10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

£ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

or

£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 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 No.)
632 Adams Street — Suite 700, Bowling Green, KY	42101
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:            (270) 842-2421

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

Common Stock, $0.005 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes o  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes £  No þ

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 the definitions of “large accelerated filer,” “accelerated Filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (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 Act). Yes o  No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012, the last day of the registrant’s most recently completed second quarter, was $870,129.

As of March 21, 2013 the registrant had 990,230 shares of Common Stock, par value $0.005 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE     None.

FORM 10-K

TABLE OF CONTENTS

PART I		2
ITEM 1.	BUSINESS	2
ITEM 1A.	RISK FACTORS	7
ITEM 1B.	UNRESOLVED STAFF COMMENTS	7
ITEM 2.	PROPERTIES	7
ITEM 3.	LEGAL PROCEEDINGS	11
ITEM 4.	MINE SAFETY DISCLOSURES	11
PART II		11
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	11
ITEM 6.	SELECTED FINANCIAL DATA	12
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
ITEM 8.	FINANCIAL STATEMENTS and supplementary data	16
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	16
ITEM 9a.	CONTROLS AND PROCEDURES	16
ITEM 9B.	OTHER INFORMATION	18
PART III		18
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	18
ITEM 11.	EXECUTIVE COMPENSATION	19
ITEM 12.	SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	21
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	22
ITEM 14.	PRINCIPAL ACCOUNTANTing FEES AND SERVICES	23
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	23
SIGNATURES		26

i

INTRODUCTORY COMMENT

Throughout this Annual Report on Form 10-K (this "Report”), the terms “we,” “us,” “our,” or the “Company” refers to Bayou City Exploration, Inc., a Nevada corporation.

FORWARD LOOKING STATEMENTS

When used in this Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “intend,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding events, conditions and financial trends which may affect the Company’s future plans of operations, business strategy, operating results and financial position. Such statements are not guarantees of future performance and are subject to risks and uncertainties described herein and actual results may differ materially from those included within the forward-looking statements. Additional factors are described in the Company’s other public reports and filings with the Securities and Exchange Commission (the “SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

This Report contains certain estimates and plans related to us and the industry in which we operate, which assume certain events, trends and activities will occur and the projected information based on those assumptions. We do not know that all of our assumptions are accurate. If our assumptions are wrong about any events, trends and activities, then our estimates for future growth for our business may also be wrong. There can be no assurance that any of our estimates as to our business growth will be achieved.

The following discussion and analysis should be read in conjunction with our financial statements and the notes associated with them contained elsewhere in this Report. This discussion should not be construed to imply that the results discussed in this Report will necessarily continue into the future or that any conclusion reached in this Report will necessarily be indicative of actual operating results in the future. The discussion represents only the best assessment of management.

1

PART I

ITEM 1.               business

Development of the Company

Bayou City Exploration, Inc., a Nevada corporation (the “Company”), was organized in November 1994, as Gem Source, Incorporated and in June 1996 changed its name to Blue Ridge Energy, Inc. On June 8, 2005, the Company again changed its name to Bayou City Exploration, Inc.

Overview of Business

The Company is primarily engaged in the oil and gas exploration business, and focuses its operations in the gulf coast of Texas, east Texas, south Texas, and Louisiana. The Company also serves as the Managing Member and Investment Manager of funds organized as limited liability companies to acquire portfolios of mortgage notes and land contracts secured by real estate (the “Mortgage Notes and Land Contracts”). Nevertheless, most of our business resources are focused upon the management of partnerships created to explore and develop oil and gas reserves. We manage partnerships that purchase interests in exploratory wells and/or interests in producing oil and gas properties with undrilled reserves. Our growth strategy is based on sponsoring partnerships in which third party investors purchase an interest. These partnerships then assume the costs associated with the drilling of oil and gas wells in exchange for units in a partnership that holds a portion of the working interest derived from the wells they finance. We act as the managing general partner for these partnerships and typically maintain a 10% interest in such partnerships, but may also maintain a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project and subsequent operating expenses to the extent that we retain a portion of the working interest. We believe this strategy allows for a reduction of financial risk associated with drilling new wells, while enabling us to earn income from present production in addition to income from any successful new drilling.

Oil and Gas Drilling Partnerships and Properties

When we undertake a drilling project, a calculation is made to estimate the costs associated with drilling the project well(s). The Company then forms and sells interest in a partnership that will acquire working interest in the wells and undertake drilling operations. We typically enter into turnkey contracts with the partnerships we manage, pursuant to which we agree to undertake the drilling and completion of the partnerships’ well(s), for a fixed price, to a specific formation or depth (each, a “Turnkey Agreement”). As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells, which we record as revenue.

As of December 31, 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 Agreements with each of these partnerships pursuant to which we receive 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.

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, in what is known as the Friesian Well, 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.

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.

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.

2

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.

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 well.

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 well.

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 well.

The Opportunity Funds 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, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other 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 VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established in February 2013, both of which are also Delaware limited liability company that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

The BYCX Fund I was organized on June 28, 2011 with the objective of investing in a managed portfolio comprised of Mortgage Notes and Land Contracts secured by real estate to provide members with quarterly cash distributions. The subscription periods in which units were offered for sale in the Opportunity Funds have closed. Fund VI, BYCX Fund I and Opportunity Fund VII are participants in a “Holding Fund” called 2011-12 Opportunity Fund 6-1, LLC, which is managed by the Company and Blue Ridge Group, Inc. As of January 2013, Fund VI owns approximately 52% of the Holding Fund, BYCX Fund I owns approximately 28% of the Holding Fund and Opportunity Fund VII owns approximately 20% of the Holding Fund. The Holding Fund has acquired 437 Mortgage Notes and Land Contracts with unpaid balances totaling approximately $15,807,695. The Holding Fund was capitalized with approximately $10,632,660 as of December 31, 2012. The first quarterly distributions from the Holding Fund were made in January 2012 and as of January 2013 a total of approximately $838,634 has been distributed to Holding Fund members.

Competition, Markets and Regulations

Competition in the Oil and Gas industry: The oil and gas industry is highly competitive in all its phases. The sale of interests in oil and gas projects, like those sponsored by the Company, is also very competitive. Major and independent oil and gas companies actively bid for desirable oil and gas prospects. Many of our competitors are substantially larger than we are and possess substantially greater financial resources, personnel, and budgets than we do, which may affect our ability to compete.

3

Competition in the Mortgage Notes and Land Contracts Industry: Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring mortgage-related investments, we compete with mortgage REITs, mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities. These entities and others that may be organized in the future may have similar asset acquisition objectives and increase competition for the available supply of mortgage assets suitable for purchase. Additionally, our investment strategy is dependent on the amount of financing available to us in the repurchase agreement market, which may also be impacted by competing borrowers. Our investment strategy will be adversely impacted if we are not able to secure financing on favorable terms, if at all.

Oil and Gas Markets: The price obtainable for oil and gas production from our properties and the oil and gas partnerships we manage is affected by market factors beyond our control. Such factors include the extent of domestic production, the level of imports of foreign oil and gas, the general level of market demand on a regional, national and worldwide basis, domestic and foreign economic conditions that determine levels of industrial production, political events in foreign oil-producing regions, variations in governmental regulations and tax laws and the imposition of new governmental requirements upon the oil and gas industry. There can be no assurance that oil and gas prices will not decrease in the future, thereby decreasing net revenues from our properties. Changes in oil and gas prices can impact our determination of proved reserves as well as our calculation of the standardized measure of discounted future net cash flows relating to oil and gas reserves. In addition, demand for oil and gas in the United States and worldwide may affect the levels of production obtained by our properties. From time to time, a surplus of gas or oil supplies may exist, the effect of which may be to reduce the amount of hydrocarbons that we may produce and sell, while such an oversupply exists. In recent years, initial steps have been taken to provide additional gas pipelines from Canada to the United States. If additional Canadian gas is brought to the United States market, it could create downward pressure on United States gas prices.

Mortgage Notes and Land Contracts Market: There are a number of firms, institutions and individuals who buy Mortgage Notes and Land Contracts similar to those purchased by the Opportunity Funds. Some of the buyers have substantially greater financial, technical and other resources than the Opportunity Funds.

Environmental Regulation

As the managing general partner of the Company’s drilling partnerships, our 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 our financial position and business operations. 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 our operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed upon us for violating such regulations, our operations would be adversely affected.

The oil and gas partnerships we sponsor and manage hold interests in properties upon which each partnership has or intends to explore for and produce oil and natural gas. Such properties and the wastes disposed thereon may be subject to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act (“RCRA”) and analogous state laws, as well as state laws governing the management of oil and natural gas wastes. Under such laws, the Company and the partnerships we manage could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination.

CERCLA and similar state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances found at the site. Persons who are or were responsible for the waste of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

4

Climate Change Legislation and Greenhouse Gas Regulation.

Studies in recent years have indicated that emissions of certain gases may be contributing to warming of the Earth’s atmosphere. Many nations have agreed to limit emissions of greenhouse gases (“GHGs”) pursuant to the United Nations Framework Convention on Climate Change, and the Kyoto Protocol. Methane, a primary component of natural gas, and carbon dioxide, a byproduct of the burning of crude oil, natural gas, and refined petroleum products, are considered GHGs regulated by the Kyoto Protocol. Although the United States is currently not participating in the Kyoto Protocol, several states have adopted legislation and regulations to reduce emissions of GHGs. Restrictions on emissions of methane or carbon dioxide that may be imposed in various states could adversely affect our operations and demand for crude oil and natural gas. On December 7, 2009, the Environmental Protection Agency (“EPA”) issued a finding that serves as the foundation under the Clean Air Act to issue rules that would result in federal GHGs regulations and emissions limits under the Clean Air Act, even without Congressional action. On September 29, 2009, the EPA also issued a GHG monitoring and reporting rule that requires certain parties, including participants in the oil and gas industry, to monitor and report their GHG emissions, including methane and carbon dioxide, to the EPA. The emissions will be published on a register to be made available on the Internet. These regulations may apply to the operations engaged in by our managed oil and gas partnerships. The EPA has proposed two other rules that would regulate GHGs, one of which would regulate GHGs from stationary sources, and may affect the oil and gas exploration and production industry and the pipeline industry. The EPA’s finding, the GHG reporting rule, and the proposed rules to regulate the emissions of GHGs would result in federal regulation of carbon dioxide emissions and other GHGs, and may affect the outcome of other climate change lawsuits pending in United States federal courts in a manner unfavorable to the oil and gas industry.

Proposed Regulation.

Various legislative proposals are being considered in Congress and in the legislatures of various states, which, if enacted, may significantly and adversely affect the petroleum and gas industries. Such proposals involve, among other things, the imposition of price controls on all categories of natural gas production, the imposition of land use controls, such as prohibiting drilling activities on certain federal and state lands in protected areas, as well as other measures. At the present time, it is impossible to predict what proposals, if any, will actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals will have on our operations.

Federal Regulation of Natural Gas

The transportation and sale of natural gas in interstate commerce is heavily regulated by agencies of the federal government. The following discussion is intended only as a summary of the principal statutes, regulations and orders that may affect the production and sale of natural gas from our oil and gas holdings.

Federal Energy Regulatory Commission Orders

Several major regulatory changes have been implemented by the Federal Energy Regulatory Commission (“FERC”) from 1985 to the present that affect the economics of natural gas production, transportation and sales. In addition, the FERC continues to promulgate revisions to various aspects of the rules and regulations affecting those segments of the natural gas industry that remain subject to the FERC’s jurisdiction. In April 1992, the FERC issued Order No. 636 pertaining to pipeline restructuring. This rule requires interstate pipelines to unbundle transportation and sales services by separately stating the price of each service and by providing customers only the particular service desired, without regard to the source for purchase of the gas. The rule also requires pipelines to (i) provide nondiscriminatory “no-notice” service allowing firm commitment shippers to receive delivery of gas on demand up to certain limits without penalties, (ii) establish a basis for release and reallocation of firm upstream pipeline capacity and (iii) provide non-discriminatory access to capacity by firm transportation shippers on a downstream pipeline. The rule requires interstate pipelines to use a straight fixed variable rate design. The rule imposes these same requirements upon storage facilities. FERC Order No. 500 affects the transportation and marketability of natural gas. Traditionally, natural gas has been sold by producers to pipeline companies, which then resell the gas to end-users. FERC Order No. 500 alters this market structure by requiring interstate pipelines that transport gas for others to provide transportation service to producers, distributors and all other shippers of natural gas on a nondiscriminatory, “first-come, first-served” basis (“open access transportation”), so that producers and other shippers can sell natural gas directly to end-users. FERC Order No. 500 contains additional provisions intended to promote greater competition in natural gas markets.

It is not anticipated that the marketability of and price obtainable for natural gas production from our oil and gas interests will be significantly affected by FERC Order No. 500. Gas produced from our properties normally will be sold to intermediaries who have entered into transportation arrangements with pipeline companies. These intermediaries will accumulate gas purchased from a number of producers and sell the gas to end-users through open access pipeline transportation.

5

Regulation of Mortgage Notes and Land Contracts

The U.S. Government, through the U.S. Federal Reserve, the Federal Housing Administration (“FHA”), and the Federal Deposit Insurance Corporation, has implemented a number of federal programs designed to assist homeowners, including the Home Affordable Modification Program, or HAMP, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the Hope for Homeowners Program, or H4H Program, which allows certain distressed borrowers to refinance their mortgages into FHA-insured loans in order to avoid residential mortgage loan foreclosures, and the Home Affordable Refinance Program, or HARP, which applies to loans sold or guaranteed by government-sponsored enterprises on or prior to May 31, 2009, allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments, with no current loan-to-value ratio upper limit and without requiring new mortgage insurance. HAMP, the H4H Program and other loss mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the Mortgage Notes and Land Contracts held by the Opportunity Funds (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or the extension of payment terms of the loans. A significant number of loan modifications with respect to loans in the Opportunity Funds’ portfolios that have not already been modified could result in increased prepayment rates and negatively impact the realized yields and cash flows on such loans. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may adversely affect the value of, and the returns on, residential Mortgage Notes and Land Contracts held by the Opportunity Funds.

In response to the financial issues affecting the banking system and financial markets and going concern threats to commercial banks, investment banks and other financial institutions, the Emergency Economic Stabilization Act, or EESA, was enacted by the U.S. Congress in 2008. There can be no assurance that the EESA or any other U.S. Government actions will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to any such actions by the U.S. Government or such actions do not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications.

In July 2010, the U.S. Congress enacted the Dodd Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act imposes significant restrictions on the proprietary trading activities of certain banking entities and subjects other systemically significant organizations regulated by the U.S. Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the mortgage-backed securities market) by requiring the retention of a portion of the credit risk inherent in a pool of securitized assets and by imposing additional registration and disclosure requirements. Certain of the new requirements and restrictions exempt agency securities, other government issued or guaranteed securities, or other securities. Nonetheless, the Dodd-Frank Act also imposes significant regulatory restrictions on the origination of residential mortgage loans and will impact the formation of new issuances of non-agency securities. The Dodd-Frank Act has also created a new regulatory bureau, the Consumer Financial Protection Bureau, or the CFPB, which now oversees many of the core laws which regulate the mortgage industry, including among others, the Real Estate Settlement Procedures Act and the Truth in Lending Act. While the full impact of the Dodd-Frank Act and the role of the CFPB cannot be assessed until all implementing regulations are released, the Dodd-Frank Act's extensive requirements may have a significant effect on the financial markets, and may affect the availability of mortgage pools being traded and the prices at which loans are purchased and sold. Restrictions on loan trading could have an adverse effect on the Opportunity Funds and the the Mortgage Notes and Land Contracts held by them.

State Regulations

Production of oil and gas from our oil and gas holdings is affected by state regulations. States in which we operate have statutory provisions regulating the production and sale of oil and gas, including provisions regarding deliverability. Such statutes, and the regulations promulgated in connection therewith, are generally intended to prevent waste of oil and gas and to protect correlative rights to produce oil and gas between owners of a common reservoir. State regulatory authorities also regulate the amount of oil and gas produced by assigning allowable rates of production to each well or proration unit.

Operating Hazards and Insurance

General: The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. The occurrence of any of these events could result in substantial losses due to severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The occurrence of a significant event could materially and adversely affect our future revenues from any given prospect.

6

Recent Terrorist Activities and the Potential for Military and Other Actions: The continued threat of terrorism and the impact of retaliatory military and other action by the United States and its allies might lead to increased political, economic and financial market instability and volatility in prices for oil and natural gas, which could affect the market for our exploration and production operations. In addition, future acts of terrorism could be directed against companies operating in the United States, and it has been reported that terrorists might be targeting domestic energy facilities. While we believe that the risk to our energy assets is minimal, there is no assurance that we can completely secure our assets or completely protect them against a terrorist attack. These developments have subjected our operations to increased risks and, depending on their ultimate magnitude, could have a material adverse effect on our business. In particular, we might experience increased capital or operating costs to implement increased security for our energy assets.

Employees

We currently have one employee, Stephen C. Larkin, our President, Chief Executive Officer and Chief Financial Officer, who is employed by the Company full time. From time to time we may engage outside consultants to perform service on the Company’s behalf. In addition, we often utilize the resources of Blue Ridge Group, Inc., with whom we share common management. See “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

Additional Information

We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Securities and Exchange Commission (the “SEC”) on a regular basis, and are required to disclose certain material events in a current report on Form 8-K. The public may read and copy any materials that we file with the SEC at the Public Reference Room at the SEC located at 100 F Street NE, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. In addition, our periodic reports may be found on our website, www.bcexploration.com. We will make available to any stockholder, without charge, copies of any filings not otherwise available on our website. For copies of any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101 or call (270) 842-2421.

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 1B.            UNRESOLVED STAFF COMMENTS

None.

ITEM 2.               PROPERTIES

Principal Office

Our principal office is located at 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101, in office space leased from GC Royalty, LLC and shared with Blue Ridge Group, Inc. (“Blue Ridge Group”), which has common employees with the Company. GC Royalty, LLC is owned by Robert and Doris Burr, who collectively beneficially own 29.79% of the Company’s Common Stock. For the year ended December 31, 2012, the space we occupy, which encompasses 24,205 square feet of office and general storage space, was leased by Blue Ridge Group, and used by the Company pursuant to a management arrangement pursuant to which the Company paid Blue Ridge approximately $44,000 per year for use of office space and certain general and administrative duties. In November 2012, the Company executed a new lease for this same space, which became effective January 1, 2013 for a base monthly rent of $15,000. The new lease will expire at the end of 2016. While we believe comparable office space would be available to us on commercially reasonable terms, in the event we were not able to continue to use our current office space, it is likely new space would be acquired on substantially different terms.

During 2011, the Company leased two office suited located at 303 S. Jupiter Road, Allen, Texas 75002. On October 10, 2011, the Company signed an agreement with RMB Jupiter Office Park, Ltd. (the “Landlord”), wherein the Company agreed to move from the two office suites previously leased into one larger suite of approximately 2,041 square feet for $2,891.50 per month. The lease, which was amended on October 10, 2011, extends a lease previously held by the Company and is for a five (5) year term that began November 1, 2011. In the event this office space becomes unavailable, we believe comparable office space would be available on substantially similar terms.

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Disclosure of Reserves

Net Proved Oil and Gas Reserves

In January 2009, the SEC adopted new rules related to modernizing reserve calculation and disclosure requirements for oil and gas companies, which became effective prospectively for annual reporting periods ending on or after December 31, 2009.  In addition to expanding the definition and disclosure requirements for crude oil and natural gas reserves, the new rule changes the requirements for determining quantities of crude oil and natural gas reserves. The new rule requires disclosure of crude oil and natural gas proved reserves by significant geographic area, using the un-weighted arithmetic average of the first-day-of-the-month commodity prices over the preceding 12-month period, rather than end-of-period prices, and allows the use of reliable technologies to estimate proved crude oil and natural gas reserves, if those technologies have been demonstrated to result in reliable conclusions about reserves volumes. Reserve and related information for 2012 is presented consistent with the requirements of the new rule.

Presented below are the estimates of the Company’s proved oil and natural gas reserves as of December 31, 2012, based upon a report prepared by Pressler Petroleum Consultants, Inc. (“PPC”). All of the Company’s proved reserves are located in the United States.

Summary of Oil and Gas Reserves as of December 31, 2012

					Future Net Revenue, $
Reserve Category	Oil (Bbls*)		Gas (Mcf**)		Undiscounted		Present Worth at 10%
Proved Developed Producing		5,400		68,180	$	612,240	$	544,710
Proved Developed Non-Producing		0		0		0		0
Total Net Proved Reserves		5,400		68,180	$	612,240	$	544,710

*Bbls: Barrels of oil

**Mcf: Thousand cubic feet of gas

As specified by the SEC regulations, when calculating economic producibility, the base product price must be the 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the-month price for each month within the prior 12-month period. The benchmark base prices used for this evaluation were $94.71 per barrel of oil for West Texas Intermediate oil at Cushing, Oklahoma, and $2.849 per thousand standard cubic feet of natural gas at Henry Hub, Louisiana. The oil and gas prices were adjusted on each well based on deductions such as quality, energy content, and basis differential, as appropriate. Prices for oil and natural gas were held constant throughout the remaining life of the properties.

