##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Fiscal Year Ended March 31, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number: 0-7914
 BASIC EARTH SCIENCE SYSTEMS, INC.
 633 17 th Street, Suite 1645
Denver, Colorado 80202-3625
Telephone (303) 296-3076
 Incorporated in Delaware
    
    IRS ID# 84-0592823
 
 Yes o No þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    our strategies, either existing or anticipated;
 
    
    our future financial position, including anticipated liquidity, including the amount of
and our ability to make debt service payments should we utilize some or all of our available
borrowing capacity;
 
    
    amounts and nature of future capital expenditures;
 
    
    acquisitions and other business opportunities;
 
    
    operating costs and other expenses;
 
    
    wells expected to be drilled;
 
    
    asset retirement obligations; and
 
    
    estimates of proved oil and natural gas reserves, deferred tax assets, and depletion rates.
  
    
    oil and natural gas prices;
    
    our ability to replace oil and natural gas reserves;
    
    loss of senior management or technical personnel;
    
    inaccuracy in reserve estimates and expected production rates;
    
    exploitation, development and exploration results;
    
    costs related to asset retirement obligations;
    
    a lack of available capital and financing;
    
    the potential unavailability of drilling rigs and other field equipment and services;
    
    the existence of unanticipated liabilities or problems relating to acquired properties;
    
    general economic, market or business conditions;
    
    factors affecting the nature and timing of our capital expenditures, including the
availability of service contractors and equipment, permitting issues, workovers, and weather;
    
    the impact and costs related to compliance with or changes in laws governing our operations;
    
    environmental liabilities;
    
    acquisitions and other business opportunities (or the lack thereof) that may be pursued by
us;
    
    competition for available properties and the effect of such competition on the price of
those properties;
    
    risk factors discussed in this report and other factors, many of which are beyond our
control.
    2




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##### 



Basic Earth Science Systems, Inc.
Form 10-K
March 31, 2009
  
 Table of Contents
 PagePart IItem 1 Description of Business
    
    
    4Item 1B Unresolved Staff Comments
    
    
    9Item 2 Description of Property
    
    
    9Item 3 Legal Proceedings
    
    
    11Item 4 Submission of Matters to a Vote of Security Holders
    
    
    11Part IIItem 5 Market for Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    12Item 6 Selected Financial Data
    
    
    13Item 7 Managements Discussion and Analysis and Plan of Operation
    
    
    13Item 7A Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 8 Financial Statements
    
    
    19Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    
    41Item 9A Controls and Procedures
    
    
    41Item 9B Other Information
    
    
    42Part IIIItem 10 Directors, Executive Officers, and Corporate Governance
    
    
    43Item 11 Executive Compensation
    
    
    46Item 12 Security Ownership of Certain Beneficial Owners and Management
    
    
    48Item 13 Certain Relationships and Related Transactions
    
    
    49Item 14 Principal Accountant Fees and Services
    
    
    49Part IVItem 15 Exhibits and Financial Statement Schedules
    
    
    50Signatures
    
    
    51Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   3




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##### Table of Contents



Part I
 
 ITEM 1
DESCRIPTION OF BUSINESS
 Overview
  Strategy
   
    
    Identification and acquisition of strategic and significant producing
properties; strategic and significant in that they are either
accretive to our existing production or will provide an increase to
the Companys existing production base.
    
    Cost effective implementation of internally and externally generated
exploration and development drilling projects.
    
    Boosting cash flows from existing oil and gas production through a
combination of cost control and the exploitation of behind-pipe
potential.
  Areas of Focus
 Williston Basin .
  4




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##### Table of Contents



Banks Prospect  McKenzie County, North Dakota.
 South Flat Lake Prospect  Sheridan County, Montana.
 Other Areas
  Denver-Julesberg Basin  Weld County, Colorado.
 Christmas Meadows Prospect  Summit County, Utah.
  5




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##### Table of Contents



Onshore Gulf Coast.
 Contemplated Activities
   Segment Information and Major Customers
 Industry segment.
 Markets.
 Competition
   Regulations
 General.
  6




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##### Table of Contents



Environmental matters.
 Risk Factors
 Volatility of oil and gas prices.
   Uncertainty of reserve information and future net revenue estimates.
  7




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##### Table of Contents



Reserve replacement.
 Operating hazards.
 Other
 Competition Regulations
   8




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##### Table of Contents



ITEM 1B
UNRESOLVED STAFF COMMENTS
  
 ITEM 2
DESCRIPTION OF PROPERTY
 Producing Properties: Location and Impact
 Credit Line
 Producing Property
 Gross Wells
    
    
    Net WellsOil
    
    
    Gas
    
    
    Oil
    
    
    GasColorado
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    7.35Louisiana
    
    
    1
    
    
    
    1
    
    
    
    0.01
    
    
    
    0.10Montana
    
    
    20
    
    
    
    
    
    
    
    9.77
    
    
    
    North Dakota
    
    
    49
    
    
    
    
    
    
    
    9.43
    
    
    
    Texas
    
    
    23
    
    
    
    1
    
    
    
    20.66
    
    
    
    0.11Wyoming
    
    
    1
    
    
    
    
    
    
    
    0.47
    
    
    
    Total
    
    
    94
    
    
    
    36
    
    
    
    40.34
    
    
    
    7.56
 Production
  Reserves
    9




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##### Table of Contents



Net Oil
    
    
    Net Gas(Bbls)
    
    
    (Mcf)
    
