UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________________ to ______________________________
Commission File Number: 0-27443
| BAYOU CITY EXPLORATION, INC. |
| (Exact name of registrant as specified in its charter) |
| NEVADA | 61-1306702 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| 632 Adams Street, Suite-700, Bowling Green, KY | 42101 |
| (address of principal executive offices) | (Zip Code) |
| (800) 798-3389 |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. þYes oNo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) ¨Yes ¨No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes þNo
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. oYes ¨No
APPLICABLE ONLY TO CORPORATE ISSUERS:
| Shares outstanding for each class of stock as of the latest practicable date: |
| Title or Class | Shares Outstanding on October 31, 2010 |
| Common Stock, $0.005 par value | 29,003,633 |
PART I FINANCIAL INFORMATION | ||
| ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) | 1 |
| BALANCE SHEETS AS OF SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009 | 1 | |
| STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNDAUDITED) | 2 | |
| STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (UNAUDITED) | 3 | |
| NOTES TO FINANCIAL STATEMENTS (UNAUDITED) | 4 | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS | 10 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 13 |
| ITEM 4. | CONTROLS AND PROCEDURES | 13 |
PART II OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS | 14 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 14 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 14 |
| ITEM 4. | (REMOVED AND RESERVED) | 14 |
| ITEM 5. | OTHER INFORMATION | 14 |
| ITEM 6. | EXHIBITS | 14 |
| SIGNATURES | 15 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BAYOU CITY EXPLORATION, INC.
BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| ASSETS: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 244,889 | $ | 51,704 | ||||
| Accounts receivable: | ||||||||
Trade and other (net of allowance for doubtful accounts- $-0- as of September 30, 2010 and $37,465 as of December 31, 2009) | ||||||||
| Prepaid expenses and other | 30,140 | - | ||||||
| TOTAL CURRENT ASSETS | 322,168 | 217,650 | ||||||
| OIL AND GAS PROPERTIES, NET | 564,453 | 308,967 | ||||||
| TOTAL ASSETS | $ | 886,621 | $ | 526,617 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued liabilities | $ | 24,283 | $ | 133,071 | ||||
| Accounts payable - related party | 84,906 | 134,906 | ||||||
| Notes payable - related parties | 100,000 | 475,000 | ||||||
| TOTAL CURRENT LIABILITIES | 209,189 | 742,977 | ||||||
| TOTAL LIABILITIES | 209,189 | 742,977 | ||||||
| STOCKHOLDERS' EQUITY (DEFICIT): | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2010 and December 31, 2009 | - | - | ||||||
Common stock, $0.005 par value; 150,000,000 shares authorized; 29,003,633 shares issued and outstanding at September 30, 2010 and 26,653,633 issued and outstanding at December 31, 2009 | 145,018 | 133,268 | ||||||
| Additional paid in capital | 13,375,180 | 13,363,430 | ||||||
| Accumulated deficit | (12,842,766 | ) | (13,713,058 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | 677,432 | (216,360 | ) | |||||
| TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) | $ | 886,621 | $ | 526,617 | ||||
The accompanying notes are an integral part of these financial statements
1
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Oil and gas sales | $ | 98,084 | $ | 226,457 | $ | 226,070 | $ | 756,075 | ||||||||
| Gain on sale of oil and gas properties | - | - | 1,000,000 | - | ||||||||||||
| TOTAL OPERATING REVENUES | 98,084 | 226,457 | 1,226,070 | 756,075 | ||||||||||||
| OPERATING COSTS AND EXPENSES: | ||||||||||||||||
| Lease operating expenses and production taxes | 17,699 | 15,029 | 39,149 | 46,732 | ||||||||||||
| Depreciation, depletion and amortization | 25,173 | - | 43,937 | 5,834 | ||||||||||||
| General and administrative costs | 121,398 | 56,859 | 287,644 | 62,707 | ||||||||||||
| Marketing costs | 3,525 | - | 3,525 | - | ||||||||||||
| TOTAL OPERATING COSTS | 167,795 | 71,888 | 374,255 | 115,273 | ||||||||||||
| OPERATING INCOME (LOSS) | (69,711 | ) | 154,569 | 851,815 | 640,802 | |||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | - | (7,336 | ) | (3,551 | ) | (25,409 | ) | |||||||||
| Forgiveness of debt | - | - | - | 167,344 | ||||||||||||
| Other income | 9,532 | 2,095 | 22,028 | 44,299 | ||||||||||||
| NET INCOME (LOSS) BEFORE INCOME TAX | (60,179 | ) | 149,328 | 870,292 | 827,036 | |||||||||||
| Income Tax Provision | - | - | - | - | ||||||||||||
| NET INCOME (LOSS) | $ | (60,179 | ) | $ | 149,328 | $ | 870,292 | $ | 827,036 | |||||||
| NET INCOME (LOSS) PER COMMON SHARE | $ | (0.00 | ) | $ | 0.01 | $ | 0.03 | $ | 0.03 | |||||||