Qualifications of Technical Persons and Internal Controls Over the Reserves Estimation Process

Reserve engineering is inherently a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured exactly.  The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment.  Accordingly, reserve estimates may vary from the quantities of oil and natural gas that are ultimately recovered.  Future prices received for production may vary, perhaps significantly, from the prices assumed for the purposes of estimating the standardized measure of discounted future net cash flows.  The standardized measure of discounted future net cash flows should not be construed as the market value of the reserves at the date shown.  The 10% discount factor required to be used under the provisions of applicable accounting standards may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry.  The standardized measure of discounted future net cash flows is materially affected by assumptions about the timing of future production, which may prove to be inaccurate.

The reserve estimates reported herein were prepared by independent engineers of PPC.  The process performed by PPC engineers to prepare reserve amounts included their estimation of reserve quantities, future producing rates, future net revenue and the present value of such future net revenue, based in part on data provided by the Company.  The estimates of reserves were determined by accepted industry methods. Methods utilized by PPC in preparing the estimates include extrapolation of historical production trends and analogy to similar producing properties. PPC believes the assumptions, data, methods and procedures utilized in preparing the estimates were appropriate for the purpose served by their report, and that it utilized all methods and procedures it considered necessary to prepare their report.

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The Company’s internal control over the preparation of reserve estimates is a process designed to provide reasonable assurance regarding the reliability of the Company’s reserve estimates in accordance with SEC regulations.  The preparation of reserve estimates are created by a third party consultant, PPC, and overseen by the Company’s Director, President Chief Executive Officer and Chief Financial Officer, Stephen C. Larkin. Mr. Larkin has been working with oil and gas companies since he began his position with Blue Ridge Group, Inc. in 2008. PPC performs evaluations based on accepted engineering standards. Reserves were determined by decline curve projection in the case of established production. For behind the pipe zones, reserves were calculated based on production and review of offset wells in the area and by reviewing calculated volumetric data.  These specific reserve estimates were performed by Mr. Stan S. Valdez, P.E. and Mr. Andrew Tharp, E.I.T. of PPC. Mr. Valdez has over 16 years of practical experience in the estimation and evaluation of petroleum reserves, as well as continuing education concerning the estimating and auditing of oil and gas reserves. He holds a B.S. in Petroleum Engineering from Texas A&M University. Mr. Reis is a qualified reserves estimator as set forth in the “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information” promulgated by the Society of Petroleum Engineers. Mr. Tharp has over one year of practical experience in the estimation and evaluation of oil and gas reserves and holds a B.S. in Petroleum Engineering from the University of Texas at Austin.

Proved Undeveloped Reserves.

At this time the Company has no undeveloped properties under lease.

Oil and Gas Production, Production Prices and Production Costs.

The following table summarizes the sales volumes of the Company’s net oil and gas production expressed in barrels of oil. Equivalent barrels of oil were obtained by converting gas to oil on the basis of their relative energy content — six thousand cubic feet of gas equals one barrel of oil. During 2012, 2011, and 2010 the average selling price for natural gas was $3.66, $5.06, and $4.44 per Mcf, respectively, and the average selling price for oil was $92.45, $75.69, and $58.47 per barrel, respectively.

	Net		Net		Net
	Production		Production		Production
	For the Year		For the Year		For the Year
	12/31/2012		12/31/2011		12/31/2010
Net Volumes (Equivalent Barrels)		5,277		2,412		7,489
Average Sales Price per Equivalent Barrel	$	26.47	$	54.17	$	33.79
Average Production Cost per Equivalent Barrel (includes production taxes)	$	15.72	$	20.01	$	6.79

The Average Production Cost per Equivalent Barrel represents the Lease Operating Expenses divided by the Net Volumes in equivalent barrels. Lease Operating Expenses include normal operating costs such as pumper fees, operator overhead, salt water disposal, repairs and maintenance, chemicals, equipment rentals, production taxes and ad valorem taxes.

Drilling and Other Exploratory and Development Activities.

In 2012, three partnerships were formed that are managed by the Company and they drilled a total of one exploratory well and one developmental well, one of which is currently in production, and one of which was determined to be a dry hole. There was also one exploratory well drilled in 2012 outside of the managed partnerships that started into production in October 2012. In 2011, the six partnerships managed by the Company drilled a total of seven exploratory wells and one developmental well, four of which are currently in production, one was determined to be in dry hole, and two produced for a short period of time and then became unviable. In 2010, the one partnership managed by the Company at the time drilled one exploratory well that was determined to be a dry hole and the Company drilled one developmental well outside of the managed partnerships that is currently in production.

Present Activities.

The Company formed three new oil and gas drilling partnerships in 2012. The partnerships drilled four wells, one began producing in 2012, one was deemed a dry hole, and the remaining two wells began production in January 2013.

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Delivery Commitments.

The Company is not currently committed to providing a fixed and determinable quantity of oil or gas under any existing contract or agreement.

Oil and Gas Properties, Wells, Operations and Acreage.

During 2012, the Company participated in the drilling of three new wells, one of which was determined to be a dry hole and has been plugged and abandoned. See “Drilling and Other Exploratory and Development Activities” above.

As of December 31, 2012, the Company owned a direct working interest in six producing wells, including the Rooke #2, the Squeeze Box #1, the Kleimann #1, the Prairie Bell East, the Loma Blanca, and the Koehn #2. Two other wells in which the Company owns working interest have been drilled, one was a dry hole and the other produced for nine months and dried up in October 2012. The Company drilled one dry hole that was plugged and abandoned. The Rooke #1, which stopped producing in October 2010, was converted into a salt water disposal well in 2011 and has yet to be plugged and abandoned.

The following tables summarize by geographic area the Company’s developed acreage and gross and net interests in producing oil and gas wells as of December 31, 2012. The Company did not hold any undeveloped acreage at December 31, 2012. Productive wells are producing wells and wells mechanically capable of production. Wells that are dually completed in more than one producing horizon are counted as one well.

DEVELOPED AND UNDEVELOPED ACREAGE

	Developed Acreage				Undeveloped Acreage
Geographic Area:	Gross Acres		Net Acres		Gross Acres		Net Acres
Louisiana		319.52		2.49		-0-		-0-
Texas		2,117.44		76.52		-0-		-0-
Totals		2,436.96		79.01		-0-		-0-

PRODUCTIVE WELLS

	Gross Wells				Net Wells
Geographic Area:	Oil		Gas		Oil		Gas
Louisiana		0		1		0		.01
Texas		2		3		.02		.21
Totals		2		4		.02		.22

Key Properties

The working interest owned by the Company, either directly or through the partnerships we manage, is owned jointly with other working interest partners. Management does not believe any of these burdens materially detract from the value of the properties or materially interfere with their use. The following are the primary properties held by the Company as of December 31, 2012.

Developed Properties

Rooke #2: The Company owns a 9.5% working interest in one well located in Refugio County, Texas, which began production in May 2010. The well produces about six Bbls per day.

Kleimann #1: The Company owns a 0.26% working interest in the Kleimann #1, a well located in Colorado County, Texas. Production started on March 6, 2012 and the well is currently producing approximately 250 Mcf and six Bbls per day.

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Squeeze Box: The Company owns a 0.78% working interest in the Squeezebox well. This gas well is located in Cameron Parish, Louisiana, and began production in November 2011. The well produces about 1,286 Mcf and 12 Bbls per day.

Prairie Bell East: The Company owns a 0.49% working interest in the Prairie Bell East well, a gas well is located in Colorado County, Texas. The well has been in production since February 27, 2012 and has been producing approximately 1,522 Mcf and 53 Bbls per day.

Loma Blanca: The Company owns a 0.59% working interest in the Loma Blanca well, which well is located in Brookes County, Texas. The well has been in production since August 2012. The well produces about 112 Mcf per day.

Koehn #2: The Company owns an 11.00% working interest in the Koehn #2 well, which is located in Colorado County, Texas. This well has been in production since October 2012. The well produces about 93 Bbls and 533 Mcf per day.

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 0.005% of the joint venture. 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.

Dry Holes and Abandonment of Properties during 2012

In 2012, the Company incurred $128,344 in dry hole or abandonment expenses. The expenses incurred were from a dry hole drilled by one of the partnerships managed by the Company in 2011, the Company also had a large direct interest in the well.

Title to Properties

In the normal course of business, the operator of each lease has the responsibility of examining the title on behalf of all working interest partners. Titles to all significant producing properties of the Company have been examined by various attorneys. The properties are subject to royalty, overriding royalty and other interests customary in the industry.

The working interest owned by the Company, either directly or through the partnerships we manage, is owned jointly with other working interest partners or is subject to various royalty and overriding royalty interest, which generally range in total between 20%-30% on each property. Management does not believe any of these burdens materially detract from the value of the properties or materially interfere with their use.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal or governmental proceedings relating to our Company or properties to which we are a party, and to our knowledge, there are no material proceedings to which any of our directors, executive officers, affiliates or stockholders are a party adverse to us or have a material interest adverse to us.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Common Stock of the Company is quoted on the OTC Market Groups, Inc. OTCQB (the “OTCQB”) under the symbol “BYCX.” The following table shows the high and low bid information for our Common Stock for each quarter ended during the last two fiscal years. This information has been obtained from the OTC Bulletin Board. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

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	High Bid		Low Bid
March 31, 2011	$	0.00	$0.00
June 30, 2011		0.00	0.00
September 30, 2011		0.00	0.00
December 31, 2011		0.00	0.00
March 31, 2012	$	0.035	$0.025
June 30, 2012		0.045	0.012
September 30, 2012		1.15	0.10
December 31, 2012		0.60	0.36

According to OTC Market Groups, Inc., there were no bid or ask prices for our Common Stock during the 2011 fiscal years. The closing bid prices for the quarters ended September 30 and December 31, 2012, reflect prices following the Company’s 1 for 100 reverse stock split, which occurred on July 26, 2012.

Stockholder Information

As of March 21, 2013, there were 549 stockholders of record of the Company’s Common Stock. The number of registered stockholders excludes any estimate by us of the number of beneficial owners of shares of Common Stock held in “street name.”

Dividend Information

No cash dividends have been declared or paid on our Common Stock since inception. The Company has not paid, nor does it intend to pay, cash dividends on its Common Stock in the foreseeable future. We intend to retain earnings, if any, for the future operation and development of our business. Our dividend policy will be subject to any restrictions placed on it in connection with any debt offering or significant long-term borrowing.

Recent Sales of Unregistered Securities

All of the Company’s recent sales of unregistered securities within the past three years have been previously reported in Quarterly Reports on Form 10-Q and current reports on Form 8-K.

Securities authorized for issuance under equity compensation plans

The following table sets forth certain information, as of December 31, 2012, concerning securities authorized for issuance under the Company’s 2005 Stock Option and Incentive Plan.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		20,000	$	1.00		21,500
Equity compensation plans not approved by security holders		–		–		–
Total		20,000	$	1.00		21,500

ITEM 6.              selected financial data

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 7.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in an understanding of the Company’s financial position and results of operations for each of the yearly periods ended December 31, 2012 and 2011. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with the following discussion.

Recently Issued Accounting Pronouncements

During the year ended December 31, 2012 and through April 11, 2013, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

Consolidation Policy

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.

Critical Accounting Policies and Estimates

Financial Statements and Use of Estimates: In preparing financial statements, management is required to select appropriate accounting policies and make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Stock Options: Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, there was no stock compensation expense to be recognized in the year ended December 31, 2012 and stock compensation expense of $11,008 was required to be recognized in the year ended December 31, 2011.

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period. The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Oil and Gas Activities: The accounting for upstream oil and gas activities (exploration and production) is subject to special accounting rules that are unique to the oil and gas business. There are two methods to account for oil and gas business activities, the successful efforts method and the full cost method. The Company has elected to use the successful efforts method. A description of our policies for oil and gas properties, impairment and direct expenses is located in Note 1 to our financial statements.

The successful efforts method reflects the volatility that is inherent in exploring for oil and gas resources in that costs of unsuccessful exploratory efforts are charged to expense as they are incurred. These costs primarily include seismic costs (G&G costs), other exploratory costs (carrying costs) and exploratory dry hole costs. Under the full cost method, these costs would be capitalized and then expensed (depreciated/amortized) over time.

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Oil and Gas Reserves: The term proved oil and gas reserves is defined by the SEC in Rule 4-10(a) (22) of Regulation S-X adopted under the Securities Act of 1933, as amended (the “Act”). In general, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas and natural gas liquids that geological or engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices based on an unweighted 12-month average and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based on future conditions.

Our estimates of proved reserves materially impact depletion expense. If proved reserves decline, then the rate at which we record depletion expense increases. A decline in estimates of proved reserves may result from lower prices, new information obtained from development drilling and production history; mechanical problems on our wells; and catastrophic events such as explosions, hurricanes and floods. Lower prices also may make it uneconomical to drill wells or produce from fields with high operating costs. In addition, a decline in proved reserves may impact our assessment of our oil and natural gas properties for impairment.

Our proved reserves estimates are a function of many assumptions, all of which could deviate materially from actual results. As such, reserves estimates may vary materially from the ultimate quantities of crude oil and natural gas actually produced.

Capitalized Prospect Costs: The Property and Equipment balance on the Company’s balance sheets, if any, include oil and gas property costs that are excluded from capitalized costs being amortized. These amounts represent investments in undeveloped leasehold acreage and work-in-progress exploratory wells. The Company excludes these costs on a property-by-property basis until proved reserves are found, until the lease term expires, or if it is determined that the costs are impaired. All costs excluded are reviewed annually to determine if any of these conditions have occurred; if so, the capitalized amount is transferred to abandonment expense and recorded to the statement of operations.

Impairments: In accordance with FASB ASC 360-10-35, long lived assets, such as oil and gas properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount of the fair value less costs to sell and are no longer depreciated or depleted.

The application of this guidance did not result in any impairment of the oil and gas properties of the Company for the periods presented.

Results of Operations

The Company reported a net income of $816,410 in 2012, as compared to a net income of $257,114 in 2011. The $559,296 increase in net income resulted from the Company recording $1,339,503 more in total operating revenues, offset by $882,004 more in operating costs and a net increase in other income of $134,669 in 2012 as compared to 2011. On a per share basis the Company had a net income of $0.95 per share in 2012 and a net income of $0.89 per share in 2011.

Operating Revenues: Operating revenues totaled $3,312,772 in 2012 as compared to $1,973,269 in 2011, a 67.9% increase for the year. The increase in total operating revenue was primarily a result of a change in the Company’s business focus during 2011, wherein $3,132,676 of the Company’s revenues were derived from net turnkey drilling contract revenue in 2012, while in 2011, the Company had $1,839,915 of turnkey drilling contract revenue. In 2012, the Company’s revenues from oil and gas sales also increased $46,742 compared to 2011 which was a result of increased production primarily from the Koehn #2 well, which began production in the October 2012.

Direct Operating Costs: Direct operating costs for the producing oil and gas wells, which include lease operating expenses and production taxes, totaled $47,021 in 2011 compared to $75,527 in 2012. This 60.6% increase in expense is primarily due to increased lease operating expenses on the Coastal Plains wells’ which are approaching the end of their useful life.

Other Operating Expenses: Other operating expenses include abandonment and dry hole costs, marketing costs, depreciation, depletion, and amortization expense, turnkey drilling contract costs and marketing. Other operating expenses decreased to $420,607 in 2012 compared to $434,852 in 2011. This decrease of $14,245 was a result of a $33,217decrease in depletion and amortization, and a $74,337 decrease in marketing costs, offset by an increase of $93,309 in abandonment and dry hole costs.

General and Administrative Costs: General and administrative costs were $716,124 in 2012 compared to $636,995 for 2011, an increase of $79,129, or approximately 12.42%. The increase was primarily attributable to increases office rent with related costs, and legal and audit fees related to the SEC filings and review of the Company’s limited partnership offerings, and includes a quarterly management fee of approximately $11,000 payable to Blue Ridge Group, Inc., with whom we share office space and utilize various accounting-related and administrative services.

Other Income: The Company’s Other Income increased $119,931 during the year ended December 31, 2012. This increase in other income was primarily a result of $150,099 in equity earnings received by the Company for its holdings in Affiliated Partners, which was purchased during 2012, offset by $22,799 in miscellaneous expenses. In contrast, during 2011, the Company had net other expense of $7,369 including $631 worth of miscellaneous income and $8,000 of interest expense.

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Income Taxes: In 2012 the Company had $32,872 in federal or state income tax liability and no income tax liability or benefit in 2011 as a result of a large net operating loss carry forward from years 2011 and prior. Based on the amount of net losses in 2011 and prior, a full valuation allowance has been recorded against the deferred tax assets associated with the net operating loss carry forwards. The Company had an estimated net operating loss carry forward of $7,264,508 and $8,004,196 as of December, 31, 2012 and 2011, respectively.  However, the Company had an ownership change in March, 2012 with the issuance of additional shares in a private placement transaction.  This resulted in an Internal Revenue Code (IRC) Section 382 limitation on the availability of the Company’s net operating losses immediately before the ownership change to operational periods following the date of the ownership change.  The Section 382 limitation rule limits the use of the Company’s current net operating loss carry forward to $30,193 per year in future years.  This annual limitation was allocated in the year 2012 to the period following the change date and resulted in net operating losses available for the time period of April through December, 2012, being limited to $22,645 and the above tax liability for 2012 of $32,872.

Balance Sheet Review

Assets: The Company’s total assets increased $977,203 from $2,218,336 as of December 31, 2011 to $3,195,539 as of December 31, 2012. The increase was primarily attributable to a $591,439 increase in current assets during 2012, from $1,778,140 as of December 31, 2011 to $2,369,579 as of December 31, 2012. The increase was attributable to an $827,546 increase in cash received from Turnkey Agreements entered into between the Company and partnerships we sponsored, as well as increases in accounts receivable of $151,179. The increase in total current assets was offset in part by a $387,286 decrease in pre-paid expenses from 2011 to 2012. The $385,764 additional increase in the Company’s assets was a result of a $184,015 increase in oil and gas properties as compared to 2011, a $57,017 increase in other investments at cost during 2012, and a $150,099 investment in an unconsolidated affiliate company in which we did not hold an interest during 2011, partially offset by decrease in the Company’s other fixed assets, which deceased a $5,367, from $25,047 during 2011 to $19,680 for the year ended December 31, 2012.

Liabilities: The Company’s liabilities decreased $197,207 in 2012 to $1,384,913 as of December 31, 2012 compared to $1,582,120 as of December 31, 2011. The majority of this decrease is the result of a $659,763 decrease in turnkey partnership obligations, due to a decrease in the number of limited partnerships formed, from six in 2011 to only three in 2012. There was also a $100,752 decrease in accounts payable and accrued expenses, offset by a $530,611 accounts payable to related parties and $32,697 in federal income taxes payable during 2012. The Company did not owe income taxes for 2011. The accounts payable to related parties is attributable to the amounts received by the Company as the result of Turnkey Agreements it has with the partnerships it sponsors and manages. The amounts received under such Turnkey Agreements are booked as revenue, but considered a deferred liability until such time as the Company has completed all its responsibilities under the Turnkey Agreements.

There was $84,906 in deferred liability and a $100,000 note payable obligation to a minority stockholder remained unchanged from period to period.

Stockholders’ Equity: Total stockholder’s equity of the Company increased $1,174,410, from $636,216 at December 31, 2011 to $1,810,626 at December 31, 2012. This increase is mainly the result of a net operating profit of $932,744 and an issuance of stock in the amount of $327,500 during 2012.

Liquidity and Capital Resources

The Company’s current ratio (current assets / current liabilities) was 1.12 to 1 as of December 31, 2011 compared to 1.71 to 1 as of December 31, 2012. The change in the current ratio from 2011 to 2012 is the result a significant increase in current assets due to the cash on hand the Company holds as a result of certain Turnkey Agreements.

The Company saw a significant change in its liquidity during the year ended December 31, 2012, which was primarily the result of implementing a new business plan that started in 2010, in which we serve as the sponsor and managing general partner of partnerships formed for the purpose of undertaking oil and gas exploration activities. During 2011, in contrast, the Company sponsored an additional five limited partnerships, for which it serves as the managing general partner and has received revenues from Turnkey Agreements with such partnerships, wherein for a fixed price the Company agrees to drill, test and, if advisable, complete, oil and wells in which each partnership holds an interest. Generally, the amount charged by the Company to undertake these exploration activities under a Turnkey Agreement exceeds the total costs paid by the Company to complete such operations. When the Company receives payment from a partnership for the services it agrees to perform under a Turnkey Agreement, it records any amounts received as revenue. However, such amounts are also considered a deferred liability on the Company’s balance sheets until such time as the Company’s obligations under the Turnkey Agreement are completed. As of December 31, 2012, the Company recorded $3,132,676 in net turnkey drilling contract revenue, and had a deferred liability of $582,746. As the Company continues to sponsor and manage partnerships, it expects that the revenues received from Turnkey Agreements will enable it to continue to meet its financial obligations and be profitable. To the extent the Company is unable to successfully sponsor additional partnerships, it may have difficulty continuing operations.