    
    BOE
    
    
    %Williston BasinOperated
    
    
    105,000
    
    
    
    53,000
    
    
    
    114,000
    
    
    
    14.4
    %Non-Operated
    
    
    221,000
    
    
    
    124,000
    
    
    
    241,000
    
    
    
    30.3
    %326,000
    
    
    
    177,000
    
    
    
    355,000
    
    
    
    44.7
    %South Texas/Onshore Gulf CoastOperated
    
    
    250,000
    
    
    
    2,000
    
    
    
    251,000
    
    
    
    31.6
    %Non-Operated
    
    
    
    
    
    
    155,000
    
    
    
    26,000
    
    
    
    3.3
    %250,000
    
    
    
    157,000
    
    
    
    277,000
    
    
    
    34.9
    %D-J BasinOperated
    
    
    16,000
    
    
    
    293,000
    
    
    
    65,000
    
    
    
    8.2
    %Non-Operated
    
    
    46,000
    
    
    
    309,000
    
    
    
    97,000
    
    
    
    12.2
    %62,000
    
    
    
    602,000
    
    
    
    162,000
    
    
    
    20.4
    %Total
    
    
    638,000
    
    
    
    936,000
    
    
    
    794,000
    
    
    
    100
    %
 Leasehold Acreage
  Developed Acreage
    
    
    Undeveloped AcreageGross
    
    
    Net
    
    
    Gross
    
    
    NetColorado
    
    
    640
    
    
    
    384
    
    
    
    
    
    
    
    Louisiana
    
    
    687
    
    
    
    51
    
    
    
    
    
    
    
    Montana
    
    
    6,330
    
    
    
    3,126
    
    
    
    5,662
    
    
    
    3,127North Dakota
    
    
    14,373
    
    
    
    2,929
    
    
    
    26,506
    
    
    
    4,623Texas
    
    
    3,080
    
    
    
    2,486
    
    
    
    
    
    
    
    Utah
    
    
    
    
    
    
    
    
    
    
    35,945
    
    
    
    719Wyoming
    
    
    1,555
    
    
    
    329
    
    
    
    40
    
    
    
    1Total
    
    
    26,665
    
    
    
    9,305
    
    
    
    68,153
    
    
    
    8,470
  10




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##### Table of Contents



Field Service Equipment
  Office Lease
 
 
 ITEM 3
LEGAL PROCEEDINGS
  
 ITEM 4
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
   11




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##### Table of Contents



Part II
 
 ITEM 5
MARKET FOR COMMON EQUITY,
RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
  High
    
    
    LowYear Ended March 31, 2008First Quarter
    
    $
    1.64
    
    
    $
    1.30Second Quarter
    
    
    1.45
    
    
    
    0.95Third Quarter
    
    
    1.23
    
    
    
    1.01Fourth Quarter
    
    
    1.12
    
    
    
    0.89Year Ended March 31, 2009First Quarter
    
    $
    3.04
    
    
    $
    1.09Second Quarter
    
    
    2.31
    
    
    
    1.21Third Quarter
    
    
    1.30
    
    
    
    0.51Fourth Quarter
    
    
    1.08
    
    
    
    0.51
   Purchases of Equity Securities
 Number of
    
    
    MaximumShares
    
    
    Shares thatTotal
    
    
    
    
    
    
    Purchased
    
    
    May Yet beNumber of
    
    
    Average
    
    
    as Part of a
    
    
    PurchasedShares
    
    
    Price Paid
    
    
    Publicly Announced
    
    
    underPurchased (1)
    
    
    Per Share
    
    
    Plan (1)
    
    
    the Plan (1)Quarter ended December 31, 2008
    
    
    21,600
    
    
    $
    0.67
    
    
    
    21,600
    
    
    
    478,400Quarter ended March 31, 2009
    
    
    8,600
    
    
    $
    0.64
    
    
    
    8,600
    
    
    
    469,800Total
    
    
    30,200
    
    
    
    
    
    
    
    30,200
 (1)
    
    In October 2008, the Companys Board of Directors authorized a stock
buyback program for the Company to repurchase up to 500,000 shares of
its common stock. The program does not have a specified expiration
date, it does not require the Company to repurchase any specific
number of shares, and the Company may terminate the repurchase program
at any time. During the year ended March 31, 2009, 30,200 shares
(rounded to 31,000 in the Statement of Stockholders Equity) were
repurchased under the stock buyback program and 469,800 shares remain
available for future repurchase.  12




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##### Table of Contents



ITEM 6
SELECTED FINANCIAL DATA
  
 ITEM 7
MANAGEMENTS DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION
 Liquidity Outlook
  Capital Structure and Liquidity
 Overview
  Credit Line
  Hedging
  13




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Working Capital
 Cash Flow
  Capital Expenditures Areas of Focus Company Developments
  Divestitures/Abandonments
 Impact of Inflation
 Other Commitments
 Results of Operations
 Fiscal 2009 Compared with Fiscal 2008
 Overview
 Revenues
  14




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Volumes and Prices
 Expenses
        15




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Other Income/Expense
 Income Taxes.
 Selected Financial Information
  Year EndedMarch 31,2009
    
    
    2008
    
    
    2007Sales volumeOil (barrels)
    
    
    92,657
    
    
    
    89,400
    
    
    
    104,200Gas (mcf)
    
    
    175,413
    
    
    
    108,600
    
    
    
