UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________________ to ______________________________
Commission File Number: 0-27443
| BAYOU CITY EXPLORATION, INC. |
| (Exact name of registrant as specified in its charter) |
| Nevada | 61-1306702 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| 632 Adams Street, Suite-700, Bowling Green, Kentucky | 42101 |
| (Address of principal executive offices) | (Zip Code) |
| (800) 798-3389 |
| (Registrant’s telephone number, including area code) |
| (Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
Shares outstanding for each class of stock as of the latest practicable date:
| Title or Class | Shares Outstanding on November 6, 2012 |
| Common Stock, $0.005 par value | 990,176 |
PART I FINANCIAL INFORMATION | ||
| ITEM 1. | FINANCIAL STATEMENTS | 1 |
| BALANCE SHEETS AS OF SEPTEMBER 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011 | 1 | |
| STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED) | 2 | |
| STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (UNAUDITED) | 3 | |
| NOTES TO FINANCIAL STATEMENTS (UNAUDITED) | 4 | |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 8 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 14 |
| ITEM 4. | CONTROLS AND PROCEDURES | 15 |
PART II OTHER INFORMATION | ||
| ITEM 1. | LEGAL PROCEEDINGS | 16 |
| ITEM 1A. | RISK FACTORS | 16 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 16 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 16 |
| ITEM 4. | MINE SAFETY DISCLOSURES | 16 |
| ITEM 5. | OTHER INFORMATION | 16 |
| ITEM 6. | EXHIBITS | 16 |
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAYOU CITY EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS: | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 1,579,256 | $ | 1,259,934 | ||||
| Accounts receivable: | ||||||||
| Trade and other | 65,565 | 13,778 | ||||||
| Prepaid expenses and other | 5,520 | 5,520 | ||||||
| TOTAL CURRENT ASSETS | 1,650,341 | 1,279,232 | ||||||
| OIL AND GAS PROPERTIES, NET | 418,557 | 415,149 | ||||||
| OTHER FIXED ASSETS, NET | 21,469 | 25,047 | ||||||
| OTHER INVESTMENTS AT COST | 123,659 | – | ||||||
| INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY | 141,901 | – | ||||||
| TOTAL ASSETS | $ | 2,355,927 | $ | 1,719,428 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued liabilities | $ | 25,911 | $ | 154,705 | ||||
| Accounts payable – related party | 84,906 | 84,906 | ||||||
| Net turnkey partnership obligation | 774,501 | 743,601 | ||||||
| Notes payable - minority shareholders | 100,000 | 100,000 | ||||||
| TOTAL CURRENT LIABILITIES | 985,318 | 1,083,212 | ||||||
| TOTAL LIABILITIES | 985,318 | 1,083,212 | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2012 and December 31, 2011 | – | – | ||||||
| Common stock, $0.005 par value; 150,000,000 shares authorized; 990,176 shares issued and outstanding at September 30, 2012 and 384,393 shares issued and outstanding at December 31, 2011. | 495,018 | 145,018 | ||||||
| Additional paid in capital | 13,414,747 | 13,414,747 | ||||||
| Accumulated deficit | (12,539,156 | ) | (12,923,549 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 1,370,609 | 636,216 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 2,355,927 | $ | 1,719,428 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
BAYOU CITY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Oil and gas sales | $ | 32,824 | $ | 21,822 | $ | 115,018 | $ | 95,864 | ||||||||
| Turnkey drilling contract revenue | 328,696 | 1,009,604 | 1,829,164 | 1,009,604 | ||||||||||||
| TOTAL OPERATING REVENUES | 361,520 | 1,031,426 | 1,944,182 | 1,105,468 | ||||||||||||
| OPERATING COSTS AND EXPENSES: | ||||||||||||||||
| Lease operating expenses and production taxes | 163 | 10,923 | 44,295 | 32,100 | ||||||||||||
| Abandonment and dry hole costs | 66,903 | 1,006 | 66,903 | 23,705 | ||||||||||||
| Depreciation, depletion and amortization | 40,001 | 6,311 | 73,874 | 61,895 | ||||||||||||
| Turnkey drilling contract costs | 123,923 | 589,918 | 775,668 | 589,918 | ||||||||||||
| Marketing costs | 32,666 | 39,463 | 282,844 | 143,790 | ||||||||||||
| General and administrative costs | 123,502 | 119,171 | 456,009 | 435,221 | ||||||||||||
| TOTAL OPERATING COSTS | 387,158 | 766,792 | 1,699,593 | 1,286,629 | ||||||||||||
| OPERATING INCOME (LOSS) | (25,638 | ) | 264,634 | 244,589 | (181,161 | ) | ||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Miscellaneous income (expense) | – | – | (2,364 | ) | 200 | |||||||||||
| Equity in earnings from affiliated company | 61,120 | – | 142,168 | – | ||||||||||||
| NET INCOME BEFORE INCOME TAX PROVISION | 35,482 | 264,634 | 384,393 | (180,961 | ) | |||||||||||
| Income tax provision | – | – | – | – | ||||||||||||
| NET INCOME (LOSS) | $ | 35,482 | $ | 264,634 | $ | 384,393 | $ | (180,961 | ) | |||||||
| NET INCOME (LOSS) PER COMMON SHARE - BASIC | $ | 0.04 | $ | 0.91 | $ | 0.48 | $ | (0.62 | ) | |||||||
| NET INCOME (LOSS) PER COMMON SHARE - DILUTED | $ | 0.04 | $ | 0.91 | $ | 0.48 | $ | (0.62 | ) | |||||||
| Weighted average common shares outstanding - | ||||||||||||||||
| Basic | 990,154 | 290,036 | 798,469 | 290,036 | ||||||||||||
| Diluted | 990,154 | 290,036 | 798,469 | 290,036 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
