1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-5525
PYRAMID OIL COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-0787340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2008 - 21ST. STREET,
BAKERSFIELD, CALIFORNIA 93301
(Address of principal executive offices) (Zip Code)
(661) 325-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
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 [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
2
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
(Class) (Outstanding at May 14,2010)
COMMON STOCK WITHOUT PAR VALUE 4,677,728
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PYRAMID OIL COMPANY
FORM 10-Q
March 31, 2010
Table of Contents
Page
----
PART I
Item 1. Financial Statements
Balance Sheets - March 31, 2010
and December 31, 2009 4
Condensed Statements of Operations -
Three months ended March 31, 2010 and 2009 6
Condensed - Statements of Cash Flows -
Three months ended March 31, 2010 and 2009 8
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 21
PART II
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Removed and Reserved 22
Item 5. Other Information 22
Item 6. Exhibits 22
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
March 31, December 31,
2010 2009
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,083,551 $ 1,438,825
Short-term investments 3,348,487 3,344,061
Trade accounts receivable 585,980 375,954
Income taxes receivable 104,281 124,281
Crude oil inventory 89,177 62,760
Deferred income taxes 196,200 196,200
Prepaid expenses and other assets 141,837 169,595
------------ ------------
TOTAL CURRENT ASSETS 5,549,513 5,711,676
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oil and gas properties and equipment
(successful efforts method) 16,596,418 16,085,228
Capitalized asset retirement costs 389,463 382,550
Drilling and operating equipment 2,109,993 2,109,993
Land, buildings and improvements 1,066,571 1,065,371
Automotive, office and other
property and equipment 1,164,035 1,160,617
------------ ------------
21,326,480 20,803,759
Less: accumulated depletion,
depreciation, amortization
and valuation allowance (17,296,047) (17,125,834)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 4,030,433 3,677,925
------------ ------------
OTHER ASSETS
Deposits 250,000 250,000
Deferred income taxes 446,850 485,400
Other assets 17,013 17,013
------------ ------------
TOTAL ASSETS $10,293,809 $10,142,014
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
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PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31,
2010 2009
(Unaudited) (Audited)
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 49,029 $ 88,170
Accrued professional fees 108,739 138,381
Accrued taxes, other than income taxes 62,310 62,310
Accrued payroll and related costs 65,108 51,606
Accrued royalties payable 197,955 159,933
Accrued insurance 36,326 54,947
Current maturities of long-term debt 14,518 20,640
------------ ------------
TOTAL CURRENT LIABILITIES 533,985 575,987
------------ ------------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,206,451 1,193,324
------------ ------------
TOTAL LIABILITIES 1,740,436 1,769,311
------------ ------------
COMMITMENTS (note 5)
STOCKHOLDERS' EQUITY:
Preferred stock - no par value;
10,000,000 authorized shares;
no shares issued or outstanding -- --
Common stock - no par value;
50,000,000 authorized shares;
4,677,728 shares issued and
outstanding 1,515,945 1,515,945
Retained earnings 7,037,428 6,856,758
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,553,373 8,372,703
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,293,809 $10,142,014
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
6
PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
---------------------------
2010 2009
------------ ------------
REVENUES $1,001,739 $ 594,045
------------ ------------
COSTS AND EXPENSES:
Operating expenses 339,920 351,350
General and administrative 207,367 225,304
Taxes, other than income
and payroll taxes 27,820 48,298
Provision for depletion,
depreciation and amortization 149,387 158,314
Valuation allowances 25,141 --
Accretion expense 6,213 5,866
Other costs and expenses 17,240 24,171
------------ ------------
773,088 813,303
------------ ------------
OPERATING INCOME (LOSS) 228,651 (219,258)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 7,953 26,475
Other income 2,797 3,600
Interest expense (181) (415)
------------ ------------
10,569 29,660
------------ ------------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION (BENEFIT) 239,220 (189,598)
Income tax provision (benefit)
Current 20,000 (103,383)
Deferred 38,550 103,000
----------- ------------
58,550 ( 383)
------------ ------------
NET INCOME (LOSS) $ 180,670 $(189,215)
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
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PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
---------------------------
2010 2009
------------ ------------
EARNINGS PER COMMON SHARE
Basic Income (Loss) Per Common Share $ 0.04 $(0.04)
============ ============
Diluted Income (Loss) Per Common Share $ 0.04 $(0.04)
============ ============
Weighted average number of
common shares outstanding 4,677,728 4,677,728
============ ============
Diluted average number of
common shares outstanding 4,686,018 4,677,728
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
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PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 180,670 $(189,215)
Adjustments to reconcile net income (loss)
to cash provided by (used in)
operating activities:
Provision for depletion,
depreciation and amortization 149,387 158,314
Valuation allowances 25,141 --
Accretion expense 6,213 5,866
Loss on retirement of fixed assets 803 --
Deferred taxes 38,550 103,000
Changes in assets and liabilities:
Increase in trade accounts, interest
and income taxes receivable (190,426) (111,384)
(Increase) decrease in
crude oil inventories (26,417) 12,194
Decrease in prepaid expenses 27,658 28,489
(Decrease) in accounts payable
and accrued liabilities (35,880) (225,516)
--------- ---------
Net cash provided by (used in)
operating activities 175,699 (218,252)
--------- ---------
The Accompanying Notes are an Integral Part of These Financial Statements.