    155,800RevenueOil
    
    $
    7,406,000
    
    
    $
    6,748,000
    
    
    $
    6,115,000Gas
    
    
    1,585,000
    
    
    
    667,000
    
    
    
    1,014,000Total revenue
    
    
    8,991,000
    
    
    
    7,415,000
    
    
    
    7,129,000Total production expense1
    
    
    3,183,000
    
    
    
    2,706,000
    
    
    
    2,422,000Gross profit
    
    $
    5,808,000
    
    
    $
    4,709,000
    
    
    $
    4,707,000Depletion expense
    
    $
    1,188,000
    
    
    $
    673,000
    
    
    $
    631,000General and administrative expense
    
    
    1,347,000
    
    
    
    716,000
    
    
    
    546,000Average sales price2Oil (per barrel)
    
    $
    79.93
    
    
    $
    75.47
    
    
    $
    58.70Gas (per mcf)
    
    $
    9.04
    
    
    $
    6.13
    
    
    $
    6.51Average per BOEProduction expense2,3,4
    
    $
    26.09
    
    
    $
    19.27
    
    
    $
    18.61Gross profit3,4
    
    $
    47.61
    
    
    $
    43.96
    
    
    $
    36.17Depletion expense3,4
    
    $
    10.03
    
    
    $
    5.59
    
    
    $
    4.85General and administrative expense3,4
    
    $
    11.04
    
    
    $
    5.94
    
    
    $
    4.20
  16




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##### Table of Contents



1
    
    Operating expenses, including production tax2
    
    Averages calculated based upon non-rounded figures3
    
    Per equivalent barrel (6 Mcf of gas is equivalent to 1 barrel of oil)4
    
    Excluding impairment expense related to full cost pool ceiling limitation Critical Accounting Policies and Estimates
  Oil and Gas Property
 Oil and Gas Reserves
  17




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Asset Retirement Obligations
 Off Balance Sheet Transactions, Arrangements or Obligations
  Recent Accounting Pronouncements
  
 ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
   18




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##### Table of Contents



ITEM 8
FINANCIAL STATEMENTS
 Basic Earth Science Systems, Inc.
Table of Contents
Consolidated Financial Statements
and Accompanying Notes
March 31, 2009 and 2008
 PageReport of Independent Registered Public Accounting Firm  Ehrhardt Keefe Steiner &
Hottman PC
    
    
    20Report of Prior Independent Registered Public Accounting Firm  Hein & Associates LLP
    
    
    21Consolidated Balance Sheets
    
    
    2223Consolidated Statements of Operations
    
    
    24Consolidated Statements of Shareholders Equity
    
    
    25Consolidated Statements of Cash Flows
    
    
    26Notes to Consolidated Financial Statements
    
    
    2740
  19




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Ehrhardt Keefe Steiner & Hottman PC
 
  20




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##### Table of Contents



REPORT OF PRIOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    HEIN & ASSOCIATES LLP
 
  21




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##### Table of Contents



Basic Earth Science Systems, Inc.
 
 Consolidated Balance Sheets
 March 31,
    
    
    March 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,088,000
    
    
    $
    5,571,000Accounts receivable:Oil and gas sales
    
    
    1,611,000
    
    
    
    1,110,000Joint interest and other
receivables, net of $71,000 and
$50,000 in allowance, respectively
    
    
    230,000
    
    
    
    236,000Other current assets
    
    
    508,000
    
    
    
    280,000Total current assets
    
    
    6,437,000
    
    
    
    7,197,000Oil and gas property, full cost method:Proved property
    
    
    32,187,000
    
    
    
    29,050,000Unproved property
    
    
    1,077,000
    
    
    
    2,515,000Accumulated depletion and impairment
    
    
    (22,397,000
    )
    
    
    (18,515,000
    )Net oil and gas property
    
    
    10,867,000
    
    
    
    13,050,000Support equipment and other non-current
assets, net of $337,000 and $299,000 in
accumulated depreciation, respectively
    
    
    458,000
    
    
    
    443,000Total non-current assets
    
    
    11,325,000
    
    
    
    13,493,000Total assets
    
    $
    17,762,000
    
    
    $
    20,690,000
   22




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##### Table of Contents



Basic Earth Science Systems, Inc.
Consolidated Balance Sheets
 March 31,
    
    
    March 31,2009
    
    
    2008Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    64,000
    
    
    $
    1,443,000Accrued liabilities
    
    
    1,328,000
    
    
    
    2,586,000Total current liabilities
    
    
    1,392,000
    
    
    
    4,029,000Long-term liabilities:Deferred tax liability
    
    
    2,242,000
    
    
    
    2,800,000Asset retirement obligation
    
    
    1,558,000
    
    
    
    1,877,000Total long-term liabilities
    
    
    3,800,000
    
    
    
    4,677,000Total liabilities
    
    
    5,192,000
    
    
    
    8,706,000Commitments (Note 7)Shareholders Equity:Preferred stock, $.001 par value,
3,000,000 authorized, and none issued or
outstanding
    
    
    
    
    
    
    Common stock, $.001 par value,
32,000,000 shares authorized, and 17,506,000
and 17,466,000 shares issued and
outstanding, respectively
    
    
    18,000
    
    
    
    17,000Additional paid-in capital
    
    
    22,825,000
    
    
    
    22,798,000Treasury stock (380,000 shares); at cost
    
    
    (43,000
    )
    
    
    (23,000
    )Accumulated deficit
    
    
    (10,230,000
    )
    
    
    (10,808,000
    )Total shareholders equity
    
    
    12,570,000
    
    
    
    11,984,000Total liabilities and shareholders equity
    
    $
    17,762,000
    
    
    $
    20,690,000
   23




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##### Table of Contents



Basic Earth Science Systems, Inc.
 