BAYOU CITY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2012 | 2011 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net (Loss) Income | $ | 384,393 | $ | (180,961 | ) | |||
| Adjustments to reconcile net income to net cash flows used in operating activities: | ||||||||
| Depreciation, depletion, and amortization | 73,874 | 61,895 | ||||||
| Abandonments and dry holes | 66,903 | – | ||||||
| Equity in earnings of affiliated company | (141,901 | ) | – | |||||
| Stock issued for services | 22,500 | – | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable - trade | (51,787 | ) | 11,965 | |||||
| Prepaid expenses and other | – | (30,000 | ) | |||||
| Accounts payable and accrued liabilities | (128,794 | ) | 79,205 | |||||
| Net turnkey partnership obligation | 30,900 | – | ||||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | 256,088 | (57,896 | ) | |||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of oil and gas properties | (140,607 | ) | (457,383 | ) | ||||
| Deferred liability – oil and gas partnerships | – | 1,007,360 | ||||||
| Purchase of investment in BYCX opportunity fund | (123,659 | ) | – | |||||
| NET CASH (USED IN) INVESTING ACTIVITIES | (264,266 | ) | 549,977 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuing stock | 327,500 | – | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 327,500 | – | ||||||
| NET INCREASE IN CASH | 319,321 | 492,081 | ||||||
| CASH AT BEGINNING OF PERIOD | 1,259,934 | 491,708 | ||||||
| CASH AT END OF PERIOD | $ | 1,579,256 | $ | 983,789 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
BAYOU CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2011 and subsequent filings with the SEC.
The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.
Accounts Receivable
Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of September 30, 2012, there were no accounts receivable considered potentially uncollectible.
Managed Limited Partnerships
The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of each limited partnership as its 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.
Consolidation Policy
The financial statements include the accounts of the Company and its wholly owned subsidiary, Rivergreen Financial Group, LLC.
The Company consolidates its interest in joint ventures and partnerships in the oil and gas industry using the ‘proportionate consolidation’ method provided for in Accounting Standards Codification (ASC) Topic 810-10-45-14, Consolidation – Other Presentation Matters. A proportionate consolidation is permitted when the Company does not control the joint venture or partnership but nonetheless exercises significant influence. Under this method, the Company recognizes their proportionate share of each partnership’s assets, liabilities, revenues and expenses, which are included in the appropriate classifications on the Company’s consolidated financial statements.
All significant intercompany transactions of its consolidated subsidiary and the limited partnerships are eliminated.
| 4 |
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 production 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 exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, 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 September 30, 2012 and December 31, 2011 the Company had $0 in capitalized costs pending determination.
Other Dispositions
Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.
Impairment of Long-Lived Assets
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 ASC 932-235, “Disclosures about Oil and Gas Producing Activities.”
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 statements of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.
Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.
| 5 |
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 account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At September 30, 2012, the cash balances were at $1,579,256.
Offering Related Expenses
The Company expenses marketing-related offering expenses as these are incurred. Marketing expenses totaled $282,844 and $143,790 in the nine months ended September 30, 2012 and 2011, 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.
3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Sale of Common Stock to Related Parties
On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 70,000,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private offering (the “Offering”) at a price of $0.005 per share, for total consideration to the Company valued at $350,000. The Investors included Charles T. Bukowski, Jr., the Company’s President and Chief Executive Officer, as well as a member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s Chief Financial Officer and a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder and G2 International, Inc., a consultant to the Company. Of the $350,000, $327,500 was collected in cash and $22,500 was issued in satisfaction of payment for consulting services.
As of September 30, 2012, there were 990,176 shares of common stock issued and outstanding. Stephen C. Larkin, Director and Chief Financial Officer of the Company, beneficially owns approximately 27.06% of the issued and outstanding Common Stock as a result of his purchase in the Offering.