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The Company also anticipates it will earn revenue over time from its direct oil and gas holdings, including holdings in oil and gas wells held by the limited partnerships it manages. In 2012, the Company purchased an 11% working interest in the Koehn #2 which started into production in October 2012 and is currently producing average net revenue in excess of $28,000 per month. In addition, the Company seeks to generate revenue from joint ventures with other oil and gas companies, such as the Next Energy JV, in which it participated in 2011. To date, however, the Company’s revenues from its oil and gas holdings and other investments have been very limited, and it is dependent upon the revenues it receives from Turnkey Agreements in order to continue its operations, which during 2012 were sufficient to pay the Company’s operating expenses. The Company believes that revenue from Turnkey Agreements will be sufficient to fund their ongoing business; and based on previous years’ expenses, the Company’s current cash resources will be enough to fund their operations for the next twelve months.

As of December 31, 2012, the Company’s cash balance was $2,087,480 and its liabilities totaled $1,384,913, which include $582,746 of deferred liability associated with obligations it has under current Turnkey Agreements, $530,611 in accounts payable to related party to pay for an interest in partnership wells, and approximately $184,906 in related party accounts payable and notes outstanding to a minority stockholder. At December 31, 2012 the Company had total working capital of $1,045,113 and no contractual obligations that will encumber its cash flow into the future.

Off Balance Sheet Arrangements

The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structure finance or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2012 and 2011, the Company was not involved in any unconsolidated SPE transactions nor any other off-balance sheet arrangements.

ITEM 7A. 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.

ITEM 8. FINANCIAL STATEMENTS and supplementary data

All financial statements required by this Item are listed in Part IV, Item 15 of this Form 10-K, are presented beginning on Page F-1, and are incorporated herein by this reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our 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 the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective due to the inherent limitations describe below, as of the Evaluation Date, to ensure that information required to be disclosed in reports that we file or submit under that Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosures.

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Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rule 13a-15(f) o the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:

· Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s procedures and internal control over financial reporting as of December 31, 2002. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s internal controls over financial reporting were not effective in that there was a material weakness as of December 31, 2012.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

The Company’s management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications related to the Company’s unique industry accounting and disclosure rules.

Attestation Report of the Registered Public Accounting Firm

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, wherein non-accelerated filers are exempt from Sarbanes-Oxley internal control audit requirements.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting, that occurred during the year ended December 31, 2012, that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention and overriding of controls and procedures. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error fraud may occur and not be 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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Management is aware that there is a lack of segregation of duties and accounting personnel with appropriate qualifications at the Company due to the small number of employees dealing with general administrative and financial matters. This constitutes a deficiency in the internal controls. Management has decided that considering the employees involved, the control procedures in place, and the outsourcing of certain financial functions, the risks associated with such lack of segregation were low and the potential benefits of adding additional employees to clearly segregate duties did not justify the expenses associated with such increases. Management periodically reevaluates this situation. In light of the Company’s current cash flow situation, the Company does not intend to increase staffing to mitigate the current lack of segregation of duties within the general administrative and financial functions.

ITEM 9B.            OTHER INFORMATION

None.

PART III

ITEM 10.            DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following individuals currently serve as directors and/or executive officers of our Company. All directors of the Company hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. The executive officers of our Company are appointed by our Board of Directors and hold office until their death, resignation or removal from office.

Director	Age	Company Position or Office	Director Since
Stephen C. Larkin	53	Director, President, Chief Executive Officer and Chief Financial Officer	2010
Travis Creed	46	Chairman	2010

STEPHEN C. LARKIN, age 53, was elected to serve as our President and Chief Executive Officer effective as of November 30, 2012 and has served as a director and the Chief Financial Officer of the Company since November 22, 2010. Mr. Larkin also currently serves as a director and the President of Blue Ridge Group, Inc., and served as its Chief Financial Officer beginning in July 2008 until his appointment as its President in November 2010. From September 1998 until September 2007, Mr. Larkin served as President and Chief Executive Officer of Sensus Precision Die Casting, Inc. and President, Chief Executive Officer and Chairman of the Board Sensus Rongtai (Yangzhou) Precision Die Casting, Ltd. (a Chinese subsidiary of Sensus Precision Die Casting, Inc.) and managed all aspects of the company. Mr. Larkin spent a total of 21 years with Sensus Metering Systems, Inc. (parent company to Sensus Precision Die Casting, Inc.) in positions ranging from Controller and Chief Financial Officer of one of its divisions (for seven years), to Vice President of Operations (for four years) then finally with Sensus Precision Die Casting Company as their President and Chief Executive Officer. Prior to that Mr. Larkin spent almost six years with Ernst and Young, LLP both in the Lansing, Michigan office and the Tampa Bay, Florida office and held the position of Senior Manager-Auditing when he left. Mr. Larkin earned a B.A. Degree from Michigan State University in Accounting in 1981, a Master of Business Administration degree from Michigan State University in Operations Management in 1989 and an Executive Master of Business Administration from the University of New Hampshire in International Business in 1997. Mr. Larkin became a Certified Public Accountant in May 1982 in the State of Florida.

TRAVIS N. CREED, age 46, was appointed to serve as a director of the Company in July 2010. Since 2007, Mr. Creed has also served as Senior Vice President - Real Property Division and General Counsel for Blue Ridge Group, Inc.  Mr. Creed holds degrees from Westminster College and the University of Arkansas School of Law.  Mr. Creed is a licensed to practice law in the State of Arkansas, however, he has been voluntarily inactive since 2007 and does not presently engage in the practice of law. In addition to the practice of law, Mr. Creed has owned an electrical contracting company, a mortgage trading company and a real estate development company.  He has experience in banking including founding and serving as President of Pinnacle Resources, a wholly owned subsidiary of Pinnacle Bank in Little Rock, Arkansas.  

Family Relationships

There are no family relationships between any of our directors and executive officers.

Involvement In Certain Legal Proceedings

During the past ten years, none of the Company's officers or directors were involved in any legal proceedings that are material to an evaluation of the ability or integrity of such directors and officers.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”). Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms filed by them. Based solely on our review of the copies of such forms received by us with respect to fiscal year 2012, or written representations from certain reporting persons, we believe all of our officers and directors and persons who own more than 10% of our Common Stock have met all applicable filing requirements, except as described in this paragraph. Kevin Cline, who was appointed to serve as a director of the Company on June 26, 2012, filed one late Form 3 on November 27, 2012. Robert D. Burr, a stockholder owning greater than 10% of the Company’s common stock as of March 8, 2012, filed one late Form 3 on March 28, 2012.

Code of Ethics for Financial Executives

On April 14, 2011, the Company's Board of Directors approved a Code of Ethics that applies to the Company’s principal officers. The Company will provide a copy of this policy free of charge upon written request to Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101.

Board Committees and Financial Expert

The Company does not currently maintain separate audit, nominating or compensation committees. When necessary, the entire Board of Directors performs the tasks that would be required of those committees. Furthermore, we do not have a qualified financial expert serving on the Board of Directors at this time, because we have not been able to hire a qualified candidate and we have inadequate financial resources at this time to hire such an expert.

ITEM 11.            Executive Compensation

Summary Compensation Table

The below table lists the compensation of the Company's principal executive officers who served the Company in such capacities during the fiscal year ended December 31, 2012.

SUMMARY COMPENSATION TABLE

		Salary		Bonus		Total
Name and Principal Position	Year	($)		($)		($)
Charles T. Bukowski	2012		110,000		–	$	110,000
Former President and Chief Executive Officer	2011		120,000		–	$	127,405
Stephen C. Larkin,	2012		92,500		27,750	$	120,250
President, Chief Executive Officer and Chief Financial Officer	2011		90,000		–	$	94,653

Narrative Disclosure to Summary Compensation Table

Charles Bukowski, the Company’s former President and Chief Executive Officer, received a base salary of $120,000, which he began receiving in July 2010. However, Mr. Bukowski resigned on November 30, 2012. Our President, Chief Executive Officer, and Chief Financial Officer, Stephen Larkin, currently receives a base salary of $120,000 per year. This was increased on December 1, 2012 from a previous salary of $90,000 per year. As part of the Company’s compensation package, its officers are from time to time awarded stock options. In 2009, Mr. Larkin received stock options as part of a decision on the part of the Board to cancel outstanding stock options that were substantially “out of the money” and issue new stock options on terms more in line with the Company’s stock price at that time. The Board uses the stock options as an incentive to its officers and believes this practice to be comparable to other public companies. In May 2009, Mr. Larkin was awarded an option to purchase 10,000 shares of common stock at an exercise price of $0.01 per share. Mr. Larkin’s options vested over a two year period. The stock option awards were issued pursuant to the Company’s 2005 Stock Option and Incentive Plan. In 2010, Mr. Bukowski was awarded 5,000 stock options in connection with his appointment as the Company’s President and Chief Executive Officer. Mr. Bukowski’s options vested over a two-year period and have a $0.05 exercise price. Each of the named executive officers’ stock option awards have a ten year term, beginning on the award date. However, after Mr. Bukowski’s resignation on November 30, 2012, his stock options expired thirty days later on December 30, 2012.

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In July 2010, the Board of Directors, in connection with the appointment of Charles Bukowski as the Company’s now former President and Chief Executive Officer, passed a corporate resolution establishing a bonus program for the Company’s Chief Executive Officer and Chief Financial Officer. The resolution established that for the first $500,000 in pre-tax income the Company makes after July 1, 2010, the Company will pay each of the officers 20% of their base salary and for each $250,000 the Company makes in pre-tax income thereafter, the Company will pay an additional bonus equal to 10% of the officer’s base salary. The bonus is to reset on January 1^st of each year. During 2011, the Company failed to reach the $500,000 threshold, however in 2012 the company reached over the $750,000 threshold and accordingly Stephen Larkin was paid a bonus of $27,750, which is based on 30% of his gross earnings for 2012, on March 14, 2013.

Employment Agreements

There were no employment agreements in place as of December 31, 2012.

Stock Option Plan

On February 22, 2005, the Board of Directors approved the Bayou City Exploration, Inc. (formerly Blue Ridge Energy, Inc.) 2005 Stock Option and Incentive Plan (the “Stock Option Plan”). The Stock Option Plan allows for the granting of stock options to eligible directors, officers, employees, consultants and advisors.

Effective January 1, 2006, the Company accounts for the Stock Option Plan in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2010. Prior to January 1, 2006, the Company accounted for stock compensation cost under the Plan in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) as permitted by SFAS 123 as originally issued. Under APB 25, stock compensation expense was recognized only if the options had intrinsic value (difference between option exercise price and the fair market value of the underlying stock) at the date of grant. As the Company issued all options with an exercise price equal to the grant date market value of the underlying stock, no compensation expense had previously been recorded by the Company.

The maximum number of shares with respect to which options may be awarded under the Stock Option Plan is seventy thousand (70,000) common shares of which approximately 21,500 shares remain available for grant as of December 31, 2012. The following table shows more information about our Stock Option Plan.

Outstanding Equity Awards

The following table shows information regarding awards granted to each of our named executive officers and directors under our Stock Option Plan outstanding as of December 31, 2012.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

OPTION AWARDS

	Number of Securities Underlying Unexercised Options (#)		Number of Securities Underlying Unexercised Options (#)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options		Option Exercise Price		Option Expiration
Name	Exercisable		Unexercisable		(#)		($)		Date
Stephen C. Larkin
President, CEO and CFO		10,000		–		–	$	1.00	05/18/19
Travis N. Creed
Chairman		5,000		–		–	$	1.00	05/18/19

Director Compensation

During 2012, the directors of the Company were not compensated for their services as directors of the Company.

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Compensation Committee Interlocks and Insider Participation

The Company does not currently maintain separate compensation committee. When necessary, the entire Board of Directors performs the tasks that would be required of a compensation committee. Stephen C. Larkin, our President, Chief Executive Officer and Chief Financial Officer and sole employee, also serves on the Board of Directors and participated in deliberations of the Board of Directors concerning executive officer compensation. Moreover, Mr. Larkin also currently serves as a director and the President of Blue Ridge Group, Inc., a company for which Travis N. Creed, the Chairman of our Board of Directors, serves as Senior Vice President - Real Property Division and General Counsel.

Compensation Committee Report

Stephen C. Larkin and Travis N. Creed, who collectively constitute the entire Board of Directors of the Company, perform the tasks that would be required of a compensation committee when necessary. The Board of Directors has reviewed with management the disclosures relating to executive compensation herein and determined that such disclosures should be included in this Annual Report.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the ownership, as of March 21, 2013, of our Common Stock by each person known by us to be the beneficial owner of more than 5% of our outstanding Common Stock, each of our directors and executive officers, and all of our directors and executive officers as a group. The information presented below regarding beneficial ownership of our Common Stock has been presented in accordance with the rules of the SEC and is not necessarily indicative of ownership for any other purpose. This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Except as otherwise listed below, the address of each person is c/o Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101. Except as set forth below, applicable percentages are based upon 990,230 shares of Common Stock outstanding as of March 21, 2013.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent of Class
Stephen C. Larkin(1)		270,629		27.33%
Travis N. Creed(2)		35,000		3.53%
All directors, nominees and officers as a group (2 persons)		305,629		30.86%
Robert Burr(3)		294,981		29.79%
Doris Burr(3)		294,981		29.79%

(1) Mr. Larkin’s beneficial ownership interest includes vested options for the purchase of 10,000 shares exercisable within 60 days March 30, 2013, plus 260,629 shares in his personal portfolio.

(2) Mr. Creed’s beneficial ownership interest includes vested options for the purchase of 5,000 shares exercisable within 60 days March 30, 2013, plus 30,000 shares in his personal portfolio.

(3) Represents 9,981 shares held by Robert Burr individually and 285,000 shares held jointly with Doris Burr, his spouse. Mr. and Ms. Burr’s address is 1314 Fairview Avenue, Bowling Green, KY 42103.

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ITEM 13.            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

The Company has an unwritten agreement with Blue Ridge Group pursuant to which it pays a quarterly management fee in the amount of $11,018. This fee is based on the time and salaries of Blue Ridge Group’s employees for work performed for the Company. The Company and Blue Ridge Group share common management as well as office space. The Company’s President, Chief Executive Officer, and Chief Financial Officer and director, Stephen Larkin, serves as President and Chief Executive Officer of Blue Ridge Group. Travis Creed, who is also a director of the Company, is Senior Vice President – Real Property Division and General Counsel of Blue Ridge Group. In addition, the Company utilizes the administrative and accounting services of Blue Ridge Group, including the services of its Controller, Paul Larkin, for purposes of compiling the Company’s financial statement information for SEC reporting purposes and for reports made to partners of the partnerships sponsored by the Company. Paul Larkin is the son of Stephen Larkin, the Company’s Chief Financial Officer and a member of the Board of Directors of the Company.

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 700,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private 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. The consideration for the Common Stock was paid primarily in cash, however, the shares issued to G2 International, Inc. were issued in exchange for settlement of outstanding invoices for consulting services rendered.

In April 2012, 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 the Company’s President, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and its other 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 VII”), which invests in Mortgage Notes and Land Contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established in early 2013, subsequent to the date of this Report, both of which are also Delaware limited liability company that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, the Company is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

On June 26, 2012 the Company named Kevin Cline, Source Capital Group’s Managing Principal to its board of directors. Mr. Cline’s appointment was made in connection with the formation of Rivergreen Financial, LLC (“Rivergreen”) a subsidiary formed for the purpose of selling the Company’s managed partnerships and Opportunity Funds, for which Mr. Cline was to serve as President. In November 2012, following the Company’s decision not to utilize Rivergreen as a broker-dealer, Mr. Cline resigned as a board member of the Company.  While serving on the board, Kevin was paid $27,375 in non-employee compensation related to fees earned by Source Capital in connection with the Company’s offerings.

Director Independence

Our securities are not currently listed on a national securities exchange or interdealer quotation system which would require that the Board of Directors include a majority of directors that are “independent.” Furthermore, Travis Creed is the only member of our Board of Directors that would qualify as an “independent” director as such term is defined in the Nasdaq Global Market listing standards.

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ITEM 14.            PRINCIPAL ACCOUNTANTing FEES AND SERVICES

On June 7, 2012, the Company executed a letter agreement engaging Turner, Stone & Company, L.L.P. (“Turner Stone”) as its independent registered public accounting firm, and terminated the engagement of its former independent registered public accounting firm, KWCO, P.C. (“KWCO”), for geographic convenience. It is not anticipated that the auditors will be present at the Annual Meeting.

Audit Fees

The Company incurred $17,390, in fees from Turner Stone for the review of the second and third 2012 quarterly 10-Q reports, $22,870 from KWCO for review of the first quarter 2012 quarterly 10-Q report, and will pay approximately $30,000 for its annual December 31, 2012 audit. The Company incurred $21,355 in fees from KWCO for the review of the three 2011 quarterly 10-Q reports and $49,453 from KWCO for auditing the Company’s financial statements for December 31, 2011 and review of the annual 10-K.

Audit Related Fees

The Company incurred no fees or expenses for the 2012 and 2011 fiscal years for professional services rendered by Turner Stone or KWCO other than the fees disclosed above under the caption “Audit Fees” for assurance and related services relating to performance of the audit or review of our financial statements.

Tax Fees

We incurred no fees or expenses for the 2012 and 2011 fiscal years for professional services rendered by Turner Stone or KWCO for tax compliance, tax advice, or tax planning.

All Other Fees

We incurred no other fees or expenses for the 2012 and 2011 fiscal years for any other products or professional services rendered by Turner Stone or KWCO other than as described above.

Administration of Engagement of Auditor

The Company does not currently maintain a separate audit committee. When necessary, the entire Board of Directors performs the tasks that would be required of such committees. As such, at its regularly scheduled and special meetings, the Board of Directors considers and pre-approves any audit and non-audit services to be performed by our independent accountants.  

ITEM 15.            exhibits, financial statement schedules

(a) Financial Statements

The following documents are filed as part of this Annual Report on Form 10-K beginning on the pages referenced below:

	Page
Report of Independent Registered Public Accounting Firm	F-1
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets as of December 31, 2012 and 2011	F-3
Statements of Operations for the years ended December 31, 2012 and 2011	F-4
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and 2011	F-5
Statements of Cash Flows for the years ended December 31, 2012 and 2011	F-6
Notes to Financial Statements	F-7– F20

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(b) Exhibits

The following exhibits are filed with this Annual Report on Form 10-K or are incorporated by reference as described below.

Exhibit	Description
3.1	Articles of Incorporation of Gem Source, Incorporated dated November 30, 1994 (incorporated by reference to Exhibit 3(i) of the Company’s Registration Statement on Form 10-SB (Amendment No. 2) filed with the Commission on January 19, 2000)
3.2	Certificate of Amendment to the Articles of Incorporation of Gem Source, Incorporated filed June 17, 1996 (incorporated by reference to Exhibit 3(i) of the Company’s Registration Statement on Form 10-SB (Amendment No. 2) filed with the Commission on January 19, 2000)
3.3	Certificate of Designation of Series E Preferred Stock of Blue Ridge Energy, Inc. filed June 17, 2002 (incorporated by reference to Ex. 3.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Commission on April 15, 2011 (the “2010 10-K”))
3.4	Certificate of Amendment to the Articles of Incorporation of Blue Ridge Energy, Inc. filed October 11, 2004 (incorporated by reference to Ex. 3.4 of the Company’s 2010 10-K)
3.5	Certificate of Amendment to the Articles of Incorporation of Blue Ridge Energy, Inc. filed June 9, 2005 (incorporated by reference to Ex. 3.5 of the Company’s 2010 10-K)
3.6	Certificate of Amendment to the Articles of Incorporation of Bayou City Exploration Inc. filed July 9, 2012 (incorporated by reference to Appendix A to the Company’s Schedule 14C Information Statement filed with the Commission on July 6, 2012)
3.7	Bylaws of Gem Source, Incorporated  adopted December 2, 1994 (incorporated by reference to Exhibit 3(ii) of the Company’s Registration Statement on Form 10-SB (Amendment No. 2) filed with the Commission on January 19, 2000)
10.1	Services Agreement between Bayou City Exploration, Inc. and Source Capital Group, Inc. dated effective March 1, 2011 (incorporated by reference to Ex. 10.1 of the Company’s 2010 10-K)
10.2	Limited Partnership Agreement of Bayou City Louisiana Drilling Program, L.P. dated July 8, 2010 (incorporated by reference to Ex. 10.2 of the Company’s 2010 10-K)
10.3	Turnkey Drilling Contract between Bayou City Exploration, Inc. and Bayou City Louisiana Drilling Program, L.P. dated July 8, 2010 (incorporated by reference to Ex. 10.3 of the Company’s 2010 10-K)
10.4	Limited Partnership Agreement of 2011 Bayou City Two Well Drilling Program, L.P. dated January 10, 2011(incorporated by reference to Ex. 10.4 of the Company’s 2010 10-K)
10.5	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011 Bayou City Two Well Drilling Program, L.P. dated January 10, 2011(incorporated by reference to Ex. 10.5 of the Company’s 2010 10-K)
10.6	Limited Partnership Agreement of 2011-B Bayou City Two Well Drilling Program, L.P. dated March 4, 2011(incorporated by reference to Ex. 10.6 of the Company’s 2010 10-K)
10.7	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011-B Bayou City Two Well Drilling Program, L.P. dated March 4, 2011 (incorporated by reference to Ex. 10.7 of the Company’s 2010 10-K)
10.8	Limited Partnership Agreement of 2011 Bayou City Two Well Drilling and Production Program, L.P. dated March 18, 2011(incorporated by reference to Ex. 10.8 of the Company’s 2010 10-K)
10.9	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011 Bayou City Two Well Drilling and Production Program, L.P. dated March 18, 2011(incorporated by reference to Ex. 10.9 of the Company’s 2010 10-K)
10.10	2005 Stock Option and Incentive Plan (incorporated by reference to Exhibit A of the Company’s Definitive Proxy filed May 2, 2005)
10.11	Non-Qualified Stock Option Agreement between the Company and Robert D. Burr, dated May 18, 2009 (1) (incorporated by reference to Ex. 10.11 of the Company’s 2010 10-K)
10.12	Non-Qualified Stock Option Agreement between the Company and Stephen Larkin, dated May 18, 2009 (1) (incorporated by reference to Ex. 10.12 of the Company’s 2010 10-K)
10.13	Non-Qualified Stock Option Agreement between the Company and Travis Creed, dated May 18, 2009 (1) (incorporated by reference to Ex. 10.13 of the Company’s 2010 10-K)
10.14	Non-Qualified Stock Option Agreement between the Company and Kevin Cline, dated May 18, 2009 (incorporated by reference to Ex. 10.14 of the Company’s 2010 10-K)
10.15	Non-Qualified Stock Option Agreement between the Company and Charles Bukowski, dated August 3, 2010 (1) (incorporated by reference to Ex. 10.15 of the Company’s 2010 10-K)
10.16	Purchase of Interest Agreement by and between 2009 Production and Drilling Program, L.P. and the Company, dated January 4, 2010 (incorporated by reference to Ex. 10.16 of the Company’s 2010 10-K)

