Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - BAYOU CITY EXPLORATION, INC. | c98678exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - BAYOU CITY EXPLORATION, INC. | c98678exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - BAYOU CITY EXPLORATION, INC. | c98678exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - BAYOU CITY EXPLORATION, INC. | c98678exv32w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
þ | ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
o | TRANSITION REPORT UNDER 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.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA | 61-1306702 | |
(STATE OR OTHER JURISDICTION OF | (I.R.S. EMPLOYER IDENTIFICATION NUMBER) | |
INCORPORATION OR ORGANIZATION) | ||
632 Adams Street Suite 700, Bowling Green, KY | 42101 | |
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES) | (ZIP CODE) |
(270) 842-2421
(ISSUERS TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK PAR VALUE $.005 PER SHARE
(ISSUERS TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK PAR VALUE $.005 PER SHARE
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in rule 405 of
the Securities Act. Yes o No þ
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. Yes o No þ
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act 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.
Yes þ No o
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 during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated Filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | 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). Yes o No þ
State issuers revenues for its most recent fiscal year: $1,025,000
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant was approximately $2,132,291 as of March 29, 2010 based upon the closing price of the
common stock on the OTC Bulletin Board on March 29, 2010 of $0.08 per share. As of March 30, 2010
the registrant had 26,653,633 shares of Common Stock, par value $0.005 per share, and 0 shares of
Preferred Stock, par value $0.001 per share, subscribed or outstanding.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date.
26,653,633 Shares of Common Stock Outstanding at March 29, 2010; 0 Shares of Preferred Stock
Outstanding at March 29, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
None.
FORM 10-K
Amendment No. 1
TABLE OF CONTENTS
1 | ||||||||
4 | ||||||||
6 | ||||||||
6 | ||||||||
7 | ||||||||
7 | ||||||||
10 | ||||||||
10 | ||||||||
11 | ||||||||
12 | ||||||||
13 | ||||||||
14 | ||||||||
17 | ||||||||
18 | ||||||||
19 | ||||||||
19 | ||||||||
20 | ||||||||
FINANCIAL STATEMENTS |
||||||||
Killman, Murrell, & Company, P.C. |
F-1 | |||||||
F-2 | ||||||||
F-3 | ||||||||
F-4 | ||||||||
F-5 | ||||||||
F-6 | ||||||||
F-17 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I
1. DESCRIPTION OF BUSINESS
General Description
Bayou City Exploration, Inc., (the Company), a Nevada corporation, was organized in November
1994, as Gem Source, Incorporated (Gem Source), and subsequently changed the Companies name to
Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name to Bayou City
Exploration, Inc.
On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams
Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate
operations and reduce the number of personnel on staff. This move was completed in May, 2007. The
Companys executive office in the year 2006 was located at 10777 Westheimer, Suite 170, Houston,
Texas, 77042. Since relocating the Companys headquarters to Bowling Green, Kentucky the Company
maintained only the geological contract staff in the Houston office for the development and sale of
the Companys prospects until June 2008 when the Company eliminated all paid staff and closed the
office.
In 2007, the Company announced that Robert D. Burr had been appointed President and Chief Executive
Officer of the Company by the Board on an interim basis as of April 3, 2007 while the Company
continues to search for new executive management. In January 2010, the Company announced the
Boards appointment of Stephen C. Larkin as the new Chief Financial Officer. The appointment runs
through December 31, 2010 and extends automatically each year for twelve months unless terminated
by either party within ninety days of the anniversary date.
All of our periodic report filings with the Securities and Exchange Commission (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-QSB, 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: Robert D. Burr at Bayou City Exploration, Inc., 632 Adams Street
Suite 700, Bowling Green, KY 42101 or call (270) 842-2421.
The Company is engaged in the oil and gas business primarily in the gulf coast of Texas, east
Texas, south Texas, and Louisiana. The Company develops oil and gas prospects for the drilling of
oil and gas wells and attempts to sell the prospects to oil and gas exploration companies under
terms that provide the participating company will provide the funds necessary to drill and complete
a well on the prospect, reimburse the Company for any leasehold or exploration costs associated
with the prospect, pay the Company a prospect fee for developing the oil and gas prospect, and
allow the Company to retain a carried interest in the well to be drilled. The wells drilled by the
Company included both exploratory and developmental wells.
Prior to May 1, 2007, the Company operated many of the wells in which it owned an interest. The
Company no longer intends to operate properties. The Company will seek to sell a portion of the
interest in each prospect it generates to an operator that will be responsible for the drilling and
operating of the oil and gas properties. In prior years, the Company has been licensed as an oil
and gas operator with the Texas Railroad Commission in the state of Texas. During the second
quarter 2007, the Companys license with the Texas Railroad Commission to be an operator in the
state of Texas was not renewed. The Company operated two wells in Texas and one in Louisiana. All
three wells are now plugged and abandoned. The Companys ownership in all remaining wells is
through non-operated working and royalty interests.
The Company plans to pursue other sources of capital through either the issuance or restructuring
of debt or equity securities. The Company also owns certain oil and gas interests as of December
31, 2009 that have developed into revenue producing properties it intends to use cash generated by
these properties to cover its ongoing operational needs and restructuring of the Balance Sheet.
On July 17, 2009 the Company renewed a line of credit from Blue Ridge Group, Inc. (BR Group) in
the amount of $500,000 to finance the Companys operations. As of December 31, 2009 the Company
has a liability balance under this line of credit arrangement due BR Group in the amount of
$375,000. 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 is due July 17, 2010.
- 1 -
Table of Contents
During the 4th quarter, 2007, Peter Chen, a minority shareholder loaned the Company
$100,000 to finance the Companys operations. The Company executed a promissory note on October 4,
2007; the note is due on demand and bears an interest rate of 0%.
Competition, Markets and Regulations
Competition: The oil and gas industry is highly competitive in all its phases. The Company
encounters strong competition from other independent oil and gas companies. Major and independent
oil and gas companies actively bid for desirable oil and gas properties, as well as for the
equipment and labor required to operate and develop such properties. Many of its competitors
possess substantially greater financial resources, personnel, and budgets than the Company, which
may affect its ability to compete with companies in Texas & Louisiana.
Markets: The price obtainable for oil and gas production from the Companys properties is
affected by market factors beyond the control of the Company. Such factors include the extent of
domestic production, the level of imports of foreign oil and gas, the general level of market
demand on a regional, national and worldwide basis, domestic and foreign economic conditions that
determine levels of industrial production, political events in foreign oil-producing regions,
variations in governmental regulations and tax laws and the imposition of new governmental
requirements upon the oil and gas industry. There can be no assurance that oil and gas prices will
not decrease in the future, thereby decreasing net revenues from the Company properties. Changes in
oil and gas prices can impact the Companys determination of proved reserves and the Companys
calculation of the standardized measure of discounted future net cash flows relating to oil and gas
reserves. In addition, demand for oil and gas in the United States and worldwide may affect the
Companys level of production. From time to time, a surplus of gas or oil supplies may exist, the
effect of which may be to reduce the amount of hydrocarbons that the Company may produce and sell,
while such an oversupply exists. In recent years, initial steps have been taken to provide
additional gas pipelines from Canada to the United States. If additional Canadian gas is brought to
the United States market, it could create downward pressure on United States gas prices.
Regulations:
Environmental Regulation
The federal government and various state and local governments have adopted laws and regulations
regarding the control of contamination of the environment by the oil and gas industry. These laws
and regulations may require the acquisition of permits by oil and gas operators before drilling
commences, prohibit drilling activities on certain lands lying within wilderness areas or where
pollution arises and impose substantial liabilities for pollution resulting from operations,
particularly operations near or in onshore and offshore waters or on submerged lands. These laws
and regulations may also increase the costs of routine drilling and operating of wells. Because
these laws and regulations change frequently and are becoming increasingly more stringent, the
costs to the Company of compliance with existing and future environmental regulations and the
overall impact on the Companys operations or financial condition cannot be predicted, but are
likely to increase.
The Company currently owns or leases one property that for many years has been used for the
exploration and production of oil and natural gas and several that have just started to produce.
Although the Company believes it has utilized good operating and waste disposal practices, prior
owners and operators of these properties may not have utilized similar practices, and hydrocarbons
or other wastes may have been disposed of or released on or under the properties owned or leased by
the Company or on or under locations where such wastes have been taken for disposal. These
properties and the wastes disposed thereon may be subject to the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA), RCRA and analogous state laws, as well as
state laws governing the management of oil and natural gas wastes. Under such laws, the Company
could be required to remove or remediate previously disposed wastes (including wastes disposed of
or released by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future contamination.
CERCLA and similar state laws impose liability, without regard to fault or the legality of the
original conduct, on certain classes of persons that are considered to have contributed to the
release of a hazardous substance into the environment. These persons include the owner or
operator of the disposal site or sites where the release occurred and companies that disposed of or
arranged for the disposal of the hazardous substances found at the site. Persons who are or were
responsible for the waste of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for neighboring landowners
and third parties to file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment.
- 2 -
Table of Contents
Federal Regulation of Natural Gas
The transportation and sale of natural gas in interstate commerce is heavily regulated by agencies
of the federal government. The following discussion is intended only as a summary of the principal
statutes, regulations and orders that may affect the production and sale of natural gas from the
Company properties.
FERC Orders
Several major regulatory changes have been implemented by the Federal Energy Regulatory Commission
(FERC) from 1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the natural gas industry that
remain subject to the FERCs jurisdiction. In April 1992, the FERC issued Order No. 636 pertaining
to pipeline restructuring. This rule requires interstate pipelines to unbundle transportation and
sales services by separately stating the price of each service and by providing customers only the
particular service desired, without regard to the source for purchase of the gas. The rule also
requires pipelines to (i) provide nondiscriminatory no-notice service allowing firm commitment
shippers to receive delivery of gas on demand up to certain limits without penalties, (ii)
establish a basis for release and reallocation of firm upstream pipeline capacity and (iii) provide
non-discriminatory access to capacity by firm transportation shippers on a downstream pipeline. The
rule requires interstate pipelines to use a straight fixed variable rate design. The rule imposes
these same requirements upon storage facilities. FERC Order No. 500 affects the transportation and
marketability of natural gas. Traditionally, natural gas has been sold by producers to pipeline
companies, which then resell the gas to end-users. FERC Order No. 500 alters this market structure
by requiring interstate pipelines that transport gas for others to provide transportation service
to producers, distributors and all other shippers of natural gas on a nondiscriminatory,
first-come, first-served basis (open access transportation), so that producers and other
shippers can sell natural gas directly to end-users. FERC Order No. 500 contains additional
provisions intended to promote greater competition in natural gas markets.