| Weighted Average Common Shares Outstanding – Basic and Diluted | 27,828,633 | 26,653,633 | 27,123,633 | 26,653,633 | ||||||||||||
The accompanying notes are an integral part of these financial statements
2
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net Income | $ | 870,292 | $ | 827,036 | ||||
Adjustments to reconcile net income to net cash flows used in operating activities: | ||||||||
| Depreciation, depletion, and amortization | 43,937 | 5,834 | ||||||
| Gain on sale of oil and gas property | (1,000,000 | ) | - | |||||
| Forgiveness of debt | - | (167,344 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 118,807 | 77,194 | ||||||
| Prepaid expenses and other | (30,140 | ) | - | |||||
| AFE advances - JIB owners | - | (51,186 | ) | |||||
| Accounts payable - related party | (50,000 | ) | (111,392 | ) | ||||
| Accounts payable and accrued liabilities | (108,788 | ) | (94,844 | ) | ||||
| Long term liability - P&A costs | - | (43,806 | ) | |||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (155,892 | ) | 441,492 | |||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of oil and gas properties | (299,423 | ) | (242,554 | ) | ||||
| Proceeds from sale of oil and gas properties | 1,000,000 | - | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 700,577 | (242,554 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on long term debt | - | (207,019 | ) | |||||
| Proceeds (payments) on line of credit | (375,000 | ) | 15,450 | |||||
| Proceeds from exercising stock options | 23,500 | - | ||||||
| NET CASH USED IN FINANCING ACTIVITIES | (351,500 | ) | (191,569 | ) | ||||
| NET INCREASE IN CASH | 193,185 | 7,369 | ||||||
| CASH AT BEGINNING OF PERIOD | 51,704 | 18,042 | ||||||
| CASH AT END OF PERIOD | $ | 244,889 | $ | 25,411 | ||||
The accompanying notes are an integral part of these financial statements
3
BAYOU CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission.
The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.
Accounts Receivable
Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of September 30, 2010, a total of $0 was considered potentially uncollectible.
Managed Limited Partnerships
The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 1% of the Limited Partnerships as the Managing General Partner and accounts for the investment under the equity method. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively.
Oil and Gas Properties
The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:
| (1) | the costs of acquiring mineral interest in properties, | |
| (2) | costs to drill and equip exploratory wells that find proved reserves, | |
| (3) | costs to drill and equip development wells, and | |
| (4) | costs for support equipment and facilities used in oil and gas producing activities. |
These costs are depreciated, depleted or amortized on the unit of productions method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.
The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.
4
The costs of drilling exploration wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If after a year has passed, and the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired, and its costs are charged to expense. At December 31, 2009 the Company had $186,000 in capitalized costs pending determination, but at December 31, 2008, the Company had no costs capitalized pending determination.
Other Dispositions
Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.
Impairment of Long-Lived Assets
In accordance with FASB ASC 360-10-35, long lived assets, such as oil and gas properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount of the fair value less costs to sell and are no longer depreciated or depleted.
Income (Loss) Per Common Share
The Company calculates basic earnings per common share (“Basic EPS”) using the weighted average number of common shares outstanding for the period.
The following table provides the numerators and denominators used in the calculation of Basic EPS for the three and nine month periods ended September 30, 2010 and 2009:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Income (loss) from operations | $ | (60,179 | ) | $ | 149,328 | $ | 870,292 | $ | 827,036 | |||||||
| Less preferred stock dividends | -0- | -0- | -0- | -0- | ||||||||||||
| Income (loss) available to common stockholders | $ | (60,179 | ) | $ | 149,328 | $ | 870,292 | $ | 827,036 | |||||||
| Common stock outstanding for the period ended | 29,003,633 | 26,653,633 | 29,003,633 | 26,653,633 | ||||||||||||
| Basic weighted average common shares outstanding | 27,828,633 | 26,653,633 | 27,123,633 | 26,653,633 | ||||||||||||
| Assumed exercise of stock options | -0- | -0- | -0- | -0- | ||||||||||||
| Diluted average common shares outstanding | 27,828,633 | 26,653,633 | 27,123,633 | 26,653,633 | ||||||||||||
5
Stock Options
Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.
Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.
The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.
Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits
The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The balances are insured by the Federal Deposit Insurance Corporation for up to $250,000. At September 30, 2010 all cash balances were under $250,000.
Advertising
The Company expenses advertising costs as these are incurred. There were no advertising costs incurred during the nine months ended September 30, 2010.
Fair Value of Financial Instruments
The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (the “FASB”) established the FASB Accounting Standards Codification (“Codification”) as the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements issued for interim and annual periods ending after September 15, 2009. The codification has changed the manner in which U.S. GAAP guidance is referenced, but did not have an impact on our financial position, results of operations or cash flows.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Accounting Standards Codification (“ASC”) 820. ASU 2010-06 amends ASC 820 to now require: (1) a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and (2) in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchase s, sales, issuances, and settlements. In addition, ASU 2010-06 clarifies the requirements of existing disclosures. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company will comply with the additional disclosures required by this guidance upon its adoption in January 2010.
Also in January 2010, the FASB issued Accounting Standards Update No. 2010-03, “Extractive Activities—Oil and Gas—Oil and Gas Reserve Estimation and Disclosures.” This ASU amends the “Extractive Industries—Oil and Gas” Topic of the Codification to align the oil and gas reserve estimation and disclosure requirements in this Topic with the SEC’s Release No. 33-8995, “Modernization of Oil and Gas Reporting Requirements (Final Rule),” discussed below. The amendments are effective for annual reporting periods ending on or after December 31, 2009, and the adoption of these provisions on December 31, 2009 did not have a material impact on our financial statements.
6
On December 31, 2008, the Securities and Exchange Commission (the “SEC”), referred to in this report as the SEC, issued Release No. 33-8995, “Modernization of Oil and Gas Reporting Requirements (Final Rule),” which revises the disclosures required by oil and gas companies. The SEC disclosure requirements for oil and gas companies have been updated to include expanded disclosure for oil and gas activities, and certain definitions have also been changed that will impact the determination of oil and gas reserve quantities. The provisions of this final rule are effective for registration statements filed on or after January 1, 2010, and for annual reports for fiscal years ending on or after December 31, 2009.
In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value,” related to fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, a reporting entity is required to measure fair value using one or more valuation techniques. This guidance is effective for the first reporting period beginning after issuance.
In June 2009, the FASB issued guidance under ASC 105, “Generally Accepted Accounting Principles.” This guidance established a new hierarchy of GAAP sources for non-governmental entities under the FASB Accounting Standards Codification. The Codification is the sole source for authoritative U.S. GAAP and supersedes all accounting standards in U.S. GAAP, except for those issued by the SEC. The guidance was effective for financial statements issued for reporting periods ending after September 15, 2009. The adoption had no impact on the Company’s financial position, cash flows or results of operations.
In May 2009, the FASB issued guidance under ASC 855 “Subsequent Events,” which sets forth: (1) the period after the balance sheet date during which management of reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance was effective on a prospective basis for interim or annual financial periods ending after June 15, 2009.
In April 2009, the FASB updated its guidance under ASC 820, “Fair Value Measurements and Disclosures,” related to estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying circumstances that indicate a transaction is not orderly. The guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have any impact on the Company’s results of operations.
Also in April 2009, the FASB updated its guidance under ASC 825, “Financial Instruments,” which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. The guidance was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The FASB updated its guidance under ASC 805, “Business Combinations,” in April 2009, which addresses application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for business combinations occurring on or after the beginning of the first annual period on or after December 15, 2008.
In June 2008, the FASB updated its guidance under ASC 260, “Earnings Per Share.” This guidance clarified that all unvested share-based payment awards with a right to receive non-forfeitable dividends are participating securities and provides guidance on how to allocate earnings to participating securities and compute basic earnings per share using the two-class method. This guidance was effective for fiscal years beginning after December 15, 2008. The Company adopted this guidance on January 1, 2009. The adoption did not have a material impact on the Company’s earnings per share calculations.
