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 September 30, 2010
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-32989
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
Date 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]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(Class) (Outstanding at November 12,2010)
COMMON STOCK WITHOUT PAR VALUE 4,677,728
2
PYRAMID OIL COMPANY
FORM 10-Q
SEPTEMBER 30, 2010
Table of Contents
Page
----
PART I
Item 1. Financial Statements
Balance Sheets - September 30, 2010
and December 31, 2009 3
Income Statements -
Three months ended September 30, 2010 and 2009 5
Nine months ended September 30, 2010 and 2009 7
Condensed - Statements of Cash Flows -
Nine months ended September 30, 2010 and 2009 9
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 4. Controls and Procedures 23
PART II
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Removed and Reserved 24
Item 5. Other Information 24
Item 6. Exhibits 24
3
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
September 30,
2010 December 31,
(Unaudited) 2009
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $1,677,586 $1,438,825
Short-term investments 3,110,446 3,344,061
Trade accounts receivable 406,751 375,954
Income taxes receivable 4,200 124,281
Crude oil inventory 63,861 62,760
Prepaid expenses and other assets 107,090 169,595
Deferred income taxes 241,400 196,200
------------ ------------
TOTAL CURRENT ASSETS 5,611,334 5,711,676
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oil and gas properties and equipment
(successful efforts method) 17,613,326 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 1,183,114 1,160,617
------------ ------------
22,362,467 20,803,759
Less: accumulated depletion,
depreciation, amortization
and valuation allowance (18,329,833) (17,125,834)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 4,032,634 3,677,925
------------ ------------
OTHER ASSETS
Deposits 250,000 250,000
Deferred income taxes 620,300 485,400
Other assets 17,013 17,013
------------ ------------
TOTAL OTHER ASSETS 887,313 752,413
------------ ------------
TOTAL ASSETS $10,531,281 $10,142,014
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
4
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
2010 December 31,
(Unaudited) 2009
------------ ------------
CURRENT LIABILITIES:
Current debt 905 20,640
Accounts payable $ 160,120 $ 88,170
Accrued professional fees 111,663 138,381
Accrued taxes, other than income taxes 35,661 62,310
Accrued payroll and related costs 72,864 51,606
Accrued royalties payable 172,253 159,933
Accrued insurance -- 54,947
------------ ------------
TOTAL CURRENT LIABILITIES 553,466 575,987
------------ ------------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,219,013 1,193,324
------------ ------------
TOTAL LIABILITIES 1,772,479 1,769,311
------------ ------------
COMMITMENTS (Note 4)
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 1,629,445 1,515,945
Retained earnings 7,129,357 6,856,758
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,758,802 8,372,703
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,531,281 $10,142,014
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
5 PYRAMID OIL COMPANY
INCOME STATEMENT
(UNAUDITED)
Three months ended
September 30,
---------------------------
2010 2009
------------ ------------
REVENUES
Oil and gas sales $1,099,464 $ 945,413
Gain on sale of fixed assets 320,556 --
------------ ------------
1,420,020 945,413
------------ ------------
COSTS AND EXPENSES:
Operating expenses 386,897 346,800
General and administrative 195,838 198,703
Severance award agreement 113,500 --
Taxes, other than income
and payroll taxes 39,654 33,809
Valuation allowances -- --
Provision for depletion,
depreciation and amortization 151,855 150,209
Accretion expense 6,664 5,898
Other costs and expenses 26,403 18,628
------------ ------------
920,811 754,047
------------ ------------
OPERATING INCOME 499,209 191,366
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 13,521 20,508
Other income 3,600 3,600
Interest expense ( 30) (299)
------------ ------------
17,091 23,809
------------ ------------
INCOME BEFORE INCOME
TAX PROVISION (BENEFIT) 516,300 215,175
Income tax provision (benefit)
Current 47,200 ( 43,499)
Deferred 75,300 37,300
----------- ------------
122,500 ( 6,199)
------------ ------------
NET INCOME $ 393,800 $ 221,374
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
6 PYRAMID OIL COMPANY
INCOME STATEMENT
(UNAUDITED)
Three months ended
September 30,
---------------------------
2010 2009
------------ ------------
EARNINGS PER COMMON SHARE
Basic Income
Per Common Share $ 0.08 $ 0.05
============ ============
Diluted Income
Per Common Share $ 0.08 $ 0.05
============ ============
Weighted average number
of common shares outstanding 4,677,728 4,677,728
============ ============
Diluted average number
of common shares outstanding 4,720,014 4,719,004
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
7 PYRAMID OIL COMPANY
INCOME STATEMENT