Payables and Notes Payable to Related Parties
As of September 30, 2012 and December 31, 2011, the Company had the following debts and obligations to related parties:
| September 30, 2012 | December 31, 2011 | |||||||
| Note Payable to a minority shareholder | $ | 100,000 | $ | 100,000 | ||||
| Total Note Payable to a minority shareholder | $ | 100,000 | $ | 100,000 | ||||
During the fourth quarter 2007, Peter Chen, a minority shareholder, loaned the Company $100,000 to finance the Company’s operations. The Company executed a written promissory note on October 4, 2007 which is due on demand and bears an interest rate of 0%.
| 6 |
Partnership Interest in Affiliated Entity
In April 2011, the Company acquired a 25% ownership interest in Affiliated Partners, a general partnership formed for the purpose of holding an 80% interest in Loanmod, LLC, a Delaware limited liability company (“Loanmod”). Affiliated Partners is also owned by our Chief Financial Officer and director, Stephen Larkin (50%) and our director, Travis Creed (25%). The Company acquired its interest in Affiliated Partners in exchange for its agreement to serve as the managing member and investment manager of the Opportunity Fund VII, LLC, a Delaware limited liability company (the “Opportunity Fund”), which invests in mortgage notes and land contracts secured by real estate (the “Mortgages and Contracts”). The purchases of Mortgages and Contracts by the Opportunity Fund are facilitated by Loanmod, which receives income as a result in connection with its acquisition of Mortgages and Contracts for the Opportunity Fund. During the nine months ended September 30, 2012, the Company received income of $142,168 from its Affiliated Partners Interest.
4. OIL AND GAS PROPERTIES
Oil and Gas properties, stated at cost, consisted of the following:
| September 30, 2012 | December 31, 2011 | |||||||
| Proved oil and gas properties | $ | 113,462 | $ | 434,289 | ||||
| Investment in partnerships | 558,575 | 207,280 | ||||||
| Investment in undeveloped leases in Illinois Basin | 190,000 | 190,000 | ||||||
| Total oil and gas properties | 862,037 | 831,569 | ||||||
| Less accumulated depletion and amortization | (443,460 | ) | (416,420 | ) | ||||
| Less impairment | – | – | ||||||
| Net oil and gas properties | $ | 418,577 | $ | 415,149 | ||||
5. COMMITMENTS AND CONTINGENCIES
Commitments
As of September 30, 2012, neither the Company nor any of its properties is subject to any material pending legal proceedings.
Contingencies
As the managing general partner of the Company’s investment partnerships, the Company’s operations are subject to environmental protection regulations established by federal, state, and local agencies that may necessitate significant capital outlays that, in turn, would materially affect the financial position and business operations of the Company. These regulations, enacted to protect against waste, conserve natural resources and prevent pollution, could necessitate spending funds on environmental protection measures, rather than on drilling operations. 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 Company’s operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed on the Company for violating such regulations, the Company’s operations could be adversely affected.
6. STOCKHOLDERS’ EQUITY
Authorization to Issue Shares — Preferred and Common
The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As of September 30, 2012, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as Common Stock, of which 990,176 were outstanding, and 5,000,000 shares designated as preferred stock, of which no shares were outstanding.
Issuance of Equity Securities
As described in Note 3 above, on March 8, 2012, the Company conducted a private Offering pursuant to which the Company sold 70,000,000 shares of the Company’s Common Stock for total consideration to the Company valued at $350,000. The consideration for the Common Stock was paid primarily in cash, however, the shares issued to one Investor were issued in exchange for settlement of outstanding invoices for consulting services rendered.
| 7 |
During the three months ended September 30, 2012, the Company did not issue any equity securities.
Stock Options
During the three months ended September 30, 2012, the Company did not issue any options to purchase shares of the Company’s Common Stock, and no outstanding options were exercised during this period.
Reverse Split of Common Stock
On June 26, 2012, the Company’s Board unanimously adopted resolutions declaring the advisability of, and recommending that stockholders approve, an amendment to the Company’s Articles of Incorporation (the “Amendment”) to effect a 1-for-100 reverse split of the issued and outstanding shares of the Company’s Common Stock (the “Reverse Split”). In connection with the adoption of this resolution, the Board elected to seek the written consent of the holders of a majority of the Company’s issued and outstanding shares of Common Stock in order to reduce the costs and implement the proposals in a timely manner.
On June 26, 2012, shareholders holding 55,560,905 shares of the Company’s issued and outstanding Common Stock (approximately 56.1%), consented to the proposed amendment, which became effective on July 26, 2012. As of September 30, 2012, the Company had 990,176 shares of Common Stock outstanding.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We urge you to read the following discussion in conjunction with management’s discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011 as well as with our condensed consolidated financial statements and the notes thereto included elsewhere herein.