In March 2008, the FASB issued guidance under ASC 815, “Derivatives and Hedging,” which changes the disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related items affect an entity’s financial position, operations and cash flows. This guidance was effective as of the beginning of an entity’s fiscal year that begins after November 15, 2008. The Company adopted this guidance on January 1, 2009.
7
3. SALE OF PROPERTY
In late December 2009, the Company accepted an offer to purchase its 8.073375% royalty interest in the Sein #1 well for a total price of $1,000,000, which took place in two separate transactions, the first on January 1, 2010 and the second on March 01, 2010. The offer to purchase the royalty interest was made by five entities, all of which have a material relationship with the Company’s former President and CEO, Robert D. Burr. Blue Ridge Group, Inc. is the Managing General Partner of the 2009 Production and Drilling Program, L.P. which purchased 1.9943981198% of the aforementioned royalty interest on January 01, 2010 for $247,034. Blue Ridge Group is also the managing General Partner of the 2009/2010 Production and Drilling Program L.P. which purchased 1.1695494694% of the afo rementioned royalty interest on March 01, 2010 for $144,865. Argyle Energy, Inc. is the Managing General Partner of the Argyle Energy 2009-VI Year End Production Program, L.P. which purchased .5494981226% of the aforementioned royalty interest on January 01, 2010 for $68,063. Argyle Energy, Inc. is also the Managing General Partner of the Argyle Energy 2009/2010-VI Year End Production Program, L.P. which purchased .5341506368% of the aforementioned royalty interest on March 01, 2010 for $66,162. Lastly, Burrite, Inc. purchased 3.8257786515% of the aforementioned royalty interest on March 01, 2010 for $473,876. Mr. Burr is the President of Blue Ridge Group, Inc., Argyle Energy, Inc., and Burrite, Inc. In light of the material relationship between the buyers and seller, the Board of Directors required a third party appraisal of the royalty interest as a condition precedent to acceptance of the offer. The appraisal was received on December 10, 2009 providin g an opinion of value equal to $1,000,000. Accordingly, the Board of Directions voted to accept the above referenced offer and proceed to closing. All transactions were in cash and disclosed on two separate Form 8-K’s that were filed on January 12, 2010 and March 10, 2010.
4. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As of September 30, 2010, there are 29,003,633 shares of common stock issued and outstanding. A total of 3,638,371 shares are held by Blue Ridge Group, Inc. (“BR Group”), a related company, and 2,350,000 are held by Robert D. Burr, the President and CEO of Blue Ridge Group, Inc.
Payables and Notes Payable to Related Parties
As of September 30, 2010 and December 31, 2009 the Company had the following debts and obligations to related parties:
| September 30, 2010 | December 31, 2009 | |||||||
| Drilling Advances payable to Gulf Coast Drilling Co. | $ | -0- | $ | 50,000 | ||||
| Payable to minority shareholders | 184,906 | 184,906 | ||||||
| Line of Credit payable to BR Group for operating capital | -0- | 375,000 | ||||||
| Total Payable or Notes Payable to Related Parties | $ | 184,906 | $ | 609,906 | ||||
The line of credit payable to BR Group was executed by the Company on July 17, 2009, in the amount of $500,000 to finance the Company’s operations. The line of credit provides for interest at the rate of 8% per annum on the unpaid outstanding balance and is due upon demand. If no demand for payment is made by BR Group, the line of credit balance plus all accrued unpaid interest was due July 17, 2010. The line of credit was paid off in early 2010 and was not renewed in July of 2010. For the period ended December 2009 the balance of the line of credit was 375,000.
During the 4th quarter 2007, Peter Chen, a minority shareholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007; the note is due on demand and bears an interest rate of 0%. The Company charges interest at 8.0% or $8,000 and regards it as interest expense and additional paid in capital.
As of September 30, 2010 and December 31, 2009, the Company owed Gulf Coast Drilling Company (an affiliate of BR Group) $-0- and $50,000, respectively, in monies that were in excess of BR Group’s participation interest in the well.