It is not anticipated that the marketability of and price obtainable for natural gas production
from the Companys properties will be significantly affected by FERC Order No. 500. Gas produced
from the Companys properties normally will be sold to intermediaries who have entered into
transportation arrangements with pipeline companies. These intermediaries will accumulate gas
purchased from a number of producers and sell the gas to end-users through open access pipeline
transportation.
State Regulations
Production of any oil and gas from the Companys property is affected by state regulations. States
in which the Company operates have statutory provisions regulating the production and sale of oil
and gas, including provisions regarding deliverability. Such statutes, and the regulations
promulgated in connection therewith, are generally intended to prevent waste of oil and gas and to
protect correlative rights to produce oil and gas between owners of a common reservoir. State
regulatory authorities also regulate the amount of oil and gas produced by assigning allowable
rates of production to each well or proration unit.
Operating Hazards and Insurance
General: The oil and gas business involves a variety of operating risks, including the risk
of fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. The
occurrence of any of these events could result in substantial losses to the Company due to injury
or loss of life, severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. In accordance with customary industry practice, we maintain
insurance against some, but not all, of the risks described above. However, there can be no
assurance that any insurance obtained by us will be adequate to cover any losses or liabilities. We
cannot predict the continued availability of insurance or the availability of insurance at premium
levels that justify its purchase. The occurrence of a significant event, not fully insured or
indemnified against, could materially and adversely affect our financial condition and operations.
Recent Terrorist Activities and the Potential for Military and Other Actions: The continued
threat of terrorism and the impact of retaliatory military and other action by the United States
and its allies might lead to increased political, economic and financial market instability and
volatility in prices for oil and natural gas, which could affect the market for our exploration and
production operations. In addition, future acts of terrorism could be directed against companies
operating in the United States, and it has been reported that terrorists might be targeting
domestic energy facilities. While we believe that the risk to our energy assets is minimal, there
is no assurance that we can completely secure our assets or completely protect them against a
terrorist attack. These developments have subjected our operations to increased risks and,
depending on their ultimate magnitude, could have a material adverse effect on our business. In
particular, we might experience increased capital or operating costs to implement increased
security for our energy assets.
- 3 -
Table of Contents
Employees
During 2008 the Company has had only one employee, Mr. Robert D. Burr, serving as President and
Acting Chief Financial Officer without pay. In April 2009 the Company started paying Mr. Burr an
annual salary of $90,000 and hired a Controller, Stephen C. Larkin at an annual salary of $30,000
per year. These are the only two paid employees for the Company.
From May 2007 until February 2008, only the exploration contract personnel have remained in the
Houston, Texas office. At the time of notice of termination, the Company had employment and
consulting agreements with three persons. One of the agreements was with an exploration and
prospect development contractor. This contractor worked for the Company until February 2008 when
his services were terminated.
The Companys headquarters is now the same as the corporate office of one of its major
stockholders, Blue Ridge Group, Inc. (BR Group). Since moving the Companys headquarters to
Bowling Green Kentucky the Company has made direct investments in five new projects described
below. Mr. Burr (CEO and Acting CFO) and Mr. Larkin (Controller) have been in charge of all
administrative matters of the Company and all other business matters of the Company have been
fulfilled through independent contractors. Mr. Burr has served the Company without salary during
2008 and until April 1, 2009 when the Board of Directors approved an annual salary of $90,000.
Annually, the Board of Directors determines if any of the executive officers of the Company are
eligible for a performance bonus. No performance bonuses were paid during 2009 and 2008.
2. DESCRIPTION OF PROPERTIES
During 2009, the Company participated in the drilling of four new wells and one of its existing
wells has been plugged and abandoned.
As of December 31, 2009, the Company owns a direct working interest in two producing well, being
the Rooke #1 and the Chapman #75-1 in Texas; two wells being completed, being the Garcitas #1 and
the Rooke B-1 also in Texas. All other wells in which the Company previously owned direct
participation working interest have been abandoned and plugged. The Company owns a small indirect
interest in 1 well in Texas through two different partnerships managed by BR Group. The Company
also owns a small royalty interest in 1 well in Texas.
The following tables summarize by geographic area the Companys developed and undeveloped acreage
and gross and net interests in producing oil and gas wells as of December 31, 2009. Productive
wells are producing wells and wells capable of production. Wells that are dually completed in more
than one producing horizon are counted as one well.
DEVELOPED AND UNDEVELOPED ACREAGE
Developed Acreage | Undeveloped Acreage | |||||||||||||||
Geographic Area: | Gross Acres | Net Acres | Gross Acres | Net Acres | ||||||||||||
Texas |
-0- | -0- | -0- | -0- | ||||||||||||
Totals |
-0- | -0- | -0- | -0- |
PRODUCTIVE WELLS
Gross Wells | Net Wells | |||||||||||||||
Geographic Area: | Oil | Gas | Oil | Gas | ||||||||||||
Texas |
2 | 4 | .18 | .26 | ||||||||||||
Totals |
2 | 4 | .18 | .26 |
- 4 -
Table of Contents
Key Properties
The working interest owned by the Company, either directly or indirectly through oil and gas
partnerships, is owned jointly with other working interest partners. Management does not believe
any of these burdens materially detract from the value of the properties or materially interfere
with their use. The following are the primary properties held by the Company as of December 31,
2009:
Developed Properties:
Bridges #1 well in Shelby County, Texas: The Company owns a 0.7% indirect working interest in this
well through two partnerships managed by BR Group.
Sein #1 well: The Company owns an 8.1% royalty interest in 1 well located in Aransas County Texas
which began production in November 2008. The well produces about 6,600 Mcf per day and 90 Bbls of
oil per day.
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. The well produces about 425 Mcf per day and about 10
Bbls of oil per day.
Chapman No. 75-1: The Company owns an 8% working interest in 1 well located in Nueces County,
Texas which began production in October 2009. The well produces about 390 Mcf per day.
Garcitas #1: The Company owns a 9.5% working interest in 1 well located in Jackson & Victoria
County, Texas. The well has been drilled and gone to completion. It is believed that the well
will begin producing in the first quarter of 2010.
Rooke B-1: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas.
The well has been drilled and gone to completion. It is believed that the well will begin
production late in the first quarter of 2010 or early in the second quarter of 2010.
In February 2008, the Company sold the mineral rights on approximately 460 acres in Aransas, Texas
to an operating company for $350,000 and retained a royalty interest of 12% in the property. The
operating company subsequently developed a producing well that went to production in November 2008.
In 2009 the Company received approximately $1,006,000 from the royalty interest.
During 2009 & 2008 the Company received total cash flow of approximately $3,000 and $8,000 from its
interest in the partnerships operated by BR Group and Eagle Energy respectively.
Undeveloped Properties:
At this time the Company has no undeveloped properties under lease.
Dry Holes and Abandonment of Properties during 2008
The Company had a 2.5% working interest in the Powers well located in Colorado County, Texas which
was drilled and completed in the fourth quarter of 2009. The well was determined to be a dry hole
and has been abandoned, for a total write off of $100,000.
Title to Properties
In the normal course of business, the operator of each lease has the responsibility of examining
the title on behalf of all working interest partners. Titles to all significant producing
properties of the Company have been examined by various attorneys. The properties are subject to
royalty, overriding royalty and other interests customary in the industry.
The working interest owned by the Company, either directly or indirectly through the oil and gas
partnerships, is owned jointly with other working interest partners and is subject to various
royalty and overriding royalty interest, which generally range in total between 20%-30% on each
property. Management does not believe any of these burdens materially detract from the value of the
properties or materially interfere with their use.
- 5 -
Table of Contents
Production and Sales Price
The following table summarizes the sales volumes of the Companys net oil and gas production
expressed in barrels of oil. Equivalent barrels of oil were obtained by converting gas to oil on
the basis of their relative energy content six thousand cubic feet of gas equals one barrel of
oil. During 2009 and 2008, the average selling price for natural gas was $4.44 and $9.11 per Mcf,
respectively, and the average selling price for oil was $58.47 and $99.65 per barrel, respectively.
Net | Net | |||||||
Production | Production | |||||||
For the Year | For the Year | |||||||
12/31/09 | 12/31/08 | |||||||
Net Volumes (Equivalent Barrels) |
35,431.00 | 6,833.00 | ||||||
Average Sales Price per Equivalent Barrel |
$ | 28.78 | $ | 42.12 | ||||
Average Production Cost per Equivalent Barrel (includes production taxes) |
$ | 1.88 | $ | 3.12 |
The Average Production Cost per Equivalent Barrel represents the Lease Operating Expenses divided
by the Net Volumes in equivalent barrels. Lease Operating Expenses include normal operating costs
such as pumper fees, operator overhead, salt water disposal, repairs and maintenance, chemicals,
equipment rentals, production taxes and ad valorem taxes.
Net Proved Oil and Gas Reserves
The Companys participation in its three current producing wells is very small percentages and no
other participants are publically traded companies, therefore they do not need a reserve report
prepared in accordance with criteria prescribed by the SEC. The cost of the Company attaining one
solely for SEC disclosure purposes frankly is cost prohibitive, therefore the Company has chosen
not to and will not disclose proven oil & gas reserves in this report.
Drilling Activities
The Company drilled 5 wells in year 2009 and 0 wells in 2008. As of December 31, 2009 two of these
have gone into production and two other wells are in the process being completed. The fifth well
is still in the process of being drilled.
3. LEGAL PROCEEDINGS
The Company has one judgment against it for $55,000 on which it is currently making monthly
payments to resolve the judgment. No other action against it is known at this time. The Company
also has significant monthly payments on its notes payable, all of which mature and be due in full
during the year 2010. The Company expects to pay these notes payable off in full prior to the
maturity dates. Other than noted above, neither the Company nor any of its properties is subject
to any material pending legal proceedings.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
- 6 -
Table of Contents
PART II
5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company is thinly traded on the OTC Bulletin Board with BYCX as its stock
symbol. The range of high and low bid information for each quarter since January 1, 2008 is as
follows:
High Bid | Low Bid | |||||||
March 31, 2008 |
$ | 0.25 | $ | 0.14 | ||||
June 30, 2008 |
0.15 | 0.03 | ||||||
September 30, 2008 |
0.08 | 0.03 | ||||||
December 31, 2008 |
0.08 | 0.01 | ||||||
March 31, 2009 |
$ | 0.01 | $ | 0.01 | ||||
June 30, 2009 |
0.05 | 0.01 | ||||||
September 30, 2009 |
0.07 | 0.01 | ||||||
December 31, 2009 |
0.10 | 0.03 |
These quotations reflect inter dealer prices, without retail mark-up, markdown or commission, and
may not represent actual transactions.
