Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 15, 2009.

 

Common Stock $.0006665 par value – 9,912,457

 

THE BEARD COMPANY

 

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(1)  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures normally prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in The Beard Company’s 2008 annual report on Form 10-K.

 

The accompanying financial statements include the accounts of The Beard Company and its wholly and majority-owned subsidiaries in which The Beard Company has a controlling financial interest (“Beard” or the “Company”). Subsidiaries and investees in which Beard does not exercise control are accounted for using the equity method. All significant intercompany transactions have been eliminated in the accompanying financial statements.

 

The financial information included herein is unaudited; however, such information reflects solely normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.

 

The results of operations for the three-month period ended March 31, 2009, are not necessarily indicative of the results to be expected for the full year.

 

The Company’s current significant operations are within the following segments: (1) the Coal Reclamation (“Coal”) Segment, (2) the Carbon Dioxide (“CO2”) Segment, (3) the e-Commerce (“e-Commerce”) Segment, and (4) the Oil & Gas (“Oil & Gas”) Segment. The Company is also conducting minerals exploration and development through its Geohedral investment.

 

The Coal Segment is in the business of operating coal fines reclamation facilities in the United States of America and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage starpay’s™ intellectual property portfolio of Internet payment methods and security technologies. The Oil & Gas Segment is in the business of producing oil and gas.

 

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors, including employee stock options. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has utilized the guidance of SAB 107 in its adoption of SFAS 123R.

 

SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the results of operations at their grant-date fair values. The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. Under this transition method, compensation cost recognized in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date value estimated in accordance with the provisions of SFAS 123R.

 

 

 

In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated.

 

The Company reserved 100,000 shares of its common stock for issuance to key management, professional employees and directors under The Beard Company 2005 Stock Option Plan (the "2005 Plan") adopted in February 2005. There were 45,000 options granted under the 2005 Plan in the first quarter of 2005, however, on May 1, 2006, the Company cancelled the 2005 Plan and all the options under the 2005 Plan. Also, on May 1, 2006, the Company replaced the 2005 Plan with the 2006 Stock Option Plan (the “2006 Plan”). The Company granted 45,000 options under the 2006 Plan in replacement of the options that were cancelled under the 2005 Plan; 15,000 of these options were cancelled effective July 31, 2006 following the resignation of the holder thereof. An additional 15,000 options were cancelled on March 31, 2009 following the termination of another holder.

 

Grant-Date Fair Value

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of the options granted in 2006 was calculated using the following estimated weighted average assumptions:

 

 

The expected volatility is based on historical volatility over the two-year period prior to the date of granting of the unvested options. Beginning in 2006, the Company has adopted the simplified method outlined in SAB 107 to estimate expected lives for options granted during the period. The risk-free interest rate is based on the yield on zero coupon U. S. Treasury securities for a period that is commensurate with the expected term assumption. The Company has not historically issued any dividends and does not expect to in the future.

 

Share-Based Compensation Expense

The Company uses the straight-line attribution method to recognize expense for unvested options. The amount of share-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company will re-evaluate the forfeiture rate annually and adjust as necessary. The Company did not recognize any share-based compensation expense under SFAS 123R for either the three months ended March 31, 2009 or 2008. Prior to January 1, 2006, the Company accounted for its share-based compensation under the recognition and measurement principles of APB No. 25 and related interpretations, the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” In accordance with APB No. 25, no share-based compensation was reflected in the Company’s net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the fair market value of the stock on the date of grant.

 

As of March 31, 2009, there were $13,000 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share based awards, which is expected to be recognized over a weighted average period of 7.08 years.

 

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123R-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based

 

 

 

compensation awards that are outstanding upon adoption of SFAS 123R. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules. Since no material tax benefit was recorded for share based payment awards in the three-month periods ended March 31, 2009 or 2008, the aforementioned provisions of SFAS 123R and the related FASB Staff Position No. FAS 123R-3 had no impact on the consolidated financial statements of the Company.

 

Option Activity

A summary of the activity under the Company’s stock option plans for the three-month period ended March 31, 2009 is presented below:

 

 

Reclassifications

Certain 2008 balances have been reclassified to conform to the 2009presentation.

 

(2)  Ability to Fund Operations and Continue as a Going Concern

Overview

The accompanying financial statements have been prepared based upon the Company’s belief that it will continue as a going concern. The Company has incurred operating losses and negative cash flows from operations during each of the last six years. The Company commenced a project in its Coal Segment in 2005 which was projected to begin generating positive cash flow during the last half of 2006, but such projection was not attained. The Coal Segment did, however, reflect a slightly decreased operating loss in the first three months of 2009, primarily as a result of an increase in revenue and smaller increases in other costs. All efforts to make the China Segment profitable have been unsuccessful, and in December of 2007 the segment was discontinued. The Company relinquished its ownership interests in two of the entities in the China Segment on December 31, 2008 and realized a gain of $1,671,000. Although the Company finalized its first licensing arrangement in its e-Commerce Segment in 2003, the arrangement did not make the segment profitable in any of the subsequent years and will not make it profitable in 2009. The segment’s operating loss for the first three months of 2009 decreased to $25,000 versus a $26,000 operating loss in the 2008 first three months, reflecting decreased costs associated with the Visa litigation. The CO₂ Segment’s operating profit decreased 20% to $246,000 in the 2009 first quarter compared to $307,000 in the 2008 first quarter, primarily due to lower production to the Company’s interest as a result of the sale of 35% of the Company’s interest in the McElmo Dome field, effective February 1, 2008. Production to the Company’s interest in the Oil & Gas Segment increased 17% but this was more than offset by a 32% decrease in price and increases in lease operating expenses and ad valorem taxes. These factors combined to reduce the operating profit for the segment from $18,000 for the first three months of 2008 to $2,000 for the same period in 2009.

 

 

 

During the three years ended December 31, 2007, the Company took several steps which reduced its negative cash flow to some degree, including (i) salary deferrals by its Chairman and President (2005 only), (ii) deferrals of directors’ fees into its Deferred Stock Compensation Plans (the “DSC Plans”) and (iii) suspension of the Company’s 100% matching contribution (up to a cap of 5% of gross salary) under its 401(k) Plan.