24

10.17	Purchase of Interest Agreement by and between Argyle Energy 2009-VI Year End Production Program, L.P. and the Company, dated January 4, 2010 (incorporated by reference to Ex. 10.17 of the Company’s 2010 10-K)
10.18	Purchase of Interest Agreement by and between 2009/10 Production & Drilling Program, L.P. and the Company, dated March 1, 2010. (incorporated by reference to Ex. 10.18 of the Company’s 2010 10-K)
10.19	Purchase of Interest Agreement by and between Burrite, Inc. and the Company, dated March 1, 2010 (incorporated by reference to Ex. 10.19 of the Company’s 2010 10-K)
10.20	Purchase of Interest Agreement by and between AE 2009/2010-VI Year End Production Program, L.P. and the Company, dated March 1, 2010 (incorporated by reference to Ex. 10.20 of the Company’s 2010 10-K)
10.21	Lease between RMB Jupiter Office Park, Ltd. and Bayou City Exploration, Inc. dated July 15, 2010 (incorporated by reference to Ex. 10.21 of the Company’s 2010 10-K)
10.22	Lease between RMB Jupiter Office Park, Ltd. and Bayou City Exploration, Inc. dated January 15, 2011 (incorporated by reference to Ex. 10.22 of the Company’s 2010 10-K)
10.23	Joint Venture Agreement of Next Energy Illinois Basin Oil & Gas Lease Development JV, dated August 26, 2011(incorporated by reference to Ex. 10.1 of the Company’s quarterly report on Form 10-Q for the period ended September 30, 2011, filed with the Commission on November 14, 2011 (the “September 2011 10-Q)
10.24	Limited Partnership Agreement of 2011 Bayou City Exploration, Inc. and 2011 Bayou City Year End Drilling Program, L.P., dated October 5, 2011 (incorporated by reference to Ex. 10.2 of the September 2011 10-Q)
10.25	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011 Bayou City Year End Drilling Program, L.P., dated October 5, 2011 (incorporated by reference to Exhibit 10.3 of the September 2011 10-Q)
10.26	Stock Purchase Agreement, dated March 8, 2012 by and among the Company and the investors named therein (incorporated by reference to Ex. 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on March 9, 2012)
10.27	First Amendment to Lease by and between the RMB Jupiter Office Park and the Company, executed October 10, 2011(incorporated by reference to Ex. 10.27 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2011)
10.28	Limited Partnership Agreement of 2012-A Bayou City Drilling Program, L.P. dated January 2, 2012 (incorporated by reference to Ex. 10.1 of the Company’s quarterly report for the period ended March 31, 2012 (the “March 2012 10-Q”)
10.29	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012-A Bayou City Drilling Program, L.P., dated January 2, 2012 (incorporated by reference to Ex. 10.2 of the Company’s March 2012 10-Q)
10.30	Limited Partnership Agreement of 2012 Bayou City Squeeze Box Offset Program, L.P. dated April 9, 2012 (incorporated by reference to Ex. 10.4 of the Company’s March 2012 10-Q)
10.31	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012 Bayou City Squeeze Box Offset Program, L.P., dated April 9, 2012 (incorporated by reference to Ex. 10.5 of the Company’s March 2012 10-Q)
10.32	Operating Agreement of BYCX Opportunity Fund I , LLC dated June 28, 2011*
10.33	Operating Agreement of Opportunity Fund VII , LLC dated June 30, 2011*
10.34	Operating Agreement of Opportunity Fund VIII , LLC dated February 1, 2013*
10.35	Lease Agreement between Bayou City Exploration and GC Royalty, LLC, effective January 1, 2013*
10.36	Operating Agreement of 2011-12 Opportunity Fund 6-1, LLC, dated October 10, 2012*
14.1	Code of Ethics (incorporated by reference to Ex. 14.1 of the Company’s 2010 10-K)
23.1	Consent of Pressler Petroleum Consultants, Inc.*
31.1	Certification of Principal Executive Officer and Principal Financial Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a).*
32.1	Certification of Principal Executive Officer Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*
99.1	Report of Pressler Petroleum Consultants, Inc.*

* Filed herewith.

(1) Signifies a management agreement.

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Bayou City Exploration, Inc.
By:	/s/ Stephen C. Larkin
	Stephen C. Larkin
	President, Chief Executive Officer and Chief Financial Officer
	April 16, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in capacities and the dates indicated.

By:	/s/ Stephen C. Larkin
	Stephen C. Larkin, Director
	April 16, 2013
By:	/s/ Travis N. Creed
	Travis N. Creed, Director April 16, 2013

26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Bayou City Explorations, Inc.

Bowling Green, Kentucky

We have audited the accompanying consolidated balance sheet of Bayou City Explorations, Inc. (the “Company”) as of December 31, 2012 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bayou City Explorations, Inc. as of December 31, 2012, and the results of their consolidated operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Turner, Stone & Company, L.L.P.

Dallas, Texas

April 11, 2013

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Bayou City Exploration, Inc.
Bowling Green, Kentucky

We have audited the accompanying balance sheets of Bayou City Exploration, Inc. as of December 31, 2011, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayou City Exploration, Inc. as of December 31, 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ KWCO, P.C.

KWCO, P.C. 

Odessa, Texas 

April 9, 2012

F-2

BAYOU CITY EXPLORATION, INC.

BALANCE SHEETS

	December 31,			December 31,
	2012			2011
ASSETS
CURRENT ASSETS:
Cash	$	2,087,480		$	1,259,934
Accounts receivable:
Trade and other		60,790			13,778
Receivable due from partnerships		104,167			–
Prepaid expenses and other		117,142			504,428
TOTAL CURRENT ASSETS		2,369,579			1,778,140
OIL AND GAS PROPERTIES, NET		340,053			156,038
OTHER FIXED ASSETS, NET		19,680			25,047
OTHER INVESTMENTS AT COST		126,128			69,111
INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY		150,099			–
INVESTMENTS HELD FOR SALE		190,000			190,000
TOTAL ASSETS	$	3,195,539		$	2,218,336
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	53,953		$	154,705
Accounts payable - minority shareholder		84,906			84,906
Turnkey partnership obligation		582,746			1,242,509
Accounts payable - related party		530,611			–
Notes payable - minority shareholder		100,000			100,000
Federal income taxes payable		32,697			–
TOTAL CURRENT LIABILITIES		1,384,913			1,582,120
TOTAL LIABILITIES		1,384,913			1,582,120
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; No shares issued and outstanding as of December 31, 2012 and December 30, 2011		–			–
Common stock, $0.005 par value; 150,000,000 shares authorized; 990,176 and 290,176 shares issued and outstanding at December 31, 2012 and 2011, respectively		4,951			1,451
Additional paid in capital		13,912,814			13,558,314
Accumulated deficit		(12,107,139	)		(12,923,549	)
TOTAL STOCKHOLDERS' EQUITY		1,810,626			636,216
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,195,539			2,218,336

See accompanying notes to financial statements

F-3

BAYOU CITY EXPLORATION, INC.

STATEMENTS OF OPERATIONS

	For the years ended December 31,
	2012			2011
OPERATING REVENUES:
Oil and gas sales	$	180,096		$	133,354
Turnkey drilling contract revenue		3,132,676			1,839,915
TOTAL OPERATING REVENUES		3,312,772			1,973,269
OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes		75,527			47,021
Abandonment and dry hole costs		128,344			35,035
Depletion, depreciation, and amortization		68,689			101,906
Turnkey drilling contract costs		1,378,532			589,918
Marketing costs		223,574			297,911
General and administrative costs		716,124			636,995
TOTAL OPERATING COSTS		2,590,790			1,708,786
OPERATING INCOME		721,982			264,483
OTHER INCOME (EXPENSE):
Miscellaneous income (expense)		(22,799	)		(7,369	)
Equity in earnings from affiliated company		150,099			–
NET INCOME BEFORE INCOME TAX PROVISION		849,282			257,114
Income tax provision		(32,872	)		–
NET INCOME	$	816,410		$	257,114
NET INCOME PER COMMON SHARE - BASIC	$	0.95		$	0.89
NET INCOME PER COMMON SHARE - DILUTED	$	0.93		$	0.89
Weighted average common shares outstanding -
Basic		862,034			290,176
Diluted		874,766			290,176

See accompanying notes to financial statements

F-4

BAYOU CITY EXPLORATION, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Common Stock						Additional Paid in			Accumulated
	Shares			Amount			Capital			Deficit			Total
Balance at December 31, 2010, as previously reported		29,003,633		$	145,018		$	13,395,739		$	(13,180,663	)	$	360,094
Reverse stock split (100 for 1)		(28,713,597	)		(143,568	)		143,568			–			–
Partial shares issued for stock split		140			1			(1	)		–			–
Balance adjusted at December 31, 2010		290,176			1,451			13,539,306			(13,180,663	)		360,094
Interest on non-interest bearing note payable to shareholder		–			–			8,000			–			8,000
Stock options exercised		–			–			11,008			–			11,008
Net income		–			–			–			257,114			257,114
Balance at 12/31/2011		290,176			1,451			13,558,314			(12,923,549	)		636,216
Stock Issued for cash		655,000			3,275			324,225			–			327,500
Stock Issued for services		45,000			225			22,275			–			22,500
Interest on non-interest bearing note payable to stockholder		–			–			8,000			–			8,000
Net income		–			–			–			816,410			816,410
Balance at 12/31/2012		990,176		$	4,951		$	13,912,814		$	(12,107,139	)	$	1,810,626

See accompanying notes to financial statements

F-5

BAYOU CITY EXPLORATION, INC.

STATEMENTS OF CASH FLOWS

	For the years ended December 31,
	2012			2011
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)	$	816,410		$	257,114
Adjustments to reconcile net income to net cash flows used in operating activities:
Depreciation, depletion, and amortization		68,689			101,906
Interest contributed as capital by shareholder		8,000			8,000
Abandoments and dry holes		128,344			–
Equity in earnings of affiliated company		(150,099	)		–
Stock issued for services		22,500			–
Stock option expense		–			11,008
Change in operating assets and liabilities:
Accounts receivable - trade		(47,012	)		6,340
Receivable from partnerships		(104,167	)		–
Prepaid expenses and other		387,286			–
Accounts payable and accrued liabilities		(100,752	)		67,514
Net turnkey partnership obligation		(659,763	)		743,601
Accounts payable--related party		530,611			–
Federal income tax payable		32,697			–
NET CASH PROVIDED BY OPERATING ACTIVITIES		932,744			1,195,483
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties		(375,681	)		(402,210	)
Purchase of other fixed assets		–			(25,047	)
Purchase of investment in BYCX opportunity fund		(57,017	)		–
NET CASH USED IN INVESTING ACTIVITIES		(432,698	)		(427,257	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock		327,500			–
NET CASH PROVIDED BY FINANCING ACTIVITIES		327,500			–
NET INCREASE IN CASH		827,546			768,226
CASH AT BEGINNING OF YEAR		1,259,934			491,708
CASH AT END OF YEAR	$	2,087,480		$	1,259,934
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	–		$	–
Cash paid for federal income taxes	$	–		$	–

See accompanying notes to financial statements

F-6

BAYOU CITY EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2012 and 2011

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Bayou City Exploration, Inc., a Nevada corporation (the “Company”), was organized in November 1994, as Gem Source, Incorporated and in June 1996 changed the Company’s name to Blue Ridge Energy, Inc. On June 8, 2005, the Company again changed its name to Bayou City Exploration, Inc.

The Company is primarily engaged in the oil and gas exploration business, and focuses its operations in the gulf coast of Texas, east Texas, south Texas, and Louisiana.

The Company also serves as the Managing Member and Investment Manager of funds organized as limited liability companies to acquire portfolios of mortgage notes and land contracts secured by real estate (the “Mortgage Notes and Land Contracts”). Nevertheless, most of its business resources are focused upon the management of partnerships created to explore and develop oil and gas reserves. The Company manages partnerships that purchase interests in exploratory wells and/or interests in producing oil and gas properties with undrilled reserves. The Company’s growth strategy is based on sponsoring partnerships in which third party investors purchase an interest. These partnerships then assume the costs associated with the drilling of oil and gas wells in exchange for unit interests in a partnership that holds a portion of the working interest derived from the wells they finance. The Company acts as the Managing General Partner for these partnerships and typically maintains a partnership interest in such partnerships, but may also maintain a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project and subsequent operating expenses to the extent that we retain a portion of the working interest. The Company believes this strategy allows for a reduction of financial risk associated with drilling new wells, enabling us to earn income from present production in addition to income from any successful new drilling. As of December 31, 2012, the Company held interest in eight partnerships.

Oil and Gas Drilling Partnerships and Properties

When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the project well(s). The Company then forms and sells interest in a partnership that will acquire working interest in the well and undertake drilling operations. The Company typically enters into turnkey contracts with the partnerships it manages, pursuant to which we agree to undertake the drilling and completion of the partnerships’ well(s), for a fixed price, to a specific formation or depth (each, a “Turnkey Agreement”). As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells which the Company records as revenue.

As of December 31, 2012, the Company 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 Agreements with each of these partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).

In addition to our current business strategy described above, the Company also owns an interest in Affiliated Partners and manages certain Opportunity Funds (described below) in addition to certain oil and gas interests outside of the interests in the partnerships it sponsors that have developed into revenue producing properties as well as an interest in a lease development joint venture to develop properties located in the Illinois Basin. The Company uses the cash generated by these oil and gas interests in addition to the revenues from our direct investment partnerships to cover its ongoing operational needs and restructuring of the balance sheet.

F-7

The Opportunity Funds 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, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other 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 VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established February 2013, both of which are also Delaware limited liability company that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

Recent accounting pronouncements

During the year ended December 31, 2012 and through April 11, 2013, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

Consolidation Policy

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.

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 produced and sold during the reporting period but awaiting cash payment. Based upon a review of trade receivables as of December 31, 2012 and 2011, there were no receivables considered potentially uncollectible. Receivables are reviewed quarterly, and if any are deemed uncollectible, they are written off as bad debts.

F-8

Managed Limited Partnerships

Prior to 2004 and starting again in 2010, the Company managed limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of the limited partnerships as the Managing General Partner and accounts for the investment under the proportionate consolidation. Certain partnerships that have an interest in the Opportunity Fund, like the 2012 Bayou City Year End Drilling Program L.P., the Company has chosen to participate for the required 1%. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively. As of December 31, 2012, the Company held interest in eight partnerships.

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 units 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 exploration wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If after a year has passed, and the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired, and its costs are charged to expense. At December 31, 2012 and 2011, the Company had no capitalized costs pending determination.

Accounting for Asset Retirement Obligations

The Company follows the provisions of FASB ASC 410, Asset Retirement and Environmental Obligations. ASC 410 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Prior to 2005, management determined that any future costs related to plugging and abandonment of producing wells would be substantially offset by the value of equipment removed from the well site and such estimates were immaterial to the financial statements. Therefore, no liability was recorded prior to 2005. Due to continued rising rig and fuel costs, a detailed estimate was made in the second quarter of 2005 to determine how these rising service costs would affect future plugging and abandonment costs. As a result of this analysis, management concluded that a liability should be recorded within the financial statements under the provisions of ASC 410. These costs are evaluated annually and adjusted accordingly under the guidelines of ASC 410. As of December 31, 2012 the Company had no liability established for any of its wells that are currently in production as these amounts have been determined to be immaterial.

F-9

Surrender or Abandonment of Developed Properties

Normally, no separate gain or loss is recognized if only an individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortization base is abandoned or retired as long as the remainder of the property or group of properties continues to produce oil or gas. The asset being abandoned or retired is deemed to be fully amortized, and its cost is charged to accumulated depreciation, depletion or amortization. When the last well on an individual property or group of properties with common geological structures ceases to produce and the entire property or property group is abandoned, gain or loss, if any, is recognized. Abandonment and dry hole costs were $128,344 and $35,035 for the years ended December 31, 2012 and 2011, respectively.

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, “Extractive Activities – Oil and Gas – Notes to Financial Statements.”

Income (Loss) Per Common Share

The Company calculates basic earnings per common share (“Basic EPS”) using the weighted average number of common shares outstanding for the period.

F-10

The following table provides the numerators and denominators used in the calculation of Basic EPS for the years ended December 31, 2012 and 2011:

	2012		2011
Net income (loss) from operations	$	816,410	$	257,114
Less preferred stock dividends		-0-		-0-
Income (loss) available to common stockholders	$	816,410	$	257,114
Weighted average shares outstanding, basic		862,034		290,176
Assumed exercise of stock options		12,732		-0-
Weighted average shares outstanding, diluted		874,766		290,176

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with FASB ASC 505, “Equity,” and FASB ASC 718, “Compensation – Stock Compensation.” Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under ASC 718 and 505, the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

For purposes of the statements of cash flows, cash includes demand deposits, time deposits and short-term liquid investments with an original maturity of three months or less when purchased.  At December 31, 2012 and 2011, the Company had no such investments included in cash.  The Company maintains deposits in two financial institutions.  Beginning January 1, 2013, the Federal Deposit Insurance Corporation (FDIC) provides insurance coverage of $250,000 per depositor per bank, no longer insuring non-interest bearing transaction accounts separately from other accounts.  Based on the FDIC coverage in effect at January 1, 2013, approximately $1,046,000 of the Company’s cash at December 31, 2012 was in excess of federally insured limits.The Company has not experienced any losses in such accounts and does not believe that the Company is exposed to significant risks from excess deposits.

Marketing

During the years ended December 31, 2012 and 2011, marketing costs, which are expensed as incurred, totaled $223,574 and $297,911, respectively.

F-11

Income Taxes

There was no provision for income taxes for the year ended December 31, 2011 but there was $32,872 in federal and state income taxes to be paid in 2012 The Company had an estimated net operating loss carry forward of approximately $7,265,000 and $8,004,000 as of December, 31, 2012 and 2011, respectively.  However, the Company had an ownership change in March, 2012 with the issuance of additional shares in a private placement transaction.  This resulted in an Internal Revenue Code (IRC) Section 382 limitation on the availability of the Company’s net operating losses immediately before the ownership change to operational periods following the date of the ownership change.  The Section 382 limitation rule will limit the use of the Company’s current net operating loss carry forward to $30,193 per year in future years.  This annual limitation was allocated in the year 2012 to the period following the change date and resulted in net operating losses available for the time period of April – December, 2012 being limited to $22,645 and the above tax liability for 2012 of $32,872.Income taxes are provided for under the liability method in accordance with ASC 740 “Accounting for Income Taxes,” which takes into account the differences between financial statement treatment and tax treatment of certain transactions. It is uncertain as to whether the Company will generate sufficient future taxable income to utilize the net deferred tax assets, therefore for financial reporting purposes, a valuation allowance of $2,303,527 and $2,674,500 has been recognized to offset the net deferred tax assets at December 31, 2012 and December 31, 2011, respectively.

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 purchases of Mortgages Notes and Land 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 year ended December 31, 2012, the Company recognized income of $150,099 from its Affiliated Partners interest based upon the equity method of accounting.

Investments at Cost

The Company holds an interest in the BYCX Opportunity Fund I and the Opportunity Fund VII through their position as managing general partner for some of their limited partnerships. The investment accounts for these investments on a cost basis for which the Company will receive quarterly interest income. As of December 31, 2012, the Company had $126,128 invested in the Opportunity Funds collectively.

Assets Held for Sale

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 0.005% of the joint venture. 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. As of December 31, 2012 the investment remains valued at $190,000, even though the Company was unable to estimate the fair market value.

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.

F-12

Reclassifications

Certain accounts in prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.

2. RELATED PARTY TRANSACTIONS

A. Common Stock Transactions

As of December 31, 2012, there are 990,176 shares of common stock issued and outstanding. Of all the stockholders of record two entities own 5% or more, Stephen C. Larkin owns 27.3% and Robert and Doris Burr own 29.8%.