Caution Regarding Forward-Looking Statements
Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q (this “Report”), we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance and our anticipated growth, descriptions of our strategies, and other objectives, expectations and intentions, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.
We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC or changes in costs associated with our operations. We undertake no obligation to revise or update any forward-looking statement for any reason.
Overview
Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated, and subsequently changed its name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name again to Bayou City Exploration, Inc. The Company’s corporate headquarters are located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101.
The Company is engaged in the oil and gas business, and primarily operates in the gulf coast of Texas, East Texas, South Texas and Louisiana. The Company also serves as the Managing Member and Investment Manager of the Opportunity Fund VII, LLC, a Delaware limited liability company formed to acquire a portfolio of mortgage notes and land contracts secured by real estate (the “Mortgages and Contracts”).Nevertheless, the Company’s primary focus is the management of partnerships that are created to explore and develop oil and gas reserves. Pursuant to our current business plan, the Company manages partnerships that purchase interests in exploratory wells as well as interests in producing oil and gas properties with undrilled reserves. Our growth strategy is based on selling partnership interests to third party investors who will essentially assume the costs associated with the drilling of wells in exchange for interests in a partnership that holds working interest in the wells they finance. We act as the Managing General Partner for these partnerships and typically maintain a 10% interest in such partnerships, and may also maintain a working interest position outside of the partnership in each well or program, for which we pay our proportionate share of the actual cost of drilling, testing, and completing the program well(s) and subsequent operating expenses to the extent that we retain a portion of the working interest. We believe this strategy will reduce the financial risk for the Company in drilling new wells, while still receiving income from present production in addition to income from any new successful new drilling.
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When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the well(s). We then form and sell units in a partnership that will acquire working interest in the well(s) and undertake drilling operations. The Company typically enters into turnkey contracts (“Turnkey Contracts”) with each partnership it manages, pursuant to which we agree to undertake the drilling and completion of each partnership’s well(s), for a fixed price, to a specific formation or depth. As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells that the Company records as revenue.
As of September 30, 2012, the Company had total assets of $2,355,927, total liabilities of $985,318 and stockholders’ equity of $1,370,609. The Company had a net income of $384,393 for the nine months ended September 30, 2012 compared to a net loss of $180,961 during the nine months ended September 30, 2011. The net income per common share was $0.48 per share during the nine months ended September 30, 2012 as compared to net loss per common share of ($0.62) during the same period in 2011. All per share data in this report has been adjusted to give effect to applicable stock issues and conversions.
All of the Company’s periodic report filings with the SEC pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101 or call (800) 798-3389.
Formation of Investment Partnerships
During the three months ended September 30, 2012, we served as the managing general partner of eight limited partnerships formed for the purpose of oil and gas exploration and drilling. The Company has entered into Turnkey Contracts with each of the partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).
The 2011 Bayou City Two Well Drilling Program, L.P. (the “2011 Drilling Program”) was formed in Kentucky on January 10, 2011, and planned to acquire up to a 2.125% working interest in two oil and gas wells known as the Miller Prospect Well and the Squeeze Box Prospect Well in Colorado County, Texas. The 2011 Drilling Program has acquired a 1.78% working interest in the wells. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $327,750 in Turnkey Fees associated with the 2011 Drilling Program. The Company has realized a profit of $197,253 from the Turnkey Fees received as of September 30, 2012.
The 2011-B Bayou City Two Well Drilling Program, L.P. (the “2011-B Drilling Program”) was formed in Kentucky on March 4, 2011 to acquire a 5% working interest in two oil wells, the Friesian Prospect, located in Colorado County, Texas and the Little Chenier Well, located in Cameron Parish, Louisiana. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $818,289 in Turnkey Fees associated with the 2011-B Drilling Program. The Company realized a profit of $457,758 from the Turnkey Fees received as of September 30, 2012.
The 2011 Bayou City Drilling & Production Program, L.P. (the “Drilling and Production Program”) was formed on March 18, 2011 to acquire a 2.875% working interest in the same two wells as the 2011 and 2011-B Drilling Programs. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $529,000 in Turnkey Fees associated with the Drilling and Production Program. The Company realized a profit of $343,677 from the Turnkey Fees received as of September 30, 2012.
The 2011-C Bayou City Offset Drilling Program, L.P. (the “2011-C Drilling Program”) was formed in Kentucky on April 12, 2011 to acquire up to a 5% working interest in the Kleimann #1 Well, located in Colorado County, Texas. The 2011-C Drilling Program ended up only acquiring a 2.625% working interest in the Kleimann #1 well. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership well. At September 30, 2012, the Company had received $234,938 in Turnkey Fees associated with the 2011-C Drilling Program. The Company realized a profit of $137,865 from the Turnkey Fees received as of September 30, 2012.