 

Five private debt placements raised gross proceeds of $4,184,000 during such period. In 2005 the Company borrowed $850,000 from a related party to finance most of the cost of a fertilizer plant in China. These financings were supplemented in 2007 by (i) the sale of an additional $105,000 of convertible notes, (ii) a $150,000 short-term loan from a shareholder of a former affiliate in March, (iii) $192,000 of short-term loans from the Company’s Note holders, (iv) a $1,500,000 long-term bank facility (the “2007 Facility”) in June, and (v) sale of the Company’s interest in the Bravo Dome CO₂ field in October which generated net cash of $285,000. In addition, the Coalition Managers Litigation was concluded, and the Company received approximately $96,000 from the defense fund in August of 2007. In March of 2008 the Company sold 35% of its interest in the McElmo Dome CO₂ field, generating net cash of approximately $3,475,000. These measures enabled the Company to continue operating.

 

The private placements resulted in additional dilution to the Company’s common equity. 72,240 warrants were issued in 2005 and 12,869 warrants were issued in 2007 in connection with two of the private debt placements and 1,014,000 Stock Units (including 40,000 Units in the 2008 first quarter) were accrued in the participants’ accounts as a result of salary and fee deferrals into the various DSC Plans. During such period $4,184,000 of convertible notes were also issued which were convertible into 3,506,000 shares of common stock. During 2008 warrant holders exercised warrants for an aggregate of 368,548 shares at exercise prices ranging from $0.135 to $0.80 per share. Also during August and September, the Company elected, under the provisions of the existing loan agreements, to force convert its 2008 Convertible Notes (the “2008 Notes”) and its 2010 Convertible Notes (the “2010 Notes”) into common stock of the Company at a conversion price of $1.00 per share. This resulted in the issuance of an additional 2,763,622 shares of the common stock. The resultant dilution greatly strengthened the Company’s balance sheet by eliminating $2,205,300 of long-term debt and $558,322 of short-term debt, while adding $2,763,622 to shareholders’ equity. As a result of the issuance of these 3,132,170 shares, the Company’s total outstanding common shares increased to 9,376,017. Additional dilution also occurred due to an adjustment to the Preferred Stock conversion ratio resulting from the issuance of the warrants, the convertible notes and the salary deferrals. Termination of the 2003-2 DSC Plan resulted in the issuance of 218,000 common shares in 2005, 98,000 in 2006, 66,000 in 2007, and another 66,000 in the first quarters of 2008 and 2009. In addition, 25,000 options were issued to a financial consultant in 2005 and 15,000 employee stock options were issued in 2006 (both figures net of forfeitures).

 

The Company’s working capital position has improved significantly since December 31, 2007, when it was $(3,159,000), to $(1,799,000) at March 31, 2009---an improvement of $1,360,000. On March 26, 2008, the Company closed on the sale of 35% of its interest in the McElmo Dome CO₂ Unit (consisting primarily of the 30% of the Company’s McElmo Dome production that had been committed to sell at the Company’s lowest prices) for $3,500,000. The sale, which was effective February 1, 2008, added approximately $3,475,000 to cash flow after legal costs. Because our interest in McElmo Dome served as the collateral for our primary lines of credit we entered into a new Change of Terms Agreement reducing the maximum available credit under the 2007 Facility from $1,500,000 to $1,000,000 while modifying the required monthly principal reduction from $75,000 per month beginning in March of 2008 to $50,000 per month beginning in April of 2008. The outstanding principal balance under the facility was reduced down to zero. In addition, the outstanding loan agreement and related promissory note with The William M. Beard and Lu Beard 1988 Charitable Unitrust (the “Unitrust”) was amended to reduce the outstanding principal balance of the loan from $2,783,000 to $2,250,000, pay the accrued interest of $697,000 and extend the maturity date from April 1, 2009 to April 1, 2010. The Company also entered into a Release, Subordination and Amended and Restated Nominee Agreement whereby the Unitrust loan continued to be subordinate to the Company’s $390,000 note in favor of Boatright Family, L.L.C. (“Boatright”) and the 2007 Facility, and the Boatright note continued to be subordinate to the 2007 Facility.

 

 

 

On December 8, 2008, the 2007 Facility was replaced by the 2008 Facility, which has a Maturity Date of December 31, 2009. The maximum available credit under the 2008 Facility increased the maximum available credit under the line back to $1,000,000, with the required monthly principal reductions of $50,000 per month beginning on January 31, 2009. The Unitrust loan continued to be subordinate to the Company’s $390,000 note in favor of Boatright and the 2008 Facility, and the Boatright note continued to be subordinate to the 2008 Facility. At year-end 2008 the principal balance under the 2008 Facility was $800,000.

 

On February 28, 2009, the Company had exhausted the credit availability under the 2008 Facility and commenced a private placement of short-term 12% notes coupled with 2-year warrants exercisable at $3.00 per share in order to address the problem. All of the notes were for a term of six months with the exception of a $23,530 3-month note which was given to Boatright in lieu of an interest payment due on its $390,000 note. A total of $118,530 of notes and 23,500 warrants had been sold by March 9, 2009 when the offering was terminated in view of the pending sale of the Company’s remaining interest in McElmo Dome (see Subsequent Developments below).

 

Additional Details

In December of 2007 the Company’s Board of Directors voted to discontinue the China Segment. The Company engaged an investment banking firm to explore the available alternatives. Efforts to manufacture product for a Chinese competitor were unsuccessful, and in March of 2008 we reduced our interest in the partnership to 2%. Meanwhile, the Company and its partner advanced a total of $297,000 during 2007 and an additional $651,000 during 2008 to fund the plant’s operations. At year-end 2008 the Company disposed of its remaining interest in the partnership and recorded a financial gain of $1,671,000 as a result.

 

In 2006, the Company joined with three other partners in forming Geohedral LLC (“Geohedral”) to stake claims encompassing a series of black sand ridges which Geohedral believes contain significant quantities of magnetite (iron ore) and ilmenite (iron titanium oxide ore), and meaningful quantities of gold, silver and other precious metals. Under the Company’s direction, Geohedral raised $3,155,000 in 2008 to pay the cost of staking and filing claims covering the target area, encompassing approximately 49,000 acres along the shore of the Gulf of Alaska near the town of Yakutat in southern Alaska. A few of the claims were rejected by the U.S. Forest Service; the balance of the claims, covering approximately 48,000 acres, was approved.