B. Payables and Notes Payable to Related Parties

As of December 31, 2012 and December 31, 2011, the Company had the following debts and obligations to related parties:

	2012		2011
Accounts payable to minority stockholder for operating capital	$	84,906	$	84,906
Note payable to minority stockholder		100,000		100,000
Total Payable and Note Payable to Related Parties	$	184,906	$	184,906

During the second and third quarters of 2007, the Company received $84,906 from a minority shareholder. No documents were executed to document the terms of advances. These advances are classified as a current liability on the Company’s consolidated balance sheet at December 31, 2012 and 2011.

During the fourth quarter of 2007, Peter Chen, a minority stockholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007; the note is due on demand, unsecured and bears an interest rate of 0%. The Company charges interest at 8.0% or $8,000 and records it as interest expense and additional paid in capital.

The Company also has accounts payable to Blue Ridge Group of $530,611 for their interest in the purchasing of three wells for the 2012-A Bayou City Drilling Program, L.P.

C. Receivables from Related Parties

As of December 31, 2012, the Company has a receivable from their managed limited partnerships in the amount of $104,167 for billed turnkey fees that have not been received. All fees were received in the first quarter of 2013.

D. Non-Employee Compensation

While serving on the Company’s Board of Directors, Kevin Cline was paid $27,375 in non-employee compensation related to fees earned by Source Capital in connection with the Company’s offerings.

F-13

3. OIL AND GAS PROPERTIES

Oil and gas properties, stated at cost, consisted of the following:

	December 31
	2012			2011
Proved oil and gas properties	$	776,540		$	572,458
Total oil and gas properties		776,540			572,458
Less accumulated depletion and amortization		(436,487	)		(416,420	)
Less impairment		–			–
Net oil and gas properties	$	340,053		$	156,038

Depletion, depreciation, and amortization expense was $68,689 and $101,906 during the years ended 2012 and 2011, respectively. The decrease of $33,217 was due mainly to the fact that the wells producing in 2011 produced very little in 2012 and the wells that began production in 2012 were had very little production according to their respective anticipated life of the well.

During 2012 and 2011, the Company provided for abandonment and dry hole costs of $128,344 and $35,035, respectively. The large increase is due to the fact that six wells that produced in 2011 dried up and were abandoned in 2012. The 2011 amount represents charges for the same well that were not invoiced until 2011, in the amount of $23,705 and a dry hole drilled by one of the partnerships in the amount of $11,330.

4. PROPERTY LEASE

The Company entered into an operating lease agreement on July 12, 2010 which expires on January 31, 2015 for the offices in Texas for $2,890 per month. Rental expense totaled $37,458 and $31,740 for the years ended December 31, 2012 and 2011, respectively. The Company’s future lease commitments are $35,778 for the years ending December 31, 2013 and 2014 and $2,890 for the year ending December 31, 2015.

Effective January 1, 2013, the Company leased its principal office space from GC Royalty, LLC. GC Royalty, LLC is owned by Robert and Doris Burr, who collectively beneficially own 29.79% of the Company’s Common Stock. The lease is for approximately 24,000 square feet of office and storage space, for $15,000 per month and has a three year term expiring on December 31, 2015. The Company’s future lease commitments are $180,000 annually for each of the years ending December 31, 2013 through December 31, 2015.

5. INCOME TAXES

The tax effect of significant temporary differences representing the net deferred tax liability at December 31, 2012 and 2011 were as follows:

	2012			2011
Net operating loss carry forward	$	2,469,932		$	2,781,864
Well Costs		(6,075	)		(6,075	)
Partnership differences		(160,330	)		(101,289	)
Valuation allowance		(2,303,527	)		(2,674,500	)
Net deferred tax liability	$	–		$	–

The Company recorded $32,872 and $-0- as income tax expense for the years ended December 31, 2012 and 2011, respectively, as a result of net operating losses to offset its taxable income. Further, no income tax benefit has been recognized due to the uncertainty of the Company’s ability to recognize the benefit from the net operating losses and, therefore, has recorded a full valuation allowance against the deferred tax assets.

F-14

The income tax expense is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax income as follows:

	2012					2011
Income tax expense computed at the statutory rate	$	288,756		34.0%		$	87,419		34.0%
Increase (reduction) in tax benefit resulting from:
State and local income taxes, net of federal tax effect							10,285		4.0%
Adjustment for book to tax changes		115,089		6.0%			–		(0.0%	)
Permanent items		–		(0.0%	)		10,317		(0.0%	)
Valuation allowance decrease		(370,973	)	(38.0%	)		(87,387	)	(38.0%	)
Income tax expense	$	32,872		–		$	–		–

6. COMMITMENTS AND CONTINGENCIES

Commitments

The Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. The occurrence of any of these events could result in substantial losses to the Company due to severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The occurrence of a significant event it could materially and adversely affect our future revenues from any given prospect.

7. STOCKHOLDERS’ EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. On October 8, 2004, a Special Meeting of Stockholders was held requesting the approval of an Amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock from 20,000,000 shares to 150,000,000 shares. The amendment was approved at the Special Meeting of Stockholders. As of December 31, 2012, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as common stock, $0.005 par value, and 5,000,000 shares designated as preferred stock, $0.001 par value.

Issuance of Equity Securities

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 at the time of the Offering, 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 current President, Chief Executive Officer, and 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. The consideration for the Common Stock was paid primarily in cash, however, the shares issued to G2 International, Inc. were issued in exchange for settlement of outstanding invoices for consulting services rendered.

F-15

Reverse Stock Split

On July 26, 2012, the Company effected a 1 for 100 reverse stock split of the Company’s Common Stock, resulting in a reduction of the number of shares outstanding of the Company from approximately 99,003,633 to approximately 990,000. At December 31, 2012, the Company had 990,176. Persons holding less than 100 shares of Common Stock received one share of Common Stock. The rights and privileges of the holders of shares of Common Stock were substantially unaffected by the reverse stock split. All issued and outstanding options, warrants and convertible securities were appropriately adjusted for the reverse stock split automatically on the effective date of the reverse stock split, and have been presented in the financial statements to adjust for the reverse stock split.

Stock Options

On February 22, 2005, the Board of Directors adopted the 2005 Plan, the purposes of which are to (i) attract and retain the best available personnel for positions of responsibility within the Company, (ii) provide additional incentives to employees of the Company, (iii) provide directors, consultants and advisors of the Company with an opportunity to acquire a proprietary interest in the Company to encourage their continuance of service to the Company and to provide such persons with incentives and rewards for superior performance more directly linked to the profitability of the Company’s business and increases in stockholder value, and (iv) generally to promote the success of the Company’s business and the interests of the Company and all of its stockholders, through the grant of options to purchase shares of the Company’s Common Stock and other incentives. Subject to adjustments upon changes in capitalization or merger, the maximum aggregate number of shares which may be optioned and sold or otherwise awarded under the 2005 Plan is seven million (70,000) common shares. The Board of Directors administers the 2005 Plan. Generally, awards of options under the 2005 plan vest immediately or on a graded basis over a 5 year term. The maximum contractual period of options granted is 10 years. The 2005 Plan will terminate on February 22, 2015. As of December 31, 2012, approximately 21,500 shares are available for grant. Issuance of common stock from the exercise of stock options will be made with new shares from authorized shares of the Company.

In 2009, the Board of Directors decided that with the current stock options strike price compared to the current market price, that the outstanding options were simply not an incentive anymore to the current employees and directors. Therefore, in May of 2009 the Company decided to cancel the outstanding options to the current employees and directors and issue new ones. As a result, the Company cancelled 29,688 options and issued 60,000 options to its current employees, directors and key consultants and advisors of the Company and expensed $71,000 in relation to issuance of these options. All options were issued at the strike price of $1.00, with varying vesting terms. In 2010, there were 5,000 shares issued to Mr. Bukowski at $5.00 strike price and 17,500 options expired. All options granted have a ten year term. In 2012 the Company had 5,000 options expire as Mr. Bukowski did not exercise his options after he resigned from the Company.

At December 31, 2012 there were options, fully vested and expected to vest, to purchase 15,000 shares with a weighted average exercise price of $1.00 having an intrinsic value of $15,000 and a weighted contractual term of 6.4 years. At December 31, 2011, there were options to purchase 25,000 shares with a weighted average exercise price of $1.80, an intrinsic value of $45,000 and a weighted average contractual term of 8.2 years.

For the years ended December 31, 2012 and 2011 there was $0 and $11,008 stock based compensation expense, respectively. The stock based compensation was valued using the Black-Scholes pricing model using the following assumptions:

Estimated Fair Value	$0.014  -  $0.048
Expected Life	10 years
Risk Free Interest Rate	1.09%  -  5.00%
Volatility	100%  -  303%
Dividend Yield	–

When calculating stock-based compensation expense the Company must estimate the percentage of non-vested stock options that will be forfeited due to normal employee turnover. Since its adoption of ASC 718 and 505 on January 1, 2006, the Company initially used a forfeiture rate of 20% and increased its forfeiture rate to 50% during the third quarter 2006. This was due to the Company experiencing a number of resignations of senior management personnel, each of whom had been awarded options which, in many cases, had not vested and therefore will be forfeited. In the future the Company will use an appropriate estimate for the forfeiture rate at the time options are being granted.

F-16

The following table provides a summary of the stock option activity for all options for the year ended December 31, 2012.

	Number of Weighted Average			Options Exercise Price
Options at December 31, 2011	25,000		$	1.80
Options expired or cancelled in 2012	(10,000	)		(3.00	)
Options exercised in 2012	–			–
Options issued 2012	–			–
Options at December 31, 2012	15,000			1.00
Options exercisable at December 31, 2012	15,000		$	1.00

8. FAIR VALUE ESTIMATES

In February 2007 the FASB issued ASC 820 “Fair Value Measurements and Disclosures”. The objective of ASC 820 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.

The Company measures its options at fair value in accordance with ASC 820. ASC 820 specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when estimating fair value. The fair value of the options held for sale at December 31, 2012 and 2011, was as follows:

	Quoted Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
Options	(Level 1)		(Level 2)		(Level 3)
2012	$	–	$	–	$	–	$	–
2011	$	–	$	11,008	$	–	$	11,008

The Provisions of ASC 820 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. Options were valued using the Black-Scholes model.

9. SUBSEQUENT EVENTS:

In May 2009, the FASB issued ASC 855, subsequent events. ASC 855 establishes general standards of accounting for and disclosure of events after the balance sheet date but before financial statements are issued or are available to be issued. The adoption in the fourth quarter of 2009 did not have any material impact on the Company’s financial statements. Accordingly, the Company evaluated subsequent events through the date the financial statements were issued.

F-17

Formation of New Opportunity Fund.

Subsequent to the year ended December 31, 2012, the Company has formed and serves as the Manger of a new Delaware limited liability com4pany known as Opportunity Fund VIII, LLC, which was formed on January 8, 2013.

Bonus Payment to Chief Executive Officer

In February 2013, the Company paid Stephen Larkin, its President, Chief Executive Officer and Chief Financial Officer, a bonus of $27,750 (the “2012 Bonus”). The 2012 Bonus was based upon the Company’s performance during the 2012 fiscal year.

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Unaudited)

Capitalized Costs Relating to Oil and Gas	December 31,			December 31,
Producing Activities	2012			2011
Unproved oil and gas properties	$	–		$	–
Proved oil and gas properties		776,540			572,458
Less accumulated depreciation, depletion amortization, and impairment		(436,487	)		(416,420	)
Net capitalized costs	$	340,053		$	156,038
Costs incurred in Oil and Gas Producing Activities
For the years ended
Property acquisition costs
Proved	$	212,560		$	51,437
Unproved		163,121			350,773
Exploration costs		–			–
Development costs		–			–
Amortization rate per equivalent barrel of production	$	36.12		$	41.65
Results of Operation for Oil and Gas Producing
Activities for the years ended
Oil and gas sales	$	180,096		$	133,354
Gain on drilling program		1,754,144			1,249,997
Gain on sale of oil and gas properties		–			–
Impairment, abandonment, and dry hole costs		(128,344	)		(35,035	)
Production costs		(75,527	)		(47,021	)
Depreciation, depletion and amortization		(68,689	)		(101,906	)
		1,661,680			1,199,389
Income tax expense		–			–
Results of operations for oil and gas producing Activities (excluding corporate overhead and Financing costs)	$	1,661,680		$	1,199,389

F-18

Reserve Information

The estimates of proved oil and gas reserves utilized in the preparation of the financial statements were prepared by independent petroleum engineers. Such estimates are in accordance with guidelines established by the SEC and the FASB. All of our reserves are located in the United States.

In 2009, the SEC issued its final rule on the modernization of oil and gas reporting, and the FASB adopted conforming changes to ASC Topic 932, “Extractive Industries”, to align the FASB’s reserves requirements with those of the SEC. The final rule is now in effect for companies with fiscal years ending on or after December 31, 2009.

As it affects our reserve estimates and disclosures, the final rule:

· amends the definition of proved reserves to require the use of average commodity prices based upon the prior 12-month period rather than year-end prices (Oil - $94.71 Bbls; Gas – $2.849 Mcf for year ended December 31, 2012);

· expands the type of technologies available to establish reserve estimates and categories;

· modifies certain definitions used in estimating proved reserves;

· permits disclosure of probable and possible reserves;

· requires disclosure of internal controls over reserve estimations and the qualifications of technical persons primarily responsible for the preparation or audit of reserve estimates;

· permits disclosure of reserves based on different price and cost criteria, such as futures prices or management forecasts; and

· requires disclosure of material changes in proved undeveloped reserves, including a discussion of investments and progress made to convert proved undeveloped reserves to proved developed reserves

We emphasize that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. In addition, a portion of our proved reserves are classified as proved developed nonproducing and proved undeveloped, which increases the imprecision inherent in estimating reserves which may ultimately be produced.

F-19

The following table sets forth estimated proved oil and gas reserves together with the changes therein for the year ended December 31, 2012:

	Oil (bbls)			Gas (mcf)
Proved developed and undeveloped reserves
Beginning of year		640			12,975
Revisions of previous estimates		–			–
Improved recovery		–			–
Purchases of minerals in place		–			–
Extensions and discoveries		6,051			65,993
Production		(1,291	)		(10,788	)
Sales		–			–
End of Year		5,400			68,180
Proved developed reserves
Beginning of year		640			12,975
End of Year		5,400			68,180
Standardized measure of Discounted Future
Net Cash Flows at December 31, 2012 and 2011		2012			2011
Future cash inflows	$	811,670		$	114,540
Future production costs		(199,430	)		(39,910	)
Future development costs		–			–
Future income tax expenses		–			–
		612,240			74,630
Future net cash flows 10% annual discount for estimated timing of cash flows		(67,530	)		(13,770	)
Standardized Measures of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves	$	544,710		$	60,860

The following reconciles the change in the standardized measure of discounted future net cash flow during 2012 and 2011:

	2012			2011
Beginning of year	$	69,860			41,611
Sales of oil and gas produced, net of production costs		(104,569	)		(86,334	)
Net changes in prices and production costs		(18,235	)		(45,608	)
Extensions, discoveries, and improved recovery, less related costs		651,414			152,927
Development costs incurred during the year which were previously estimated		–			–
Net change in estimated future development costs		–			(480	)
Revisions of previous quantity estimates		–			–
Net change from purchases and sales of minerals in place		–			7,744
Accretion of discount		(53,760	)		–
Net change in income taxes		–			–
Other		–			–
End of year	$	544,710			69,860

F-20

EX-10.32

EXHIBIT 10.32

EXHIBIT A – FUND OPERATING AGREEMENT

THE UNITS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF CERTAIN STATES. THE UNITS MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE UNITS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED, OR OTHER EVIDENCE SATISFACTORY TO THE MANAGER THAT SUCH REGISTRATION IS NOT REQUIRED. ADDITIONAL RESTRICTIONS ON TRANSFER OF THE UNITS ARE SET FORTH IN THIS AGREEMENT.

OPERATING AGREEMENT OF BYCX OPPORTUNITY FUND I, LLC

THIS OPERATING AGREEMENT (this “Agreement”) was made and entered into as of the 28th day of June, 2011, by and among Bayou City Exploration, Inc., a Nevada Corporation (the “Manager and “Initial Member”), and BYCX Opportunity Fund I, LLC, a Delaware limited liability company (the “Company” or “Fund”).

WITNESSETH

WHEREAS, the Manager and Initial Member and the Company desire to enter into an Operating Agreement to govern the Company’s operations;

NOW, WHEREFORE, in consideration for the mutual agreements, covenants and premises set forth herein, the Operating Agreement is hereby adopted:

ARTICLE 1

DEFINITIONS

Defined Terms. Unless otherwise stated, the terms used in this Agreement shall have the usual and customary meanings associated with their use, and shall be interpreted in the context of this Agreement. Certain capitalized terms which are used in this Agreement shall have the meanings given in this Agreement or Schedule 1.1.

ARTICLE II

FORMATION; PURPOSE

2.1 Organization; Governance. The Initial Member has caused the formation of the Company on June 28th, 2011 (the “Effective Date”) as a limited liability company effective with the filing of the Articles of Organization (the “Articles”) with the Delaware Secretary of State. The Company has been formed pursuant to the provisions of the Delaware Statutes and upon the terms and conditions set forth in the Articles and in this Agreement. The Initial Member together with all Persons who may hereafter become Members of the Company from time to time in accordance with this Agreement (collectively, the “Members”) are and shall be bound by the terms and provision of this Agreement. The Manager is authorized to execute and cause to be filed additional Amendments to the Articles whenever required by the Act or this Agreement. Except as otherwise required by the Act, this Agreement shall govern the business and affairs of the Company and the relationships of the Members to one another as members of the Company. The Members intend that the Company be treated as a partnership for federal and state income tax purposes but that the Company not be treated as a partnership for purposes of Section 303 of the Federal Bankruptcy Code. No Member shall act inconsistently with this intent.

1

2.2 Term. The term of the Company commenced on the date the Articles were filed as described in Section 2.1 and continue perpetually unless earlier terminated under the provisions of this Agreement or by operation of law.

2.3 Name. The business of the Company shall be carried on under the name “BYCX Opportunity Fund I, LLC.”

2.4 Purpose. The primary purpose of the Company is to invest in and purchase Note Investments, and do all things reasonably related thereto. The Company seeks to provide Members with a high level of quarterly income. The Company seeks to achieve this objective by investing in a managed portfolio comprised of a blend of Mortgage Notes secured by real estate and Land Contracts secured by full ownership of the underlying collateral.

2.5 Place of Business. The principal place of business of the Company is and will be located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, until the Manager changes it after giving the Members notice. In addition, the Company may maintain such other offices and places of business in the United States as the Manager may deem advisable. The Manager will file all necessary or desirable documents to permit the Company to conduct its business lawfully in any state or territory of the United States.

2.6 Agent for Service of Process. The name and business address of the agent for service of process for the Company is Travis Creed, 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, or such other person as the Manager shall appoint from time to time, utilizing the Manager’s reasonable discretion.

2.7 Nature of Members' Membership Units. The Membership Units of the Members in the Company shall be personal property for all purposes. All property owned by the Company, whether real or personal, tangible or intangible, shall be owned by the Company as an entity, and no Member shall have any direct ownership of such property or any right to use such property for any purpose other than a purpose of the Company.

2.8 Power of Attorney.

2.8.1 Each of the Members irrevocably constitutes and appoints the Manager as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file:

(a) This Agreement, the Articles, as well as any and all amendments thereto required under the laws of the State of Delaware or of any other state, or which the Manager deems advisable to prepare, execute and file;

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(b) Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required to be filed by the Company by any governmental agency or by the laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

(c) Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, or the dissolution and termination of the Company, provided that the continuation, admission, substitution or dissolution or termination, as applicable, is in accordance with the terms of this Agreement.

2.8.2 The grant of authority in Section 2.8.1:

(a) Is a Special Power of Attorney coupled with a unit, is irrevocable, survives the death of a Member and shall not be affected by the subsequent incapacity of the Member;

(b) May be exercised by the Manager for each Member by a facsimile signature of or on behalf of the Manager or by listing all of the Members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

(c) Shall survive the delivery of an assignment by a Member of the whole or any portion of his Membership Unit; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, the Special Power of Attorney shall survive the delivery of the assignment for the sole purpose of enabling the person to execute, acknowledge, and file any instrument necessary to effect the substitution.

ARTICLE 3

THE MANAGER

3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as otherwise expressly stated elsewhere in this Agreement, the Manager has exclusive control over the business of the Company (with all acts and decisions being in its sole discretion except as specifically set forth in this Agreement), including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, assignments, security agreements, documents evidencing Note Investments and contracts, and to assume direction of the business operations. As Manager of the Company and its business, the Manager has all duties generally associated with that position, including dealing with Members, being responsible for all accounting, tax and legal matters, performing internal reviews of the Company’s investments and loans, determining how and when to invest the Company’s capital, and determining the course of action to take for Company loans and land contracts that are in default. The Manager also has all of these powers for ancillary matters. Without limiting the generality of the foregoing, the powers include the right (except as specifically set forth in Section 3.2 and elsewhere in this Agreement):

3.1.1 To evaluate potential Company investments, to expend the capital of the Company in furtherance of the Company’s business;

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3.1.2 To acquire, hold, lease, sell, trade, exchange, or otherwise dispose of all or any portion of Company property or any interest therein at a price and upon the terms and conditions as the Manager may deem proper;

3.1.3 To cause the Company to become a joint venturer, general or limited partner or member of an entity formed to own, develop, operate and dispose of real and personal properties owned or co-owned by the Company acquired through foreclosure of a Note Investment.