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5. OIL AND GAS PROPERTIES
Oil and Gas properties, stated at cost, consisted of the following:
| September 30, 2010 | December 31, 2009 | |||||||
| Proved oil and gas properties | $ | 426,165 | $ | 128,229 | ||||
| Investment in partnerships | 21,326 | 21,326 | ||||||
| Unproved oil and gas properties | 187,500 | 186,013 | ||||||
| Total oil and gas properties | 634,991 | 335,568 | ||||||
| Less accumulated depletion and amortization | 70,538 | 26,601 | ||||||
| Less impairment | ||||||||
| Net oil and gas properties | $ | 564,453 | $ | 308,967 | ||||
6. COMMITMENTS AND CONTINGENCIES
Commitments
As of September 30, 2010, neither the Company nor any of its properties is subject to any material pending legal proceedings.
Contingencies
The Company’s oil and gas exploration and production operations are subject to inherent risks, including blowouts, fire and explosions which could result in personal injury or death, suspended drilling operations, damage to or destruction of equipment, damage to producing formations and pollution or other environmental hazards. Previously the Company was an operator of oil and gas wells and carried general and umbrella liability insurance coverage of approximately $10 million per occurrence and in the aggregate to protect against these hazards. This coverage was in place through June, 2007, but the policies have now been cancelled due to expense of the policies, the Company’s decision to no longer be an operator of oil and gas wells, and the plugging and abandoning of all wells operated by the Compa ny. At the time of this filing the Company now has reinstituted an umbrella liability policy for $5,000,000.
7. STOCKHOLDERS’ EQUITY
Authorization to Issue Shares — Preferred and Common
The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As ofSeptember 30, 2010, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as common stock and 5,000,000 shares designated as preferred stock.
Stock Options
On August 4, 2010, Mr. Robert D. Burr, the Company’s former President and Chief Executive Officer, exercised an option to purchase 2,350,000 shares of the Company’s common stock, $0.005 par value, at an exercise price of $0.01 per share, for total cash consideration of $23,500.
8. SUBSEQUENT EVENTS
We have evaluated events and transactions after the balance sheet date of September 30, 2010 through November 16, 2010. We did not have any material subsequent events that would require recognition in these financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
We urge you to read the following discussion in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2010 and June 30, 2010, as well as with our condensed consolidated financial statements and the notes thereto included elsewhere herein.
Caution Regarding Forward-Looking Statements
Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q, we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar t erms. These forward-looking statements include, among other things, projections of our future financial performance and our anticipated growth, descriptions of our strategies, and other objectives, expectations and intentions, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.
We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC or our sales results or changes in costs associated with ingredients for our products, manufacture of our products, distribution and sales. We undertake no obligation to revise or update any forward-looking statement for any reason.
Overview
Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated (“Gem Source”), and subsequently changed the name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name to Bayou City Exploration, Inc. The Company’s corporate headquarters are located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101.
The Company is engaged in the oil and gas business, primarily in the gulf coast of Texas, east Texas, south Texas, and Louisiana. The wells drilled by the Company include both exploratory and development wells. During 2010, the Company refocused its business from the development of oil and gas prospects to the management of oil and gas drilling programs. The Company currently sponsors oil and gas drilling programs, for which it serves as managing general partner. It also owns working interest in various oil and gas properties both within these oil and gas drilling programs and outside the programs.
Prior to fiscal 2010, the Company generated a substantial portion of its revenues from its ownership of a royalty interest in the Sein #1 well, which was sold to related parties in late December 2009 and March 2010 for total consideration of $1,000,000. As a result of this sale, the Company’s revenues from royalties during fiscal 2010 substantially decreased from revenues generated during the same periods of fiscal 2009.
As of September 30, 2010, the Company had total assets of $887,000, total liabilities of $209,000 and a stockholders’ equity of approximately $677,000. The Company had a net loss of approximately $60,000 for the three months ended September 30, 2010 compared to net income of approximately $149,000 during the three months ended September 30, 2009. The net loss per common share was ($0.00) per share during the three months ended September 30, 2010 as compared to net income per common share of $0.01 during the same period in 2009. All per share data in this report has been adjusted to give effect to applicable stock issues and conversions.
All of the Company’s periodic report filings with the SEC pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, KY 42101 or call (800) 798-3389.
Description of Properties
The following are the primary properties held by the Company as of September 30, 2010:
Key Developed Properties
Rooke #1 well: The Company owns a 9.5% working interest in 1 well located in Refugio County Texas which began production in September 2009. During the third quarter of 2010, well production averaged approximately 525 Mcf per day and 15 Bbls per day.
