not pay cash interest on the notes.  The notes are convertible at the option of the note holder into common stock at the rate of $0.25 (the “Conversion Price”) per share and mature on July 1, 2011.  If we achieve certain earnings hurdles, we may force the noteholders to convert all or part of the then outstanding notes at the Conversion Price.  The notes are unsecured obligations and are subordinate in right of payment to all of our existing and future senior indebtedness.
 
 We evaluated the terms of the notes in accordance with the new standard issued by the FASB related to the disclosure of derivative instruments and hedging activities.   Best Energy determined that the conversion feature did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability.  We evaluated the conversion feature under the new standard for a beneficial conversion feature.  The effective conversion price was compared to the market price on the date of the notes and was deemed to be less than the market value of our common stock at the inception of the note. A beneficial conversion feature was recognized and, along with attached warrants, gave rise to a debt discount of $586,008.
 
 In connection with the private placement, we issued warrants to the placement agent to purchase 435,200 shares of common stock at an exercise price of $0.25 at any time until expiration on July 1, 2014.  These warrants were valued at $42,971.
 
 From March 25 through March 31, 2010, the Company sold units of Company securities (the “Units”) at a price of $24,000 per Unit (the “Offering”), with each Unit consisting of (i) 240,000 shares of Common Stock, (ii) five-year warrants to acquire 240,000 shares of Common Stock at an exercise price of $0.10 per share (“Subscription Warrants”) and (iii), if investors in the Offering hold shares of the Company’s Series A Preferred Stock, par value $0.001 per share (“Preferred Stock”), additional five-year warrants to acquire shares of Common Stock at an exercise price of $0.10 per share (“Participation Warrants”).  The placement agent for the Offering (or its sub-agents) received the following compensation in connection with the Offering: (i) as a commission, an amount equal to seven percent (7%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share, plus (ii) as a management fee, an amount equal to three percent (3%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share, plus (iii) as a non-accountable expense allowance, an amount equal to three percent (3%) of the funds raised in the Offering through such placement agent (or sub-agent), such amount to be paid in cash and/or shares of Common Stock at a price of $0.10 per share.  In addition, the Company is obligated to issue to the placement agent, or its sub-agents: (i) warrants to purchase up to 10% of the shares of Common Stock issued to investors in connection with the Offering and (ii) ten percent (10%) of the Subscription Warrants issued.
 
 By March 31, 2010, the Company had received cash from the sale of just over 45 Units for gross cash proceeds of $1,080,880.   The cash portion of the placement agent’s fees and commissions in connection with the initial closing of the Offering totaled $96,850. We also paid legal expenses of $106,760 and legal expenses of $7,500.
 
 On March 31, 2010, there was $107,255 of subscriptions receivable from investors who had subscribed to purchase approximately six additional Units for additional gross cash proceeds of $123,750.  The cash portion of the placement agent’s fees and commissions in connection with the subsequent closings of the Offering totaled $16,088 and legal expenses totaled $407.  The shares were issued on April 5, 2010.
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  Item3. Defaults Upon Senior Securities
 
 As of May 17, 2010, we are in default on certain non-financial covenants of our Credit Agreement and our working with our bank to remedy those defaults.
 
 Item4. Submission of Matters to a Vote of Security Holders
 
 None.
 
 Item5. Other Information
 
 None.
 
 Item 6. Exhibits
 10.1
Waiver And Amendment No. 10 to Revolving Credit, Term Loan and Security Agreement Dated May 7, 2010
 31.1
Section 302 Certification of Chief Executive Officer.
 
 31.2
Section 302 Certification of Chief Financial Officer.
 
 32.1
Section 906 Certification of Chief Executive Officer.
  32.2
Section 906 Certification of Chief Financial Officer.
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 SIGNATURES
  
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 Date May 17, 2010
BEST ENERGY SERVICES, INC./s/ Mark HarringtonMark HarringtonChief Executive Officer
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 Date May 17, 2010
BEST ENERGY SERVICES, INC./s/ Dennis IrwinDennis IrwinChief Financial Officer







34