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PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
2010 2009
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(520,925) $ (89,584)
Purchase of short-term investments -- (500,000)
Increase in short-term investments ( 4,426) (20,170)
---------- ----------
Net cash used in investing activities (525,351) (609,754)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ( 6,122) ( 5,888)
Loans to employees ( 600) ( 500)
Principal payments from loans to employees 1,100 200
---------- ---------
Net cash used in financing activities (5,622) ( 6,188)
---------- ---------
Net decrease in cash (355,274) (834,194)
Cash at beginning of period 1,438,825 1,793,563
---------- ----------
Cash at end of period $1,083,551 $ 959,369
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the three months for interest $ 181 $ 415
========= ==========
Cash paid during the three months
for income taxes $ -- $ 161,987
========= ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
10 PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2010
(UNAUDITED)
1. Summary of Significant Accounting Policies
The financial statements include the accounts of Pyramid Oil Company (the
Company). Such financial statements included herein have been prepared by the
Company, without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
A summary of the Company's significant accounting policies is contained in its
December 31, 2009 Form 10-K which is incorporated herein by reference. The
financial data presented herein should be read in conjunction with the
Company's December 31, 2009 financial statements and notes thereto, contained
in the Company's Form 10-K.
In the opinion of the Company, the unaudited financial statements, contained
herein, include all adjustments necessary to present fairly the Company's
financial position as of March 31, 2010 and the results of its operations and
its cash flows for the three month periods ended March 31, 2010 and 2009. The
results of operations for any interim period are not necessarily indicative of
the results to be expected for a full year.
Income taxes: When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period
during which, based on all available evidence, management believes it is more
likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds
the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest associated with unrecognized tax benefits are classified as interest
expense and penalties are classified in selling, general and administrative
expenses in the statements of income.
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Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing the net income
(loss) applicable to common stock by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings (loss) per
common share is calculated in the same manner, but also considers the impact
to net income (loss) and common shares for the potential dilution from our
25,000 outstanding stock warrants.
2. Impact of Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about
Fair Value Measurements. This guidance amends the disclosure requirements
related to recurring and nonrecurring fair value measurements and requires new
disclosures on the transfers of assets and liabilities between Level 1 (quoted
prices in active market for identical assets or liabilities) and Level 2
(significant other observable inputs) of the fair value measurement hierarchy,
including the reasons and the timing of the transfers. Additionally, the
guidance requires a roll forward of activities on purchases, sales, issuance
and settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The guidance became
effective for the reporting period beginning January 1, 2010, except for the
disclosure on the roll forward activities for Level 3 fair value measurements,
which will become effective for the reporting period beginning January 1,
2011. Other than requiring additional disclosures, adoption of this new
guidance has not and is not expected to have a significant impact on our
consolidated financial statements. The Company's adoption of this updated
guidance was not significant to our consolidated financial statements.
In February 2010, the FASB issued updated guidance related to subsequent
events. As a result of this updated guidance, public filers must still
evaluate subsequent events through the issuance date of their financial
statements, however, they are not required to disclose the date in which
subsequent events were evaluated in their financial statements disclosures.
This amended guidance became effective upon its issuance on February 24, 2010
at which time the Company adopted this updated guidance.
3. Dividends
No cash dividends were paid during the three months ended March 31, 2010 and
2009.
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4. Income Taxes
The Company adopted FASB ASC 740, Income Taxes (formerly FASB Interpretation
48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109) (Topic 740) on January 1, 2007. As a result of the
implementation of FASB ASC 740, the company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards
established by FASB ASC 740. As a result of the implementation of FASB ASC
740, the Company recognized no material adjustments to liabilities or
stockholders equity.