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The 2011-D Bayou City Two Well Drilling Program, L.P. (the “2011-D Drilling Program) was formed in Kentucky on May 10, 2011 to acquire a 5% working interest in the Prairie Bell West Prospect Well and the Prairie Bell East Prospect Well located in Colorado County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $949,924 in Turnkey Fees associated with the 2011-D Drilling Program. The Company realized a profit of $524,958 from the Turnkey Fees received as of September 30, 2012.
The 2011 Bayou City Year End Drilling Program, L.P. (“2011 Year End Program”) was formed in Kentucky on September 13, 2011 to acquire a 6.48% working interest in the Loma Blanca Well located in Brooks County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $1,801,500 in Turnkey Fees associated with the 2011 Year End Program. The Company realized a profit of $956,462 from the Turnkey Fees received as of September 30, 2012.
The 2012-A Bayou City Year Drilling Program, L.P. (“2012-A Program”) was formed in Kentucky on December 13, 2011 to acquire an 8.33% working interest in the Altair Well located in Colorado County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $1,500,000 in Turnkey Fees associated with the 2012-A Year End Program. The Company has not realized a profit as of September 30, 2012.
The 2012 Bayou City Squeezebox Offset Program, L.P. (“2012 Squeezebox Offset”) was formed in Kentucky on March 13, 2012 to acquire up to a 5% working interest in the Squeezebox Shallow well located in Cameron Parrish, Louisiana. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At September 30, 2012, the Company had received $351,500 in Turnkey Fees associated with the 2012 Squeezebox Offset program. To date the 2012 Squeezebox Offset has acquired a 2.08% working interest and does not plan to acquire any additional interest in the well. The Company has realized a profit of $283,011 from Turnkey Fees as of September 30, 2012.
The Opportunity Fund VII, LLC and Affiliated Partners
In April 2011, the Company acquired a 25% ownership interest in Affiliated Partners, a general partnership formed for the purpose of holding an 80% interest in Loanmod, LLC, a Delaware limited liability company (“Loanmod”). Affiliated Partners is also owned by our President, Stephen Larkin (50%) and our director, Travis Creed (25%). The Company acquired its interest in Affiliated Partners in exchange for its agreement to serve as the managing member and investment manager of the Opportunity Fund VII, LLC, a Delaware limited liability company (the “Opportunity Fund”), which invests in mortgage notes and land contracts secured by real estate (the “Mortgages and Contracts”). The purchases of Mortgages and Contracts by the Opportunity Fund are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgages and Contracts for the Opportunity Fund. In the event that the Opportunity Fund acquires Mortgages and Contracts from an unaffiliated party, the Company is entitled to a transaction feed from the Opportunity Fund equal to 2.5% of the purchase price of all Mortgages and Contracts acquired from such third party. During the nine months ended September 30, 2012, the Company received income of $142,168 from its Affiliated Partners Interest.
Description of Properties
The following are the primary properties held by the Company as of September 30, 2012:
Developed Properties
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 stopped producing in April 2012, and has since been plugged and abandoned.
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Garcitas #1: The Company owns an 11.2% working interest in 1 well located in Jackson & Victoria County, Texas, which began production in March 2010. The well produces approximately 6 barrels of oil (“Bbls”) per day as of the date of this Report.
Rooke B-1: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in February 2010. The well stopped producing in September 2012 and is in the process of being re-completed.
Rooke #2: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in May 2010. The well produces approximately 6 Bbls per day as of the date of this Report.
Miller A-1: The Company owns a 0.81% working interest in the Miller A-1, a gas well is located in Colorado County, Texas, which began production in August 2011. The well was subsequently recompleted but has ceased production. We expect the well will be plugged and abandoned.
Kleimann #1: The Company owns a 0.26% working interest in the Kleimann #1, a well located in Colorado County, Texas, which began production in March 2012. The well is currently producing approximately 176 Mcf of natural gas and 11 Bbls per day as of the date of this Report.
Squeeze Box: The Company owns a 0.78% working interest in the Squeezebox well, a gas well located in Cameron Parish, Louisiana, which began production in November 2011. The well produces approximately 1,472 Mcf of natural gas and 6 Bbls per day as of the date of this Report.
Little Chenier: The Company owns a 0.50% working interest in the Little Chenier well, a gas well located in Cameron Parish, Louisiana. The well stopped producing in September 2012 and the Company is evaluating whether or not to conduct additional operations.
Prairie Bell East: The Company owns a 0.49% working interest in the Prairie Bell East well, a gas well located in Colorado County, Texas, which began production in February 2012. The well produces approximately 1,847 Mcf of natural gas and 64 Bbls per day as of the date of this Report.