 Consolidated Statements of Operations
 Years EndedMarch 31,2009
    
    
    2008Revenues:Oil and gas sales
    
    $
    8,991,000
    
    
    $
    7,415,000Well service and water disposal revenue
    
    
    95,000
    
    
    
    32,000Total revenues
    
    
    9,086,000
    
    
    
    7,447,000Expenses:Oil and gas production
    
    
    2,539,000
    
    
    
    2,085,000Production tax
    
    
    644,000
    
    
    
    621,000Well servicing expenses
    
    
    33,000
    
    
    
    27,000Depreciation and depletion
    
    
    1,224,000
    
    
    
    685,000Accretion of asset retirement obligation
    
    
    98,000
    
    
    
    114,000Asset retirement expense
    
    
    164,000
    
    
    
    35,000Impairment of oil and gas property
    
    
    2,694,000
    
    
    
    General and administrative
    
    
    1,347,000
    
    
    
    716,000Total expenses
    
    
    8,743,000
    
    
    
    4,283,000Income from operations
    
    
    343,000
    
    
    
    3,164,000Other Income (Expense):Interest and other income
    
    
    57,000
    
    
    
    152,000Interest and other expenses
    
    
    (34,000
    )
    
    
    (28,000
    )Total other income
    
    
    23,000
    
    
    
    124,000Income before income taxes
    
    
    366,000
    
    
    
    3,288,000Current income tax expense
    
    
    346,000
    
    
    
    179,000Provision for deferred income tax (benefit) expense
    
    
    (558,000
    )
    
    
    1,346,000Total income tax (benefit) expense
    
    
    (212,000
    )
    
    
    1,525,000Net income
    
    $
    578,000
    
    
    $
    1,763,000Per share amounts:Basic
    
    $
    0.03
    
    
    $
    0.10Diluted
    
    $
    0.03
    
    
    $
    0.10Weighted average common shares outstanding:Basic
    
    
    17,477,216
    
    
    
    17,370,256Diluted
    
    
    17,477,216
    
    
    
    17,480,671
   24




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##### Table of Contents



Basic Earth Science Systems, Inc.
 
 Consolidated Statements of Shareholders Equity
Years Ended March 31, 2009 and 2008
 AdditionalCommon stock
    
    
    paid-in
    
    
    Treasury stock
    
    
    AccumulatedShares
    
    
    Par value
    
    
    capital
    
    
    Shares
    
    
    Amount
    
    
    deficit
    
    
    TotalBalance, March 31, 2007
    
    
    17,301,000
    
    
    $
    17,000
    
    
    $
    22,749,000
    
    
    
    (349,000
    )
    
    $
    (23,000
    )
    
    $
    (12,571,000
    )
    
    $
    10,172,000Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    165,000
    
    
    
    
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,763,000
    
    
    
    1,763,000Balance, March 31, 2008
    
    
    17,466,000
    
    
    $
    17,000
    
    
    $
    22,798,000
    
    
    
    (349,000
    )
    
    $
    (23,000
    )
    
    $
    (10,808,000
    )
    
    $
    11,984,000Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,000
    )
    
    
    (20,000
    )
    
    
    
    
    
    
    (20,000
    )Shares issued to
independent board members
    
    
    15,000
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,000Stock options exercised
    
    
    25,000
    
    
    
    1,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,000
    
    
    
    578,000Balance, March 31, 2009
    
    
    17,506,000
    
    
    $
    18,000
    
    
    $
    22,825,000
    
    
    
    (380,000
    )
    
    $
    (43,000
    )
    
    $
    (10,230,000
    )
    
    $
    12,570,000
   25




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##### Table of Contents



Basic Earth Science Systems, Inc.
 
 Consolidated Statements of Cash Flows
 Years EndedMarch 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    578,000
    
    
    $
    1,763,000Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and depletion
    
    
    1,224,000
    
    
    
    685,000Deferred tax liability
    
    
    (558,000
    )
    
    
    1,311,000Additional paid-in capital associated with deferred tax expense
    
    
    
    
    
    
    35,000Accretion of asset retirement obligation
    
    
    98,000
    
    
    
    114,000Share based compensation
    
    
    24,000
    
    
    
    Impairment of Oil and Gas Properties
    
    
    2,694,000
    
    
    
    Change in:Accounts receivable, net
    
    
    (495,000
    )
    
    
    (85,000
    )Other assets
    
    
    (287,000
    )
    
    
    (63,000
    )Accounts payable and accrued liabilities
    
    
    (406,000
    )
    
    
    (158,000
    )Other
    
    
    
    
    
    
    7,000Net cash provided by operating activities
    
    
    2,872,000
    
    
    
    3,609,000Cash flows from investing activities:Oil and gas property
    
    
    (4,338,000
    )
    
    
    (587,000
    )Support equipment
    
    
    
    
    
    
    (16,000
    )Insurance settlements
    
    
    
    
    
    
    66,000Proceeds from sale of oil and gas property and equipment
    
    
    
    
    
    
    14,000Other
    
    
    
    
    
    
    (52,000
    )Net cash used in investing activities
    
    
    (4,338,000
    )
    