 

While the claims were being staked and filed Geohedral raised an additional $1,640,000 to cover the cost of drilling 28 core holes with the goal of having the cores assayed under the supervision of one of the country’s leading mining engineering firms to verify Geohedral’s estimate that the claims contain significant reserves. Ten core holes were drilled to depths ranging from 65 feet to 125 feet (seven holes were in the 95 to 100 foot range) before Geohedral had to suspend the coring due to adverse weather and limited visibility. Additional core holes will be drilled later this year.

 

The project manager/senior geologist of the independent engineering firm retained to supervise the exploration at the Yakutat project has confirmed that there were significant inaccuracies in the analytical results reported by the independent laboratory that performed the initial assays on the cores. This conclusion has subsequently been verified by two other independent laboratories. The engineering firm has now selected a new laboratory that will perform the assays for Geohedral going forward.

 

The Company continues to be highly optimistic about the potential of the project. Based on an analysis completed by an independent lab Geohedral recently hired to confirm the presence of precious metals, the Company also believes that the area Geohedral has staked has meaningful value based upon the limited coring and analysis completed to date. The Company is eagerly looking forward to the additional work Geohedral will undertake during the rest of this year to confirm what they expect will prove to be a significant discovery.

 

As a result of the two private placements completed in 2008, the Company’s ownership in Geohedral has been reduced to 23.16375%.

 

 

 

Subsequent Developments

Several developments have taken place which have benefited, or are expected to benefit, the Company’s cash flow position:

 

(i) Sale of Additional Interest in McElmo Dome. On April 14, 2009, the Company entered into an agreement to sell its remaining interest in the McElmo Dome CO₂ Unit for $5,200,000. The Company received a down payment of $1,300,000 upon execution of the agreement and received the $3,736,626 balance (after adjustments for certain revenues received and billings paid by the Company, totaling a net of $163,374) of the consideration on May 7, 2009. The sale, which was effective March 1, 2009, generated a gain of $4,909,000, which will be included in the Company’s financial results for the quarter ending June 30, 2009. Because our interest in McElmo Dome served as the collateral for our primary lines of credit, the security interests of First Fidelity Bank, N.A. (the “Bank”), the Unitrust and Boatright were all released. The Company reduced the outstanding principal balance of the 2008 Facility to zero on May 7, 2009, and paid off Boatright’s outstanding $390,000 2010 Convertible Note and its $23,530 short-term note on May 8, 2009, at which time the sale was deemed to be officially closed. The Company will be entering into a new loan agreement with the Bank which will have a maximum available credit of $500,000 (the 2009 Facility) which will be secured by Certificates of Deposit. The facility is expected to have a Maturity Date of April 1, 2011; the other terms of the facility have not yet been negotiated. In addition, the outstanding loan agreement and related promissory note with the Unitrust were amended effective May 6, 2009, and accrued interest of $22,500 was paid to such date. The outstanding principal balance of the loan remained at $2,250,000 (the “Loan”) and the maturity date was extended from April 1, 2010 to April 1, 2011. The Unitrust will henceforth be unsecured with the expectation that the Company will start amortizing the Loan when it has demonstrated the financial capability to commence periodic payments of principal and interest totaling at least $100,000 per quarter. On May 11, 2009, the Company reduced the outstanding principal balance on the Loan to $2,150,000.

 

(ii) Beard Dilworth, LLC. On March 25, 2009, Beard Dilworth, LLC (“BDLLC”), a subsidiary of the Company, made an offer to purchase the properties comprising the Dilworth Field (the “Dilworth Properties”) located on the Nemaha Ridge in Kay County, Oklahoma from Summit Bank, N.A., which had purchased the properties at a sheriff’s sale, for a total purchase price of $1,695,000. On March 30, 2009, the terms of the purchase were agreed to and an $80,000 earnest money deposit was delivered to Summit. Closing of the purchase occurred on April 17, 2009.

 

It has been estimated that the Dilworth Field has produced more than 70 million barrels of oil since the discovery well was completed in 1910. A reservoir study by one of the country’s most highly respected engineering firms has estimated that the Field should be capable of recovering an additional 3.4 to 4.4 million barrels of oil from the Arbuckle Formation by utilizing high volume extraction (“HVE”) technology. BDLLC’s targeted rate of fluid recovery for the project is approximately 220,000 barrels of fluid per day with an anticipated hydrocarbon yield of 1% to 2%.

 

BDLLC is currently in the process of raising a total of $7,000,000 from private investors (including $700,000 contributed by the Company) to finance the purchase of and development of the Dilworth Properties. The Company believes that it will be able to raise the $7,000,000 needed to complete the contemplated development program. However, there is no assurance that additional funds beyond the $1,725,000 already raised will be secured. In the event there is a delay in raising the funds, or the full amount is not raised, development of the Dilworth Properties and the contemplated payout will be delayed.

 

Under the contemplated development program, BDLLC plans to drill five shallow wells to test several upper zones in the Field that it believes will be productive. It then plans to purchase two disposal wells already in place in the field that were not part of its initial purchase, drill two large-bore production wells and one additional disposal well, and start injecting water into the Arbuckle Formation.

 

(iii) Alden Project. Beard Technologies, Inc. (“BTI”) is currently developing a fine coal recovery operation with Alden Energy LLC (“Alden”), a subsidiary of Alden Energy, Inc. Alden, working in concert with BTI and Ke/La Energy, LLC (“Ke/La”), began circulating an Offering Document on April 2, 2009, to secure capital

 

 

 

funding of approximately $31 million to construct a new processing plant at Alden’s Gatliff Preparation Plant at the Bennett’s Branch impoundment located near Nevisdale in south central Kentucky. They advise that they currently have 6-8 active, interested parties. The refuse material from the impoundment will be integrated with the fine coal feed from Alden’s existing preparation plant. The recovery system will be equipped with the Ke/La binder technology to pelletize the fuel produced from the recovery plant. The project will be totally financed by Alden who will own the plant.

 

Part of the funds will be used to expand the mining capacity of one or more of the mines which produce the coal processed at the Gatliff Plant. We have been advised that the Gatliff Plant is the only facility in North America that can produce coal that meets the exacting specifications of silicon metal producers. Most of the coal shipped from the Gatliff Plant is from the Blue Gem coal seam. Such coal commands a premium price, currently up to $175 per ton.

 

Under the proposed arrangement, BTI will receive an average royalty of 7.5% (approximately $1,800,000/year) for the first 11 years and 5% (approximately $1,400,000/year) for the last nine years during the 20-year life of the project (“LOP”). In addition, BTI will receive a $30,000/month overhead fee for managing the recovery operation during the LOP, commencing with the date construction starts.