Dividend Information
No cash dividends have been declared or paid on the Companys Common Stock since the Companys
inception. The Company has not paid, nor does it intend to pay, cash dividends on its Common Stock
in the foreseeable future. We intend to retain earnings, if any, for the future operation and
development of our business. The Companys dividend policy will be subject to any restrictions
placed on it in connection with any debt offering or significant long-term borrowing.
Recent Sales of Unregistered Securities
The Company did not issue any stock during 2009 or 2008.
Shareholder Information
As of December 31, 2009, there were approximately 600 shareholders of record of the Companys
Common Stock.
6. MANAGEMENTS DISCUSSION AND FINANCIAL ANALYSIS OF FINANCIAL CONDITION
The following discussion is intended to assist in an understanding of the Companys financial
position and results of operations for each year of the two year periods ended December 31, 2009
and 2008. The financial statements and the notes thereto, which follow, contain detailed
information that should be referred to in conjunction with the following discussion.
Financial 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.
On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams
Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate
operations and reduce the number of personnel on staff. This move was completed in May, 2007. Prior
to that the Companys executive office was located at 10777 Westheimer, Suite 170, Houston, Texas,
77042. After relocating the Companys headquarters to Bowling Green, Kentucky the Company had
maintained only the geological contract staff in the Houston office for the continued development
and sale of the Companys prospects until June 2008 when the office was closed and all remaining
staff was terminated.
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Table of Contents
Critical Accounting Policies and Estimates
Financial Statements and Use of Estimates: In preparing financial statements, management is
required to select appropriate accounting policies and make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ
from those estimates.
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 of $71,000 was
required to be recognized in the year ended December 31, 2009, no stock compensation expense was
required to be recognized for the year ended December 31, 2008.
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 options 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.
Oil and Gas Activities: The accounting for upstream oil and gas activities (exploration and
production) is subject to special accounting rules that are unique to the oil and gas business.
There are two methods to account for oil and gas business activities, the successful efforts method
and the full cost method. The Company has elected to use the successful efforts method. A
description of our policies for oil and gas properties, impairment and direct expenses is located
in Note 1 to our financial statements.
The successful efforts method reflects the volatility that is inherent in exploring for oil and gas
resources in that costs of unsuccessful exploratory efforts are charged to expense as they are
incurred. These costs primarily include seismic costs (G&G costs), other exploratory costs
(carrying costs) and exploratory dry hole costs. Under the full cost method, these costs would be
capitalized and then expensed (depreciated/amortized) over time.
Oil and Gas Reserves: Proved oil and gas reserves, as defined by SEC Regulation S-X Rule
4-10(a) (2i), (2ii), (2iii), (3) and (4), are the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions. Engineering estimates of the Companys oil and gas
reserves are made using all available geological and reservoir data, as well as production
performance data, and these are inherently imprecise and represent only approximate amounts because
of the subjective judgments involved in developing such information. There are authoritative
guidelines regarding the engineering criteria that have to be met before estimated oil and gas
reserves can be designated as proved. Proved reserve estimates are updated at least annually and
take into account recent production and technical information about each field. In addition, as
prices and cost levels change from year to year, the estimate of proved reserves also changes. This
change is considered a change in estimate for accounting purposes and is reflected on a prospective
basis in related depreciation, depletion and amortization rates.
Despite the inherent imprecision in these engineering estimates, these estimates are used in
determining depreciation, depletion and amortization (DDA) expense and impairment expense, and in
disclosing the supplemental standardized measure of discounted future net cash flows relating to
proved oil and gas properties. Producing properties DDA rates for capitalized costs are determined
based on the units of oil or gas produced. Therefore, assuming all other variables are held
constant, an increase in estimated proved reserves decreases the DDA expense. Also, estimated
reserves are often used to calculate future cash flows from our oil and gas operations, which serve
as an indicator of fair value in determining whether a property is impaired or not. The larger the
estimated reserve, the less likely the property is impaired. Further, material changes in the
estimated volumes of reserves could have an impact on the DD&A rate calculation and the financial
statements.
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Capitalized Prospect Costs: The Property and Equipment balance on the Companys balance
sheets, if any, include oil and gas property costs that are excluded from capitalized costs being
amortized. These amounts represent investments in undeveloped leasehold acreage and
work-in-progress exploratory wells. The Company excludes these costs on a property-by-property
basis until proved reserves are found, until the lease term expires, or if it is determined that
the costs are impaired. All costs excluded are reviewed annually to determine if any of these
conditions have occurred; if so, the capitalized amount is transferred to abandonment expense and
recorded to the statement of operations.
Impairments: If circumstances indicate that the carrying amount of an asset or investment,
including oil and gas properties, may not be recoverable, this asset may be considered impaired,
and an impairment loss may be recognized in accordance with ASC Subtopic 360.35, Property, Plant
and Equipment Subsequent Measurement. The amount of impairment loss is the difference between
the carrying amount of the asset and its fair value. It is difficult to precisely estimate fair
value because quoted market prices for our assets are not easily available. We use all readily
available information in determining an amount that is a reasonable approximation of fair value,
including the net present value of future net cash flows based on reserve quantities as indicated
above. Once impairment is identified, the impairment expense is calculated based on the difference
between the net book value of the asset and the discounted future net cash flows estimated
utilizing a 10% discount rate, as required by SFAS No. 69, (ASC 932-235) Disclosures about Oil and
Gas Producing Activities.
Results of Operations
The Company reported a net income of $783,000 in 2009, as compared to a net loss of $175,000 in
2008. The increase in the net income (loss) is primarily due to the fact that the Companys owns an
8.1% royalty interest in the Sein well which went into production in November of 2008 and provided
the Company with $909,000 of net revenue (gross revenues less taxes) in 2009. On a per share basis
the Company had a net income of $0.03 per share in 2009 and a net loss of $0.01 per share in 2008.
Operating Revenues: Operating revenues totaled $1,025,000 in 2009 as compared to $288,000
in 2008 which is a 256% increase from 2008. The increase is mainly the result of the production of
the well in the county of Nueces, Texas called the Sien #1, which went into production in November
2008. The Company sold these leases in February 2008 and retained an 8.1% royalty interest in the
land. The Sien well was subsequently drilled on the property and produced approximately $1,006,000
of revenue for the Company for the year of 2009 and 206,000 for 2008.
Direct Operating Costs: Direct operating costs for the producing oil and gas wells totaled
$100,000 in 2009 compared to $36,000 in 2008. This increase in expenses is a result of the Sien
well being in production for all of 2009 as opposed to just 2 months in 2008.
Other Operating Expenses: Other operating expenses includes impairment, abandonment, and
dry hole costs, exploration costs, depreciation, depletion and amortization expense, and accretion
expense. Other operating expenses increase by 79% to $111,000 in 2009 compared to $62,000 in 2008.
This increase of $49,000 was made up of an increase of $72,000 in impairment, abandonment, and dry
hole costs, all other costs combined to decrease $23,000 in 2009 from 2008, mainly in depreciation,
depletion and amortization costs.
General And Administrative Costs: General and administrative costs were $374,000 in 2009
compared to $330,000 for 2008, an increase of $44,000, or an increase of 13%. The increase is due
mainly to an increase in stock based compensation expense of $71,000 and a decrease in accounting
and professional fees of $36,000. All other expenses in total were essentially the same.
Other Expenses, Net: Other income in excess of other expenses increased by a net of
$377,000 in 2009 from 2008 due largely to increase in forgiveness of debt, which was $167,000 for
2009 and $33,000 for 2008, an increase of $134,000, collection of $171,000 in bad debts previously
allowed for, and $40,000 reversal in long-term P&A liability after plugging all active wells. In
early 2009 the Company aggressively settled most of its accounts payable with companies it had not
been able to pay for several years and was able to get a large amount of the payable forgiven for
immediate payment. The Company also aggressively pursued its outstanding accounts receivables and
was able to collect a large amount of these as well.
Income Taxes: The Company had no federal or state income tax liability or benefit in 2009
or in 2008 as a result of a large NOL carry forward from years 2008 and prior. Based on the amount
of net losses in 2008 and prior, a full valuation allowance has been recorded against the deferred
tax assets associated with the net operating loss carry forwards. The Company has an estimated net
operating loss carry forward of 8,834,000 and $9,606,000 as of December 31, 2009 and 2008
respectively. Under Internal Revenue Code (IRC) Section 382, a change in ownership occurred on
December 31, 2004 with the issue of the additional shares from the private stock placement. This
rule will limit the NOL carry forward amount to $267,000 per year. These NOLs begin expiring in
2017 if not utilized.
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Balance Sheet Review
Assets: The Companys total assets increased $292,000 from $235,000 as of December 31, 2008
to $527,000 as of December 31, 2009. Property costs increased $117,000 primarily due to the
investment in the two new productive wells the Company made this year, the Rooke #1 and the Chapman
No. 75-1, and other noncurrent assets increased $186,000 due to the investment in two other wells,
the Garcitas #1 and the Rooke B-1. The Companys current assets decreased $11,000 from $229,000 as
of December 31, 2008 to $218,000 as of December 31, 2009 due to the income receivable from the Sien
#1 GU well at year-end dropping $45,000 and cash increasing $34,000.
Liabilities: The Companys liabilities decreased to $743,000 as of December 31, 2009
compared to $1,313,000 as of December 31, 2008. The Company reduced is accounts payable and accrued
expenses by $222,000, reduced its accounts payable to related parties by $111,000, reduced its
advances from JIB owners by $51,000, reduced its notes payable to related parties by $142,000, and
a reduction of $44,000 in long-term P&A cost liability. During 2009, the entire reduction in notes
payable to related parties were related to the amounts owed to Blue Ridge Group which went from
$517,000 in 2008 to $375,000 in 2009.
The Companys liabilities to third parties as of December 31, 2009 included $133,000 in trade
payables and accrued expenses. The Companys liabilities to related parties include $135,000 in
trade payables and accrued expenses and $475,000 in notes payable due to related parties as of
December 31, 2009.
Stockholders Equity: Total stockholders equity of the Company increased $862,000 to a
deficit of $216,000 at December 31, 2009. This decrease is mainly the result of the 2009 net
operating loss of $783,000.
Capital Resources and Liquidity: The Companys current ratio (current assets / current
liabilities) was .29 to 1 as of December 31, 2009 compared to .18 to 1 as of December 31, 2008. The
change in the current ratio from 2008 to 2009 is the result a significant decrease in current
liabilities due to both the Company negotiating a large reduction in accounts payable with
creditors and the Company paying off a significant amount of current liabilities with the cash flow
from the Sien #1 well.
The Companys sources of cash during 2009 were basically all from the $1,025,000 in oil and gas
sales receipts. The Companys sources of cash during 2008 were $409,000 in proceeds from the sale
of assets, plus $77,000 in loans from BR Group and other related parties, and $69,000 is oil and
gas sales.