The Company files income tax returns in the U.S. federal jurisdiction,
California and New York states. With few exceptions, the Company is no longer
subject to U.S. federal tax examination for the years before 2006. State
jurisdictions that remain subject to examination range from 2005 to 2009. The
Company does not believe there will be any material changes in its
unrecognized tax positions over the next 12 months.
The Company policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FASB ASC, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized during the quarter.
5. Commitments
In February 2002, the Company entered into an employment agreement with
John H. Alexander pursuant to which Mr. Alexander agreed to serve as the
Company's Vice President. On June 3, 2004, Mr. Alexander was appointed as the
Company's President and Chief Executive Officer. The employment agreement is
for an initial term of six years, which term automatically renews annually if
written notice is not tendered.
Pursuant to the employment agreement, the Company may terminate Mr.
Alexander's employment with or without cause at any time before its term
expires upon providing written notice. In the event the Company terminates
Mr. Alexander's employment without cause, Mr. Alexander would be entitled to
receive a severance amount equal to his annual base salary and benefits for
the balance of the term of his employment agreement. In the event of
termination by reason of Mr. Alexander's death or permanent disability, his
legal representative will be entitled to receive his annual salary and
benefits for the remaining term of his employment agreement. In the event of,
or termination following, a change in control of the Company, as defined in
the agreement, Mr. Alexander would be entitled to receive his annual salary
and benefits for the remainder of the term of his agreement. In the event
that Mr. Alexander is terminated the Company would incur approximately
$600,000 in costs.
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The Company has been notified by the United States Environmental Protection
Agency (EPA) of a final settlement offer to settle its potential liability as
a generator of waste containing hazardous substances that was disposed of at a
waste disposal site in Santa Barbara County. The Company has responded to the
EPA by indicating that the waste contained petroleum products that fall within
the exception to the definition of hazardous substances for petroleum-related
substances of the pertinent EPA regulations. Management has concluded
that under both Federal and State regulations no reasonable basis exists for
any valid claim against the Company. As such, the likelihood of any adverse
settlement is deemed remote.
6. Income Tax Provision
The Company recognized an income tax provision of $58,550 for the first
quarter of 2010 compared to an income tax benefit of $383 for the same period
in 2009. Income tax benefits were realized by the Company in the first
quarter of 2009, due primarily to net operating loss carrybacks.
Income tax provision for the first quarter of 2010 was calculated as
follows:
Federal State Total
-------- --------- --------
Current tax provision $ 17,000 $ 3,000 $ 20,000
Deferred tax provision 29,950 8,600 38,550
------- ------- -------
$ 46,950 $ 11,600 $ 58,550
======= ====== =======
Deferred income taxes are recognized using the asset and liability method by
applying income tax rates to cumulative temporary differences based on when
and how they are expected to affect the tax returns. Deferred tax assets and
liabilities are adjusted for income tax rate changes. Deferred income tax
assets have been offset by a valuation allowance of $1,766,000 as of March 31,
2010. Management reviews deferred income taxes regularly throughout the year,
and accordingly makes any necessary adjustments to properly reflect the
valuation allowance based upon current financial trends and projected results.
7. Severance Award Agreements
On June 4, 2009, the Company and John Alexander entered into a Severance
Award Agreement pursuant to which the Company awarded Mr. Alexander a
supplemental payment in connection with his future severance of employment
with the Company and recorded an increase to stockholders' equity of $209,935.
Pursuant to the Severance Award Agreement and following the termination of Mr.
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Alexander's employment, he will be entitled to receive (at the Company's
option) 25,000 shares of the Company's common stock or the then-fair market
value of the shares. As of June 30, 2009, the Company intends to deliver
the Company's common shares for the Severance Award; therefore, in accordance
with FASB ASC Topic 718, Compensation-Stock Compensation, management has
classified the share-based compensation as stockholders' equity at June 30,
2009.
On December 30, 2008, the Company and John Alexander entered into a Severance
Award Agreement pursuant to which the Company awarded Mr. Alexander a
supplemental payment in connection with his future severance of employment
with the Company and recorded an increase to stockholders' equity of $100,000.
Pursuant to the Severance Award Agreement and following the termination of Mr.
Alexander's employment, he will be entitled to receive (at the Company's
option) 25,000 shares of the Company's common stock or the then-fair market
value of the shares. As of December 31, 2008, the Company intends to deliver
the Company's common shares for the Severance Award; therefore, in accordance
with FASB ASC Topic 718, Compensation-Stock Compensation, management has
classified the share-based compensation as stockholders' equity at December
31, 2008.