    
    (575,000
    )Cash flows from financing activities:Proceeds from exercise of common stock options
    
    
    3,000
    
    
    
    14,000Purchase of treasury shares
    
    
    (20,000
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (17,000
    )
    
    
    14,000Cash and cash equivalents:(Decrease) increase in cash and cash equivalents
    
    
    (1,483,000
    )
    
    
    3,048,000Balance, beginning of year
    
    
    5,571,000
    
    
    
    2,523,000Balance, end of period
    
    $
    4,088,000
    
    
    $
    5,571,000Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    10,000
    
    
    $
    28,000Cash paid for income tax
    
    $
    517,000
    
    
    $
    171,000Non-cash:Increase in oil and gas property due to asset retirement obligation
    
    $
    33,000
    
    
    $
    210,000Additions to oil and gas also included in accrued liabilities
    
    $
    43,000
    
    
    $
    2,273,000
   26




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##### Table of Contents



Basic Earth Science Systems, Inc.
 
 Notes to Consolidated Financial Statements
 1. Summary of Significant Accounting Policies
 Organization and Nature of Operations
 Principles of Consolidation
 Oil and Gas Sales
 Oil and Gas Producing Activity
   Income Taxes
  27




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##### Table of Contents



Earnings Per Share
 Years EndedMarch 31,2009
    
    
    2008Numerator:Net income available to common shareholders
    
    $
    578,000
    
    
    $
    1,763,000Denominator:Denominator for basic earnings per share
    
    
    17,477,216
    
    
    
    17,370,256Effect of dilutive securities:Stock options
    
    
    
    
    
    
    110,415Denominator for diluted earnings per share
    
    
    17,477,216
    
    
    
    17,480,671
  Cash and Cash Equivalents
 Fair Value of Financial Instruments.
 Hedging Activities
 Support Equipment and Other
 Inventory
 Long-Term Assets
  28




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##### Table of Contents



Major Customers and Concentration of Credit Risk.
 2009
    
    
    2008Murphy Oil USA, Inc.
    
    
    25
    %
    
    
    22
    %Valero Energy
    
    
    17
    %
    
    
    20
    %Nexen Marketing USA, Inc.
    
    
    14
    %
    
    
    11
    %Plains Inc.
    
    
    14
    %
    
    
    15
    %Texon LP
    
    
    6
    %
    
    
    10
    %Total
    
    
    76
    %
    
    
    78
    %
  Stock Option Plan
 Use of Estimates
 Reclassifications
 Recent Accounting Pronouncements
   29




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##### Table of Contents



30




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##### Table of Contents



31




---



##### Table of Contents



2. Other Current Assets
  2009
    
    
    2008Lease and well equipment inventory
    
    $
    170,000
    
    
    $
    154,000Drilling and completion cost prepayments
    
    
    149,000
    
    
    
    52,000Prepaid insurance premiums
    
    
    44,000
    
    
    
    58,000Other current assets
    
    
    145,000
    
    
    
    16,000Total other current assets
    
    $
    508,000
    
    
    $
    280,000
   3. Other Non-Current Assets
  2009
    
    
    2008Lease and well equipment inventory
    
    $
    261,000
    
    
    $
    250,000Plugging bonds
    
    
    60,000
    
    
    
    69,000Other non-current assets
    
    
    137,000
    
    
    
    124,000Total other non-current assets
    
    $
    458,000
    
    
    $
    443,000
    32




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##### Table of Contents



4. Accrued Liabilities
  Years EndedMarch 31,2009
    
    
    2008Revenue and production taxes payable
    
    $
    532,000
    
    
    $
    574,000Accrued payables
    
    
    368,000
    
    
    
    1,396,000Accrued compensation
    
    
    288,000
    
    
    
    313,000Short term asset retirement obligation
    
    
    140,000
    
    
    
    303,000Total
    
    $
    1,328,000
    
    
    $
    2,586,000
 5. Asset Retirement Obligation
   Years EndedMarch 31,2009
    
    
    2008Asset retirement obligation at beginning of period
    
    $
    2,179,000
    
    
    $
    1,971,000Liabilities settled during the period
    
    
    (168,000
    )
    
    
    (116,000
    )New obligations for wells drilled and completed
    
    
    33,000
    
    
    
    84,000Accretion of asset retirement obligation
    
    
    98,000
    
    
    
    114,000Revisions to estimates
    
    
    (444,000
    )
    
    
    126,000Asset retirement obligation at end of period
    
    $
    1,698,000
    
    
    $
    2,179,000Current accrued liability
    
    $
    140,000
    
    
    $
    302,000Long-term liability
    
    
    1,558,000
    
    
    
    1,877,000Asset retirement obligation at end of each period
    
    $
    1,698,000
    
    
    $
    2,179,000
   33




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##### Table of Contents



6. Credit Line
    7. Commitments
  8. Shareholders Equity
 Preferred Stock
 Stock Option Plan
  34




---



##### Table of Contents



2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions unexercised, beginning of year
    
    
    25,000
    
    
    $
    0.1325
    
    
    
    190,000
    
    
    $
    0.0936Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (25,000
    )
    
    
    (0.1325
    )
    
    
    (165,000
    )
    
    
    (0.0941
    )Options unexercised and exercisable, end of year
    
    
    
    
    
    $
    
    
    
    
    25,000
    
    
    $
    0.1325
  Director Stock Compensation.
 9. Income Tax
  For the Years EndedMarch 31,2009
    