3.1.4 To manage, operate and develop Company property, including Real Property acquired by the Company in connection with the foreclosure of the Mortgage securing a Mortgage Note, or to employ and supervise managers who may, or may not, be an Affiliate of the Manager;

3.1.5 To maintain, at the expense of the Company, adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of account as of the end of each calendar year, together with all necessary tax-reporting information;

3.1.6 To purchase, at the expense of the Company, liability and other insurance to protect the property of the Company and its business;

3.1.7 To refinance, recast, modify, consolidate, extend or permit the assumption of a Note Investment or other investment owned by the Company;

3.1.8 To pay all expenses incurred in the operation of the Company;

3.1.9 To file tax returns on behalf of the Company and to make any and all elections available under the Code;

3.1.10 To modify, delete, add to or correct from time to time any provision of this Agreement as permitted under Section 15.4 hereof; and

3.1.11 To admit Persons as additional members of the Company in Manager’s sole discretion.

3.2 Limitations on Manager’s Authority. The Manager has no authority to:

3.2.1 Do any act in contravention of this Agreement;

3.2.2 Do any act which would make it impossible to carry on the ordinary business of the Company;

3.2.3 Confess a judgment against the Company;

3.2.4 Possess Company property or assign the rights of the Company in the property for other than a Company purpose;

3.2.5 Admit a person as a Manager without the prior affirmative vote or consent of a Super Majority or any higher vote as may be required by applicable law;

3.2.6 Sell all or a majority of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of a Super Majority;

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3.2.7 Amend this Agreement without the prior affirmative vote or consent of a Majority, except as permitted by Section 15.4 of this Agreement;

3.2.8 Dissolve or terminate the Company without the prior affirmative vote or consent of a Super Majority except as otherwise provided in this Agreement;

3.2.9 Cause the merger or other reorganization of the Company without the prior affirmative vote or consent of a Super Majority;

3.2.10 Grant to the Manager or any of its Affiliates an exclusive right to sell any Company assets;

3.2.11 Commingle the Company’s assets with those of any other Person;

3.2.12 Use or permit another Person to use the Company’s assets in any manner, except for the exclusive benefit of the Company or permit the Company to engage in any activities inconsistent with or in addition to the stated purposes of the Company;

3.2.13 Pay or award, directly or indirectly, any commissions or other compensation to any Person engaged by a potential investor for investment advice as an inducement to the advisor to advise the purchase of units in the Company; or

3.2.14 Make loans to the Manager or an Affiliate of the Manager.

3.3 Extent of Manager’s Obligation and Fiduciary Duty. The Manager shall devote the portion of its time to the business of the Company as it determines, in good faith, to be reasonably necessary to conduct the Company’s business. The Manager shall not be bound to devote all of its business time to the affairs of the Company, and the Manager and its Affiliates may engage for their own account and for the account of others in any other business ventures and employments, including ventures and employments having a business similar or identical or competitive with the business of the Company. The Manager has fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Manager’s possession or control, and the Manager will not employ, or permit another to employ the Company’s funds or assets in any manner except for the exclusive benefit of the Company. The Manager will not allow the assets of the Company to be commingled with the assets of the Manager or any other Person. The Manager, as the Initial Member, waives its right to vote for removal of the Manager or for amendment of this Agreement (except as provided in Sections 3.1.10 and 15.4) or otherwise.

3.4 Indemnification of Manager. Except as limited by law, the Fund shall indemnify the Manager for all expenses, losses, liabilities and damages the Manager actually and reasonably incurs in connection with the defense or settlement of any action arising out of or relating to the conduct of the Fund’s activities, except an action with respect to which the Manager is adjudged to be liable for breach of a fiduciary duty owed to the Fund or the Members under the Act or this Agreement. The Fund shall advance the costs and expenses of defending actions against the Manager arising out of or relating to the management of the Fund, provided it first receives the written undertaking of the Manager to reimburse the Fund if ultimately found not to be entitled to indemnification.

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3.5 Resignation of Manager. The Manager may resign from the Company provided, however, that the resignation shall not be effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that Manager gave written notice to the Members of its resignation. Failure of a Super Majority to designate and admit a new Manager within said 120 days shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The resigning Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the resignation.

3.6 Removal of Manager. The Members may remove the Manager (i) upon Manager’s dissolution or bankruptcy or (ii) by written consent or vote of a Super Majority (excluding any Units of the Manager being removed). This removal of the Manager, if there is no other Manager, shall not become effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that the Super Majority consented to the removal. Failure of a Super Majority to designate and admit a new Manager within 120 days from the date that the Super Majority elected to remove the Manager shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The removed Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the removal. The appointment of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. The new Manager shall thereupon execute, acknowledge and file an amendment to the Articles of Organization of the Company in the manner required by Delaware Statutes.

3.7 Payments at Resignation or Removal. Upon the resignation or removal of the Manager, the Company shall pay to the Manager a sum equal to all amounts then accrued and owing to the Manager.

3.8 Appointment of Additional Manager(s). An additional Manager may be admitted to the Company with the consent of all Managers and a Super Majority.

3.9 Right to Rely on Manager. Any person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by the Manager as to:

3.9.1 The identity of the Manager or any Member;

3.9.2 The existence or non-existence of any fact or facts which constitute a condition precedent to acts by the Manager or which are in any further manner germane to the affairs of the Company;

3.9.3 The persons who are authorized to execute and deliver any instrument or document of the Company; and

3.9.4 Any act or failure to act by the Company or any other matter whatsoever involving the Company or any Member.

3.10 Amendment to the Manager’s Duties. Any amendment to this Operating Agreement modifying the rights and/or duties of the Manager shall require the Manager’s consent.

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3.11 Compensation to Manager. Manager will earn compensation for managing the Company as outlined below:

3.12.1 If applicable as described in the Offering document preceding this agreement, manager will earn a transaction fee equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts purchased (the“Transaction Fee”) from third parties.

3.12.2. HSLLC as the servicer of the portfolio will earn ten percent (10%) of the interest income and Investment Gains paid on the Mortgage Notes and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Investment Manager) (the “Incentive Income”); and

3.12.3 The investment manager will, when possible, purchase performing loans from related / affiliated entities. Specifically, the investment manager owns and manages other entities that own loan assets. Where practicable and subject to the investment manager’s fiduciary duty to this and other Funds, the manager will purchase loan assets from related / affiliated entities. Such a purchase may generate a trading profit for the related entity. Any trading profits realized by related entities are subject to the fiduciary duty owed by the investment manager to the Fund or Funds and based upon the overall quality of the portfolio purchased, the seasoning of the loan(s) and the value of the collateral securing the loans. Trading profits as described herein shall not, under any circumstances, exceed 10% of the pool’s total aggregate unpaid balances at the time of purchase. When loan assets are purchased from related entities, whether select individual loans or entire pools of loans, the transaction fee will be waived. If a pool is comprised in part of loans purchased from a related entity, no transaction fee will be assessed for the percentage of the pool purchased from the related entity.

ARTICLE 4

INVESTMENT AND OPERATING POLICIES

4.1 Investment Policy. In making investments, the Manager shall follow the investment policy described in the Memorandum.

ARTICLE 5

CAPITAL CONTRIBUTIONS; LOANS TO COMPANY

5.1 Contributions of Members. Members shall acquire units in accordance with the terms of the Subscription Agreement or any future subscription materials approved by the Manager. The names, addresses, date of admissions and Capital Contributions of the Members shall be set forth in a schedule maintained by the Manager. The Manager shall update the schedule to reflect the then-current ownership of units without any further need to obtain the consent of any Member, and the schedule, as revised from time to time by the Manager, shall be presumed correct absent manifest error. Any Member shall have a right to inspect such schedule upon written request to the Manager.

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5.2 Limitations Pertaining to Capital Contributions.

5.2.1 Except as otherwise specifically provided in this Agreement, or as otherwise provided by law, no Member shall have the right to withdraw from the Company or to demand or receive a return of his capital without the consent of the Manager. Upon return of any Capital Contributions, no Member shall have the right to receive property other than cash except as may be specifically provided herein.

5.2.2 No Member shall receive any interest, salary or draw with respect to his Capital Contributions or his Capital Account or for services rendered on behalf of the Company or otherwise in his capacity as a Member.

5.2.3 None of the provisions of this Agreement, whether in regard to contributions or otherwise, is intended for the benefit of, nor shall such provisions be enforceable by, creditors of the Company.

5.2.4 No Member shall receive a credit to his Capital Account for his Capital Contribution until the Closing Date.

5.3 Loans. Any Member or Affiliate of a Member may, with the written consent of the Manager, lend or advance money to the Company. If the Manager or, with the written consent of the Manager, any Member shall make any loans to the Company or advance money on its behalf, the amount of any loan or advance shall not be treated as a contribution to the capital of the Company, but shall be a debt due from the Company. The amount of any loan or advance by a lending Member or an Affiliate of a Member shall be repayable out of the Company’s cash and shall bear interest at a rate of not in excess of the lesser of: (i) the prime rate established, from time to time, by any major bank selected by the Manager for loans to the bank’s most creditworthy commercial borrowers or (ii) the maximum rate permitted by applicable law. The inability of the Company to obtain more favorable loan terms shall be a condition to obtaining such loans from a Member or affiliate of a Member. None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company.

5.4 Initial Member. The Initial Member’s Capital Contribution is listed on a schedule maintained by the Manager.

ARTICLE 6

VOTING AND OTHER RIGHTS OF MEMBERS

6.1 No Participation in Management. Except as expressly provided in this Agreement, no Member shall take part in the conduct or control of the Company’s business or have any right or authority to act for or bind the Company.

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6.2 Rights and Powers of Members. In addition to the rights of the Members to remove and replace the Manager and as otherwise provided for in Section 3.2, the Members shall have the right to vote upon and take any of the following actions upon the approval of a Super Majority, without the concurrence of the Manager, and an affirmative vote of a Super Majority shall be required to allow or direct the Manager to:

6.2.1 Dissolve and windup the Company except as provided in this Agreement;

6.2.2 Amend this Agreement, subject to the rights to the Manager granted in Section 15.4 of this Agreement and subject also to the prior consent of the Manager if either the distributions due to the Manager or the duties of the Manager are affected;

6.2.3 Merge the Company or sell all or substantially all of the assets of the Company, otherwise than in the ordinary course of its business;

6.2.4 Change the nature of the Company’s business; and

6.2.5 Those matters set forth in Section 3.2 above.

6.3 Meetings.

6.3.1 The Members may hold meetings of Members within or outside the State of Delaware at any place selected by the Person or Persons calling the meeting. If no other place is stated, meetings shall be held at the Company’s principal place of business as established in accordance with Section 2.5 of this Agreement. The Members may approve by written consent of a Super Majority any matter upon which the Members are entitled to vote at a duly convened meeting of the Members, which consents will have the same effect as a vote held at a duly convened meeting of the Members.

6.3.2 The Manager, or Members representing more than ten percent (10%) of the outstanding Units for any matters on which the Members may vote, may call a meeting of the Company. If Members representing the requisite Units present to the Manager a statement requesting a Company meeting, or the Manager calls the meeting, the Manager shall fix a date for a meeting and shall (within ten (10) days after receipt of a statement, if applicable) give personal or mailed notice or notice by any other means of written communication, addressed to each Member at the respective address of the Member appearing on the books of the Company or given to the Company for the purpose of notice, not less than fifteen (15) or more than sixty (60) days before the date of the meeting, to all Members of the date, place and time of the meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Company shall be held at 2:00 p.m. local time at the principal office of the Company.

6.3.3 For the purpose of determining the Members entitled to vote on a matter, or to vote at any meeting of the Members or any adjournment thereof, the Member requesting such meeting may fix, in advance, a date as the record date for any such determination. Such date shall not be more than thirty (30) days nor less than ten (10) business days before any such meeting. Members may vote in person or by proxy. A Super Majority, whether present in person or by proxy, shall constitute a quorum at any meeting of Members. Every proxy must be signed by the Member or the Member’s attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. Any question relating to the Company which may be considered and acted upon by the Members may be considered and acted upon by vote at a Company meeting, and any vote required to be in writing shall be deemed given if approved by a vote by written ballot.

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6.4 Limited Liability of Members. Units are non-assessable. No Member shall be personally liable for any of the expenses, liabilities, or obligations of the Company or for any Losses beyond the amount of the Member’s Capital Contribution to the Company and the Member’s share of any undistributed net income and gains of the Company.

6.5 Access to Books and Records. The Members and their designated representatives shall have access to books and records of the Company during the Company’s normal business hours. An alphabetical list of the names, addresses and business telephone numbers, to the extent such are available, of all Members, together with the number of units held by each of them, will be maintained as a part of the books and records of the Company. The Company shall make the list available on request to any Member or his representative for a stated purpose including, without limitation, matters relating to Members’ voting rights. However, the Company need not exhibit, produce or mail a copy of the Member list if the actual purpose and reason for the request therefore is to secure the list or other information for the purpose of selling the list or copies thereof, or of using it for a commercial purpose other than in the interest of the Person as a Member in the Company. The Manager may require the Person requesting the list to represent that the list is not requested for any commercial purpose.

6.6 Representation of Company. Each of the Members hereby acknowledges and agrees that the attorneys representing the Company and the Manager and its Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Members in any respect at any time. Each of the Members further acknowledges and agrees that the attorneys shall have no obligation to furnish the Members with any information or documents obtained, received or created in connection with the representation of the Company, the Manager and its Affiliates.

ARTICLE 7

DISTRIBUTIONS; PROFITS AND LOSSES

7.1 Distributions.

7.1.1 Distributions of “Cash for Distribution”. Except as otherwise provided in Sections 7.2 and 12 of this Agreement, Cash for Distribution shall be distributed to the Members for each calendar quarter in arrears, to each Member in proportion to the Participation Percentage of the Member as of the last day of the quarter to which the distribution pertains.

7.1.2 Reserved

7.1.3 Cash Distributions Upon Dissolution. Upon dissolution and winding up of the Company, the Company shall thereafter distribute all Cash for Distribution available for distribution, if any, to the Members in accordance with the provisions of Section 12.3 of this Agreement.

7.2 Restriction on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

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7.3 Allocation of Profits and Losses. After giving effect to the special allocations set forth in Section 7.5, the Manager shall allocate all Company Profits and Losses for any fiscal year to the Members in proportion to their respective Participation Percentages. In determining the allocations to Members for any quarterly period during a fiscal year, the Manager may allocate to the Members all Profits and Losses realized by the Company during such quarter as of the close of business on the last day of such calendar quarter without regard to Profits and Losses realized for time periods within the quarter, or in such other manner selected by the Manager and permitted under Section 706 of the Code and the Treasury Regulations hereunder.

7.4 Reserved

7.5 Special Allocation Rules.

7.5.1 Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the Minimum Gain at a time no later than the time at which the Minimum Gain is reduced below the sum of the deficit Capital Account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-2(f).

7.5.2 If any Member unexpectedly receives any adjustment, allocation,or distribution described in Sections 1.704-1(b)(2)(ii)(d)(4) through 1.704-1(b)(2)(ii)(d)(6) of the Regulations which causes or increases a deficit in the Member’s Capital Account as of the end of the tax year to which the adjustment, allocation or distribution relates, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 7.5.2 shall be made if and only to the extent that the Member would have a Capital Account deficit after all other allocations provided for in Section 7.3 through 7.6 have been tentatively made as if this Section 7.5.2 were not in the Agreement.

7.5.3 To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of his Interest in the Company, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis) and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

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7.5.4 For purposes of determining the Profits, Losses or any other items allocable to any period, these other items shall be determined on a daily, monthly, quarterly or other basis, as determined by the Manager using any permissible method under Section 706 of the Code and the Treasury Regulations hereunder.

7.5.5 Notwithstanding Section 7.3, Profits and Losses, if any, allocable to the period before the admission of any Members shall be allocated to the Initial Member. Profits or Losses allocable to the period commencing with the admission of Members and all subsequent periods shall be allocated in accordance with Section 7.3.

7.5.6 Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for the year.

7.5.7 The Members are aware of the income tax consequences of the allocations made by this Article 7 and hereby agree to be bound by the provisions of this Article 7 in reporting their shares of Company Profits, Losses and other allocable items for income tax purposes.

7.6 Code Section 704(c) Allocations.

7.6.1 Income, gains, losses and deductions, as determined for Federal income tax purposes, for any Company asset which has a Gross Asset Value that differs from its adjusted basis for Federal income tax purposes shall, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the Company asset to the Company for Federal income tax purposes and its initial Gross Asset Value in accordance with Code Section 704(c) and the Treasury Regulations hereunder. In furtherance of the foregoing, it is understood and agreed that any income, gain, loss, or deduction attributable to Code Section 704(c) property shall be allocated to the Members in accordance with the traditional method of making Code Section 704(c) allocations, in accordance with Treasury Regulation Section 1.704-3(b).

7.6.2 If the Gross Asset Value of any Company asset is adjusted, subsequent allocations of income, gain, losses and deductions, as determined for Federal income tax purposes, for the Company asset shall, solely for Federal income tax purposes, take account of any variation between the adjusted basis of the Company asset for Federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations hereunder.

7.6.3 Allocations under this Section 7.6 are solely for purposes of Federal, state and local income taxes and shall not affect, or in any way be taken into account in computing any Member’s Capital Account.

7.6.4 Except as otherwise set forth in this Agreement, any elections or other decisions relating to allocations under this Section 7.6 shall be made by the Manager, with the review and concurrence of the Company’s accountants, in a manner that reasonably reflects the purpose and intention of this Agreement.

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7.7 Intent of Allocations. It is the intent of the Company that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those Sections, including the qualified income offset and minimum gain charge- back, which are hereby incorporated by reference. If, for whatever reasons, the Company is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the Manager is granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of allocations and distributions provided in this Agreement. In addition, if the Manager is required to make any special allocations of Company Profits, Losses, income, gain or deductions to comply with the requirements of the Regulations, the Manager shall make such special allocations in whatever manner it determines appropriate so that, after such allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the allocations mandated by the Regulations were not required to be made. The Manager shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate for the admission of Members to reflect Members’ Participation Percentages in the Company at the close of the years.

7.8 Quarterly Valuation of Assets. For each of the Company’s Note Investments and other investments, the Manager shall review the investments at the end of each calendar quarter and determine if a Write-down is required with respect thereto. The Manager shall cause the Company’s accountants, within thirty (30) days of the end of each calendar quarter, to verify that the Manager’s determination was made in compliance with generally accepted accounting principles. Any Write-down of an asset resulting from the valuation shall be effective on the last day of the respective calendar quarter during the term of this Agreement.

7.9 Limitation on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

ARTICLE 8

[RESERVED]

ARTICLE 9

BOOKS AND RECORDS, REPORTS AND RETURNS

9.1 Books and Records. At the expense of the Company, the Manager shall: (a) cause the Company to keep all books and records required by Delaware Statutes; and (b) shall cause the Company to keep adequate books and records at its principal place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Company. Upon five (5) day written notice all books and records shall be available for inspection and copying by, and at the sole expense of, any Member, or any Member’s duly authorized representatives, during the Company’s normal business hours.

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9.2 Annual Statements.

9.2.1 The Manager shall cause to be prepared at least annually, at the Company’s expense, financial statements prepared in accordance with generally accepted accounting principles. The financial statements will include: (i) a balance sheet, (ii) statements of income or loss, (iii) Members’ equity and (iv) a statement of cash flows.

9.2.2 The Company’s accountants will itemize the costs of any verification performed by them and may be reimbursed to the Manager by the Company only to the extent that the reimbursement when added to the costs for administrative services rendered, does not exceed the competitive rate for the services as determined under Article 9.2.1.

9.2.3 Notwithstanding the 120-day period specified in Section 9.2.3(b) below, the Manager shall cause to be prepared and distributed to the Members not later than seventy-five (75) days after the close of each Fiscal Year of the Company all Company information necessary in the preparation of the Members’ federal income tax returns.

9.3 Filings. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall also cause to be prepared and timely filed with and/or delivered to appropriate federal and state regulatory and administrative bodies and/or the Members applicable, all reports required to be filed with or delivered to those entities or Members under applicable law, including those described in the Company’s undertakings in any securities filing. The reports shall be prepared using the accounting or reporting basis required by the relevant regulatory bodies. The Company will provide a copy of the reports to each Member who requests one, without expense to the Member. The Manager, at Company expense, shall file, with the appropriate agency in the states in which this Company is registered, as required by these states, a copy of each report referred to under this Article 9.

9.4 Suitability Requirements. The Manager, at Company expense, shall maintain for a period of at least six (6) years, a record of the documentation indicating that a Member complies with the suitability standards set forth in the Memorandum.

9.5 Fiscal Matters.

9.5.1 The Company has adopted the Fiscal Year for tax and accounting purposes. Subject to the provisions of Section 706 of the Code and approval by the Internal Revenue Service and the applicable state taxing authorities, in the Manager’s sole discretion and without the approval of the Members, from time to time the Manager may change the Company’s fiscal year to a period to be determined by the Manager.