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2010 2009
------------ ------------
REVENUES
Oil and gas sales $3,329,594 $2,341,359
Gain on sale of fixed assets 320,556 --
------------ ------------
3,650,150 2,341,359
------------ ------------
COSTS AND EXPENSES:
Operating expenses 1,165,209 1,023,339
General and administrative 653,793 653,805
Severance award agreement 113,500 209,935
Taxes, other than income
and payroll taxes 97,313 114,593
Valuation allowances 867,468 --
Provision for depletion,
depreciation and amortization 498,115 468,665
Accretion expense 18,775 17,696
Other costs and expenses 90,946 88,773
------------ ------------
3,505,119 2,576,806
------------ ------------
OPERATING INCOME (LOSS) 145,031 (235,447)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 29,904 68,378
Other income 9,997 10,800
Interest expense ( 333) (1,072)
------------ ------------
39,568 78,106
------------ ------------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION (BENEFIT) 184,599 (157,341)
Income tax provision (benefit)
Current 92,100 (181,082)
Deferred (180,100) 30,500
----------- ------------
( 88,000) (150,582)
------------ ------------
NET INCOME (LOSS) $ 272,599 $ ( 6,759)
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
8 PYRAMID OIL COMPANY
INCOME STATEMENT
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2010 2009
------------ ------------
EARNINGS PER COMMON SHARE
Basic Income (Loss)
Per Common Share $ 0.06 $ --
============ ============
Diluted Income (Loss)
Per Common Share $ 0.06 $ --
============ ============
Weighted average number
of common shares outstanding 4,677,728 4,677,728
============ ============
Diluted average number
of common shares outstanding 4,719,276 4,677,728
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
9
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 272,599 $ ( 6,759)
Adjustments to reconcile net income (loss)
to cash provided by (used in)
operating activities:
Provision for depletion,
depreciation and amortization 498,115 468,665
Gain on sale of fixed assets (320,556) --
Loss on retirement of fixed assets 803 --
Accretion expense 18,775 17,696
Valuation allowances 867,468 --
Severance award agreement 113,500 209,935
Deferred taxes (180,100) 30,500
Changes in assets and liabilities:
Decrease (increase) in trade accounts
and income taxes receivable 89,284 (234,932)
(Increase) decrease in crude oil inventories (1,101) 25,860
Decrease in prepaid expenses 61,605 126,855
Decrease in accounts payable
and accrued liabilities ( 2,786) (339,477)
--------- ---------
Net cash provided by
operating activities 1,417,606 298,343
--------- ---------
The Accompanying Notes Are an Integral Part of These Financial Statements.
10
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2010 2009
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(1,714,181) $ (261,974)
Proceeds from sale of fixed assets 320,556 --
Purchases of short-term investments (550,000) (500,000)
Redemptions of short-term investments 680,000 --
Increase in short-term investments 103,615 ( 51,644)
--------- ---------
Net cash (used in) investing activities (1,160,010) (813,618)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to employees (2,900) (1,200)
Principal payments from loans to employees 3,800 2,400
Principal payments on long-term debt (19,735) (17,837)
--------- --------
Net cash (used in) financing activities (18,835) (16,637)
--------- --------
Net increase (decrease) in cash 238,761 (531,912)
Cash at beginning of period 1,438,825 1,793,563
--------- ---------
Cash at end of period $1,677,586 $1,261,651
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the nine months for interest $ 303 $ 1,072
======== ========
Cash paid during the nine months for income taxes $ 1,100 $191,388
======== ========
The Accompanying Notes Are an Integral Part of These Financial Statements.
11 PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2010 and December 31, 2009 and the
results of its operations and its cash flows for the three and nine month
periods ended September 30, 2010 and 2009. The results of operations for an
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.
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 2007. State
jurisdictions that remain subject to examination range from 2006 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 740, 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.
12
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.
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.
Valuation Allowances
The Company has recorded valuation allowances for certain of its oil and gas
properties when the undiscounted future net cash flows are less than the net
capitalized costs for the property. For the nine months ended September 30,
2010, the Company has recorded a valuation allowance of approximately $867,000
for a well that was drilled and abandoned in the second quarter of 2010. The
well was drilled to its objective but did not encounter adequate hydrocarbons
to warrant completion of the well.