    
    2008Current:Federal
    
    $
    305,000
    
    
    $
    155,000State
    
    
    41,000
    
    
    
    24,000Total current
    
    
    346,000
    
    
    
    179,000Deferred :Federal
    
    
    (483,000
    )
    
    
    1,166,000State
    
    
    (75,000
    )
    
    
    180,000Total deferred (benefit)
    
    
    (558,000
    )
    
    
    1,346,000Total income tax provision
    
    $
    (212,000
    )
    
    $
    1,525,000
  35




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##### Table of Contents



For the Years EndedMarch 31,2009
    
    
    2008Federal income tax provision at statutory rates
    
    $
    124,000
    
    
    $
    1,118,000State income tax
    
    
    (18,000
    )
    
    
    164,000Change in depletion carryforward
    
    
    
    
    
    
    592,000Excess percentage depletion
    
    
    (322,000
    )
    
    
    (346,000
    )Other
    
    
    4,000
    
    
    
    (3,000
    )Income tax expense
    
    $
    (212,000
    )
    
    $
    1,525,000
  For the Years EndedMarch 31,2009
    
    
    2008Allowance for doubtful accounts
    
    $
    26,000
    
    
    $
    20,000Asset retirement obligation
    
    
    633,000
    
    
    
    850,000Other accruals
    
    
    (4,000
    )
    
    
    112,000Statutory depletion carryforward
    
    
    858,000
    
    
    
    1,043,000Total gross deferred tax assets
    
    
    1,513,000
    
    
    
    2,025,000Deferred tax liability 
Depreciation, depletion and
intangible drilling costs
    
    
    (3,755,000
    )
    
    
    (4,825,000
    )Net deferred tax liability
    
    $
    (2,242,000
    )
    
    $
    (2,800,000
    )
    36




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##### Table of Contents



10. Related Party Transactions
  11. Oil and Gas Property
 
 2009
    
    
    2008Proved property
    
    $
    32,187,000
    
    
    $
    29,050,000Unproved property
    
    
    1,077,000
    
    
    
    2,515,000Gross oil and gas property
    
    
    33,264,000
    
    
    
    31,565,000Accumulated depletion and impairment
    
    
    (22,397,000
    )
    
    
    (18,515,000
    )Net oil and gas property
    
    $
    10,867,000
    
    
    $
    13,050,000
  Banks Prospect Areas of Focus
 Christmas Meadows Areas of Focus
 South Flat Lake Prospect Areas of Focus
  37




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##### Table of Contents



TotalCosts Incurred During
    
    Exploration
    
    
    Development
    
    
    Acquisition
    
    
    UnprovedYear Ended
    
    Costs
    
    
    Costs
    
    
    Costs
    
    
    PropertyMarch 31, 2009
    
    $
    249,000
    
    
    $
    
    
    
    $
    
    
    
    $
    249,000March 31, 2008
    
    
    29,000
    
    
    
    
    
    
    
    
    
    
    
    29,000March 31, 2007
    
    
    308,000
    
    
    
    
    
    
    
    
    
    
    
    308,000March 31, 2006
    
    
    428,000
    
    
    
    39,000
    
    
    
    
    
    
    
    467,000March 31, 2005
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Total
    
    $
    1,038,000
    
    
    $
    39,000
    
    
    $
    
    
    
    $
    1,077,000
  For the Years EndedMarch 31,2009
    
    
    2008Development costs
    
    $
    2,177,000
    
    
    $
    2,410,000Exploration costs
    
    
    
    
    
    
    40,000Acquisitions:Proved
    
    
    
    
    
    
    250,000Unproved
    
    
    
    
    
    
    Total
    
    $
    2,177,000
    
    
    $
    2,700,000
 12. Unaudited Oil and Gas Reserves Information
    38




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##### Table of Contents



Analysis of Changes in Proved Reserves
 Proved Reserves
 Oil andNaturalgas
    
    
    Naturalliquids
    
    
    gas(Bbls)
    
    
    (Mcf)Proved developed reserves at March 31, 2007
    
    
    995,000
    
    
    
    1,138,000Revisions of previous estimates
    
    
    112,000
    
    
    
    (113,000
    )Extensions and discoveries
    
    
    19,000
    
    
    
    203,000Sales of reserves in place
    
    
    
    
    
    
    Improved recovery
    
    
    15,000
    
    
    
    1,000Purchase of reserves
    
    
    22,000
    
    
    
    Production
    
    
    (89,000
    )
    
    
    (109,000
    )Proved developed reserves at March 31, 2008
    
    
    1,074,000
    
    
    
    1,120,000Revisions of previous estimates
    
    
    (429,000
    )
    
    
    (262,000
    )Extensions and discoveries
    
    
    86,000
    
    
    
    253,000Sales of reserves in place
    
    
    
    
    
    
    Improved recovery
    
    
    
    
    
    
    Purchase of reserves
    
    
    
    
    
    
    Production
    
    
    (93,000
    )
    
    
    (175,000
    )Proved developed and undeveloped reserves at March 31, 2009
    
    
    638,000
    
    
    
    936,000
    39




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##### Table of Contents



Standardized Measure of Estimated Discounted Future Net Cash Flows
 For the Years EndedMarch 31,2009
    
    
    2008Future cash inflows
    
    $
    31,793,000
    
    
    $
    114,296,000Future cash outflows:Production cost
    
    
    (17,924,000
    )
    
    
    (49,599,000
    )Development cost
    
    
    (490,000
    )
    