8. Incentive and Retention Plan
On January 9, 2007, the Company's Board of Directors adopted an Incentive and
Retention Plan pursuant to which the Company's officers and other employees
selected by the Company's Compensation Committee are entitled to receive
payments if they are employed by the Company as of the date of a 'Corporate
Transaction,' as defined in the Incentive and Retention Plan. A 'Corporate
Transaction' includes certain mergers involving the Company, sales of Company
assets, and other changes in the control of the Company, as specified in the
Incentive and Retention Plan. In general, the amount that is payable to each
plan participant will equal the number of plan units that have been granted to
him or her, multiplied by the increase in the value of the Company between
January 9, 2007 and the date of a Corporate Transaction. There has been no
Corporate Transaction since the adoption of the Incentive and Retention Plan.
9. Related-party Transaction
Effective January 1, 1990, John H. Alexander, an officer and director of the
Company participated with a group of investors that acquired the mineral and
fee interest on one of the Company's oil and gas leases (Santa Fe Energy
lease) in the Carneros Creek field after the Company declined to participate.
The thirty-three percent interest owned by Mr. Alexander represents a minority
interest in the investor group. Royalties on oil and gas production from this
property paid to the investor group approximated $52,000 during the first
quarter of 2010 and $36,000 during the first quarter of 2009.
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10. Warrants Issued
The Company issued warrants to purchase common shares of the Company as
compensation for consulting services. The value of warrants issued for
compensation is accounted for as a non-cash expense to the Company at the fair
value of the warrants issued. The Company values the warrants at fair value
as calculated by using the Black-Scholes option-pricing model.
The following table summarizes the warrant activity for the nine months ended
March 31, 2010:
Number Weighted-Average
(Unaudited) of Warrants Exercise Price
----------- ----------------
Outstanding, December 31, 2009 25,000 $3.20
Granted -- --
Exercised -- --
Cancelled -- --
------ ----
Outstanding, March 31, 2010 25,000 $3.20
====== ====
The following summarizes the warrants issued, outstanding and exercisable as
of March 31, 2010:
Grant Date November, 2008
Strike Price $3.20
Expiration Date November, 2010
Warrants Remaining 25,000
Proceeds if Exercised $80,000
Call Feature None
11. Fair Value
Effective January 1, 2009, we adopted FASB ASC 820 (formerly SFAS No. 157) for
our nonfinancial assets and nonfinancial liabilities measured on a
non-recurring basis. We adopted the provisions of FASB ASC 820 for measuring
the fair value of our financial assets and liabilities during 2008. As
defined in FASB ASC 820, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. We utilize market data
or assumptions that we believe market participants would use in pricing the
asset or liability, including assumptions about risk and the risks inherent in
the inputs to the valuation technique. FASB ASC 820 establishes a
three-tiered fair value hierarchy which prioritizes the inputs used in
measuring fair value as follows:
Level 1 - Observable inputs such as quoted prices in active markets; this
included the Company's short-term investments.
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Level 2 - Inputs, other than quoted prices, that are observable for the
asset or liability, either directly or indirectly. These include quoted prices
for similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active; and
Level 3 - Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions. Included
in this category is the Company's determination of the value of its asset
retirement obligation liability. The obligation has increased $13,127 during
the three months ended March 31, 2010 as a result of normal accretion
expense and the drilling of a new well in the first quarter of 2010.
The carrying amount of our cash and equivalents, accounts receivable, accrued
current liabilities, accounts payable and long term debt reported in the
condensed consolidated balance sheets approximates fair value because of the
short maturity of those instruments.
Note 12. Registration Statement on Form S-3
The Company filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission (SEC) on December 22,2009, that became
effective on January 14, 2010. The registration statement is designed to
provide the Company the flexibility to offer and sell from time to time up to
$20 million of the Company's common stock. The Company may offer and sell
such securities through one or more methods of distribution, subject to market
conditions and the Company's capital needs. The terms of any offering under
the shelf registration statement will be established at the time of such
offering and will be described in a prospectus supplement filed with the SEC
prior to the completion of the offering. The Company has not filed any
supplemental prospectus with the SEC or sold any common stock under this
registration statement.