During 2009 the Company relied primarily upon oil and gas sales receipts and in 2008 the Company
relied primarily upon sales of assets to fund its operations. Management intends to fund further
growth with the current oil and gas revenues by continuing to invest in oil and gas prospects for a
profit.
As of December 31, 2009 the Company has no contractual obligations that will encumber their cash
flow into the future.
7. FINANCIAL STATEMENTS
The response to this item is set forth herein in a separate section of this Report, beginning on
Page F-1.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company elected to change auditors for its 2007 financial statements. The accounting firm of
Killman, Murrell & Company, PC was retained to audit its December 31, 2008 and 2007 financial
statements. The Company had no disagreements with its previous auditors, Mountjoy & Bressler, LLP
who audited the Companys December 31, 2006 financial statements.
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8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 15d-15(e) under the Securities and
Exchange Act of 1934 (the Exchange Act) promulgated there under, our management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report (the
Evaluation Date). Based on such evaluation, our management, including our CEO and CFO, concluded
that our disclosure controls and procedures were effective, at a reasonable assurance level, as of
the Evaluation Date, to ensure that information required to be disclosed in reports that we file or
submit under that Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our CEO and CFO, in a manner that allows timely decisions regarding required
disclosure.
Changes in Internal Controls over Financial Reporting
The Company maintains a system of internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. There was no change in
our internal control over financial reporting, that occurred during the year ended December 31,
2009, that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined rule 13a-15(f) of the Exchange Act. The
Companys internal control system was designed to provide reasonable assurance to the Companys
management and Board of Directors regarding the preparation and fair presentation of published
financial statements.
An evaluation was preformed under the supervision and with the participation of the Companys
management, including the CEO and CFO, of the effectiveness of the design and operation of the
Companys procedures and internal control over financial reporting. In making this assessment, the
Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, the
Companys management, including the CEO and CFO, concluded that the Companys internal control over
financial reporting was effective in providing reasonable assurance regarding the reliability of
financial reporting and the preparation of the Companys financial statements for external purposes
in accordance with generally accepted accounting principals as of December 31, 2009.
This Form 10-K does not include an attestation report of the Companys registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the Companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only managements report in
their annual report.
Inherent Limitations of Internal Controls
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention and overriding of
controls and procedures. A control system, no matter how well conceived and operated, can only
provide reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of the control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
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8B. OTHER INFORMATION
On January 1, 2006, the Company entered into an employment agreement with D. Edwin Suhr, Jr. to
serve as Senior Vice President Land as well as the Corporate Secretary (2006 Contract). Mr.
Suhrs contract was for a one year period and was automatically extended for one additional year at
the end of the initial term and each extension period, unless either party gives at least 90 days
prior notice, prior to the end of the applicable term. Mr. Suhrs annual base salary was $120,000.
On January 1, 2007, the Company entered into a revised three year employment agreement with Mr.
Suhr (2007 Contract). The 2007 Contract provides for automatic extensions for one additional year
at the end of the initial term and each extension period, unless either party gives at least 30
days prior notice, prior to the end of the applicable term. Mr. Suhrs annual base salary was
increased to $180,000. Mr. Suhrs 2007 Contract also provided that the Company would grant him the
number of shares of restricted Company common stock equal to $30,000 divided by the previous 30 day
trading price of the Company stock on each of the anniversary dates of the agreement in 2008, 2009,
2010.
On December 1, 2006, the Company entered into an employment agreement with James G. Brown to serve
as the Drilling and Production Manager. Mr. Browns contract is for a three year period and
provides for automatic extensions for one additional year at the end of the initial term and each
extension period, unless either party gives at least 30 days prior notice, prior to the end of the
applicable term. Mr. Browns annual base salary was $168,000. Mr. Browns employment contract also
provided that the Company would grant him the number of shares of restricted Company common stock
equal to $20,000 divided by the previous 30 day trading price of the Company stock on each of the
anniversary dates of the agreement in 2007, 2008, 2009.
Both employment agreements may be terminated by the Company on the death or disability of the
officer or in the event the officer engages in any act constituting cause, as defined in the
agreements. Mr. Suhrs 2006 Contract also contained a provision allowing the Company to terminate
his employment at any time with or without cause on 30 days written notice. Both agreements also
provide that the officers will be entitled to participate in any other individual or group health
insurance, which the Company may from time to time make available to similarly situated employees.
The employment agreements contain provisions providing for non-disclosure of proprietary
information and surrender or records and contains a covenant not to solicit, divert or appropriate
any Restricted Clients (as defined in the agreements) of Company during their employment and for
two years following the termination of their employment.
On September 18, 2006, the Company entered into a Consulting Agreement with Bart Birdsall to
provide consulting services to evaluate geology and geophysical data in areas of interest to the
Company and to identify certain drilling prospects. The Consulting Agreement provides that Mr.
Birdsall would be paid $700 per day as well as 1% overriding royalty interest reduced to the net
mineral interest acquired in each oil and gas prospect identified by Mr. Birdsall and accepted by
the Company. The term of the agreement is until December 31, 2009 and the contract will be
automatically extended for additional one year terms unless either party gives at least 30 days
prior notice, prior to the end of the applicable term. The full text of the three employment
agreements and the consulting agreement were filed as Exhibits 10.1, 10.2, 10.3 and 10.4,
respectively, with its Form 10-KSB filed for the year ended December 31, 2007.
The Company gave Messrs. Suhr, Brown and Birdsall 30 days notice of termination of their
employment or agreement with the Company as of May 1, 2007. Messrs. Suhr and Brown are no longer
associated with the Company. Messr. Birdsall has continued to provide exploration efforts to the
Company on a contract basis since May 1, 2007. The Company has not obtained a release from these
contracts. The ultimate outcome of these contracts is unknown at this time.
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PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
The directors of the Company as of December 31, 2009 are as follows:
Director | Age | Company Position or Office | Director Since | |||
Robert D. Burr |
64 | Chairman, President and CEO | 1996 | |||
Harry J. Peters |
66 | Director | 2000 | |||
Gregory B. Shea |
47 | Director | 1999 | |||
Stephen C. Larkin |
50 | Director and CFO | 2009 |
ROBERT D. BURR, age 64, Bowling Green, Kentucky, was named interim president and Chief Executive
Officer in April, 2007, and has been Chairman of the Board of the Company since May 1996. He served
as President and Chief Executive Officer from May 1996 until March 1, 2000. Mr. Burr has also been
the Chairman of the Board, President and Chief Executive Officer of Blue Ridge Group, Inc. (BR
Group) since August 1993. Mr. Burr is a native of Port Arthur, Texas and attended McNeese State
College, Lake Charles, Louisiana. He has been active for over 25 years in the oil and gas business
with a myriad of companies.
HARRY J. PETERS, age 65, Bowling Green, Kentucky, served as Senior Vice President and Chief
Operating Officer (COO) from May 2003 through September 2005. He was Senior Vice
President-Acquisitions from August 2000 to April 2003. Mr. Peters served the Company as Senior Vice
President-Sales and Marketing from April 2000 to July 2000 and has served as a Director since April
2000. A native of New York, he has over 30 years of experience in sales and marketing, both
domestic and international. Over the years, he has developed close working relationships with
investment bankers, institutional investors and securities dealers while directing market financing
of reserve purchases, and raising drilling risk capital and venture capital for wells in Texas,
Kentucky, Oklahoma, Louisiana, Colorado, West Virginia and Utah. Mr. Peters has been a director and
Senior Vice President-Sales and Marketing of BR Group since April of 1999. He is a graduate of St.
Michaels College in Santé Fe, New Mexico.
GREGORY B. SHEA, age 47, Bowling Green, Kentucky, has been a Director since 1999. From 1999 through
June 2005, Mr. Shea served as Senior Vice President-Operations of the Company and from May 2002
through June 2005 he also served as Secretary-Treasurer. Mr. Shea has previously managed BR Groups
and Bayou City Exploration, Inc.s Kentucky drilling and field operations, drilling over 350 wells
from 1997 to 2002. During that time, Mr. Shea was also President of Blue Ridge Builders, Inc., a
residential and commercial construction company in Bowling Green, Kentucky and a majority-owned
subsidiary of BR Group since November 1994. Blue Ridge Builders, Inc. is responsible for the
construction of over 70 properties in Kentucky and Tennessee. He was elected a Director of BR Group
in February 1995. Between 1981 and 1986, he attended North Texas State University. Mr. Shea is also
the son-in-law of Mr. Burr.
STEPHEN C. LARKIN, age 50, Bowling Green, Kentucky, was appointed as a Director in June 2009, and
appointed as Chief Financial Officer on January 4, 2010. Prior to becoming Chief Financial
Officer, he served as Controller since April 1, 2009. Mr. Larkin has also served as Chief
Financial Officer of BR Group since June 2008. Mr. Larkin earned a B.A. Degree form Michigan State
University in 1981, an MBA Degree from Michigan State University in 1989 and an Executive MBA from
the University of New Hampshire in 1997.
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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys officers and directors
and persons who own more than 10% of a registered class of the Companys equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange Commission (SEC).
Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms filed by them.
The Company believes that during the 2009 fiscal year, its officers, directors and 10% shareholders
complied with the Section 16(a) filing requirements in a timely fashion.
REPORT OF THE AUDIT COMMITTEE
As of the date of this filing, the Company has not appointed members to an audit committee and an
audit committee does not exist. Therefore, the role of an audit committee has been conducted by the
Board of Directors of the Company.
The Company intends to establish an audit committee. When established, the audit committee will be
comprised of at least two disinterested members. The audit committees primary function will be to
provide advice with respect to the Companys financial matters and to assist the Board of Directors
in fulfilling its oversight responsibilities regarding finance, accounting, tax and legal
compliance. The audit committees primary duties and responsibilities will be: (i) to serve as an
independent and objective party to monitor the Companys financial reporting process and internal
control system; (ii) to review and appraise the audit efforts of the Companys independent
accountants; (iii) to evaluate the Companys quarterly financial performance as well as its
compliance with laws and regulations; (iv) to oversee managements establishment and enforcement of
financial policies and business practices; and (v) to provide an open avenue of communication among
the independent accountants, management and the Board of Directors.
Currently, the entire Board of Directors performs the duties of an Audit Committee and oversees the
Companys financial reporting process. Management has the primary responsibility for the financial
statements and the reporting process including the systems of internal controls. In fulfilling its
oversight responsibilities, the Board of Directors reviewed the interim financial statements filed
quarterly and the audited financial statements in the Annual Report with management including a
discussion of the quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the financial
statements. At this time, the Board of Directors does not have a financial expert because of its
small company size; however, the Board of Directors intends to appoint a financial expert in the
future.
10. Executive Compensation
The following table shows information for the year ended December 31, 2009 regarding the
compensation of our Chief Executive Officers.