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 nine months ended September 30, 2010
and 2009.
13
4. Commitments and Contingencies
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.
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
settlement is deemed remote.
5. Income Tax Provision
Income tax benefits of $88,000 were realized by the Company for the first
nine months of 2010, due primarily to a valuation allowance for the write-down
of a certain oil and gas property in the amount of $867,468. Income tax
benefits of $150,582 were realized by the Company for the first nine months of
2009, due primarily to a net loss before income tax provision (benefit) for
the nine months ended September 30, 2009 and certain adjustments related to a
true-up of estimates made to the recently filed 2008 tax returns.
Net income tax benefit for the first nine months ended September 30, 2010 was
calculated as follows:
Federal State Total
-------- --------- --------
Current tax provision $ 78,000 $ 14,100 $ 92,100
Deferred tax benefit (140,100) (40,000) (180,100)
------- ------- -------
$( 62,100) $(25,900) $( 88,000)
======= ====== =======
14
Net income tax benefit for the first nine months ended September 30, 2009 was
calculated as follows:
Federal State Total
-------- --------- --------
Current tax provision $( 76,000) $(11,228) $( 87,228)
Tax return true-up (105,311) 11,457 ( 93,854)
Deferred tax benefit 26,000 4,500 30,500
------- ------- -------
$(155,311) $ 4,729 $(150,582)
======= ====== =======
Net income tax provision for the three months ended September 30, 2010 was
calculated as follows:
Federal State Total
-------- --------- --------
Current tax provision $ 40,150 $ 7,050 $ 47,200
Deferred tax benefit 58,800 16,500 75,300
------- ------- -------
$ 98,950 $ 23,550 $ 122,500
======= ====== =======
Net income tax benefit for the three months ended September 30, 2009 was
calculated as follows:
Federal State Total
-------- --------- --------
Current tax provision $ 39,000 $ 11,355 $ 50,355
Tax return true-up (105,311) 11,457 ( 93,854)
Deferred tax benefit 31,800 5,500 37,300
------- ------- -------
$( 34,511) $ 28,312 $( 6,199)
======= ====== =======
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 $1,750,000 as of September
30, 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.
The first quarter tax provision was based on one quarter of the full year
estimate due to the inability to accurately calculate certain tax temporary
differences at that time. As of the second quarter such calculations have
been made.
6. Severance Award Agreements
On September 15, 2010, 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 $113,500
(25,000 shares at $4.54 per share). 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 September 30,
2010, the Company intends to deliver the Company's common shares for the
Severance Award; therefore, in accordance with SFAS 123(R), management has
classified the share-based compensation as stockholders' equity at September
30, 2010.
15
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.
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 SFAS 123(R), 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.
7. 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.
8. 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 $154,000 during the first
nine months of 2010 and $142,000 during the first nine months of 2009.
9. 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.
PAGE <16>
The following table summarizes the warrant activity for the nine months ended
September 30, 2010:
Number Weighted-Average
(Unaudited) of Warrants Exercise Price
----------- ----------------
Outstanding, December 31, 2009 25,000 $3.20
Granted -- --
Exercised -- --
Cancelled -- --
------ ----
Outstanding, September 30, 2010 25,000 $3.20
====== ====
The following summarizes the warrants issued, outstanding and exercisable as
of September 30, 2010:
Grant Date November, 2008
Strike Price $3.20
Expiration Date November, 2011
Warrants Remaining 25,000
Proceeds if Exercised $80,000
Call Feature None
10. 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;
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 $25,689 during
the nine months ended September 30, 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 current debt reported in the
condensed consolidated balance sheets approximates fair value because of the
short maturity of those instruments.
PAGE <17>
Note 11. 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 12. 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 6,914
Accretion expense 18,775
---------
Balance at September 30, 2010 $1,219,013
=========
13. Gain on Sale of Fixed Assets
On July 28, 2010, the Company entered into a Purchase and Sale Agreement for
the sale of a portion of its Texas joint venture leaseholds. Pursuant to the
agreement, the Company agreed to sell to the buyers 5% of the working interest
of the Company's Texas joint venture, subject to certain prior agreements and
encumbrances. The purchase price for the assigned interest is $320,566.
After the sale, the Company continues to own a 7.5% working interest in the
assets. The Company recognized a gain on the sale of the Texas leasehold
interests in the amount of $320,566. The leasehold interests had been
previously fully amortized.