 

The plant is expected to start construction as soon as financing has been consummated. Ramp up is targeted to commence approximately one year following the construction start-up, with cash flow commencing approximately five months thereafter.

 

Despite assurances from Alden that they do not anticipate any problem in securing the proposed financing, there is no assurance that the required financing will be obtained and that the Alden Project will proceed.

 

(iv) Other Projects. In addition to the Alden project discussed above, the Coal Segment has a number of other projects under development for which it will be seeking financing once complete information on the projects becomes available. Two of these are in the advanced stage of development, and one of these, the TransAlta project, is far enough along that it could be at the startup stage prior to year-end. However, the timing of such projects is uncertain and their continuing development is subject to obtaining the necessary financing. There is no assurance that the required financing will be obtained or that any of the projects under development will materialize.

 

(3)  Discontinued Operations

BE/IM Segment

In 1999 the Management Committee of a joint venture 40%-owned by the Company adopted a formal plan to discontinue the business and dispose of its assets. The joint venture was dissolved in 2000 and the Company took over certain remaining assets and liabilities. The Company recorded no revenues for this segment for either of the three-month periods ended March 31, 2009 or 2008. The Company recorded losses of $1,000 and none for this segment for the three-month periods ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the significant assets related to the segment’s operations consisted primarily of equipment with no estimated net realizable value. The segment had no significant liabilities at March 31, 2009. The Company is actively pursuing opportunities to sell the segment’s few remaining assets and expects the disposition to be completed by December 31, 2009.

 

WS Segment

In 2001, the Company made the decision to cease pursuing opportunities in Mexico and the WS Segment was discontinued. The bulk of the segment’s assets were sold in 2001. The segment recorded no revenues for either the first three months of 2009 or 2008. The segment recorded losses of less than $200 for each of the first three months of 2009 and 2008, respectively. The Company is actively pursuing the sale of the remaining assets and expects to have them sold or otherwise disposed of by December 31, 2009. As of March 31, 2009, the significant assets of the WS Segment were fixed assets totaling $20,000. The significant liabilities of the segment consisted of trade accounts payable and other accrued expenses totaling $40,000. The Company anticipates that all of the liabilities of the segment will be paid prior to December 31, 2009.

 

 

 

China Segment

In December of 2007, the Company elected to dispose of its fertilizer manufacturing operations and related interests in China. On December 31, 2008, the Company relinquished all of its ownership interests in the partnership which owned a fertilizer manufacturing plant operating in China and recorded a gain of $1,671,000. In the first quarter of 2009, the Company ceased operations of the two remaining entities operating in China and wrote off all remaining assets and liabilities associated with these two entities, recording a gain of $6,000. Revenues for the segment were none and $38,000 for the three-month periods ending March 31, 2009 and 2008, respectively. The segment incurred a gain of $6,000 and losses of $257,000 for the three-month periods ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the significant assets related to the segment’s operations consisted primarily of equipment with no estimated net realizable value. At March 31, 2009, the liabilities of the segment consisted of a note payable along with accrued interest totaling $48,000. The Company will dispose of the segment’s assets prior to December 31, 2009. The Company expects to pay its share of the other existing liabilities of the segment prior to December 31, 2009.

 

ITF Segment

In 1999 the Company’s Board of Directors adopted a formal plan to discontinue its interstate travel facilities (“ITF”) Segment. ITF recorded no revenues and earnings of $1,000 for the three months ended March 31, 2009. The earnings were attributable to collections of amounts written off in prior periods. ITF recorded no revenues or losses for the three months ended March 31, 2008. As of March 31, 2009, the ITF Segment had no significant assets or liabilities.

 

(4)  Convertible Preferred Stock

Effective January 1, 2003, the Company’s preferred stock became convertible into Beard common stock. Each share of Beard preferred stock was convertible into 10.64438204 shares on March 31, 2009 (total of 296,318 shares). The conversion ratio will be adjusted if additional warrants or convertible notes are issued in each case at an exercise, conversion or grant price below $1.38665703 per share. Fractional shares will not be issued, and cash will be paid in redemption thereof.

 

(5)  Earnings (Loss) Per Share

Basic earnings (loss) per share data is computed by dividing earnings (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. In the fourth quarter of 2005 four of the five participants in the 2003-2 DSC Plan elected, irrevocably, to receive a portion of their shares in such Plan over periods ranging from two to 10 years. Those shares were included in the calculation of the common stock equivalents up to the date of those elections in 2005 but are excluded from the 2007 computation except for 23,765 shares which were distributed in June of 2007 and 42,370 shares which were distributed in July of 2007 and from the 2008 and 2009 computations except for 66,135 and 66,134 shares which were distributed in January of 2008 and 2009, respectively. As the remaining shares are distributed in future years, they will then be included in the computation of shares outstanding. 283,139 of such shares from the 2003-2 DSC Plan remain to be distributed in the years 2010 through 2014. Diluted earnings per share reflect the potential dilution that could occur if the Company’s outstanding options and warrants were exercised (calculated using the treasury stock method) and if the Company’s preferred stock and convertible notes were converted to common stock.

 

 

 

 

 

 

(6)  Income Taxes

In accordance with the provisions of the Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” ("SFAS No. 109"), the Company's net deferred tax asset is being carried at zero book value, which reflects the uncertainties of the Company's utilization of the future net deductible amounts. The Company recorded provisions of none and $54,000 for federal alternative minimum taxes for the three-month periods ended March 31, 2009 and 2008, respectively.

 

At March 31, 2009, the Company estimates that it had the following income tax carryforwards available for both income tax and financial reporting purposes (in thousands):

 

 

(7) Commitments and Contingencies

In the normal course of business various actions and claims have been brought or asserted against the Company. Management does not consider them to be material to the Company’s financial position, liquidity or results of operations.

 

(8)  Business Segment Information

The Company manages its business by products and services and by geographic location (by country). The Company evaluates its operating segments’ performance based on earnings or loss from operations before income taxes. The Company had four reportable segments in the first three months of 2009 and 2008. The segments are Coal, Carbon Dioxide, e-Commerce and Oil & Gas.

 

The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment

 

 

 

consists of the production of CO2 gas. The e-Commerce Segment consists of a 71%-owned subsidiary whose current strategy is to develop business opportunities to leverage the subsidiary’s intellectual property portfolio of Internet payment methods and security technologies. The Oil & Gas Segment consists of the production of oil and gas.