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Chapman No. 75-1 well: The Company owns an 8% working interest in 1 well located in Nueces County, Texas which began production in October 2009. During the third quarter of 2010, this well produced about 271 Mcf per day.
Garcitas #1 well: The Company owns a 9.5% working interest in 1 well located in Jackson & Victoria County, Texas. The well has been drilled and was completed during the first quarter of 2010. Production began during the third quarter of 2010 and produced approximately 13 Bbls per day.
Rooke B-1 well: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas. The well has been drilled and was completed in early 2010. It started producing in early February 2010 and during the third quarter produced about 546 Mcf per day and about 10 Bbls of oil per day.
Rooke #2 well: The Company owns a 9.5% working interest in 1 well located in Refugio County Texas. This well was completed during the first quarter of 2010 and production began to stabilize in mid April. During the third quarter of 2010, the well produced approximately 322 Mcf per day and 41 Bbls of oil per day.
Critical Accounting Policies
Since the Company filed its Annual Report for the fiscal year ended December 31, 2009, there have been no changes to the Company’s Critical Accounting Policies.
Results of Operations
Comparison of Three Month Periods Ended September 30, 2010, and September 30, 2009
The Company had a net loss of $60,179 for the three months ended September 30, 2010 compared to net income of $149,328 for the same period in 2009. The loss per common share was ($0.00) per share during the third quarter of 2010 compared to income per common share of $0.01 per share during the third quarter of 2009. The significant decrease in net income in the third quarter of 2010 was the result of the Company selling the Sein #1 well the first quarter of 2010 and the loss of those revenues. The Company also recovered approximately $151,000 of previously written off bad debts in the third quarter of 2009 compared to approxmately $10,000 during the same period of 2010.
Operating Revenues
Operating revenues from oil and gas sales were $98,084 during the three months ended September 30, 2010 as compared to $226,457 during the three months ended September 30, 2009 due to the sale of the Sein #1 well and consequent decrease oil and gas production revenue from the Sein #1 well.
Direct Operating Costs
Direct operating costs are reflected as lease operating expenses and production taxes on the Company’s statement of operations and were $17,699 for the three months ended September 30, 2010 as compared to $15,029 during the three months ended September 30, 2009. The slight increase occurred because the Company owned interests in five oil and gas wells that were in full operation during the third quarter of 2010, whereas only three wells were operating during the same period in 2009.
Other Operating Expenses
The Company’s general and administrative expenses increased to $121,398 for the third quarter 2010 as compared to $56,859 for the third quarter of 2009. This increase is primarily due to the increase in salaries paid to the President and Chief Executive Officer and the start-up costs associated with a drilling program sponsored by the Company during the third quarter of 2010.
Comparison of Nine Month Periods Ended September 30, 2010 and September 30, 2009
The Company had a net income of $870,292 during the nine months ended September 30, 2010 compared to approximately $827,036 for the same period in 2009. The net income per common share was $0.03 per share for the nine months ended September 30, 2010 and September 30, 2009.
The increase in net income for the nine months ended September 30, 2010 over the same period for 2009 was due to a number of factors. First, the Company sold its intrest in the Sein #1 well in March of 2010, recognizing a gain of $1,000,000, which was offset by the fact that the Company no longer receives net revenue from the well. In addition, the Company collected approximately $151,000 of previously written off receivables in the first nine months of 2009 and negotiated forgiveness of debt with creditors of approximately $167,000 in the first nine months of 2009, whereas, the Company had only $10,000 in collections of previously written off receivables in 2010 and no forgiveness of debt in 2010.
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Operating Revenues
Operating revenues totaled $226,070 during the nine months ended September 30, 2010 as compared to $756,075 during the nine months ended September 30, 2009. This decrease in the amount of revenues was a result of the sale of the Company’s interest in the Sein #1 well in March 2010.
Direct Operating Costs
Direct operating costs totaled $39,149 during the nine months ended September 30, 2010, as compared to $46,732 during the same period in 2009. All these costs are directly related to the increase in the number of oil and gas wells from three to five operating wells in which the Company holds interest.