18
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
increased by $8.05 per barrel since September 30, 2010.
Pyramid owns a 30% interest in an 876-acre joint venture prospect in Menard
County, Texas. The Company was notified in late October that a contract
operator has been engaged to manage and operate the prospect. It is expected
that the first well, which well test the Goem Lime formation, will be drilled
before the end of the year.
In late September and early October the Company successfully re-drilled two of
its older wells in the Mountain View field of Kern County, CA. The first well
was completed and the Company is waiting on a down-hole survey to identify and
shut off an area of water entry. The second well has been completed and
perforated and we are currently conducting initial testing. The Company has
plans to do an additional re-drill in the Mountain View field shortly after
the first of the year, depending on rig availability.
Pyramid and Victory Oil Company have agreed in principle to jointly
participate in the drilling of an approximately 4,000-foot test well in the
Taft area of Kern County. The Companies are presently in the process of
finalizing the terms of the joint venture that may involve drilling up to four
wells during the next 12 to 18 months. Pyramid will be the operator of the
project. Victory Oil Company is a 75-year-old privately owned company with a
number of producing properties in Kern County.
The Company was well prepared for, and is effectively managing, the present
economic downturn, as management positioned the Company with no debt and
significant cash reserves. Management continues to believe that during the
next 12 months there will be an expanding range of opportunities to invest in
oil and gas assets at more attractive valuations than have been available
during the past several years.
The Company's growth in 2010 will be highly dependant on the amount 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 explorations 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.
19
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 for the nine months ended September 30, 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.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Portions of this 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.
20
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2010
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2009
REVENUES
The increase in oil and gas sales of $154,051 is due primarily to higher
average prices for the third quarter of 2010 and slightly higher crude oil
production. The average price of the Company's oil and gas for the third
quarter of 2010 increased by $9.30 per equivalent barrel when compared to the
same period for 2009.
On July 28, 2010, the Company entered into a Purchase and Sale Agreement for
the sale of a portion of its Texas joint venture leaseholds. Pursuant to the
agreement, the Company agreed to sell to the buyers 5% of the working interest
of the Company's Texas joint venture, subject to certain prior agreements and
encumbrances. The purchase price for the assigned interest is $320,566.
After the sale, the Company continues to own a 7.5% working interest in the
assets. The Company recognized a gain on the sale of the Texas leasehold
interests in the amount of $320,566. The leasehold interests had been
previously fully amortized.
OPERATING EXPENSES
Operating expenses increased by $40,097 for the third quarter of 2010. The
cost to produce an equivalent barrel of crude oil during the third quarter of
2010 was $25.78 per barrel, an increase of $2.32 per barrel when compared with
production costs for the third quarter of 2009. The increase in lease
operating expenses is caused by many factors. These include higher costs for
parts and supplies, labor and contract operations. This was offset by the
quarterly adjustment for inventory change. Inventory change decreased by
$23,696 when compared with the same period of 2009. Inventory volumes were
lower by 1,000 barrels at September 30, 2009 as compared with the inventory
volumes at June 30, 2009. The inventory volumes at September 30, 2010 were
lower by approximately 100 barrels when compared with the total volume at June
30, 2010.
Parts and supplies increased by $23,221 due to an increase in lease and well
maintenance activities. Company labor increased by $18,822 due primarily to
an increase in both regular and overtime hours worked. Contract operations
increased by $9,073 due to increased activity on the Texas joint venture.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $2,865 for the third quarter
of 2010 when compared with the same period for 2009. Accounting services
decreased by $27,525 due primarily to lower projected audit fees for the third
quarter of 2010 when compared with the same period of 2009. This was offset
by higher fees of $13,305 for consulting services. Consulting services
increased due primarily to fees paid to a third-party geologist who is
reviewing the Company's oil and gas properties for potential well drilling
locations. The remaining unfavorable variance of $11,355 is comprised of many
different items, none of which were significant individually.
21
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by
$1,646 for the three months ended September 30, 2010. The is due primarily to
an increase in depletion of the Company's oil and gas properties.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2009
REVENUES
The increase in revenues of $988,235 is due primarily to higher average prices
for the first nine months of 2010 and slightly higher crude oil production.
The average price of the Company's oil and gas for the first nine months of
2010 increased by $21.78 per equivalent barrel when compared to the same
period for 2009.