SUMMARY COMPENSATION TABLE
Change in | ||||||||||||||||||||||||||||||||||||
pension value | ||||||||||||||||||||||||||||||||||||
and non- | ||||||||||||||||||||||||||||||||||||
Non-equity | qualified | |||||||||||||||||||||||||||||||||||
Name and | Stock | Option | incentive plan | deferred | All other | |||||||||||||||||||||||||||||||
Principal | Salary | Bonus | Awards | Awards | compensation | compensation | compensation | Total | ||||||||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($) | Non-Equity | earnings ($) | ($) | ($) | |||||||||||||||||||||||||||
Robert D. Burr President and CEO |
2009 | 68,000 | | | 33,000 | | | | $ | 101,000 |
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Employment Agreements
There are no employment agreements in place as of December 31, 2009.
STOCK OPTION PLAN
On February 22, 2005, the Board of Directors approved the Bayou City Exploration, Inc. (formerly
Blue Ridge Energy, Inc.) 2005 Stock Option and Incentive Plan (the Stock Option Plan). The Stock
Option Plan allows for the granting of stock options to eligible directors, officers, employees,
consultants and advisors.
Effective January 1, 2006, the Company accounts for the Plan in accordance with revised Statement
of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R)). 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, 2009. Prior to January 1, 2006,
the Company accounted for stock compensation cost under the Plan in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) as permitted by
SFAS 123 as originally issued. Under APB 25, stock compensation expense was recognized only if the
options had intrinsic value (difference between option exercise price and the fair market value of
the underlying stock) at the date of grant. As the Company issued all options with an exercise
price equal to the grant date market value of the underlying stock, no compensation expense had
previously been recorded by the Company.
The maximum number of shares with respect to which options may be awarded under the Stock Option
Plan is seven million (7,000,000) common shares of which approximately 900,000 shares remain
available for grant as of December 31, 2009. The following table shows more information about our
Stock Option Plan.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
equity compensation | ||||||||||||
plans (excluding | ||||||||||||
Number of securities to | Weighted-average | securities to be issued | ||||||||||
be issued upon exercise | exercise price of | upon exercise of | ||||||||||
of outstanding options, | outstanding options, | outstanding options, | ||||||||||
Plan category | warrants and rights | warrants and rights | warrants, and rights) | |||||||||
Equity
compensation plans
approved by
security holders |
6,100,000 | $ | 0.028 | 900,000 | ||||||||
Equity
compensation plans
not approved by
security holders |
None | n/a | None | |||||||||
Total |
6,100,000 | $ | 0.028 | 900,000 |
The following table shows information regarding awards granted to each of our Named Executive
Officers under our Stock Option Plan outstanding as of December 31, 2009.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS
OPTION AWARDS
Number of | Number of | |||||||||||||||||||
Securities | Securities | Equity Incentive Plan | ||||||||||||||||||
Underlying | Underlying | Awards: Number of | ||||||||||||||||||
Unexercised | Unexercised | Securities Underlying | ||||||||||||||||||
Options | Options | Unexercised | Option Exercise | Option | ||||||||||||||||
(#) | (#) | Unearned Options | Price | Expiration | ||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | |||||||||||||||
Robert D. Burr President and CEO |
2,350,000 | | | $ | 0.01 | 05/18/19 | ||||||||||||||
Harry J. Peters Director |
950,000 | | | $ | 0.01 | 05/18/19 | ||||||||||||||
Gregory B. Shea Director |
700,000 | | | $ | 0.01 | 05/18/19 | ||||||||||||||
Stephen C. Larkin Director |
333,333 | 666,667 | | $ | 0.01 | 05/18/19 |
BOARD MEETINGS AND COMPENSATION
During the year ended December 31, 2009, the Board of Directors of the Company met on four
occasions. Each of the Companys directors attended the meeting of the Board of Directors. While
the Company has no formal policy, directors are encouraged to attend the Companys annual meeting
of stockholders. The Company does not have an Audit, Nomination or Compensation Committee.
Based on the Companys history and experience without a nominating committee, the Board of
Directors believes it is appropriate for the Company to continue operations without a standing
nominating committee. Historically, there have not been many vacancies on the Board and the entire
Board has identified available, qualified candidates. All directors participate in the
consideration of the director nominees. Qualifications for consideration as a director nominee may
vary according to the skills and experience being sought to complement the existing Boards
composition. However, in making nominations the Board will consider the individuals integrity,
business experience, industry experience, financial background, time availability and other skills
and experience possessed by the individual. The Board of Directors will consider persons for
director nomination who are proposed by stockholders. The Board of Directors will evaluate nominees
for director on the same basis regardless of whether the nominee is recommended by an officer,
director or stockholder. Stockholders who wish to propose a person for consideration by the Board
of Directors as a director nominee should send the name of such person, together with information
concerning such persons qualifications and experience, in writing to the Chairman of the Board at
the Companys address.
During 2009, the directors of the Company received the following compensation for their services as
directors of the Company.
DIRECTOR COMPENSATION
Fees | Non- | |||||||||||||||||||||||||||
Earned | Qualified | |||||||||||||||||||||||||||
or | Non-Equity | Deferred | ||||||||||||||||||||||||||
Paid in | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
Name | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Robert D. Burr |
| | | | | | | |||||||||||||||||||||
Harry J. Peters |
| | | | | | | |||||||||||||||||||||
Gregory B. Shea |
| | | | | | | |||||||||||||||||||||
Stephen C. Larkin |
| | | | | | |
- 16 -
Table of Contents
11. SECURITIES OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth each stockholder who is known to the Company to be the beneficial owner
of more than 5% of the Common Stock of the Company at December 31, 2009. The Securities Exchange
Act of 1934 requires certain persons, including the Companys directors and executive officers, to
file reports with the SEC regarding beneficial ownership of certain equity securities of the
Company. The Company has relied upon information known to the Company and these SEC beneficial
ownership filings in disclosing the following information regarding security ownership of 5%
beneficial owners and management.
Name and Address | Amount and Nature of | |||||||
of Beneficial Owner | Beneficial Ownership | Percent of Class | ||||||
Robert D. Burr |
4,933,971 | (1) | 18.5 | % | ||||
632 Adams Street, Suite 710 Bowling Green, KY 42101 |
||||||||
Blue Ridge Group, Inc. |
3,638,371 | (2) | 13.7 | % | ||||
632 Adams Street, Suite 710 Bowling Green, KY 42101 |
(1) | Mr. Burrs beneficial ownership includes vested options of 2,350,000 shares and 2,583,971 shares (71.02% of 3,638,371) of BR Groups direct ownership of common shares. By virtue of his position as Chairman of the Board of BR Group, Mr. Burr may be deemed to beneficially own the 3,638,371 shares of the Companys Common Stock beneficially owned by BR Group Mr. Burr disclaims beneficial ownership of these shares except to the extent described in the following sentence. Mr. Burr beneficially owns approximately 71.02% of the outstanding shares of BR Group, which beneficially owns approximately 13.7% of the Company. | |
(2) | BR Groups beneficial ownership is attributable to its direct ownership of 3,638,371 shares of the Companys Common Stock. |
The table below sets forth the beneficial ownership of the Companys Common Stock by each executive
officer, director and director nominee of the Company as of December 31, 2009.
Name of | Amount and Nature of | Percent | ||||||
Beneficial Owner | Beneficial Ownership (4) | of Class | ||||||
Robert D. Burr (1) |
4,933,971 | 18.5 | % | |||||
Harry J. Peters (2) |
1,014,763 | 3.8 | % | |||||
Gregory B. Shea (3) |
764,763 | 2.9 | % | |||||
Stephen C. Larkin (4) |
333,333 | 1.2 | % | |||||
All directors, nominees and officers as a group (4 persons) |
7,046,830 | 26.4 | % |
(1) | Mr. Burrs beneficial ownership includes vested options of 2,350,000 shares and 2,583,971 shares (71.02% of 3,638,371) of BR Groups direct ownership of common shares. By virtue of his position as Chairman of the Board of BR Group, Mr. Burr may be deemed to beneficially own the 3,638,371 shares of the Companys Common Stock beneficially owned by BR Group however, Mr. Burr disclaims beneficial ownership of these shares except to the extent described in the following sentence. Mr. Burr beneficially owns approximately 71.02% of the outstanding shares of BR Group, which beneficially owns approximately 13.7% of the Company. | |
(2) | Mr. Peters beneficial ownership includes vested options of 950,000 shares and 64,763 shares (1.78% of 3,638,371) of BR Groups direct ownership of common shares. | |
(3) | Mr. Sheas beneficial ownership includes vested options of 700,000 shares and 64,763 shares (1.78% of 3,638,371) of BR Groups direct ownership of common shares. | |
(4) | Mr. Larkins beneficial ownership interest includes vested options of 333,333 shares. | |
(5) | These beneficial ownerships represent vested stock options and options exercisable within 60 days of December 31, 2009. |
- 17 -
Table of Contents
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Common Stock Transactions
As of December 31, 2009, there are 26,653,633 shares of common stock issued and outstanding. A
total of 3,638,371 shares are held by Blue Ridge Group, Inc. and the remaining 23,015,262 shares
are held by approximately 600 shareholders of record.
B. Payables and Notes Payable to Related Parties.
As of December 31, 2009 and December 31, 2008 the Company had the following debts and obligations
to related parties:
December 30, | December 31, | |||||||
2009 | 2008 | |||||||
Trade payable to BR Group |
$ | -0- | $ | 3,000 | ||||
Payable to BR Group for proceeds from sale of asset |
-0- | -0- | ||||||
Drilling Advances payable to Gulf Coast Drilling Co. |
50,000 | 104,000 | ||||||
Payable to minority shareholders for operating capital |
85,000 | 85,000 | ||||||
Note payable to BR Group |
-0- | 123,000 | ||||||
Line of Credit payable to BR Group for operating capital |
375,000 | 393,000 | ||||||
Note payable to Peter Chen a minority shareholder |
100,000 | 100,000 | ||||||
Accrued Interest |
-0- | 55,000 | ||||||
Total Payable or Notes Payable to Related Parties |
$ | 610,000 | $ | 863,000 | ||||
The promissory note payable to BR Group was originally entered into October 1, 2004, for $123,000
to settle outstanding cash advances received from BR Group during prior periods. The note was
interest bearing at the rate of 7.95% and was payable in full on or before July 17, 2009. The note
was secured by all oil and gas production income that the Company holds until the note was paid in
full. The Company paid the note in full, with all accrued interest, on March 24, 2009
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 Companys operations. As of December 31, 2009 the Company has a
liability balance under this line of credit arrangement due BR Group in the amount of 375,000. 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 is due July 17, 2010. Accrued interest on the note as of December
31, 2009 was -0-.