Note 13. Subsequent Events
During the second quarter of 2010, the Company commenced drilling of a
horizontal well on one of its Mountain View properties in Kern County,
California. The well was drilled to its objective but did not encounter
adequate hydrocarbons to warrant completion of the well. At March 31, 2010,
the Company recorded a valuation allowance of $25,141 for certain costs that
had been incurred prior to the drilling of this well. The Company is
projecting that an additional valuation allowance of approximately $830,000
will be required in the second quarter of 2010 to reflect the costs incurred
for the drilling of this well.
PAGE <17>
Note 14. Assets Retirement Obligations
The Company recognizes a liability at discounted fair value for the future
retirement of tangible long-lived assets and associated assets retirement cost
associated with the petroleum and natural gas properties. The fair value of
the liability is capitalized as part of the cost of the related asset and
amortized to expense over its useful life. The liability accretes until the
date of expected settlement of the retirement obligations. The related
accretion expense is recognized in the statement of operations. The provision
will be revised for the effect of any changes to timing related to cash flow
or undiscounted abandonment costs. Actual expenditures incurred for the
purpose of site reclamation are charged to the asset retirement obligations to
the extent that the liability exists on the balance sheet. Differences between
the actual costs incurred and the fair value of the liability recorded are
recognized in income in the period the actual costs are incurred.
There are no legally restricted assets for the settlement of asset retirement
obligations. A reconciliation of the Company's asset retirement obligations
from the periods presented are as follows:
Balance at December 31, 2009 $1,193,324
Incurred during the period --
Additions for new wells 6,942
Accretion expense 6,185
---------
Balance at March 31, 2010 $1,206,451
=========
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
FORWARD LOOKING INFORMATION
Looking forward into the balance of fiscal 2010, crude oil prices have
decreased by $8.15 per barrel.
During the first quarter, the Company commenced a program of increased
drilling activity on its Kern County, California leases. The first well in
the program was successfully drilled in January on the Company's Anderson
property in the Carneros Creek field. This well was drilled to approximately
3,300 feet, logged and completed, and is now producing at a rate of
approximately 25 barrels per day. A second prospect, a horizontal well
drilled during April in the Company's Mountain View field, did not encounter
hydrocarbons at levels sufficient to justify completion. The well did,
however, provide new geologic information about the Mountain View field, where
the Company currently operates approximately 30 wells. During the third
PAGE <18>
fiscal quarter the Company intends to commence drilling an additional Kern
County prospect, which will either be a new well or a re-drilling of an
existing well.
During the first quarter, the original well in the Company's Texas natural gas
joint venture was horizontally re-drilled into the Eagle Ford formation with a
4,500-foot lateral leg. The well was stimulated with a multi-stage hydraulic
frac, and testing showed oil production in the range of 100-barrels per day.
In late April, drilling operations were begun on a second Eagle Ford formation
horizontal well on the joint venture's farmout property. Results from this
well will be provided after completion and testing.
Management continues to seek and evaluate opportunities within the energy
sector to enhance the value of the Company. Pyramid's growth during the
balance of 2010 will be highly dependant on the level of success the Company
has in its operations and capital investments, including the outcome of wells
that have not yet been drilled. The Company's capital investment program may
be modified during the year due to exploration and development successes or
failures, market conditions and other variables. The production and sales of
oil and gas involves many complex processes that are subject to numerous
uncertainties, including reservoir risk, mechanical failures, human error and
market conditions.
The Company has positioned itself, over the past several years, to withstand
various types of economic uncertainties, with a program of consolidating
operations on certain producing properties and concentrating on properties
that provide the major revenue sources. The drilling of a new well and
several limited work-overs of certain wells have allowed the Company to
maintain its crude oil reserves for the last three years. The Company expects
to maintain its reserve base in 2010 by drilling new wells and routine
maintenance of its existing wells.
The Company may be subject to future costs necessary for compliance with the
new implementation of air and water environmental quality requirements of the
various state and federal governmental agencies. The requirements and costs
are unknown at this time, but management believes that costs could be
significant in some cases. As the scope of the requirements become more
clearly defined, management may be better equipped to determine the true costs
to the Company.
The Company continues to absorb the costs for various state and local fees and
permits under new environmental programs, the sum of which were not material
during 2009 and the first quarter of 2010. The Company retains outside
consultants to assist the Company in maintaining compliance with these
regulations. The Company is actively pursuing an ongoing policy of upgrading
and restoring older properties to comply with current and proposed
environmental regulations. The costs of upgrading and restoring older
properties to comply with environmental regulations have not been determined.
Management believes that these costs will not have a material adverse effect
upon its financial position or results of operations.