Prairie Bell West: The Company owns a 0.49% working interest in the Prairie Bell West well, which is located in Colorado County, Texas. After a pipeline was built, attempts to bring the well to production were unsuccessful. The well is scheduled to be plugged and abandoned.
Loma Blanca: The Company owns a 0.59% working interest in the Loma Blanca well, which is located in Brookes County, Texas. The well was completed and production began as of August 2012, but no revenue was received during the period covered in this Report.
Koehn #2: The Company owns an 11.0% working interest in the Koehn #2 well, which is located in Colorado County, Texas. The well has been completed and production revenue is anticipated in the fourth quarter 2012.
Key Undeveloped Properties
On August 29, 2011, the Company invested $190,000 and entered into the Next Energy Illinois Basin Oil & Gas Lease Development JV (“Next Energy JV”), a joint venture with Next Energy, LLC and other industry participants to evaluate, test and purchase mineral leases in the Illinois Basin. The venture is targeting up to 300,000 net acres of oil and gas leases. The investment entitles the Company to a 0.005% interest in the Next Energy JV. The Company does not own a direct interest in any of the acreage, but rather an interest in a joint venture that holds undeveloped acreage.
Critical Accounting Policies
Since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, there have been no changes to the Company’s Critical Accounting Policies.
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Results of Operations
Comparison of Three Month Periods Ended September 30, 2012 and September 30, 2011
The Company had a net income of $35,482 for the three months ended September 30, 2012 compared to a net income of $264,634 for the same period in 2011. The income per common share was $0.04 during the third quarter of 2012 compared to a loss per common share of $0.91 during the third quarter of 2011. The change in net income in the third quarter of 2012 was primarily the result of more Turnkey Contract revenue being recognized in 2011 than in 2012, offset by an increase in dry hole and abandonment costs. Expenses from the third quarter of 2011 to the third quarter of 2012 include a$465,995 decrease in Turnkey Contract drilling costs, a $6,797 decrease in marketing costs, a $33,690 increase in depreciation, depletion and amortization expense, a $10,760 decrease in lease operating expenses and production taxes, a $65,897 increase in abandonment and dry hole costs, and a $4,331 increase in general and administrative costs.
Operating Revenues
The Company’s operating revenues decreased $669,906 in the three months ended September 30, 2012 as compared to the same period in 2011. This significant decrease was primarily a result of recognizing $680,908 more income from Turnkey Fees in the third quarter of 2011 than recognized during the same period in 2012. However, revenues from the oil and gas production increased $11,002 during the third quarter of 2012 as compared to the same period in 2011 due to an increase of wells being in production.
Operating Costs and Expenses
The Company’s total operating costs decreased $379,634 from three months ended September 30, 2011 compared to the three months ended September 30, 2012. The decrease in total costs was primarily a result of $589,918 in Turnkey Contract costs being recognized in 2011 compared to $123,923 in 2012. In addition, direct operating costs (reflected as lease operating expenses and production taxes on the Company’s statement of operations) were $163 for the three months ended September 30, 2012 as compared to $10,923 during the three months ended September 30, 2011, and marketing costs decreased $6,797 during the third quarter of 2012 as compared to the same period in 2011. In addition, the Company saw decreases of $10,760 in lease operating expsense increases of $65,897 in abandonment and dry hole costs and $33,690 in depreciation, depletion and amortization costs during the period as compared to the three months ended September 30, 2011.
The Company’s decreases in Turnkey Contract drilling costs, marketing costs and operating costs and expenses were offset by increases of $65,897 in abandonment and dry hole costs, $33,690 in abandonment and dry hole costs, and a $4,331 increase in general and administrative expenses in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.
Other Income
During the three months ended September 30, 2012, the Company recognized $61,120 in income from Affiliated Partners. The Company did not hold an interest in Affiliated Partners during the three months ended September 30, 2011. The income recognized during the period was the result of revenues generated by Loanmod in connection with acquisitions of Mortgages and Contracts by the Opportunity Fund. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” in the Company’s footnotes to this Report.
Comparison of the Nine Month Periods Ended September 30, 2012 and September 30, 2011
The Company had a net income of $384,393 for the nine months ended September 30, 2012 compared to a net loss of $180,961 for the same period in 2011, an $565,354 increase from period to period. The income per common share was $0.48 during the nine months of 2012 compared to a loss per common share of ($0.62) during the same period of 2011. The increase in net income in the first nine months of 2012 was primarily the result of increased net income recognized from Turnkey Contracts with limited partnerships the Company manages. Operating costs and expenses from the first nine months of 2011 to the first nine months of 2012 increased from $1,286,629 for the nine months ended September 30, 2011 to $1,699,593 for the same period of 2012. These increases are comprised of a $139,054 increase in marketing costs, a $20,788 increase in general and administrative costs, an $11,979 increase in depreciation, depletion and amortization expense, an increase of $43,198 in abandonment and dry hole costs, a $12,195 increase in lease operating expenses and production taxes.