 

The following is certain financial information regarding the Company’s reportable segments (presented in thousands of dollars).

 

General corporate assets and expenses are not allocated (except for $15,000 per month of “Other” expenses charged to the now discontinued China Segment beginning in December 2006 thru December 31, 2008) to any of the Company’s operating segments; therefore, they are included as a reconciling item to consolidated total assets and loss from continuing operations before income taxes reported in the Company’s accompanying financial statements.

 

 

Reconciliation of total reportable segment earnings (loss) to consolidated earnings (loss) from continuing operations before income taxes is as follows for the three months ended March 31, 2009 and 2008 (in thousands):

 

 

(9)  Subsequent Events

On April 14, 2009, the Company agreed to sell its remaining ownership interests in the McElmo Dome CO2 field effective March 1, 2009. The transaction was closed on May 8, 2009. The sales proceeds of $5,200,000 were adjusted for revenues collected by and operating and capital costs paid by the Company between the effective and closing dates. The Company will recognize a gain of $4,909,000 on the sale in the second quarter of 2009. See Note (2) – Subsequent Developments.

 

 

 

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

THIS REPORT INCLUDES “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS “MAY,” “WILL,” “EXPECT,” “INTEND,” “PROJECT,” “ESTIMATE,” “ANTICIPATE,” “BELIEVE,” OR “CONTINUE” OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS (“CAUTIONARY STATEMENTS”) ARE DISCLOSED UNDER “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND ELSEWHERE IN THIS REPORT. 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 ASSUME NO DUTY TO UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS BASED ON CHANGES IN INTERNAL ESTIMATES OR EXPECTATIONS OR OTHERWISE.

 

Item 1A.  Risk Factors

 

Not applicable.

 

 

The following discussion focuses on material changes in our financial condition since December 31, 2008 and results of operations for the quarter ended March 31, 2009, compared to the prior year first quarter. Such discussion should be read in conjunction with our financial statements including the related footnotes.

 

In preparing the discussion and analysis, we have presumed readers have read or have access to the discussion and analysis of the prior year's results of operations, liquidity and capital resources as contained in our 2008 Form 10-K (the “Form 10-K”).

 

Overview

 

The Coal Segment is in the business of operating coal fines reclamation facilities in the U.S. and provides slurry pond core drilling services, fine coal laboratory analytical services and consulting services. The CO2 Segment consists of the production of CO2 gas. The e-Commerce Segment is engaged in a strategy to develop business opportunities to leverage the subsidiary’s intellectual property portfolio of Internet payment methods and security technologies. The Oil & Gas Segment consists of the production of oil and gas.

 

Our revenues from continuing operations decreased for the first quarter of 2009 compared to the first quarter of 2008. Most of the decrease was attributable to the CO₂ Segment where the sale, effective February 1 of 2008, of 35% of our interest the McElmo Dome field resulted in lower production to the Company’s interest when comparing the two periods. CO₂ revenues were 19% lower in the 2009 first quarter than they were in the 2008 first quarter, and segment operating profit decreased 20%. The Oil & Gas Segment reflected poorer results in the current quarter as prices were down sharply. The Coal Segment reflected a decreased operating loss in the first quarter of 2009 as a

 

 

 

result of reduced operating expenses. The discontinued China Segment generated earnings of $6,000 in the first quarter of 2009 compared to a $257,000 loss in the 2008 first quarter.

 

Material changes in financial condition - March 31, 2009 as compared with December 31, 2008.

 

The following table reflects changes in our financial condition during the periods indicated:

 

 

During the first quarter of 2009, our working capital position deteriorated by $262,000 from $(1,537,000) as of December 31, 2008 to $(1,799,000) at March 31, 2009. We sold 35% of our interest in the McElmo Dome CO2 field for $3,500,000 effective February 1, 2008 and, as of March 31, 2009, had borrowed $900,000 on our credit facility at our bank. We used $62,000 to pay down debt and accrued interest. Our CO2 Segment provided working capital of $246,000. We used $139,000 of working capital to help fund the operations of the Coal Segment. Also, we used $28,000 to fund the activities of the e-Commerce Segment. We utilized the remainder of the working capital to fund other operations. At March 31, 2009 we had no availability on our reducing revolving credit line at the bank.

 

Our principal business is coal reclamation, and this is where management’s operating attention remains primarily focused. The outlook for the Coal Segment remains bright. The segment has been actively pursuing project financing for its future projects through two separate investment banking sources. However, there is no assurance that their efforts will be successful or that any meaningful cash flow will be available from this source prior to 2010.

 

Significant Improvement in Our Financial Condition due to Subsequent Developments. Several developments have taken place which have benefited, or are expected to benefit, our liquidity and cash flows:

 

 

 

 

 

sheriff’s sale, for a total purchase price of $1,695,000. On March 30, 2009, the terms of the purchase were agreed to and an $80,000 earnest money deposit was delivered to Summit. Closing of the purchase occurred on April 17, 2009.

 

It has been estimated that the Dilworth Field has produced more than 70 million barrels of oil since the discovery well was completed in 1910. A reservoir study by one of the country’s most highly respected engineering firms has estimated that the Field should be capable of recovering an additional 3.4 to 4.4 million barrels of oil from the Arbuckle Formation by utilizing high volume extraction (“HVE”) technology. BDLLC’s targeted rate of fluid recovery for the project is approximately 220,000 barrels of fluid per day with an anticipated hydrocarbon yield of 1% to 2%.

 

BDLLC is currently in the process of raising a total of $7,000,000 from private investors (including $700,000 contributed by us) to finance the purchase of and development of the Dilworth Properties. We believe that we will be able to raise the $7,000,000 needed to complete the contemplated development program. However, there is no assurance that additional funds beyond the $1,725,000 already raised will be secured. In the event there is a delay in raising the funds, or the full amount is not raised, development of the Dilworth Properties and the contemplated payout will be delayed.

 

Under the contemplated development program, BDLLC plans to drill five shallow wells to test several upper zones in the Field that it believes will be productive. It then plans to purchase two disposal wells already in place in the field that were not part of its initial purchase, drill two large-bore production wells and one additional disposal well, and start injecting water into the Arbuckle Formation.

 

 

Part of the funds will be used to expand the mining capacity of one or more of the mines which produce the coal processed at the Gatliff Plant. We have been advised that the Gatliff Plant is the only facility in North America that can produce coal that meets the exacting specifications of silicon metal producers. Most of the coal shipped from the Gatliff Plant is from the Blue Gem coal seam. Such coal commands a premium price, currently up to $175 per ton.