    
    Future income taxes
    
    
    (2,100,000
    )
    
    
    (17,826,000
    )Future net cash flows
    
    
    11,279,000
    
    
    
    46,871,000Adjustment to discount future annual net cash flows at 10%
    
    
    (4,080,000
    )
    
    
    (21,911,000
    )Standardized measure of discounted future net cash flows
    
    $
    7,199,000
    
    
    $
    24,960,000
  Changes in Standardized Measure of Estimated Discounted Net Cash Flows
 For the Years EndedMarch 31,2009
    
    
    2008Standardized measure, beginning of period
    
    $
    24,960,000
    
    
    $
    14,624,000Sales of oil and gas, net of production cost
    
    
    (5,808,000
    )
    
    
    (4,727,000
    )Net change in sales prices, net of production cost
    
    
    (25,977,000
    )
    
    
    14,598,000Discoveries, extensions and improved recoveries,
net of future development cost
    
    
    2,298,000
    
    
    
    3,054,000Change in future development costs
    
    
    
    
    
    
    Development costs incurred during the period that
reduced future development cost
    
    
    
    
    
    
    Sales of reserves in place
    
    
    
    
    
    
    Revisions of quantity estimates
    
    
    (4,745,000
    )
    
    
    2,639,000Accretion of discount
    
    
    4,279,000
    
    
    
    1,865,000Net change in income taxes
    
    
    16,594,000
    
    
    
    (4,221,000
    )Purchase of reserves
    
    
    
    
    
    
    361,000Changes in timing of rates of production
    
    
    (4,402,000
    )
    
    
    (3,233,000
    )Standardized measure, end of period
    
    $
    7,199,000
    
    
    $
    24,960,000
  40




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##### Table of Contents



ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A
CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  Managements Annual Report on Internal Control Over Financial Reporting
       41




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##### Table of Contents



Internal
Control-Integrated Framework
  By:
    
    /s/ Ray Singleton
    
    By:
    
    /s/ Joseph YoungRay Singleton, President
    
    
    
    Joseph YoungChief Executive Officer
    
    
    
    Principal Accounting OfficerJune 18, 2009
    
    
    
    June 18, 2009
 
 ITEM 9B
OTHER INFORMATION
   42




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##### Table of Contents



Part III
 
 ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 Directors
  Ray Singleton
 Richard K. Rodgers
 Monroe W. Robertson
  43




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##### Table of Contents



Executive Officers
  Joseph Youn g
  Involvement in Certain Legal Proceedings
  Corporate Governance
 Independent Directors.
  44




---



##### Table of Contents



Audit Committee.
  Compensation Committee.
  Nominating Committee .
  Code of Ethics. http://www.basicearth.net .
 Compliance with Section 16(a) of the Securities Exchange Act
   45




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##### Table of Contents



ITEM 11
EXECUTIVE COMPENSATION
 Summary Compensation Table
  Non-Equity
    
    
    AllName and
    
    Fiscal
    
    
    Salary
    
    
    Bonus
    
    
    Incentive Plan
    
    
    Other
    
    
    TotalPrincipal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    Compensation
    
    
    Compensation
    
    
    ($)(1)
    
    
    (2)
    
    
    (3)Ray Singleton
    
    
    2009
    
    
    $
    183,574
    
    
    $
    29,307
    
    
    $
    9,563
    
    
    $
    6,073
    
    
    $
    228,517President and Chief
Executive Officer
    
    
    2008
    
    
    $
    134,250
    
    
    $
    6,346
    
    
    $
    4,053
    
    
    $
    6,176
    
    
    $
    150,825Joseph Young
    
    
    2009
    
    
    $
    110,169
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    
    
    
    $
    115,169Principal Accounting Officer
 (1)
    
    The amount shown for each executive officer is the amount accrued for
in prior periods and paid in fiscal 2009.(2)
    
    The amount shown for each executive officer is the amount accrued for
fiscal 2009 and paid for fiscal 2008 through the Oil and Gas
Incentive Compensation Plan.(3)
    
    For Mr. Singleton, amount includes matching funds contributed by the
Company to its 401(k) plan of $5,826 and $5,204 for fiscal 2009 and
2008, respectively. It also includes $247 and $850 for premiums paid
by the Company on a life insurance policy for Mr. Singleton during
fiscal 2009 and 2008, respectively. Mr. Singleton designates the
beneficiary.    46




---



##### Table of Contents



Outstanding Equity Awards at Fiscal Year End
   Director Compensation
     47




---



##### Table of Contents



Fees Earned or
    
    
    
    
    
    
    All OtherPaid in Cash
    
    
    Stock Awards
    
    
    Compensation
    
    
    TotalName
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)(1)Richard Rodgers
    
    $
    33,000
    
    
    $
    36,000
    
    
    $
    
    
    
    $
    69,000Monroe Robertson
    
    
    34,000
    
    
    
    36,000
    
    
    
    
    
    
    
    70,000Total
    
    
    67,000
    
    
    
    72,000
    
    
    
    
    
    
    
    139,000
 (1)
    
    The amount shown for each director is the amount awarded each year
vesting over a three year period. 
 ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  Shares of
    
    
    Percent ofCommon
    
    
    OutstandingStock
    
    
    SharesBeneficially
    
    
    BeneficiallyName and Address of Beneficial Owner
    
    Type and Class
    
    
    Owned
    
    
    OwnedRay Singleton, Denver CO (a)
    