Operating Revenues
The Company’s operating revenues increased $838,714 in the nine months ended September 30, 2012 as compared to the same period in 2011. This increase was primarily a result of $1,829,164 of revenue in Turnkey Fees during the nine month period ended September 30, 2012, compared to $1,009,604 during the same period in 2011. In addition, operating revenues increased $19,154 from the first nine months of 2011 to the first nine months of 2012 as a result of oil and gas sales by the partnerships managed by the Company. This increase was largely due to the fact that the Company received revenues from a greater number of wells it managed during the first nine months of 2012 as compared to the nine months ended September 30, 2011.
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Operating Costs and Expenses
The Company’s total operating costs increased $412,964 from nine months ended September 30, 2011 compared to the nine months ended September 30, 2012. The rise in total costs was primarily a result of an increase of $185,750 in costs associated with the Company’s performance of Turnkey Contracts associated with the limited partnership it manages, coupled with increases in all facets of the Company’s operations during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2012, including a $139,054 increase in marketing costs associated with the partnerships we sponsor, a $12,195 increase in direct operating costs, a $43,198 increase in abandonment and dry hole costs, an $11,979 increase in depreciation, depletion and amortization expense and a $20,788 increase in general and administrative costs.
Turnkey Contract drilling costs accounted for $775,668 of the Company’s total operating costs for the nine months ended September 30, 2012, whereas the Company had $589,918 in expenses associated with Turnkey Contracts during the same period of 2011. In addition, we saw a $139,054 increase in the Company’s marketing costs during the nine month period with $282,844 in marketing costs during the nine months ended September 30, 2012 compared to $143,790 during the nine months ended September 30, 2011. This increase was primarily due to increased broker-dealer fees paid as a result of the Company’s sponsorship of a greater number of partnerships during 2012. The Company’s general and administrative expenses increased to $456,009 for the first nine months 2012 as compared to $435,221 for the first nine months of 2011. The increase in general and administrative expenses resulted primarily from a $38,181 increase in auditing fees during the first nine months of 2012 due to the consolidation of the Company’s partnerships and certain affiliates for reporting purposes.
Direct operating costs are reflected as lease operating expenses and production taxes on the Company’s statement of operations and were $44,295 for the nine months ended September 30, 2012 as compared to $32,100 during the nine months ended September 30, 2011. These costs increased $12,195 during the period because the Company owned interests in nine producing oil and gas wells that were in operation during the nine months of 2012, whereas during the same period in 2011, the Company only held interest in four operating wells in which reserves were depleting.
In addition, the Company saw increases in both abandonment and dry hole costs, which increased from $23,705 for the nine months ended September 30, 2011 to $66,903 for the nine months ended September 30, 2012, and depreciation, depletion and amortization costs which increased from $61,895 for the nine months ended September 30, 2011 to $73,874 for the nine months ended September 30, 2012. Both increases were primarily attributable to the Company’s management of a greater number of oil and gas wells in 2012.
Other Income
During the nine months ended September 30, 2012, the Company recognized $142,168 in income from Affiliated Partners. The Company did not hold an interest in Affiliated Partners during the nine months ended September 30, 2011. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” in the Company’s footnotes to this Report.
Balance Sheet Review
Assets: The Company’s total assets increased $636,499 from $1,719,428 for the year ended December 31, 2011 to $2,355,927 for the period ended September 30, 2012.
The primary reason for the increase in the Company’s current assets was due to the $265,560 increase in investments the Company made as well as an increase of $319,322 in cash, which was attributable to income from Turnkey Fees and the proceeds from the sale of its Common Stock.
In addition, the Company saw two significant increases in its total assets as a result of new business operations. During the period the Company recognized $123,659 in other investments at cost, as a result of its direct purchase of an oil and gas well. In addition, the Company realized $141,901 of investment income derived from its interest in Affiliated Partners, described above.
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Liabilities: The Company’s total liabilities decreased $97,894 from $1,083,212 for the year ended December 31, 2011 to $985,318 for the quarter ended September 30, 2012. The decrease in liabilities was primarily a result of a decrease in accounts payable and accrued expenses by $128,794 from $154,705 at year end to $25,911 at September 30, 2012, and an increase of $30,900 in net turnkey partnership obligations owed by the Company at September 30, 2012 as compared to December 31, 2011, as a result of the Company’s sponsorship of additional partnerships over the nine month period.