The fee mineral acres of the McAllen West Prospect previously secured the line of credit from BR
Group. In February, 2008, the Company was successful in selling its McAllen West Prospect and
received $358,000. The Company had costs of $300,000 associated with this prospect previously
included in property and equipment on the Companys balance sheet resulting in a $58,000 gain on
sale of assets recognized in the Companys statement of operations. The sales proceeds from the
secured property have not been paid to BR Group. BR Group has not yet demanded the proceeds from
the sale to be paid on the secured indebtedness but instead has allowed the sales proceeds to
remain in the Company to be used for operating capital.
During the 2nd and 3rd quarters, 2007, a minority shareholder loaned the
Company $85,000 to finance the Companys operations. No loan documents were executed.
During the 4th quarter, 2007, Peter Chen, a minority shareholder loaned the Company
$100,000 to finance the Companys operations. The Company executed a promissory note on October 4,
2007; the note is due on demand and bears an interest rate of 0%.
As of December 31, 2009 and 2008, the Company owed Gulf Coast Drilling Company (an affiliate of BR
Group) $50,000 and 104,000, respectively, in drilling advances received for the King Unit #1 well
that were in excess of BR Groups participation interest in the well.
As of December 31, 2009 and 2008, the Company had a trade payable due to BR Group in the amount of
-0- and $3,000, respectively.
- 18 -
Table of Contents
13. EXHIBITS
A) EXHIBITS
31.1 | Section 302 Certification of Chief Executive Officers |
|||
31.2 | Section 302 Certification of Chief Financial Officers |
|||
32.1 | Section 906 Certification of Chief Executive Officer |
|||
32.2 | Section 906 Certification of Chief Financial Officer |
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT AUDITORS
The Company hired Killman, Murrell & Company, PC (Killman) as its independent auditors for
auditing the Companys financial statements for the year ended December 31, 2009 and December 31,
2008. It is not anticipated that the auditors will be present at the Annual Meeting.
AUDIT FEES
The Company incurred $22,000 in fees from Killman for the review of three 2009 quarterly 10-Q
reports and approximately $30,000 for its annual December 31, 2009 audit. The Company incurred
$16,000 in fees from Killman for the review of the three 2008 quarterly 10-Q reports and $25,000
from Killman for auditing the Companys financial statements for December 31, 2008 and review of
the annual 10-K.
TAX FEES
During 2009 the Company engaged an independent CPA firm other than its independent auditors to
prepare its 2008 federal and state tax returns. Danny W. Looney, PC billed the Company $4,000
during 2009 for the preparation of the Companys 2008 federal and state income tax filings. During
2008 Danny W. Looney, PC billed the Company $4,000 for the preparation of the Companys 2007
federal and state income tax filings. No other fees were charged by Killman during 2009 and 2008.
The Board of Directors has considered the scope of the above services and concludes these services
do not impair the auditors independence.
- 19 -
Table of Contents
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Bowling Green, State of Kentucky on March 29, 2010.
Bayou City Exploration, Inc. |
||||
By: | /s/ Robert D. Burr | |||
Chief Executive Officer and President | ||||
By: | /s/ Stephen C. Larkin | |||
Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in capacities and the dates indicated.
Bayou City Exploration, Inc., Registrant | ||||||||
Date: March 29, 2009 | ||||||||
By:
|
/s/ Robert D. Burr | By: | /s/ Stephen C. Larkin | |||||
Robert D. Burr, Director, Chairman of the Board | Stephen C. Larkin, Director | |||||||
By:
|
/s/ Gregory B. Shea | By: | /s/ Harry J. Peters | |||||
Gregory B. Shea Director | Harry J. Peters, Director |
- 20 -
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Bayou City Exploration, Inc.
Bayou City Exploration, Inc.
Bowling Green, Kentucky
We have audited the accompanying balance sheets of Bayou City Exploration, Inc. as of December 31,
2009 and 2008, and the related statements of operations, stockholders deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Bayou City Exploration, Inc. as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Killman, Murrell & Company, P.C. |
||
Odessa, Texas |
March 31, 2010
F - 1
Table of Contents
BAYOU CITY EXPLORATION, INC.
BALANCE SHEETS
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash |
$ | 51,704 | $ | 18,042 | ||||
Accounts receivable: |
||||||||
Trade and other (net of allowance for doubtful accounts
$37,468 as of December 31, 2009 and $222,011
as of December 31, 2008) |
165,946 | 210,674 | ||||||
TOTAL CURRENT ASSETS |
217,650 | 228,716 | ||||||
OIL & GAS PROPERTIES, NET |
308,967 | 5,834 | ||||||
TOTAL ASSETS |
$ | 526,617 | $ | 234,550 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT: |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable and accrued expenses |
$ | 133,071 | $ | 354,789 | ||||
Accounts payable related party |
134,906 | 246,298 | ||||||
AFE advances from JIB owners |
| 51,186 | ||||||
Notes payable related parties |
475,000 | 616,569 | ||||||
TOTAL CURRENT LIABILITIES |
742,977 | 1,268,842 | ||||||
ASSET RETIREMENT LIABILITY |
| 43,806 | ||||||
TOTAL LIABILITIES |
742,977 | 1,312,648 | ||||||
STOCKHOLDERS DEFICIT: |
||||||||
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; 0 shares issued and outstanding as of
December 31, 2009 and December 31, 2008 |
| | ||||||
Common stock, $0.005 par value; 150,000,000 shares
authorized; 26,653,633 shares issued and
outstanding at December 31, 2009 and
December 31, 2008 |
133,268 | 133,268 | ||||||
Additional paid in capital |
13,363,430 | 13,284,765 | ||||||
Accumulated deficit |
(13,713,058 | ) | (14,496,131 | ) | ||||
TOTAL STOCKHOLDERS DEFICIT |
(216,360 | ) | (1,078,098 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT |
$ | 526,617 | $ | 234,550 | ||||
The accompanying notes are an integral part
of these financial statements
of these financial statements
F - 2
Table of Contents
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
OPERATING REVENUES: |
||||||||
Oil and gas sales |
$ | 1,025,300 | $ | 287,808 | ||||
TOTAL OPERATING REVENUES |
1,025,300 | 287,808 | ||||||
OPERATING COSTS AND EXPENSES: |
||||||||
Lease operating expenses and production taxes |
99,596 | 36,228 | ||||||
Abandonment and dry hole costs |
99,583 | 28,311 | ||||||
Depletion and amortization |
11,110 | 33,484 | ||||||
General and administrative costs |
374,284 | 329,927 | ||||||
TOTAL OPERATING COSTS |
584,573 | 427,950 | ||||||
OPERATING INCOME (LOSS) |
440,727 | (140,142 | ) | |||||
OTHER INCOME (EXPENSE): |
||||||||
Interest expense |
(45,304 | ) | (45,108 | ) | ||||
Gain (loss) on sale of assets |
| (22,129 | ) | |||||
Forgiveness of debt |
167,344 | 32,514 | ||||||
Bad debt recovery |
170,537 | | ||||||
Miscellaneous income |
49,769 | | ||||||
NET INCOME (LOSS) BEFORE INCOME TAX |
783,073 | (174,865 | ) | |||||
Income tax provision |
| | ||||||
NET INCOME (LOSS) |
$ | 783,073 | $ | (174,865 | ) | |||
NET INCOME (LOSS) PER COMMON SHARE |
$ | 0.03 | $ | (0.01 | ) | |||
Weighted Average Common Shares Outstanding |
26,653,633 | 26,653,633 | ||||||
Basic and Diluted |
See accompanying independent auditors report
and notes to financial statements
and notes to financial statements
F - 3
Table of Contents
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Common Stock | Additional | Accumulated | ||||||||||||||||||
Shares | Amount | Paid in Capital | Deficit | Total | ||||||||||||||||
Balance at 12-31-07 |
$ | 26,653,633 | $ | 133,268 | $ | 13,276,765 | $ | (14,321,266 | ) | $ | (911,233 | ) | ||||||||
Interest on
non-interest bearing
note payable
to shareholder |
| | 8,000 | | 8,000 | |||||||||||||||
Net loss |
| | | (174,865 | ) | (174,865 | ) | |||||||||||||
Balance at 12/31/2008 |
26,653,633 | 133,268 | 13,284,765 | (14,496,131 | ) | (1,078,098 | ) | |||||||||||||
Interest on
non-interest bearing
note payable
to shareholder |
| | 8,000 | | 8,000 | |||||||||||||||
Stock options issued |
| | 70,665 | | 70,665 | |||||||||||||||
Net income |
| | | 783,073 | 783,073 | |||||||||||||||
Balance at 12/31/2009 |
$ | 26,653,633 | $ | 133,268 | $ | 13,363,430 | $ | (13,713,058 | ) | $ | (216,360 | ) | ||||||||
See accompanying independent auditors report
and notes to financial statements
and notes to financial statements
F - 4
Table of Contents
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||
Net Income (Loss) |
$ | 783,073 | $ | (174,865 | ) | |||
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities: |
||||||||
Depreciation, depletion, and amortization |
11,110 | 33,484 | ||||||
Abandonment and dry hole costs |
99,583 | 28,311 | ||||||
Loss on sale of assets |
| 22,129 | ||||||
Interest contributed by shareholder |
8,000 | 8,000 | ||||||
Stock option expense |
70,665 | | ||||||
Forgiveness of debt |
(167,344 | ) | (32,514 | ) | ||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable trade |
44,728 | (197,217 | ) | |||||
Prepaid expense and other assets |
| 7,024 | ||||||
AFE advances JIB owners |
(51,186 | ) | | |||||
Accounts payable related party |
(111,392 | ) | (35,667 | ) | ||||
Accounts payable and accrued liabilities |
(54,375 | ) | (139,364 | ) | ||||
Long term liability P&A costs |
(43,806 | ) | ||||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
589,056 | (480,679 | ) | |||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
Purchase of oil and gas properties |
(413,825 | ) | (3,977 | ) | ||||
Proceeds from sale of assets |
| 408,937 | ||||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
(413,825 | ) | 404,960 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payments on long term debt |
| (4,627 | ) | |||||
Proceeds from related party line of credit |
65,450 | 77,374 | ||||||
Payments on related party line of credit |
(207,019 | ) | (700 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
(141,569 | ) | 72,047 | |||||
NET INCREASE IN CASH |
33,662 | (3,672 | ) | |||||
CASH AT BEGINNING OF YEAR |
18,042 | 21,714 | ||||||
CASH AT END OF YEAR |
$ | 51,704 | $ | 18,042 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | 37,304 | $ | 242 | ||||
Cash paid for federal income taxes |
$ | | $ | | ||||
See accompanying independent auditors report
and notes to financial statements
and notes to financial statements
F - 5
Table of Contents
BAYOU CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2009 and 2008
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
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.