9.5.2 The Company shall continue to use the cash basis method of accounting for both income tax purposes and financial reporting purposes. We may exclude C corporations as potential members (except for personal holding companies), if they will jeopardize our cash basis method of accounting.

9.5.3 Upon the transfer of a unit in the Company, the Company may, at the sole discretion of the Manager, elect under Code Section 754, to adjust the basis of the Company property as allowed by Sections 734(b) and 743(b) thereof.

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9.5.4 The Manager shall act as the “Tax Matters Partner” (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6234 of the Code and the Treasury Regulations hereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations hereunder to designate the Manager as the TMP.

ARTICLE 10

TRANSFER OF COMPANY UNITS

10.1 Intentionally left blank

10.2 Transfer of Member’s Unit. To the extent any of the following restrictions are not necessary to the Company, in the discretion of the Manager reasonably exercised; the Manager may eliminate or modify any restriction. Subject to the immediately preceding sentence, no assignee of the whole or any portion of a Member’s interest in the Company shall have the right to become a substituted Member in place of his assignor, unless the following conditions are first met:

10.2.1 Members may only transfer whole units unless the Member is transferring his entire Membership Interest;

10.2.2 The assignor shall designate its intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the Manager;

10.2.3 The transferring Member shall first obtain written consent of the Manager to the substitution. The Manager shall not unreasonably withhold its consent, but the Manager will withhold its consent to the extent necessary to prohibit transfers that could cause the Company to be classified as a publicly traded partnership. The Manager will also withhold consent if it determines that the sale or transfer will otherwise jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that the sale or transfer may violate any applicable securities laws (including any investment suitability standards);

10.2.4 The assignor and assignee named therein shall execute and acknowledge any other instruments as the Manager may deem necessary or desirable to effect the substitution, including, but not limited to, a power of attorney;

10.2.5 The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

10.2.6 The assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses connected with the substitution, including, but not limited to, reasonable attorneys’ fees associated therewith; and

10.2.7 The Company has received, if required by the Manager, a legal opinion satisfactory to the Manager that the transfer will not violate the registration provisions of the Securities Act of 1933, as amended, or any applicable state securities laws, which opinion shall be furnished at the Member’s expense.

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Assignments complying with the above shall be recognized by the Company on the first day of the calendar month following the month in which the above conditions are met.

A Person who acquires an unit but who is not admitted as a substitute Member by the Manager pursuant to the provisions of this Section 10.2 shall be entitled only to allocations and distributions with respect to such unit in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books and records of the Company, and shall not have any of the rights of a member under Delaware Statutes or this Agreement.

10.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained in this Agreement, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of units, and any proposed sale, assignment or transfer in violation of same shall be void and of no effect:

10.3.1 No Member shall make any transfer or assignment of all or any part of his unit if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Company for federal or Delaware state income tax (if any) purposes;

10.3.2 Notice to California residents: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY UNIT THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.

10.3.3 Appropriate legends (including the legend above) under applicable securities laws shall be affixed to any certificates evidencing the units and issued or transferred to purchasers in other states. For a detailed list, see pages 1-7 of the Company’s Private Placement Memorandum.

10.3.4 No Member shall make any transfer or assignment of all or any of his interest if the Manager determines that the transfer or assignment would result in the Company being classified as a “publicly traded partnership” with the meaning of Section 7704(b) of the Code or Treasury Regulations. To prevent that:

(a) The Manager will not permit trading of units on an established securities market within the meaning of Section 7704(b);

(b) The Manager will prohibit any transfer of unit which would not comply with any applicable safe harbors; and

(c) The Manager will not permit any withdrawal of any unit.

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10.4 Distributions and Allocations with Respect to Transferred Units. If any unit is assigned during any accounting period in compliance with the provisions of this Section 10, all Profits, Losses, each item thereof, and all other items attributable to the assigned unit for such period shall be divided and allocated between the assignee and the assignor by taking into account their varying rights during the period in accordance with Code Section 706(d), using any convention permitted by law and selected by the Manager. All distributions on or before the date of such assignment shall be made to the assignor and all distributions thereafter shall be made to the assignee.

ARTICLE 11 

WITHDRAWAL OF A MEMBER;

PLANNED TERMINATION OF THE FUND

11.1 Withdrawal of Members. Absent extreme circumstances, members may not withdraw from the Fund. After the Fund Termination Date the assets of the Fund will be sold and the Fund will be wound up in orderly fashion as set forth in Article 12 below. The Manager may, at its discretion, allow withdrawal of a member if conditions dictate such.

11.2 Planned Existence and Termination of Fund. The Fund is intended to have a limited existence as follows.

11.2.1 The Subscription Period for the Fund, during which time Persons who meet the suitability standards set forth in the Memorandum and the Subscription Agreement may subscribe for units in the Company, shall last from the date of the Memorandum until June 30, 2012.

11.2.2 The Active Investment Period begins July 1, 2011 and ends when all funds have been utilized to purchase mortgage notes and land contracts. Additional principal is generated by early pay-offs of loans held in the Fund and will be distributed to investors in accordance with their pro-rata ownership.

11.2.3 The Fund will terminate its existence after all loans have been liquidated and the proceeds thereof have been distributed to investor/members. The investment manager intends to begin liquidating the loans held in the Fund shortly after June 30, 2015 and expects to complete liquidation and distribution of the resulting proceeds by June 30, 2016 (the “Termination Date”) with due regard to market conditions and the effect thereof on pricing. The termination date may be extended at the discretion of the investment manager for up to two one year periods to June 30, 2018. In the event the investment manager deems it necessary to extend the termination date beyond June 30, 2016 he shall provide the reason or reasons for doing so in writing to all members.

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ARTICLE 12

DISSOLUTION OF THE COMPANY

12.1 Events Causing Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (“Liquidating Events”):

12.1.1 The Fund Termination Date: June 30, 2016 or if extended by the Manager, June 30, 2017 or June 30, 2018.

12.1.2 The sale of or other disposition of all or substantially all of the Company Property (without receipt of an exchange property);

12.1.3 Affirmative vote or consent of a Super Majority to dissolve, wind up, and liquidate the Company;

12.1.4 The happening of any other event that makes it unlawful or impossible to carry on the business of the Company;

12.1.5 The resignation or removal of the sole Manager without appointing a replacement therefore in accordance with Sections 3.5 or 3.6 above;

12.1.6 The entry of a judgment of dissolution under Section 1335 of the Act.

The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Liquidating Event.

As soon as possible following the occurrence of a Liquidating Event, Manager shall comply with the provisions of Section 1336 of the Act, giving notice of the dissolution of the Company and the commencement of the winding up of its affairs.

12.2 Winding Up. Upon the occurrence of a Liquidating Event, the Company shall immediately be dissolved, but shall continue until its affairs have been wound up according to the provisions of the Delaware Statutes. Upon dissolution of the Company, the Manager will wind up the Company’s affairs as follows:

12.2.1 No new Note Investments shall be invested in or purchased;

12.2.2 The Manager(s) shall liquidate the assets of the Company by sale to third parties;

12.2.3 All sums of cash held by the Company as of the date of dissolution, together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be distributed as follows:

(a) first, to the payment and discharge of all of the Company’s debts and liabilities, if any, to creditors other than Members;

(b) second, to the payment and discharge of all of the Company’s debts and liabilities, if any, to Members; then

(c) the balance, if any, to the Members in accordance with their Participation Percentage as of the Fund Termination Date.

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12.3 Compliance with Timing Requirements of Regulations. If the Company is “liquidated”within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), distributions shall be made under this Article 12 (if such liquidation constitutes a dissolution of the Company) or Article 7 hereof (if it does not) to the Members who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).

12.4 Distributions Held in Trust Reserves. In the discretion of the Manager, a pro rata share of the distributions that would otherwise be made to the Members pursuant to this Section 12 may be:

12.4.1 Distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Members arising out of or in connection with the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Manager in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or

12.4.2 Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

12.5 Deemed Distribution and Recontribution. Notwithstanding any other provision of this Section 12, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(i), but no Liquidating Event has occurred, the Company property shall not be liquidated, the Company's liabilities shall not be paid or discharged, and the Company's affairs shall not be wound up. Instead, the Company shall be deemed to have distributed the Company Property in kind to the Members, who shall be deemed to have assumed and taken subject to all Company liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Members shall be deemed to have recontributed the Company property in kind to the Company, which shall be deemed to have assumed and taken subject to all such liabilities.

12.6 Certificate of Dissolution. At such time as all of the debts, liabilities and obligations of the Company have been paid, discharged or otherwise provided for, a certificate of dissolution shall be prepared, signed, and filed by the Manager as provided in Section 1340 of the Act.

12.7 No Recourse to Manager. Upon dissolution and winding up under the Act, each Member shall look solely to the assets of the Company for the return of his Capital Account, and if a Member’s Participation Percentage of the Company assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return the amounts of the Capital Account of Members, Members shall have no recourse against the Manager or any other Member. The winding-up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Manager. The Manager is hereby authorized to do any and all acts and things authorized by law for these purposes. If the Manager is removed or resigns and no replacement Manager is appointed by the Super Majority, the winding-up of the affairs of the Company and the distribution of its assets shall be conducted by the person or entity selected by a vote of a Super Majority, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes.

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ARTICLE 13

[RESERVED]

ARTICLE 14

[RESERVED]

ARTICLE 15

MISCELLANEOUS

15.1 Covenant to Sign Documents. Each Member covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Company and to achieve its purposes, including, without limitation, any amendments to the Articles of Organization and any filings, records or publications necessary or appropriate under the laws of any jurisdiction in which the Company shall conduct its business.

15.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Members shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Members shall be addressed to the Members at the last address shown on the Company records. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 2.5 above or as hereafter changed as provided herein.

15.3 Right to Engage in Competing Business. Nothing contained in this Agreement shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for using for its own benefit information received as a consequence of the Manager’s management of the affairs of the Company. This Section 15.3 shall be subject in its entirety to the fiduciary duty of the Manager set forth in Section 3.4.

15.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Super Majority in accordance with Section 6.2; provided, however, that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Member or materially adversely affect any Member’s interest in Profits, Losses, Company assets, distributions, management rights or voting rights, except as agreed by that Member. In addition, and notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, if, in the reasonable judgment of the Manager, such amendment does not adversely affect the rights of the Members, including, without limitation, an amendment:

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15.4.1 To grant to Members (and not solely the Manager in its capacity as an Initial Member) additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon them;

15.4.2 To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions for matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

15.4.3 To conform this Agreement to applicable laws and regulations, including, without limitation, federal and state securities and tax laws and regulations;

15.4.4 In the form of a revision to or updating of Schedule A in accordance with Section 5.1 hereof; and

15.4.5 To elect for the Company to be governed by any successor Delaware statute governing limited liability companies. The Manager shall notify the Members within a reasonable time of the adoption of any amendment.

15.5 Entire Agreement. This Agreement and the Memorandum constitutes the entire agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto regarding the subject matter contained herein.

15.6 Waiver. No waiver by any party hereto of any breach of, or default under, any provision of this Agreement by any party shall be construed or deemed a waiver of any breach of or default under any other provision of this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement for any future breach or default of the same provision of this Agreement.

15.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

15.8 Application of Delaware Law. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of Delaware.

15.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement.

15.10 Number and Gender. Whenever the singular form is used in this Agreement it includes the plural when required by the context, and the masculine gender shall include the feminine and neutral genders.

15.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by Manager on behalf of the Members as their attorney-in-fact.

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15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives, during the term of the Company, any right that it may have to maintain any action for partition for any property of the Company.

15.13 Binding on Assignees. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the provisions of Section 10.2, which control the assignment or other transfer of units.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first set forth above.

COMPANY:	MEMBER:
BYCX Opportunity Fund I, LLC	__________________________________
By: Bayou City Exploration, Inc., Manager	By: _______________________________
By: ____________________________

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Schedule 1.1

Definitions

Act means the Delaware Limited Liability Company Law

Affiliate means: (a) any person directly or indirectly controlling, controlled by or under common control with the Person; (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person; (c) any officer, director or Member of the Person or (d) if the other Person is an officer, director or Manager, any company for which the Person acts in any similar capacity.

Agreement means this Operating Agreement, as amended from time to time.

Acquisition Expenses means all expenses, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, broker price opinions, tax checks, accounting fees and expenses, title insurance funded by the Company, commissions, and other miscellaneous expenses, related to the evaluation, selection and acquisition of Note Investments, whether or not a Note Investment is acquired.

Amortization Ratio means the ratio applied to voluntary principal payments and pre- payments received by the Company for purposes of allocating amortization of the Note Investment Cost. It shall be calculated as the ratio of the Note Investment Cost to the total unpaid principal balance of the Mortgage Loan or Land Contract outstanding at the time of purchase. By way of example, if the Amortization Ratio is 70%, then 70% of an applicable principal payment amortizes the Note Investment Cost and the remaining 30% is treated as an Investment Gain. Involuntary principal pre-payments received shall be applied first to fees and expenses associated with the individual Mortgage Loan or Land Contract, then to amortization of the Note Investment Cost to Members, and then, remaining proceeds, if any, shall be shared as Investment Gains.

Basis means the total cost to the Company for the acquisition of the Note Investment, including the purchase price for the Note Investment, the Acquisition Expenses, and the Transaction Fee.

Capital Account means, for any Member, the Capital Account maintained for the Member in accordance with the following provisions:

(a) The Manager shall credit to each Member’s Capital Account: (i) on the Closing Date, the Member’s Capital Contribution, (ii) the Member’s distributive share of Profits, (iii) any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member, and (iv) the amount of any Company liabilities that are assumed by the Member or that are secured by any Company property distributed to the Member.

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(b) The Manager shall debit from each Member’s Capital Account: (i) the amount of cash and the fair market value of any Company property distributed to the Member under any provision of this Agreement, (ii) the Member’s distributive share of Losses, (iii) any items in the nature of expenses or losses that are specially allocated to a Member and (iv) the amount of any liabilities of the Member that are assumed by the Company or that are secured by any property contributed by the Member to the Company.

If the Gross Asset Value of a Company asset is adjusted as a result of a Write-down, the Manager shall concurrently adjust the Capital Accounts of all Members in order to reflect the aggregate net adjustment that would have occurred if the Company had recognized Losses equal to the Write-down Amount and the Losses were allocated under Article 7.

If any unit in the Company is transferred in accordance with Section 10.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred unit.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with the Regulation. If the Manager determines that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the Manager may make the modification, provided that it is not likely to have a material effect on the amounts distributable to any Member under Articles 7 and 12 of this Agreement upon the dissolution of the Company. The Manager shall make any appropriate modification if unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-

1(b) as provided for in Sections 7.7 and 15.4.

Capital Contribution means the total investment and contribution to the capital of the Company made by a Member.

Cash for Distribution means that portion of the Cash Flow available for distribution to Members consisting of, to the extent received and available for distribution, (a) un- amortized Note Investment Cost in accordance with the Amortization Ratio, (b) 90% of the actual interest income received and (c) 90% of the Investment Gains received, subject to recovery of unrecovered losses of Note Investment Cost. Only actual interest income received (versus scheduled) will be distributed to Members and the Loan Servicer.

Cash Flow means for any calendar quarter period the cash funds received by the Company for that calendar quarter period.

Member means a Person who owns one or more units of the Company.

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Initial Member means Bayou City Exploration, Inc., a Nevada corporation.

Code means the Internal Revenue Code of 1986, as amended from time to time and corresponding provisions of subsequent revenue laws.

Company means Blue Ridge BYCX Opportunity Fund I, LLC, the Delaware limited liability company to which this Agreement pertains.

Expenses means all expenses in connection with the operation of the Company’s business, including, but not limited to, all Acquisition Expenses, but specifically excluding Manager’s office overhead.

Fiscal Year means, subject to the provisions of Section 706 of the Code and Section 9.6.1, (i) the period commencing on the date of formation of the Company and ending on December 31, 2011 (ii) any subsequent twelve (12) month period beginning on January 1 and ending on December 31 and (iii) the period commencing January 1 and ending on the date on which all Company assets are distributed to the Members under Article 12.

Gross Asset Value means, for any Company asset, the following:

(a) The initial Gross Asset Value of any Company asset at the time that it is contributed by a Member to the capital of the Company shall be an amount equal to the fair market value of the Company asset (without regard to the provisions of Code Section 7701(g)), as determined by the contributing Member and the Manager;

(b) The Gross Asset Values of all Company assets shall be adjusted, as determined by the distributed Member and the Manager, to equal their respective fair market values upon the distribution to a Member by the Company of more than a de minimis amount of Company assets (other than money), unless all Members simultaneously receive distributions of undivided units in the distributed Company assets in proportion to their respective Capital Accounts;

(c) The Gross Asset Values of all Company assets shall be adjusted to equal their respective fair market values (as determined by the Manager, in its reasonable discretion) upon the termination of the Company for Federal income tax purposes under Code Section 708(b)(1)(B); and

(d) The Gross Asset Value of a Company asset shall be adjusted in the case of a Write-down of the Company asset in accordance with the provisions of this Agreement.

HSLLC as used in this agreement means Home Servicing, LLC.

Investment Gains shall be equal to the amount by which a principal prepayment, after considering the Amortization Ratio exceeds the Company’s un-amortized Note Investment Cost on the Mortgage Loans and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Manager).

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Investment Manager means the Fund’s Investment Manager not to be confused with the Manager of the LLC. Bayou City Exploration, Inc., a Nevada corporation (which we refer to as “Manager”), has assigned the duties of Investment Manager to Blue Ridge Group, Inc. via management agreement. Blue Ridge Group, Inc. organized on August 25, 1993. Blue Ridge’s executive offices are at 625 Adams Street, Suite 700, Bowling Green, Kentucky 42101.

Units means, as the context requires, ownership of equity in the Company that are (a) issued to Members upon their admission to the Company under the Subscription Agreement and the Memorandum or (b)transferred to those who become substituted Members under Section 12.2 hereof.

Land Contracts as used in this Agreement are contracts between a buyer and the Company of a property, wherein the Company holds the title or deed to the property until all agreed upon payments have been made in full.

Delaware Statutes means the Delaware laws with respect to limited liability companies including the Act, as amended from time to time, unless indicated to the contrary by the context.

Manager means Manager of the LLC but does not mean Investment Manager. The Manager of the LLC (Managing Member) is Bayou City Exploration, Inc., a Nevada Corporation, in that capacity or any Person replacing Bayou City Exploration, Inc. under this Agreement. Bayou City assigned the duties of Investment Manager to Blue Ridge Group, Inc. via management agreement.

Member means a Member or the Initial Member.

Membership Unit(s) means the entire ownership interest of a Member in the Company at any particular time, including the right of the Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of the Member to comply with all of the terms and provisions of this Agreement.

Memorandum means the July 1, 2011 Private Placement Memorandum of the Company offering the units for sale, a copy of which is available from Manager.

Mortgage means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Note Investments, whether in the form of a deed of trust, mortgage or otherwise.

Mortgage Notes means investments of the Company that are notes, debentures, bonds and other evidences of indebtedness or obligations that are negotiable or non-negotiable and secured or collateralized by Mortgages.

Note Investment(s) means the Mortgage Notes and Land Contracts or an interest in a Mortgage Note or Land Contract that are held by the Company.

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Note Investment Cost means the purchase price paid by the Company for the Note Investment, not including Acquisition Costs and the Transaction Fee.

Offering means the offer and sale of units of the Company made under the Memorandum.

Participation Percentage means the percentage that the amount of a Member’s Capital Account represents as compared to the aggregate amount of all Member’s Capital Accounts.

Person means any natural person, partnership, corporation, unincorporated association or other legal entity.

Profits and Losses mean, for each Fiscal Year or any other period, an amount equal to the Company’s taxable income or loss for the Fiscal Year or other given period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately under Code Section 703(a) (1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses under this section shall be added to the taxable income or loss;

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures under Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses under this section, shall be subtracted from the taxable income or loss.

If any Company asset has a Gross Asset Value which differs from its adjusted cost basis, gain or loss resulting from the disposition of the Company asset shall be computed using the Gross Asset Value (rather than adjusted cost basis) of the Company asset.

Notwithstanding any other provision of this Section, any items in the nature of income, gain, expenses or losses, which are specially allocated under Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or Losses.

Real Property means and includes: (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that is located on or used as part of land.

Servicing Fee means a monthly Servicing Fee to HSLLC in an amount equal to (a) the greater of $30 per month per Mortgage Note and Land Contract or one-twelfth of 1% of the sum of the unpaid principal balance for all performing Note Investments during the relevant calendar month plus all cash on hand, plus (b) for each non-performing Note Investment, if any, $175.00 per month.

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Subscription Agreement means the document that is an exhibit to and part of the Memorandum that every Person who buys units of the Company must execute and deliver with full payment for the units and which, among other provisions, contains the written consent of each Member to the adoption of this Agreement.

Super Majority means any group of Members who together hold 80% of the total outstanding units of the Company as of a particular date (or if no date is specified, the first day of the then current calendar month).

Transaction Fee means a transaction fee equal to 2.5% of the Note Investment Cost for each Note Investment purchased by the Company.

Treasury Regulations means, except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the U.S. Department of the Treasury under the Code, as the regulations may be lawfully changed from time to time.

Unit(s) means a Membership Unit.