19
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Portions of the Quarterly Report, including Management's Discussion and
Analysis, contain forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Company's actual results
and performance in future periods to be materially different from any future
results or performance suggested in forward-looking statements in this
release. Such forward-looking statements speak only as of the date of this
report and the Company expressly disclaims any obligation to update or revise
any forward-looking statements found herein to reflect any changes in Company
expectations or results or any change in events. Factors that could cause
results to differ materially include, but are not limited to: the timing and
extent of changes in commodity prices of oil, gas and electricity,
environmental risk, drilling and operational costs, uncertainties about
estimates of reserves and government regulations.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2010
COMPARED TO THE QUARTER ENDED MARCH 31, 2009
REVENUES
The increase in revenues of $407,694 is due primarily to higher average prices
for the first quarter of 2010. Oil and gas revenues increased by 69% for the
three months ended March 31, 2010 when compared with the same period for 2009.
Oil and gas revenues increased by 82% due to higher average crude oil prices
for the first quarter of 2010. The average price of the Company's oil and gas
for the first quarter of 2010 increased by approximately $36.73 per equivalent
barrel when compared to the same period of 2009. Revenues decreased by
approximately 13% due to lower crude oil production/sales. The Company's net
revenue share of crude oil production decreased by approximately 2,000 barrels
for the first three months of 2010. The decrease in crude oil production is
primarily the result of the decline in production on the Company's Anderson
lease.
OPERATING EXPENSES
Operating expenses decreased by $11,430 for the first quarter of 2010.
Operating expenses decreased by 3% for the first quarter of 2010. The cost
to produce an equivalent barrel of crude oil during the first quarter of
2010 was approximately $25.64 per barrel, an increase of approximately $2.68
per barrel when compared with production costs for the first quarter of 2009.
The decrease in lease operating expenses is caused by many factors. These
include lower costs for labor, contract operations and inventory change. This
was offset by higher costs for waste water disposal, parts and supplies,
production equipment repair and maintenance, equipment fuel and equipment
rental costs.
20
Labor costs decreased by approximately $21,000 due to the capitalization of
labor associated with the drilling of the Anderson No. 10 well in the first
quarter of 2010. Contract operations decreased by approximately $9,500 due to
lower activity for the Texas gas prospect. Inventory change decreased by
approximately $39,000 as compared with the same period of 2009. Inventory
values were higher at March 31, 2010 as compared with the same period in 2009.
Waste water disposal increased by approximately $17,500 due to higher costs at
the Company's Delaney Tunnell lease. Parts and supplies increased by
approximately $16,500 due to an increase in maintenance activities.
Production equipment repair and maintenance increased by approximately $11,500
due to an increase in maintenance activities. Equipment fuel increased by
approximately $5,000 due to higher overall maintenance activities and higher
prices for gasoline and diesel during the first quarter of 2010. Equipment
rental costs increase by approximately $5,000 due primarily to maintenance
activities on the Company's Mullaney lease.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $17,937. Accounting services
decreased by approximately $30,000. This was offset by an increase in
salaries of approximately $6,500.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization decreased by
$8,927 for the first quarter of 2010, when compared with the same period for
2009. The decrease is due primarily to a decrease in depletion of the
Companies oil and gas properties. The decrease in depletion is due primarily
to a decrease in crude oil production for the first quarter of 2010.
VALUATION ALLOWANCES
The valuation allowance of $25,141 at March 31, 2010, reflects the write-down
of certain costs related to a horizontal well that was drilled in the second
quarter of 2010 that did not encounter adequate hydrocarbons to warrant
completion of the well. See Note 13 for additional information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
21
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded, based
on their evaluation as of the end of the period covered by this report, that
our disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.
There was no change in our internal control over financial reporting that
occurred during the quarter ended March 31, 2010 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
22
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
None
Item 1A. - Risk Factors
See the risk factors that are included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2009.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Removed and Reserved
Item 5. - Other Information
None
Item 6. - Exhibits
a. Exhibits
31.1 Certification of the Registrant's Principal Executive Officer
under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Registrant's Principal Financial Officer
under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Registrant's Principal Executive Officer
under 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Registrant's Principal Financial Officer
under 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PYRAMID OIL COMPANY
(registrant)
Dated: May 14, 2010 JOHN H. ALEXANDER
---------------------
John H. Alexander
President
Dated: May 14, 2010 LEE G. CHRISTIANSON
---------------------
Lee G. Christianson
Chief Financial Officer