On July 28, 2010, the Company entered into a Purchase and Sale Agreement for
the sale of a portion of its Texas joint venture leaseholds. Pursuant to the
agreement, the Company agreed to sell to the buyers 5% of the working interest
of the Company's Texas joint venture, subject to certain prior agreements and
encumbrances. The purchase price for the assigned interest is $320,566.
After the sale, the Company continues to own a 7.5% working interest in the
assets. The Company recognized a gain on the sale of the Texas leasehold
interests in the amount of $320,566. The leasehold interests had been
previously fully amortized.
OPERATING EXPENSES
Operating expenses increased by $141,870 for the nine months ended September
30, 2010. The cost to produce an equivalent barrel of crude oil during the
nine months ended September 30, 2010 was $25.97 per barrel, an increase of
$3.05 per barrel when compared with production costs for the same period of
2009. The increase in lease operating expenses is caused by many factors.
These include higher costs for parts and supplies, waste water disposal,
production equipment repair and maintenance, equipment rental and insurance.
Parts and supplies increased by $63,351 due to an increase in lease and well
maintenance activities during the first nine months of 2010. Waste water
disposal increased by $22,661 due to higher costs at the Company's Delaney
Tunnell lease. Production equipment repair and maintenance increased by
$17,891 due to an increase in maintenance activities. Equipment rental
increased by $16,471 due primarily to maintenance activities on the Company's
Mullaney lease and the rental of a crude oil storage tank in the second
quarter of 2010 for a new well that was drilled on the Anderson lease in the
first quarter of 2010. Insurance expense increased by $14,027 due to higher
costs for workers' compensation and employee health insurance premiums.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by a nominal amount for the
first nine months of 2010 when compared with the same period of 2009. There
were several offsetting changes during the nine months ended September 30,
2010. Major variances included the following. Accounting services decreased
by $52,263 due primarily to lower audit fees. Officers salaries decreased by
$25,000 for the nine months ended September 30, 2010. During June of 2009,
the Board of Directors approved the payment of a bonus of $25,000 to Mr.
Alexander, President. No bonuses were paid during the first nine months of
2010. These were offset by higher costs for consulting services, legal fees
and administrative salaries.
22
Consulting services increased by $28,071 due to fees paid to a third-party
geologist that is reviewing the Company's oil and gas properties for potential
well drilling locations. Legal services increased by $18,656 due primarily to
services related to the Company's filing of its proxy for the 2010 annual
meeting. Administrative salaries increased by $18,278 due to the hiring
of a part-time employee effective August 1, 2009.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by
$29,450 for the nine months ended September 30, 2010 when compared with the
same period for 2009. The increase is due primarily to an increase in
depletion of the Company's oil and gas properties. The per barrel depletion
rates for 2010 are higher than the comparable rates for 2009.
VALUATION ALLOWANCES
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. During the first
nine months of 2010, the Company recorded a valuation allowance of $867,468
for the costs that had been incurred for the drilling of this well.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $238,761 for the nine months ended September 30, 2010.
During the nine months ended September 30, 2010, operating activities provided
cash of $1,417,606. Cash was provided by the redemption of short-term
investments in the amount of $680,000 and proceeds from the sale of fixed
assets of $320,556. Cash was used for the purchase of short-term investments
of $550,000, capital spending of $1,714,181 and payments on long-term debt of
$19,735. See the Statements of Cash Flows for additional detailed
information. The Company had available a line of credit of $500,000 and
short-term investments of $3,110,446 that provided additional liquidity during
the first nine months of 2010.
IMPACT OF CHANGING PRICES
The Company's revenue is affected by crude oil prices paid by the major oil
companies. Average crude oil prices for the first nine of 2010 increased
by approximately 42% ($74.22 per equivalent barrel) when compared with the
same period of 2009. The Company cannot predict the future course of crude
oil prices.
23
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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 three months ended September 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
PYRAMID OIL COMPANY
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
None
Item 5. - Other Information -
None
Item 6. - Exhibits
a. Exhibits
10.1 Severance Award Agreement dated September 21, 2010 between the
Registrant and John H. Alexander.
31.1 Certification of the Registrant's Principal Executive Officer
under Exchange Act Rules 13a-14(a) and 15d-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 15d-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.
25
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: November 12, 2010
JOHN H. ALEXANDER
---------------------
John H. Alexander
President
Dated: November 12, 2010
LEE G. CHRISTIANSON
---------------------
Lee G. Christianson
Chief Financial Officer