Liquidity and Capital Resources
The Company’s liquidity position has significantly improved as a result of the Company’s implementation of its current business plan, in which the Company sponsors and serves as managing general partner of limited partnerships formed for the purpose of conducting oil and gas exploration and production operations. As a result of its formation and sponsorship of such limited partnerships, the Company has received Turnkey Fees from Turnkey Contracts in addition to increased revenues from oil and gas production. The Company intends to continue to sponsor such partnerships and receive revenues from similar turnkey arrangements in order to fund its operations. The Company’s ability to continue and maintain profitable operations is contingent upon its continued ability to sponsor additional partnerships and earn Turnkey Fees. In addition, the Company believes it will continue to earn revenue from its direct oil and gas holdings, including holdings from the oil and gas limited partnerships it manages. The total production capability of the nine currently producing wells and their cash flows is known, and diminishing. Revenues from currently producing wells will not be sufficient to sustain the Company’s operations on a going forward basis. Based on the Company’s projected expenses, we believe our current cash resources are sufficient to fund operations for at least the next twelve months.
As of September 30, 2012, the Company’s cash balance was $1,579,256 and its liabilities totaled $985,318, which include $774,501 in partnership obligations pursuant to its Turnkey Contracts with the partnerships it manages, as well as $25,911 in accounts payable and accrued expenses, $84,906 in related party accounts payable, and $100,000 in a note payable to a minority shareholder. Cash on hand at June 30, 2012, was primarily from Turnkey Fees received from the partnerships the Company manages and cash provided by financing activities, offset by costs associated with the purchase of oil and gas properties.
Net cash provided by operating activities during the nine months ended September 30, 2012 was $256,088. The $384,393 in net income from the first nine months of 2012 was primarily a result of the Company’s 2011 Bayou City Year End Drilling Program and 2012 Squeeze Box Offset Program (“Squeezebox”) Turnkey Fees being recognized as income. The Company’s $384,393 in net income was offset, in part, by a $66,903 charge for abandonments and dry holes, which was paid by the Company with respect to its Squeezebox program, in which the Company held a working interest in a well outside of a partnership and was required to pay costs associated with plugging and abandoning a dry hole. Net income was further offset by $141,901 in earnings of the Company from its affiliate, Affiliated Partners for which the Company has not yet received payment. In addition, accounts payable and accrued liabilities offset income by $128,794 during the nine months ended September 30, 2012. Net cash used in investing activities was $264,266 during the nine months ended September 30, 2012, which was a result of the purchase of oil and gas properties The Company used $264,266 over the nine month period for investing activities, comprised of $140,607 for the purchase of oil and gas properties and $123,659 for an investment in Bayou City Exploration Opportunity Fund, L.P., a partnership sponsored by the Company.
In addition, the Company recognized $327,500 in cash proceeds from the issuance of 70,000,000 shares of its Common Stock to eight investors in a private transaction during the quarter ended March 31, 2012. As a result of increases in cash from operating activities and financing activities, offset by cash used in investing activities, the Company saw a $319,321 net increase in cash during the period ended September 30, 2012.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer and principal financial officer, conducted an evaluation with the participation of our management of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2012, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, our principal executive officer, our principal financial officer and our management concluded that the Company's disclosure controls and procedures as of September 30, 2012 were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during our first nine months ended September 30, 2012 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our principal executive officer and principal financial officer with reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There are no unreported sales of unregistered securities during the quarter ended September 30, 2012.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q or are incorporated by reference as described below.
| Exhibit | Description |
| 31.1 | Certification of Principal Executive Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a). |
| 31.2 | Certification of Principal Financial Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a). |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. |
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
| 101.1 | Interactive data files pursuant to Rule 405 of Regulation S-T. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BAYOU CITY EXPLORATION, INC | |
| Date: November 16, 2012 | /s/ Charles T. Bukowski |
| Charles T. Bukowski | |
| Chief Executive Officer and President (Principal Executive Officer and Authorized Signatory) | |
| Date: November 16, 2012 | /s/ Stephen C. Larkin |
| Stephen C. Larkin | |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
17
EXHIBIT 31.1
SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Charles T. Bukowski, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2012 of Bayou City Exploration, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal controls over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 16, 2012 | /s/Charles T, Bukowski |
| Charles T. Bukowski | |
| Chief Executive Officer and President |
EXHIBIT 31.2
SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Stephen C. Larkin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2012 of Bayou City Exploration, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal controls over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
| Date: November 16, 2012 | /s/ Stephen C. Larkin |
| Stephen C. Larkin | |
| Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bayou City Exploration, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles T. Bukowski, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company |
/s/ Charles T. Bukowski
Charles T. Bukowski
Chief Executive Officer and President
November 16, 2012
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bayou City Exploration, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen C. Larkin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
| 1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company |
/s/ Stephen C. Larkin
Stephen C. Larkin
Chief Financial Officer
November 16, 2012
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4. OIL AND GAS PROPERTIES
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2012
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| Extractive Industries [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NOTE 4 - OIL AND GAS PROPERTIES | Oil and Gas properties, stated at cost, consisted of the following:
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