On April 4, 2007, the Company announced the relocation of their corporate headquarters to 632 Adams
Street, Suite 700, Bowling Green, Kentucky 42101 in order to decrease overhead, consolidate
operations and reduce the number of personnel on staff. This move was completed in May, 2007. The
Companys executive office in the year 2006 was located at 10777 Westheimer, Suite 170, Houston,
Texas, 77042. Since relocating the Companys headquarters to Bowling Green, Kentucky the Company
has maintain only the geological contract staff in the Houston office for the continued development
and sale of the Companys prospects until June of 2008 when they eliminated the staff and closed
the office.
The Company is engaged in the oil and gas business primarily in the gulf coast of Texas, east
Texas, south Texas, and Louisiana. The Company develops oil and gas prospects for the drilling of
oil and gas wells and attempts to sell the prospects to oil and gas exploration companies under
terms that provide the participating company will provide the funds necessary to drill and complete
a well on the prospect, reimburse the Company for any leasehold or exploration costs associated
with the prospect, pay the Company a prospect fee for developing the oil and gas prospect, and
allow the Company to retain a carried interest in the well to be drilled. The wells drilled by the
Company included both exploratory and development wells.
Prior to May 1, 2007, the Company operated many of the wells for which it owned an interest. The
Company no longer intends to operate properties. The Company will seek to sell a portion of the
interest in each prospect it generates to an operator that will be responsible for the drilling and
operating of the oil and gas properties. In prior years the Company has been licensed as an oil and
gas operator with the Texas Railroad Commission in the state of Texas. During the second quarter
2007 the Companys license with the Texas Railroad Commission to be an operator in the state of
Texas was not renewed. The Company operated two wells in Texas and one in Louisiana. All three
wells are now plugged and abandoned. The Companys ownership in all remaining wells is through
non-operated working and royalty interests.
Basis of Presentation
These financial statements have been prepared by management, who is responsible for their content,
in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
F - 6
Table of Contents
Recently Issued Accounting Standards
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 Financial Accounting Standards Board (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 purchases, 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
ActivitiesOil and GasOil and Gas Reserve Estimation and Disclosures. This ASU amends the
Extractive IndustriesOil and Gas Topic of the Codification to align the oil and gas reserve
estimation and disclosure requirements in this Topic with the SECs 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.
SECs Final Rule on Oil and Gas Disclosure Requirements
On December 31, 2008, the Securities and Exchange Commission, 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 Companys 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.
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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 Companys 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 Companys 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 entitys financial position, operations and cash flows.
This guidance was effective as of the beginning of an entitys fiscal year that begins after
November 15, 2008. The Company adopted this guidance on January 1, 2009.
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 December 31, 2009, a total
of $37,000 was considered potentially uncollectible, this compares to $222,000 at December 31,
2008. A reserve for uncollectible receivables was recognized for this amount and is included in
operating costs of the Companys 2009 and 2008 statement of operations. Receivables are reviewed
quarterly, and if any are deemed uncollectible, they are written off as bad debts.
Managed Limited Partnerships
Prior to 2004, the Company sponsored 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.
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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.
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
Companys 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.
Accounting for Asset Retirement Obligations
The Company follows the provisions of Statement of Financial Accounting Standards
(SFAS) No. 143(ASC 410), Accounting for Asset Retirement Obligations. SFAS No. 143(ASC 410)
requires legal obligations associated with the retirement of long-lived assets to be recognized at
their fair value at the time that the obligations are incurred. Upon initial recognition of a
liability, that cost is capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. Prior to 2005, management determined that any future
costs related to plugging and abandonment of producing wells would be substantially offset by the
value of equipment removed from the well site and such estimates were immaterial to the financial
statements. Therefore, no liability was recorded prior to 2005. Due to continued rising rig and
fuel costs, a detailed estimate was made in the second quarter of 2005 to determine how these
rising service costs would affect future plugging and abandonment costs. As a result of this
analysis, management concluded that a liability should be recorded within the financial statements
under the provisions of SFAS 143(ASC 410). These costs are evaluated annually and adjusted
accordingly under the guidelines of SFAS 143(ASC 410). As of December 31, 2008 the assets have
been fully impaired. The balance of the long term liability is $44,000 for 2008. There was no
accretion expense in 2008. The well was plugged and abandoned in 2009 and the Company paid its
share of the costs and returned the balance of the liability in the amount of $45,000 to
miscellaneous income in 2009. As of December 31, 2009 the Company had no liability established for
the two new wells that went into production in late 2009 due to the fact that production just
started in the fourth quarter and any liability for plugging cannot be calculated.
Surrender or Abandonment of Developed Properties
Normally, no separate gain or loss is recognized if only an individual item of equipment is
abandoned or retired or if only a single lease or other part of a group of proved properties
constituting the amortization base is abandoned or retired as long as the remainder of the property
or group of properties continues to produce oil or gas. The asset being abandoned or retired is
deemed to be fully amortized, and its cost is charged to accumulated depreciation, depletion or
amortization. When the last well on an individual property or group of properties with common
geological structures ceases to produce and the entire property or property group is abandoned,
gain or loss, if any, is recognized. Abandonment and dry hole costs were $100,000 and $28,000 for
the years ended December 31, 2009 and 2008, respectively.
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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
The Company follows the provisions of ASC Subtopic 360-35, Property, Plant and Equipment -
Subsequent Measurement. Consequently, the Company reviews its long-lived assets to be held and
used, including oil and gas properties accounted for under the successful efforts method of
accounting. Whenever events or circumstances indicate the carrying value of those assets may not be
recoverable, an impairment loss for proved properties and capitalized exploration and development
costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of
proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash
flows on a field-by-field basis using known expected prices, based on set agreements. If impairment
is indicated based on undiscounted expected future cash flows, then impairment is recognizable to
the extent that net capitalized costs exceed the estimated fair value of the property. Fair value
of the property is estimated by the Company using the present value of future cash flows discounted
at 10%, in accordance with SFAS No. 69 (ASC 932-235), Disclosures about Oil and Gas Producing
Activities.
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 years ended December 31, 2009 and 2008:
2009 | 2008 | |||||||
Income (loss) from operations |
$ | 783,000 | $ | (175,000 | ) | |||
Less preferred stock dividends |
-0- | -0- | ||||||
Income (loss) available to common stockholders |
$ | 783,000 | $ | (175,000 | ) | |||
Common stock outstanding for the full year |
26,653,633 | 26,653,633 | ||||||
Assumed exercise of stock options |
-0- | -0- | ||||||
Weighted average common shares outstanding |
26,653,633 | 26,653,633 | ||||||
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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 options 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 December 31, 2009 all cash balances were under $250,000.
Advertising
The Company expenses advertising costs as these are incurred. There were no advertising costs
incurred in 2009 or 2008.
Income Taxes
There is no provision for income taxes for the years ended December 31, 2009 and 2008. Income taxes
are provided for under the liability method in accordance with SFAS No. 109, (ASC 740) Accounting
for Income Taxes, which takes into account the differences between financial statement treatment
and tax treatment of certain transactions. It is uncertain as to whether the Company will generate
sufficient future taxable income to utilize the net deferred tax assets, therefore for financial
reporting purposes, a valuation allowance of $3,638,000 and $3,960,000 has been recognized to
offset the net deferred tax assets at December 31, 2009 and December 31, 2008, respectively.
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.
Reclassifications
Certain accounts in prior-year financial statements have been reclassified for comparative purposes
to conform with the presentation in the current-year financial statements.
2. SALE OF MCALLEN WEST PROSPECT
In February, 2008 the Company successfully sold its McAllen West Prospect and received proceeds of
$358,000, plus retained a 12% royalty interest pursuant to a term royalty deed. This is the
property that the Sien well is on and is currently producing. The Company recognized a gain of
$58,000 on the sale of its McAllen West Prospect.
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3. RELATED PARTY TRANSACTIONS
A. Common Stock Transactions
As of December 31, 2009, there are 26,653,633 shares of common stock issued and outstanding. A
total of 3,638,371 shares are held by Blue Ridge Group, Inc., a related company, and the remaining
23,015,262 shares are held by approximately 600 shareholders of record.
B. Payables and Notes Payable to Related Parties.
As of December 31, 2009 and December 31, 2008 the Company had the following debts and obligations
to related parties:
December 31, 2009 |
December 31, 2008 |
|||||||
Trade payable to BR Group |
$ | -0- | $ | 3,000 | ||||
Drilling Advances payable to Gulf Coast Drilling Co. |
50,000 | 104,000 | ||||||
Payable to minority shareholders for operating capital |
85,000 | 85,000 | ||||||
Note payable to BR Group |
-0- | 123,000 | ||||||
Line of Credit payable to BR Group for operating capital |
375,000 | 393,000 | ||||||
Note payable to Peter Chen a minority shareholder |
100,000 | 100,000 | ||||||
Accrued Interest |
-0- | 55,000 | ||||||
Total Payable or Notes Payable to Related Parties |
$ | 610,000 | $ | 863,000 | ||||
The promissory note payable to BR Group was originally entered into October 1, 2004, for $500,000
to settle outstanding cash advances received from BR Group during prior periods. The note was
interest bearing at the rate of 7.95% and is payable in full on or before July 17, 2009. The note
was secured by all oil and gas production income that the Company holds until the note has been
paid in full. The Company paid the note in full, with all accrued interest, on March 24, 2009.
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 Companys 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 is due
July 17, 2010. The balance of the line of credit was $375,000 and $393,000 for the years ended
December 31, 2009 and 2008 respectively. The accrued interest amount includes the unpaid interest
on this line of credit in the amount of $-0- and $34,000 as of December 31, 2009 and 2008,
respectively.
During the 4th quarter, 2007, Peter Chen, a minority shareholder loaned the Company
$100,000 to finance the Companys 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 December 31, 2009 and 2008, the Company owed Gulf Coast Drilling Company (an affiliate of BR
Group) $50,000 and $104,000, respectively, in monies that were in excess of BR Groups
participation interest in the well.
As of December 31, 2009 and 2008, the Company had a trade payable due to BR Group in the amount of
$-0- and $3,000 respectively.
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4. OIL AND GAS PROPERTIES
Oil and Gas properties, stated at cost, consisted of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
Proved oil and gas properties |
$ | 129,000 | $ | 98,000 | ||||
Investment in partnerships |
21,000 | 21,000 | ||||||
Unproved oil and gas properties |
186,000 | | ||||||
Total oil and gas properties |
336,000 | 119,000 | ||||||
Less accumulated depletion and amortization |
(27,000 | ) | (113,000 | ) | ||||
Less impairment |
| | ||||||
Net oil and gas properties |
$ | 309,000 | $ | 6,000 | ||||
Depletion and amortization expense was $11,000 and $33,000 during the years ended 2009 and 2008,
respectively. The decrease of $22,000 was due mainly to the fact that the two new producing wells
went into production late in 2009 and produced very little in 2009.