 

Under the proposed arrangement, BTI will receive an average royalty of 7.5% (approximately $1,800,000/year) for the first 11 years and 5% (approximately $1,400,000/year) for the last nine years during the 20-year life of the project (“LOP”). In addition, BTI will receive a $30,000/month overhead fee for managing the recovery operation during the LOP, commencing with the date construction starts.

 

The plant is expected to start construction as soon as financing has been consummated. Ramp up is targeted to commence approximately one year following the construction start-up, with cash flow commencing approximately five months thereafter.

 

Despite assurances from Alden that they do not anticipate any problem in securing the proposed financing, there is no assurance that the required financing will be obtained and that the Alden Project will proceed.

 

 

 

 

projects is uncertain and their continuing development is subject to obtaining the necessary financing. There is no assurance that the required financing will be obtained or that any of the projects under development will materialize.

 

Material changes in results of operations - Quarter ended March 31, 2009 as compared with the Quarter ended March 31, 2008.

 

We recorded a loss of $273,000 for the first quarter of 2009 compared to earnings of $2,768,000 for the first quarter of 2008. The primary reason for the $3,041,000 decline in results was the sale, effective February, 1, 2008, of 35% of our interest in the McElmo Dome CO2 field resulting in a gain of $3,344,000 with no such comparable sale in the first quarter of 2009. The operating loss in the Coal Segment decreased $3,000 to $136,000 for the first quarter of 2009 compared to $139,000 for the first quarter of 2008. The operating profit in the CO2 Segment decreased $61,000 to $246,000 in the first quarter of 2009 compared to $307,000 for the same period in 2008. The e-Commerce Segment incurred operating losses of $25,000 for the first quarter of 2009 compared to $26,000 in the first quarter of 2008. The Oil & Gas Segment recorded a profit of $18,000 for the first quarter of 2008 but produced a profit of only $2,000 in 2009. The operating loss in Other activities for the first quarter of 2009 increased $68,000 to $275,000 compared to $207,000 for the same period in 2008. As a result, the operating loss for the current quarter increased $141,000 to $188,000 versus $47,000 in the corresponding quarter of the prior year.

 

Operating results of our primary operating Segments are reflected below:

 

 

The “Other” in the above table reflects primarily general and corporate activities, as well as our other activities.

 

Coal reclamation

 

The segment recorded revenues of $1,000 for the first quarter of 2009 compared to none in the same period of 2008. Operating costs decreased $7,000 to $130,000 for the first quarter of 2009 compared to $137,000 for the same period in 2008.The segment incurred $5,000 more in depreciation for the first quarter of 2009 compared to the first quarter in 2008 as a result of the purchase, in the fourth quarter of 2008, of new office and lab facilities in Somerset, Pennsylvania.

 

Carbon dioxide

 

First quarter 2009 operations reflected an operating profit of $246,000 compared to $307,000 for the 2008 first quarter. The sole component of revenues for this segment is the sale of CO2 gas from the working and overriding royalty interests of our carbon dioxide producing unit in Colorado. Operating revenues in this segment decreased $65,000 or 19% to $280,000 for the first three months of 2009 compared to $345,000 for the same period in 2008. We sold 35% of our interest in the McElmo Dome field effective February 1, 2008 and the reduced production to the Company’s interest was the primary reason for the decreased revenues.

 

e-Commerce

 

The e-Commerce Segment incurred an operating loss of $25,000 for the first quarter of 2009 versus an operating loss of $26,000 in the prior year quarter. The segment recorded revenues from royalty fees of $3,000 in the first three months of 2009 compared to $5,000 for the same period in 2008. Under the segment’s patent license agreement, the provision for an annual license fee of $25,000 terminated at the end of the first quarter of 2005. The

 

 

 

segment will continue to receive royalty fee income according to the terms of the agreement. The segment incurred $2,000 less in travel costs and $1,000 more in legal fees in the 2009 period compared to the prior year quarter. The increase in legal expenses is associated with the Visa litigation.

 

Oil & Gas

 

The Oil & Gas Segment recorded $23,000 in revenues for the first quarter of 2009 compared to $28,000 for the same period in 2008. There was a 17% increase in production volumes in the first quarter of 2009 versus the first quarter in 2008. Prices, however, decreased by an average of almost 32% from the first quarter of 2008 to the first quarter of 2009 resulting in a decrease in revenue of $5,000. Operating costs totaled $17,000 and $7,000 for the first quarter of 2009 and 2008, respectively. Increases of $7,000, $1,000 and $1,000 in lease operating expenses, ad valorem taxes and delay rentals, respectively, accounted for the majority of the increase. As a result, the segment contributed $2,000 of operating profit for the first quarter of 2009 compared to $18,000 for the same period in the prior year.

 

Other activities

 

Other operations, consisting primarily of general and corporate activities, generated a $68,000 larger operating loss for the first quarter of 2009 compared to the same period last year. The increased loss for the first quarter of 2009 compared to the same period in 2008 was primarily the result of increases in professional fees of $31,000 and a reduction of $36,000 in the amount of administrative costs billed to the discontinued China Segment due to the sale of the two principal subsidiaries of the segment in the fourth quarter of 2008. Additionally, rent expense increased $7,000 and compensation costs increased $16,000 for the 2009 quarter compared to the same period in 2008. Amortization expenses were $20,000 less in 2009 compared to 2008 because, in the fourth quarter of 2008, we wrote off the remaining capitalized costs associated with the debt that was converted to common stock in that period and, as a result, there were fewer costs to amortize in the first quarter of 2009.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses (“SG&A”) in the current quarter increased $88,000 to $271,000 from $183,000 in the 2008 first quarter. See “Other” above.

 

Depreciation, depletion and amortization expenses

 

Depreciation, depletion and amortization expenses (“DD&A”) decreased $14,000 for the first quarter of 2009 compared to the same period of 2008. Amortization expenses decreased to less than $2,000 for the first quarter of 2009 compared to $22,000 for the same period in 2008. This decrease is attributable to our expensing a significant amount of capitalized costs associated with our debt when that debt was converted to common stock in the third and fourth quarters of 2008. Depreciation expenses associated with fixed assets increased to $21,000 in the first quarter of 2009 compared to $14,000 for the same period in 2008. Our Coal Segment had the largest change in depreciation expense as the segment’s depreciation expense increased $5,000 for the first quarter of 2009 compared to the first three months of 2008 as a result of the segment’s purchase of its lab and office facilities in the fourth quarter of 2008. Depreciation in “Other” increased $1,000 for the first three months of 2009 compared to the same period in 2008 as we purchased some new computer and telephone equipment when we moved offices in the fourth quarter of 2008.