Other Operating Expenses
Depreciation, depletion and amortization expense for the nine months ended September 30, 2010 was $43,937 as compared to $5,834 in the nine months ended September 30, 2009. The credit in 2009 is due to the fact that the actual plugging and abandoning costs for the Pedigo #1 well were approximately $39,000 less than what the Company had previously set up as a liability when the well went into production a few years ago. General and administrative expenses increased to $287,644 for the nine months ended September 30, 2010 as compared to $62,707 for the nine months ended September 30, 2009. The increase is primarily a result of the collection of approximately $151,000 of previously written off bad debts in the second quarter of 2009, whereas only approximately $10,000 was collected duri ng the same period of 2010.
Other Income (Expenses)
Net other income for the nine months ended September 30, 2010 was $22,028 as compared to $44,299 for the same period in 2009. The majority of other income in 2009 was attributable to the reversal of the plugging liability over accrued in previous years, which is not expected to occur in 2010.
Income Tax Provision
Consistent with the prior period, the Company did not record a provision for income taxes due to the sufficient net operating loss carry forwards available via the federal income tax carry forward provisions. A valuation allowance continues to be recorded due to the uncertainty regarding the Company’s ability to utilize the deferred tax assets.
Liquidy and Capital Resources
The Company’s cash balance as of September 30, 2010 was $244,889. At that time, there were accounts receivable of $47,139 and prepaid expenses of $30,140 for deposits made to attend a trade show in October 2010 and a deposit on a sales office lease. Cash on hand at September 30, 2010, was primarily from the sale of one of the Company’s oil and gas properties in December 2009 and production from the Company’s five producing wells. Current liabilities as of September 30, 2010 totaled $209,189 and included $24,283 in accounts payable and accrued liabilities and an aggregate $184,906 in accounts payable and notes payable to related parties.
Net cash used in operating activities during the nine months ended September 30, 2010 was $155,892. This was primarily the result of net income of $870,292 offset by cash generated from the gain on the sale of oil and gas property of $1.0 million and a decrease in depreciation, depletion and amortization expense of $43,937, as well as the change in operating assets and liabilities resulting from accounts receivable of $118,807 and an increase in prepaid expenses of $30,140, accounts payable to a related party of $50,000 and accounts payable and accrued liabilities of $108,788.
Net cash provided by investing activities was $700,577 during the nine months ended September 30, 2010, which was a result of the $1 million proceeds from the sale of oil and gas properties, offset by the $299,423 purchase of oil and gas properties.
Net cash used in financing activities totaled $351,500 for the nine months ended September 30, 2010, which was the Company’s payment on a line of credit and proceeds from the exercise of stock options by a former officer of the Company.
The Company’s primary source of cash during the first nine months of 2010 was from the sale of the Sein #1 well and production from its five producing wells. At this point it is unclear as to the total production capability of the five currently producing wells and an additional well that is expected to produce during the fourth quarter of 2010; therefore, future cash flows and duration of those cash flows cannot be known with any degree of certainty. However, the Company believes its cash balance is sufficient to fund its operations through at least the next 12 months.
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Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.
Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer and principal financial officer, conducted an evaluation with the participation of our management of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2010, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, our principal executive officer, our principal financial officer and our management concluded that th e Company's disclosure controls and procedures as of September 30, 2010 were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our first quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our principal executive officer and principal financial officer with reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can p rovide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 4, 2010, Mr. Robert D. Burr, the Company’s former President and Chief Executive Officer, exercised an option to purchase 2,350,000 shares of the Company’s common stock, $0.005 par value, at an exercise price of $0.01 per share, for total cash consideration of $23,500.
These securities were issued without registration under the Securities Act in reliance upon the exemption provided in Section 4(2) of the Securities Act. Appropriate legends were affixed to the share certificates issued in the above transaction. The Company believes that the recipient was an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in its common stock. The recipient had adequate access, through his relationship with the Company, to information about the Company. The transaction described above did not involve general solicitation or advertising.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q.
| Exhibit | Description | |
| 31.1 | Certification of Principal Executive Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a). | |
| 31.2 | Certification of Principal Financial Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a). | |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. | |
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 16, 2010 | BAYOU CITY EXPLORATION, INC |
/s/ Charles T. Bukowski | |
| Charles T. Bukowski | |
Chief Executive Officer and President (Principal Executive Officer and Authorized Signatory) | |
| Date: November 16, 2010 | /s/ Stephen C. Larkin |
| Stephen C. Larkin | |
Chief Financial Officer (Principal Financial and Accounting Officer) |
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