    Common Stock
    
    
    4,505,912
    
    
    
    25.7
    %Richard Rodgers, Denver, CO (c)
    
    Common Stock
    
    
    7,571
    
    
    
    
    (d)Monroe W. Robertson, Denver, CO (d)
    
    Common Stock
    
    
    13,471
    
    
    
    
    (d)All officers and directors as a group
(3 persons) (a), (b), and (c)
    
    Common Stock
    
    
    4,526,954
    
    
    
    25.7
    %
 (a)
    
    All 4,505,912 shares are owned directly by Mr. Singleton.(b)
    
    All 7,571 shares are fully vested and owned directly by Mr. Rodgers(c)
    
    All 13,471 shares are fully vested and owned directly by Mr. Robertson.(d)
    
    Less than 1%   48




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##### Table of Contents



ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
   
 ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Years EndedMarch 31,2009
    
    
    2008Audit fees (1)
    
    $
    92,000
    
    
    $
    70,000Audit-related fees(2)
    
    
    4,000
    
    
    
    Tax fees(3)
    
    
    
    
    
    
    11,500All other fees(4)
    
    
    
    
    
    
    Total
    
    $
    96,000
    
    
    $
    81,500
 (1)
    
    Reflects fees billed for the audit of the Companys consolidated financial statements
included in its Form 10-K and review of its quarterly reports on Form 10-Q.(2)
    
    Reflects fees, if any, for services related to financial accounting and reporting matters.(3)
    
    Reflects fees billed for tax compliance, tax advice and preparation of the Companys
federal tax return.(4)
    
    Reflects fees, if any, for other products or professional services not related to the
audit of the Companys consolidated financial statements and review of its quarterly
reports, or for tax services. Pre-Approval Policies and Procedures
   49




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##### Table of Contents



Part IV
 
 ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Exhibits
 ExhibitNo.
    
    Document3i
    1
    
    Restated Certificate of Incorporation included in Basics Form 10-K for the
year ended March 31, 19813i
    1
    
    By-laws included in Basics Form S-1 filed October 24, 19803i
    1
    
    Certificate of Amendment to Basics Restated Certificate of Incorporation
dated March 31, 199610(i)a
    1
    
    Loan Agreement between The Bank of Cherry Creek and Basic, dated March 4, 200210(i)a
    1
    
    Amended Loan Agreement between American National Bank (formerly The Bank of
Cherry Creek) and Basic dated January 3, 2006.10(i)a
    1
    
    Amended Loan Agreement between American National Bank (formerly The Bank of
Cherry Creek) and Basic dated December 31, 200610(ii)
    1
    
    Oil and Gas Incentive Compensation Plan included in Basics Form 10-K for the
year ended March 31, 198510(ii)
    1
    
    Restricted Stock Agreement dated effective as of April 7, 200721
    1
    
    Subsidiaries of Basic included in Basics Form 10-KSB for the year ended
March 31, 200231.1
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray
Singleton, Chief Executive Officer)31.2
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Joseph Young, Principal Accounting Officer)32.1
    
    
    Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive Officer)32.2
    
    
    Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Joseph Young, Principal Accounting
Officer).
 1
    
    Previously filed and incorporated herein by reference   50




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##### Table of Contents



Signatures
  BASIC EARTH SCIENCE SYSTEMS, INC.
 DateBy:
    
    /s/ Ray Singleton
    
    June 18, 2009Ray Singleton, PresidentBy:
    
    /s/ Joseph Young
    
    June 18, 2009Joseph Young,Principal Accounting Officer
  Name and Capacity
    
    DateBy:
    
    /s/ Ray Singleton
    
    June 18, 2009Ray Singleton, DirectorBy:
    
    /s/ Richard K. Rodgers
    
    June 18, 2009Richard K. Rodgers, Director andCompensation Committee ChairmanBy:
    
    /s/ Monroe W. Robertson
    
    June 18, 2009Monroe W. Robertson, Director andAudit Committee Chairman
  51




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##### Table of Contents



EXHIBIT INDEX
 Exhibits
 ExhibitNo.
    
    Document3i
    1
    
    Restated Certificate of Incorporation included in Basics Form 10-K for the
year ended March 31, 19813i
    1
    
    By-laws included in Basics Form S-1 filed October 24, 19803i
    1
    
    Certificate of Amendment to Basics Restated Certificate of Incorporation
dated March 31, 199610(i)a
    1
    
    Loan Agreement between The Bank of Cherry Creek and Basic, dated March 4, 200210(i)a
    1
    
    Amended Loan Agreement between American National Bank (formerly The Bank of
Cherry Creek) and Basic dated January 3, 2006.10(i)a
    1
    
    Amended Loan Agreement between American National Bank (formerly The Bank of
Cherry Creek) and Basic dated December 31, 200610(ii)
    1
    
    Oil and Gas Incentive Compensation Plan included in Basics Form 10-K for the
year ended March 31, 198510(ii)
    1
    
    Restricted Stock Agreement dated effective as of April 7, 200721
    1
    
    Subsidiaries of Basic included in Basics Form 10-KSB for the year ended
March 31, 200231.1
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ray
Singleton, Chief Executive Officer)31.2
    
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Joseph Young, Principal Accounting Officer)32.1
    
    
    Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Ray Singleton, Chief Executive Officer)32.2
    
    
    Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (Joseph Young, Principal Accounting
Officer).
 1
    
    Previously filed and incorporated herein by reference   52