During 2009 and 2008, the Company provided for abandonment and dry hole costs of $100,000 and
$28,000, respectively. The amount for 2009 was related to the Powers well drilled in the third
quarter of 2009 which was a dry hole. The 2008 amount was for abandonment of undeveloped
properties.
5. SEISMIC LICENSE
The Company entered into a lifetime participation membership in the Echo 3-D Gulf Coast, Permian
Basin, Rocky Mountain and Mid-Continent Programs on July 1, 2004. There are 56 3-D data sets and
13,000 miles of 2-D data available for use in generating drilling prospects. The Board is
considering various options to fully exploit this dataset for the greatest benefit to the Company.
This seismic license and any related prospecting costs such as geological and geophysical (G&G)
consulting and G&G studies are defined as Exploration Costs under ASU 932 and such expenditures are
to be expensed as incurred. During 2009 and 2008, $-0- and $15,000, respectively, was incurred for
exploration costs and charged to expense.
6. OPERATING LEASE
The Company entered into an operating lease for its administrative office in Houston, Texas on
April 1, 2003. The lease expired on June 30, 2008 and was not renewed. Total rental expense was
approximately $58,000 for 2008.
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7. INCOME TAXES
The tax effect of significant temporary differences representing the net deferred tax liability at
December 31, 2009 and 2008 were as follows:
2009 | 2008 | |||||||
Net operating loss carry forward |
$ | 3,357,000 | $ | 3,650,000 | ||||
Depletion, depreciation and amortization |
1,000 | (3,000 | ) | |||||
Stock based compensation |
344,000 | 316,000 | ||||||
Valuation allowance |
(3,702,000 | ) | (3,963,000 | ) | ||||
Net deferred tax liability |
$ | | $ | | ||||
The Company recorded $-0- as income tax expense for the years ended December 31, 2009 and 2008, as
a result of the net loss recognized in 2008 and the use of net operating losses to offset its 2009
taxable income. Further, an income tax benefit was not recognized in either of the years due to the
uncertainty of the Companys ability to recognize the benefit from the net operating losses and,
therefore, has recorded a full valuation allowance against the deferred tax assets.
The benefit for income taxes is different from the amount computed by applying the U.S. statutory
corporate federal income tax rate to pre-tax loss as follows:
2009 | 2008 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Income tax benefit (tax expense) computed at the statutory rate |
$ | (266,000 | ) | 34.0 | % | $ | 59,000 | 34.0 | % | |||||||
Increase (reduction) in tax benefit resulting from: |
||||||||||||||||
State and local income taxes, net of federal tax effect |
(31,000 | ) | 4.0 | % | 7,000 | 4.0 | % | |||||||||
Adjustment for book to tax changes |
4,000 | (38.0 | )% | (32,000 | ) | (38.0 | )% | |||||||||
Permanent items |
| (0.0 | )% | | (0.0 | )% | ||||||||||
Valuation allowance (increase) decrease |
293,000 | (38.0 | )% | (34,000 | ) | (38.0 | )% | |||||||||
Income tax benefit |
$ | | | $ | | | ||||||||||
The Company has an estimated net operating loss carry forward of $8,834,000 and $9,606,000 as of
December 31, 2009 and 2008 respectively. These net operating loss carry forwards will begin
expiring in 2017 unless utilized sooner. Under Internal Revenue Code (IRC) Section 382, a change in
ownership occurred on December 31, 2004 with the issuance of the additional shares from the private
stock placement. As of December 31, 2004, the net operating loss (NOL) carry forward amount was
$3,341,000. The Section 382 rule will limit the use of this December 31, 2004 NOL carry forward to
$267,000 per year.
8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has liabilities to various vendors with past due amounts including a judgment against
it for $55,000. These liabilities are recorded in the financial statements in accounts payable.
The Company also has significant payments for notes payable which will all mature in 2010. The
Company expects to pay these in full prior to the maturity dates in 2010. Other than noted above,
neither the Company nor any of its properties is subject to any material pending legal proceedings.
Contingencies
The Companys 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
Companys decision to no longer be an operator of oil and gas wells, and the plugging and
abandoning of all wells operated by the Company. At the time of this filing the Company is not
insured for public liability and property damage to others with respect to its operations, except
to the extent the Company may be covered as a non-operator in specific wells through the liability
insurance policies of other operators.
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9. 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. On October 8, 2004, a Special Meeting of Stockholders was held requesting the approval of an
Amendment to the Companys Articles of Incorporation to increase the authorized shares of Common
Stock from 20,000,000 shares to 150,000,000 shares. The amendment was approved at the Special
Meeting of Stockholders. As of December 31, 2009, 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 February 22, 2005, the Board of Directors adopted the 2005 Plan, the purposes of which are to
(i) attract and retain the best available personnel for positions of responsibility within the
Company, (ii) provide additional incentives to employees of the Company, (iii) provide directors,
consultants and advisors of the Company with an opportunity to acquire a proprietary interest in
the Company to encourage their continuance of service to the Company and to provide such persons
with incentives and rewards for superior performance more directly linked to the profitability of
the Companys business and increases in shareholder value, and (iv) generally to promote the
success of the Companys business and the interests of the Company and all of its stockholders,
through the grant of options to purchase shares of the Companys Common Stock and other incentives.
Subject to adjustments upon changes in capitalization or merger, the maximum aggregate number of
shares which may be optioned and sold or otherwise awarded under the 2005 Plan is seven million
(7,000,000) common shares. The Board of Directors administers the 2005 Plan. Generally, awards of
options under the 2005 plan vest immediately or on a graded basis over a 5 year term. The maximum
contractual period of options granted is 10 years. The 2005 Plan will terminate on February 22,
2015. As of December 31, 2009, approximately 900,000 shares are available for grant. Issuance of
common stock from the exercise of stock options will be made with new shares from authorized shares
of the Company.
There were no stock options granted during the year 2008. In 2009 the Board of Directors decided
that with the current stock options strike price compared to the current market price, that the
outstanding options were simply not an incentive anymore to the current employees and directors.
Therefore, in May of 2009 the Company decided to cancel the outstanding options to the current
employees and directors and issue new ones. As a result, the Company cancelled 2,968,750 options
and issued 6,000,000 options to its current employees, directors and key consultants and advisors
of the Company and expensed $71,000 in relation to issuance of these options. All options were
issued at the strike price of $.01, with varying vesting terms. All options granted have a ten
year term.
At December 31, 2009, there were options, fully vested and expected to vest, to purchase 6,100,000
shares with a weighted average exercise price of $0.028, an intrinsic value of $287,000 and a
weighted average contractual term of 9.23 years.
At December 31, 2008, there were options, fully vested and expected to vest, to purchase 3,068,750
shares with a weighted average exercise price of $0.428, an intrinsic value of $0.00 and a weighted
average contractual term of 1.786 years.
For the years ended December 31, 2009 and 2008 there was $71,000 and $0 stock based compensation
expense, respectively.
When calculating stock-based compensation expense the Company must estimate the percentage of
non-vested stock options that will be forfeited due to normal employee turnover. Since its adoption
of SFAS 123(R) (ASC 718 and 505) on January 1, 2006, the Company initially used a forfeiture rate
of 20% and increased its forfeiture rate to 50% during the third quarter 2006. This was due to the
Company experiencing a number of resignations of senior management personnel, each of whom had been
awarded options which, in many cases, had not vested and therefore will be forfeited. In the
future the Company will use an appropriate estimate for the forfeiture rate at the time options are
being granted.
The Company did not record any tax benefit for stock based compensation expense in accordance with
its current policy on providing for a full income tax valuation allowance more fully explained in
the Income Taxes note.
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The following table provides a summary of the stock option activity for all options for the year
ended December 31, 2009.
Number of Weighted | Options Exercise | |||||||
Average | Price | |||||||
Options at December 31,2008 |
3,068,750 | $ | 0.428 | |||||
Options expired or cancelled in 2009 |
(2,968,750 | ) | (0.410 | ) | ||||
Options issued 2009 |
6,000,000 | 0.010 | ||||||
Options at December 31, 2009 |
6,100,000 | $ | 0.028 | |||||
Options exercisable at December 31, 2009 |
4,766,667 | $ | 0.026 | |||||
10. FAIR VALUE ESTIMATES
In February 2007 the FASB issued SFAS No. 157 (ASC 820) Fair Value Measurements. The objective
of SFAS 157 (ASC 820) is to increase consistency and comparability in fair value measurements and
to expand disclosures about fair value measurements. SFAS 157 (ASC 820) defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principals, and
expands disclosures about fair value measurements. SFAS 157 (ASC 820) applies under other
accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements.
The Company measures its options at fair value in accordance with SFAS 157 (ASC 820). SFAS 157
(ASC 820) specifies a valuation hierarchy based on whether the inputs to those valuation techniques
are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the Companys own assumptions. These two types of
inputs have created the following fair value hierarchy:
Level 1 | Quoted prices for identical instruments in active markets; | ||
Level 2 | Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and | ||
Level 3 | Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to minimize the use of unobservable inputs and to use
observable market data, if available, when estimating fair value. The fair value of the options
held for sale at December 31, 2009 was as follows:
Quoted Active | ||||||||||||||||
Markets for | ||||||||||||||||
Identical | Significant Other | Significant | ||||||||||||||
Assets | Observable Inputs | Unobservable Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||||||
Options |
$ | | $ | 71,000 | $ | | $ | 71,000 |
The Provisions of SFAS 157 are effective for fair value measurements made in fiscal years beginning
after November 15, 2007.
Options were valued using the Black-Scholes model.
11. SUBSEQUENT EVENTS:
In early 2010, the Company sold its 12% royalty interest in the Sein #1 well to a group of related
party partnerships for $1,000,000. All of the related party partnerships share common management
with the Company. The entire transaction was cash.
In May 2009, the FASB issued SFAS No. 165 (ASC 855), subsequent events (ASC 855). ASC 855
establishes general standards of accounting for and disclosure of events after the balance sheet
date but before financial statements are issued or are available to be issued. The adoption in the
fourth quarter of 2009 did not have any material impact on the Companys financial statements.
Accordingly, the Company evaluated subsequent events through March 30, 2010, the date the financial
statements were issued.
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Table of Contents
BAYOU CITY EXPLORATION, INC.
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
The Companys participation in its three current producing wells is very small percentages and no
other participants are publically traded companies, therefore they do not need a reserve report
prepared in accordance with criteria prescribed by the SEC. The cost of the Company attaining one
solely for SEC disclosure purposes frankly is cost prohibitive, therefore the Company has chosen
not to and will not disclose proven oil & gas reserves in this report.
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