 

Other income and expenses

 

The other income and expenses for the first quarter of 2009 netted to a loss of $91,000 compared to earnings of $3,127,000 for the same period in 2008. We realized a gain of $3,344,000 from the sale, effective February 1, 2008, of 35% of our interest in the McElmo Dome field compared to $1,000 from the sale of other assets during the first quarter of 2009. Interest income was $3,000 for the first quarter of 2009 compared to $1,000 for the same period in 2008. Interest expense was $126,000 less in the first quarter of 2009 compared to the first quarter of 2008 primarily as a result of our having paid down $1,981,000 of our debt in late March of 2008 with a portion of the proceeds from the McElmo Dome sale and the conversion and redemption of $3,652,000 of our debt in the third and fourth quarters of 2008. Our equity in earnings of unconsolidated affiliates reflected net income of $1,000 for the first quarter of 2008 compared to none for the same period in 2009.

 

 

 

Income taxes

 

We recorded a provision of $54,000 for federal alternative minimum taxes for the first quarter of 2008 compared to none for the first quarter of 2009. The Company recorded no provision for state income taxes in either the first quarter of 2008 or 2009. We have not recorded any financial benefit attributable to our various tax carryforwards due to uncertainty regarding their utilization and realization.

 

Discontinued operations

 

Our financial results from our discontinued operations included earnings of $6,000 for the first quarter of 2009 compared to losses of $258,000 for the first quarter of 2008, as a result of the discontinuance of three of our segments. We made the decision to discontinue the China Segment during the fourth quarter of 2007. The losses attributable to this segment amounted to $257,000 for the first quarter of 2008 but the segment recognized earnings of $6,000 for the first quarter of 2009 because it terminated operations in two more of the entities in the segment. Losses from the discontinued iodine manufacturing operation amounted to $1,000 for both the first quarters of 2008 and 2009. The discontinued interstate travel facilities segment realized earnings of $1,000 in the first quarter of 2009 compared to none in the same period of 2008 as we collected some overdue amounts owed us that were written off in a prior period. As of March 31, 2009, assets of discontinued operations held for resale totaled $21,000 and liabilities of discontinued operations totaled $51,000. We believe that all of the assets of the discontinued segments have been written down to their realizable value. We are actively pursuing opportunities to sell the remaining assets and expect the dispositions to be completed by December 31, 2009.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

At March 31, 2009, we had total debt of $4,231,000. Debt in the amount of $3,331,000 has fixed interest rates; therefore, our interest expense and operating results would not be affected by an increase in market interest rates for this amount. Another $900,000 note is accruing interest at Wall Street Journal Prime plus 1.5% with a floor of 6% at March 31, 2009. A 10% increase in market interest rates above quarter-end rates would have increased our interest expense by less than $2,000. At March 31, 2009, a 10% increase in market interest rates would have reduced the fair value of our debt by $36,000.

 

We have no other market risk sensitive instruments.

 

Item 4.  Controls and Procedures.

 

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2009, to ensure that information required to be disclosed by us in reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures. We believe our consolidated financial statements included in this Form 10Q fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in accordance with United States generally accepted accounting principles.

 

PART II.  OTHER INFORMATION.

 

Item 1.  Legal Proceedings.

 

Visa Litigation.

In May of 2003 our 71%-owned subsidiary, starpay.com, l.l.c., along with VIMachine, Inc. filed a suit in the U. S. District Court for the Northern District of Texas, Dallas Division against Visa International Service Association and Visa USA, Inc., both d/b/a Visa (Case No. CIV:3-03-CV0976-L). VIMachine is the holder of U.S. Patent No.

 

 

 

5,903,878 (the “VIMachine Patent”) that covers, among other things, an improved method of authenticating the cardholder involved in an Internet payment transaction. In July of 2003, the Plaintiffs filed an Amended Complaint. The suit seeks damages and injunctive relief (i) related to Visa’s infringement of the VIMachine Patent; (ii) related to Visa’s breach of certain confidentiality agreements express or implied; (iii) for alleged fraud on the Patent Office based on Visa’s pending patent application; and (iv) under California’s common law and statutory doctrines of unfair trade practices, misappropriation and/or theft of starpay’s intellectual property and/or trade secrets. In addition, Plaintiffs are seeking attorney fees and costs related to the foregoing claims. If willfulness can be shown, Plaintiffs will seek treble damages.

 

In August of 2003 the Defendants filed a motion to dismiss the second, third and fourth claims. Despite objections to such motion by the Plaintiffs, the Judge in February of 2004 granted Defendants’ motion to dismiss the second and third causes of action, and denied the motion insofar as it sought to dismiss the fourth cause of action. Accordingly, Plaintiffs’ fourth claim (misappropriation and/or theft of intellectual property and/or trade secrets) will continue to move forward.

 

In February of 2004 Defendants filed an Answer to Plaintiffs’ Amended Complaint. In such filing Visa denied each allegation relevant to claim four. Visa asked that the VIMachine Patent be declared invalid, and, even if it is found valid, Visa asked that theybe found not to infringe the VIMachine Patent. Visa asked for other related relief based onthese two allegations.

 

In April and May 2004, Plaintiffs filed their Patent Infringement Contentions and a supplement thereto detailing Visa’s alleged infringement of the majority of the patent claims depicted in the VIMachine Patent. Subsequently, in May 2004, Defendants filed Preliminary Invalidity Contentions requesting the VIMachine Patent be found invalid.

 

From May through October 2004, the Plaintiffs and Defendants submitted numerous filings related to interpretation of the terms and phrases set out in the VIMachine Patent claims. A hearing regarding patent claim construction (a “Markman hearing”) was held in October of 2004, allowing both parties to present oral arguments before the Court regarding the claim construction issues. On January 4, 2005, Magistrate Judge Sanderson filed a Report and Recommendation of the United States Magistrate Judge addressing his findings and recommendations with respect to the claim constructions to be applied to the VIMachine Patent. Judge Sanderson found that 24 of the 28 claims asserted by the Plaintiffs were valid. Both parties pursued modifications of the Magistrate’s recommendations in the form of an appeal to District Judge Lindsey.

 

In July of 2005 the Federal Circuit Court of Appeals issued an en banc decision in the patent case of Phillips v. AWH Corp. (the “Phillips Case”). Subsequent to the Federal Circuit’s decision in July, Defendants requested and the Court ordered supplemental briefs to the Court addressing Magistrate Judge Sanderson’s Report and Recommendation respective to the Markman hearing in light of the Federal Circuit’s en banc decision in the Phillips Case. Both parties filed their supplemental briefs in August 2005. Oral arguments regarding these issues were held in November of 2005. On January 19, 2006, Magistrate Judge Sanderson filed his final Report and Recommendation on the Markman issues to District Judge Lindsey. In his report Judge Sanderson found no reason to change any portions of his recommendations filed on January 4, 2005, in light of the Federal Circuit’s decision in the Phillips Case. In mid-September District Judge Lindsey issued his final ruling on the Markman hearing. He adopted nine of the 14 claim constructions previously suggested by Magistrate Sanderson and modified five other claim constructions. Judge Lindsey did not modify Magistrate Sanderson’s previous finding that 24 of the 28 claims asserted by the Plaintiffs were valid.

 

This ruling allows the patent infringement action to proceed immediately as no appeal is allowed from this intermediate ruling.  Noteworthy among the changes is the definition of a “unique transaction identifier” or UTID.  Visa had asked that the UTID be defined as a globally unique data string, and Judge Lindsey refused to adopt that construction, construing the UTID more broadly in a manner more favorable to Plaintiffs’ patent infringement claims. Based on the ruling, Plaintiffs anticipate filing a motion for summary judgment asking the Court to rule in their favor as a matter of law, and Plaintiffs anticipate that Visa will also file a summary judgment motion.

 

During the first quarter of 2000 starpay’s trade secrets were relayed to Visa verbally in face-to-face conferences and telephone calls, as well as in correspondence by post and electronic mail. After receiving starpay’s technology and ideas, Visa filed a series of provisional patent applications beginning in April of 2000 using starpay’s trade

 

 

 

secrets. At the same time, Visa wrongfully incorporated starpay’s trade secrets in to its Visa Payer Authentication Service, also known as Verified by Visa (“VPAS”). VPAS infringes the VIMachine Patent. From early 2000 until recently, starpay tried on several occasions to enter into meaningful negotiations with Visa to resolve their intellectual property concerns. Visa has continually denied their infringement of the VIMachine Patent and starpay’s assertion that Visa has appropriated starpay’s trade secrets.

 

In November of 2000 Visa publicly announced that it was testing VPAS. In September of 2001 Visa stated that, once rolled out globally, it expected VPAS to reduce Internet payment disputes by at least 50%. In an October 2004, news release, Visa depicted Verified by Visa as “the leading security standard for authentication of Internet transactions.” In this release Visa announced that Verified by Visa had “recorded an increase of close to 200% in the number of transactions for the quarter ending in September 2004,” and that “total Verified by Visa card volume for the first nine months of 2004 was $5.4 billion.” In April of 2005 Visa announced that “transaction volume during the first quarter of 2005 had increased more than 230% over last year.” Towards the end of 2005 Visa announced that Verified by Visa had “$7 billion in volume during the first half of the year......a 194% year-over-year increase.” Since late 2005, Plaintiffs have not seen or received public information bearing on the transaction volume within the Verified by Visa system. However, Visa’s current Verified by Visa Fact Sheet touts that “more than 110,000 merchants have adopted Verified by Visa and 10,000 banks have made the service available to over 395 million consumers globally” through implementation in more than 65 countries representing 99% of global e-commerce volume. Other Visa documents state that “since Verified by Visa was implemented in 2003, there has been a 75% reduction in chargebacks on Verified by Visa compared with non-Verified by Visa transactions.”

 

The parties mediated in January 2008. A settlement was reached, and starpay.com views the settlement as acceptable. However, questions are outstanding regarding the enforceability of the settlement agreement in view of objections of starpay.com’s litigation partner to the terms thereof. Motions are currently being filed to address the issues presented by the dispute surrounding the settlement agreement. It is anticipated that the settlement will either be enforced in the near term, or it will be invalidated and the litigation will continue.

 

Item 1A.  Risk Factors.

 

Not applicable.

 

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

 

On February 28, 2009, we delivered a $23,530 12% note due May 29, 2009, in lieu of an interest payment due on such date to the holder of a $390,000 12% Convertible Subordinated Note due August 31, 2009 that had a secured interest in McElmo Dome. On that date we also sold a $25,000 12% note due August 28, 2009 to another party for cash. On March 9, 2009, we sold $70,000 aggregate principal amount of 12% short-term notes due August 28, 2009 (the “S-T Notes”) to four other parties for cash. In connection with the issuance of the six notes we issued two-year warrants (the “2009 Warrants”) to purchase a total of 23,500 shares of our common stock for $3.00 per share. On April 22, 2009, we prepaid a $50,000 S-T Note at the holder’s request, and replaced its 10,000 share 2009 Warrant with a 2,500 share 2009 Warrant maturing on March 9, 2009. On May 11, 2009, we prepaid the $23,530 note at the holder’s request in order to facilitate the closing of the McElmo Dome sale; the holder was allowed to retain its 4,500 share 2009 Warrant as part of the transaction.

 

None of the 2009 Warrants or the Underlying Common Stock which may be issued in connection with the 2009 Warrants are registered under the Securities Act of 1933, as amended (the “Securities Act”). The 2009 Warrants and the Underlying Common Stock were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act for “transactions by the issuer not involving a public offering,” in transactions that fell within the safe harbor provided by Rule 506 of Regulation D of the Securities Act.

 

Item 3.  Default upon Senior Securities.

 

Not applicable.

 

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

 

Not applicable.

 

 

 

Item 5.  Other Information.

 

Effective as of February 15, 2008, the Company and PinnOak terminated the last agreements governing the Pinnacle Project in West Virginia, and the Company ceased to be the contract operator of the coal project.

 

Item 6.  Exhibits.

 

 

 

 

 

 

 

 

We will furnish to any shareholder a copy of any of the above exhibits upon the payment of $.25 per page. Any request should be sent to The Beard Company, Enterprise Plaza, Suite 320, 5600 North May Avenue, Oklahoma City, Oklahoma 73112, Attention: Hue Green, Secretary.

 

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.