Write-down means a determination by the Manager for a particular Note Investment or other Company investment (which determination has been verified by the Company’s accountants as being in conformity with generally accepted accounting principles) that the fair market value of the investment at the time the determination is made is less than the amount actually paid or allocated to the purchase of the investment, which determination shall be made by the Company and its accountants within thirty (30) days of the end of each calendar quarter and any Write-down shall be effective on the last day of the relevant calendar quarter during the term of this Agreement.

Write-down Amount means, for any Note Investment or other Company investment, the amount by which, at the time that a Write-down is determined for the Note Investment, the amount actually paid or allocated to the purchase of the investment exceeds its fair market value.

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EX-10.33

EXHIBIT 10.33

EXHIBIT A – FUND OPERATING AGREEMENT

THE UNITS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF CERTAIN STATES. THE UNITS MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE UNITS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED, OR OTHER EVIDENCE SATISFACTORY TO THE MANAGER THAT SUCH REGISTRATION IS NOT REQUIRED. ADDITIONAL RESTRICTIONS ON TRANSFER OF THE UNITS ARE SET FORTH IN THIS AGREEMENT.

OPERATING AGREEMENT OF OPPORTUNITY FUND VII, LLC

THIS OPERATING AGREEMENT (this “Agreement”) was made and entered into as of the 30th day of June, 2012, by and among Bayou City Exploration, Inc., a Nevada Corporation (the “Manager and “Initial Member”), and Opportunity Fund VII, LLC, a Delaware limited liability company (the “Company” or “Fund”).

WITNESSETH

WHEREAS, the Manager and Initial Member and the Company desire to enter into an Operating Agreement to govern the Company’s operations;

NOW, WHEREFORE, in consideration for the mutual agreements, covenants and premises set forth herein, the Operating Agreement is hereby adopted:

ARTICLE 1

DEFINITIONS

Defined Terms. Unless otherwise stated, the terms used in this Agreement shall have the usual and customary meanings associated with their use, and shall be interpreted in the context of this Agreement. Certain capitalized terms which are used in this Agreement shall have the meanings given in this Agreement or Schedule 1.1.

ARTICLE II FORMATION; PURPOSE

2.1 Organization; Governance. The Initial Member has caused the formation of the Company on June 30th, 2012 (the “Effective Date”) as a limited liability company effective with the filing of the Articles of Organization (the “Articles”) with the Delaware Secretary of State. The Company has been formed pursuant to the provisions of the Delaware Statutes and upon the terms and conditions set forth in the Articles and in this Agreement. The Initial Member together with all Persons who may hereafter become Members of the Company from time to time in accordance with this Agreement (collectively, the “Members”) are and shall be bound by the terms and provision of this Agreement. The Manager is authorized to execute and cause to be filed additional Amendments to the Articles whenever required by the Act or this Agreement. Except as otherwise required by the Act, this Agreement shall govern the business and affairs of the Company and the relationships of the Members to one another as members of the Company. The Members intend that the Company be treated as a partnership for federal and state income tax purposes but that the Company shall not be treated as a partnership for purposes of Section 303 of the Federal Bankruptcy Code. No Member shall act inconsistently with this intent.

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2.2 Term. The term of the Company commenced on the date the Articles were filed as described in Section 2.1 and continue perpetually unless earlier terminated under the provisions of this Agreement or by operation of law.

2.3 Name. The business of the Company shall be carried on under the name “Opportunity Fund VII, LLC.”

2.4 Purpose. The primary purpose of the Company is to invest in and purchase Note Investments, and do all things reasonably related thereto. The Company seeks to provide Members with a high level of quarterly income. The Company seeks to achieve this objective by investing in a managed portfolio comprised of a blend of Mortgage Notes secured by real estate and Land Contracts secured by full ownership of the underlying collateral.

2.5 Place of Business. The principal place of business of the Company is and will be located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, until the Manager changes it after giving the Members notice. In addition, the Company may maintain such other offices and places of business in the United States as the Manager may deem advisable. The Manager will file all necessary or desirable documents to permit the Company to conduct its business lawfully in any state or territory of the United States.

2.6 Agent for Service of Process. The name and business address of the agent for service of process for the Company is Travis Creed, 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, or such other person as the Manager shall appoint from time to time, utilizing the Manager’s reasonable discretion.

2.7 Nature of Members' Membership Units. The Membership Units of the Members in the Company shall be personal property for all purposes. All property owned by the Company, whether real or personal, tangible or intangible, shall be owned by the Company as an entity, and no Member shall have any direct ownership of such property or any right to use such property for any purpose other than a purpose of the Company.

2.8 Power of Attorney.

2.8.1: Each of the Members irrevocably constitutes and appoints the Manager as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file:

(a) This Agreement, the Articles, as well as any and all amendments thereto required under the laws of the State of Delaware or of any other state, or which the Manager deems advisable to prepare, execute and file;

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(b) Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required to be filed by the Company by any governmental agency or by the laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

(c) Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, or the dissolution and termination of the Company, provided that the continuation, admission, substitution or dissolution or termination, as applicable, is in accordance with the terms of this Agreement.

2.8.2: The grant of authority in Section 2.8.1:

(a) Is a Special Power of Attorney coupled with a unit, is irrevocable, survives the death of a Member and shall not be affected by the subsequent incapacity of the Member;

(b) May be exercised by the Manager for each Member by a facsimile signature of or on behalf of the Manager or by listing all of the Members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

(c) Shall survive the delivery of an assignment by a Member of the whole or any portion of his Membership Unit; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, the Special Power of Attorney shall survive the delivery of the assignment for the sole purpose of enabling the person to execute, acknowledge, and file any instrument necessary to effect the substitution.

ARTICLE 3

THE MANAGER

3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as otherwise expressly stated elsewhere in this Agreement, the Manager has exclusive control over the business of the Company (with all acts and decisions being in its sole discretion except as specifically set forth in this Agreement), including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, assignments, security agreements, documents evidencing Note Investments and contracts, and to assume direction of the business operations. As Manager of the Company and its business, the Manager has all duties generally associated with that position, including dealing with Members, being responsible for all accounting, tax and legal matters, performing internal reviews of the Company’s investments and loans, determining how and when to invest the Company’s capital, and determining the course of action to take for Company loans and land contracts that are in default. The Manager also has all of these powers for ancillary matters. Without limiting the generality of the foregoing, the powers include the right (except as specifically set forth in Section 3.2 and elsewhere in this Agreement):

3.1.1: To evaluate potential Company investments, to expend the capital of the Company in furtherance of the Company’s business;

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3.1.2: To acquire, hold, lease, sell, trade, exchange, or otherwise dispose of all or any portion of Company property or any interest therein at a price and upon the terms and conditions as the Manager may deem proper;

3.1.3: To cause the Company to become a joint venturer, general or limited partner or member of an entity formed to own, develop, operate and dispose of real and personal properties owned or co-owned by the Company acquired through foreclosure of a Note Investment.

3.1.4: To manage, operate and develop Company property, including Real Property acquired by the Company in connection with the foreclosure of the Mortgage securing a Mortgage Note, or to employ and supervise managers who may, or may not, be an Affiliate of the Manager;

3.1.5: To maintain, at the expense of the Company, adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of account as of the end of each calendar year, together with all necessary tax-reporting information;

3.1.6: To purchase, at the expense of the Company, liability and other insurance to protect the property of the Company and its business;

3.1.7: To refinance, recast, modify, consolidate, extend or permit the assumption of a Note Investment or other investment owned by the Company;

3.1.8: To pay all expenses incurred in the operation of the Company;

3.1.9: To file tax returns on behalf of the Company and to make any and all elections available under the Code;

3.1.10: To modify, delete, add to or correct from time to time any provision of this Agreement as permitted under Section 15.4 hereof; and

3.1.11: To admit Persons as additional members of the Company in Manager’s sole discretion.

3.2 Limitations on Manager’s Authority. The Manager has no authority to:

3.2.1: Do any act in contravention of this Agreement;

3.2.2 : Do any act which would make it impossible to carry on the ordinary business of the Company;

3.2.3: Confess a judgment against the Company;

3.2.4: Possess Company property or assign the rights of the Company in the property for other than a Company purpose;

3.2.5: Admit a person as a Manager without the prior affirmative vote or consent of a Super Majority or any higher vote as may be required by applicable law;

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3.2.6: Sell all or a majority of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of a Super Majority;

3.2.7: Amend this Agreement without the prior affirmative vote or consent of a Majority, except as permitted by Section 15.4 of this Agreement;

3.2.8: Dissolve or terminate the Company without the prior affirmative vote or consent of a Super Majority except as otherwise provided in this Agreement;

3.2.9: Cause the merger or other reorganization of the Company without the prior affirmative vote or consent of a Super Majority;

3.2.10: Grant to the Manager or any of its Affiliates an exclusive right to sell any Company assets;

3.2.11: Commingle funds paid by investing members for the purchase of units in BYCX Opportunity Fund I, LLC with those of the Manager or any other Person;

3.2.12: Use or permit another Person to use the Company’s assets in any manner, except for the exclusive benefit of the Company or permit the Company to engage in any activities inconsistent with or in addition to the stated purposes of the Company;

3.2.13: Pay or award, directly or indirectly, any commissions or other compensation to any Person engaged by a potential investor for investment advice as an inducement to the advisor to advise the purchase of units in the Company; or

3.2.14: Make loans to the Manager or an Affiliate of the Manager.

3.3 Extent of Manager’s Obligation and Fiduciary Duty. The Manager shall devote the portion of its time to the business of the Company as it determines, in good faith, to be reasonably necessary to conduct the Company’s business. The Manager shall not be bound to devote all of its business time to the affairs of the Company, and the Manager and its Affiliates may engage for their own account and for the account of others in any other business ventures and employments, including ventures and employments having a business similar or identical or competitive with the business of the Company. The Manager has fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Manager’s possession or control, and the Manager will not employ, or permit another to employ the Company’s funds or assets in any manner except for the exclusive benefit of the Company. The Manager will not allow the funds paid by investing members for the purchase of units in Opportunity Fund VII, LLC to be commingled with the funds of the Manager or any other Person. The Manager may pool loan assets purchased by Opportunity Fund VII, LLC (the Fund) with loan assets purchased and owned by other Funds, where such pooling, in the sole discretion of the Manager, serves the interests of the Fund by creating economies of scale, mitigating risk or for any other reason reasonably believed to benefit the Fund. The Manager, as the Initial Member, waives its right to vote for removal of the Manager or for amendment of this Agreement (except as provided in Sections 3.1.10 and 15.4) or otherwise.

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3.4 Indemnification of Manager. Except as limited by law, the Fund shall indemnify the Manager for all expenses, losses, liabilities and damages the Manager actually and reasonably incurs in connection with the defense or settlement of any action arising out of or relating to the conduct of the Fund’s activities, except an action with respect to which the Manager is adjudged to be liable for breach of a fiduciary duty owed to the Fund or the Members under the Act or this Agreement. The Fund shall advance the costs and expenses of defending actions against the Manager arising out of or relating to the management of the Fund, provided it first receives the written undertaking of the Manager to reimburse the Fund if ultimately found not to be entitled to indemnification.

3.5 Resignation of Manager. The Manager may resign from the Company provided, however, that the resignation shall not be effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that Manager gave written notice to the Members of its resignation. Failure of a Super Majority to designate and admit a new Manager within said 120 days shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The resigning Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the resignation.

3.6 Removal of Manager. The Members may remove the Manager (i) upon Manager’s dissolution or bankruptcy or (ii) by written consent or vote of a Super Majority (excluding any Units of the Manager being removed). This removal of the Manager, if there is no other Manager, shall not become effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that the Super Majority consented to the removal. Failure of a Super Majority to designate and admit a new Manager within 120 days from the date that the Super Majority elected to remove the Manager shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The removed Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the removal. The appointment of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. The new Manager shall thereupon execute, acknowledge and file an amendment to the Articles of Organization of the Company in the manner required by Delaware Statutes.

3.7 Payments at Resignation or Removal. Upon the resignation or removal of the Manager, the Company shall pay to the Manager a sum equal to all amounts then accrued and owing to the Manager.

3.8 Appointment of Additional Manager(s). An additional Manager may be admitted to the Company with the consent of all Managers and a Super Majority.

3.9 Right to Rely on Manager. Any person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by the Manager as to:

3.9.1: The identity of the Manager or any Member;

3.9.2: The existence or non-existence of any fact or facts which constitute a condition precedent to acts by the Manager or which are in any further manner germane to the affairs of the Company;

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3.9.3: The persons who are authorized to execute and deliver any instrument or document of the Company; and

3.9.4: Any act or failure to act by the Company or any other matter whatsoever involving the Company or any Member.

3.10 Amendment to the Manager’s Duties. Any amendment to this Operating Agreement modifying the rights and/or duties of the Manager shall require the Manager’s consent.

3.11 Compensation to Manager. Manager will earn compensation for managing the Company as outlined below:

3.12.1: If applicable as described in the Offering document preceding this agreement, manager will earn a transaction fee equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts purchased (the “Transaction Fee”) from third parties.

3.12.2.: HSLLC as the servicer of the portfolio will earn ten percent (10%) of the interest income and Investment Gains paid on the Mortgage Notes and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Investment Manager) (the “Incentive Income”); and

3.12.3: The investment manager will, when possible, purchase performing loans from related / affiliated entities. Specifically, the investment manager owns and manages other entities that own loan assets. Where practicable and subject to the investment manager’s fiduciary duty to this and other Funds, the manager will purchase loan assets from related / affiliated entities. Such a purchase may generate a trading profit for the related entity. Any trading profits realized by related entities are subject to the fiduciary duty owed by the investment manager to the Fund or Funds and based upon the overall quality of the portfolio purchased, the seasoning of the loan(s) and the value of the collateral securing the loans. Trading profits as described herein shall not, under any circumstances, exceed 10% of the pool’s total aggregate unpaid balances at the time of purchase. When loan assets are purchased from related entities, whether select individual loans or entire pools of loans, the transaction fee will be waived. If a pool is comprised in part of loans purchased from a related entity, no transaction fee will be assessed for the percentage of the pool purchased from the related entity.

ARTICLE 4

INVESTMENT AND OPERATING POLICIES

4.1 Investment Policy. In making investments, the Manager shall follow the investment policy described in the Memorandum.

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ARTICLE 5

CAPITAL CONTRIBUTIONS; LOANS TO COMPANY

5.1 Contributions of Members. Members shall acquire units in accordance with the terms of the Subscription Agreement or any future subscription materials approved by the Manager. The names, addresses, date of admissions and Capital Contributions of the Members shall be set forth in a schedule maintained by the Manager. The Manager shall update the schedule to reflect the then-current ownership of units without any further need to obtain the consent of any Member, and the schedule, as revised from time to time by the Manager, shall be presumed correct absent manifest error. Any Member shall have a right to inspect such schedule upon written request to the Manager.

5.2 Limitations Pertaining to Capital Contributions.

5.2.1: Except as otherwise specifically provided in this Agreement, or as otherwise provided by law, no Member shall have the right to withdraw from the Company or to demand or receive a return of his capital without the consent of the Manager. Upon return of any Capital Contributions, no Member shall have the right to receive property other than cash except as may be specifically provided herein.

5.2.2: No Member shall receive any interest, salary or draw with respect to his Capital Contributions or his Capital Account or for services rendered on behalf of the Company or otherwise in his capacity as a Member.

5.2.3: None of the provisions of this Agreement, whether in regard to contributions or otherwise, is intended for the benefit of, nor shall such provisions be enforceable by, creditors of the Company.

5.2.4: No Member shall receive a credit to his Capital Account for his Capital Contribution until the Closing Date.

5.3 Loans. Any Member or Affiliate of a Member may, with the written consent of the Manager, lend or advance money to the Company. If the Manager or, with the written consent of the Manager, any Member shall make any loans to the Company or advance money on its behalf, the amount of any loan or advance shall not be treated as a contribution to the capital of the Company, but shall be a debt due from the Company. The amount of any loan or advance by a lending Member or an Affiliate of a Member shall be repayable out of the Company’s cash and shall bear interest at a rate of not in excess of the lesser of: (i) the prime rate established, from time to time, by any major bank selected by the Manager for loans to the bank’s most creditworthy commercial borrowers or (ii) the maximum rate permitted by applicable law. The inability of the Company to obtain more favorable loan terms shall be a condition to obtaining such loans from a Member or affiliate of a Member. None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company.

5.4 Initial Member. The Initial Member’s Capital Contribution is listed on a schedule maintained by the Manager.

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ARTICLE 6

VOTING AND OTHER RIGHTS OF MEMBERS

6.1 No Participation in Management. Except as expressly provided in this Agreement, no Member shall take part in the conduct or control of the Company’s business or have any right or authority to act for or bind the Company.

6.2 Rights and Powers of Members. In addition to the rights of the Members to remove and replace the Manager and as otherwise provided for in Section 3.2, the Members shall have the right to vote upon and take any of the following actions upon the approval of a Super Majority, without the concurrence of the Manager, and an affirmative vote of a Super Majority shall be required to allow or direct the Manager to:

6.2.1: Dissolve and windup the Company except as provided in this Agreement;

6.2.2: Amend this Agreement, subject to the rights to the Manager granted in Section 15.4 of this Agreement and subject also to the prior consent of the Manager if either the distributions due to the Manager or the duties of the Manager are affected;

6.2.3: Merge the Company or sell all or substantially all of the assets of the Company, otherwise than in the ordinary course of its business;

6.2.4: Change the nature of the Company’s business; and

6.2.5: Those matters set forth in Section 3.2 above.

6.3 Meetings.

6.3.1: The Members may hold meetings of Members within or outside the State of Delaware at any place selected by the Person or Persons calling the meeting. If no other place is stated, meetings shall be held at the Company’s principal place of business as established in accordance with Section 2.5 of this Agreement. The Members may approve by written consent of a Super Majority any matter upon which the Members are entitled to vote at a duly convened meeting of the Members, which consents will have the same effect as a vote held at a duly convened meeting of the Members.

6.3.2: The Manager, or Members representing more than ten percent (10%) of the outstanding Units for any matters on which the Members may vote, may call a meeting of the Company. If Members representing the requisite Units present to the Manager a statement requesting a Company meeting, or the Manager calls the meeting, the Manager shall fix a date for a meeting and shall (within ten (10) days after receipt of a statement, if applicable) give personal or mailed notice or notice by any other means of written communication, addressed to each Member at the respective address of the Member appearing on the books of the Company or given to the Company for the purpose of notice, not less than fifteen (15) or more than sixty (60) days before the date of the meeting, to all Members of the date, place and time of the meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Company shall be held at 2:00 p.m. local time at the principal office of the Company.

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6.3.3: For the purpose of determining the Members entitled to vote on a matter, or to vote at any meeting of the Members or any adjournment thereof, the Member requesting such meeting may fix, in advance, a date as the record date for any such determination. Such date shall not be more than thirty (30) days nor less than ten (10) business days before any such meeting. Members may vote in person or by proxy. A Super Majority, whether present in person or by proxy, shall constitute a quorum at any meeting of Members. Every proxy must be signed by the Member or the Member’s attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. Any question relating to the Company which may be considered and acted upon by the Members may be considered and acted upon by vote at a Company meeting, and any vote required to be in writing shall be deemed given if approved by a vote by written ballot.

6.4 Limited Liability of Members. Units are non-assessable. No Member shall be personally liable for any of the expenses, liabilities, or obligations of the Company or for any Losses beyond the amount of the Member’s Capital Contribution to the Company and the Member’s share of any undistributed net income and gains of the Company.

6.5 Access to Books and Records. The Members and their designated representatives shall have access to books and records of the Company during the Company’s normal business hours. An alphabetical list of the names, addresses and business telephone numbers, to the extent such are available, of all Members, together with the number of units held by each of them, will be maintained as a part of the books and records of the Company. The Company shall make the list available on request to any Member or his representative for a stated purpose including, without limitation, matters relating to Members’ voting rights. However, the Company need not exhibit, produce or mail a copy of the Member list if the actual purpose and reason for the request therefore is to secure the list or other information for the purpose of selling the list or copies thereof, or of using it for a commercial purpose other than in the interest of the Person as a Member in the Company. The Manager may require the Person requesting the list to represent that the list is not requested for any commercial purpose.

6.6 Representation of Company. Each of the Members hereby acknowledges and agrees that the attorneys representing the Company and the Manager and its Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Members in any respect at any time. Each of the Members further acknowledges and agrees that the attorneys shall have no obligation to furnish the Members with any information or documents obtained, received or created in connection with the representation of the Company, the Manager and its Affiliates.

ARTICLE 7

DISTRIBUTIONS; PROFITS AND LOSSES

7.1 Distributions.

7.1.1: Distributions of “Cash for Distribution”. Except as otherwise provided in Sections 7.2 and 12 of this Agreement, Cash for Distribution shall be distributed to the Members for each calendar quarter in arrears, to each Member in proportion to the Participation Percentage of the Member as of the last day of the quarter to which the distribution pertains.

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7.1.2: Reserved

7.1.3: Cash Distributions Upon Dissolution. Upon dissolution and winding up of the Company, the Company shall thereafter distribute all Cash for Distribution available for distribution, if any, to the Members in accordance with the provisions of Section 12.3 of this Agreement.

7.2 Restriction on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

7.3 Allocation of Profits and Losses. After giving effect to the special allocations set forth in Section 7.5, the Manager shall allocate all Company Profits and Losses for any fiscal year to the Members in proportion to their respective Participation Percentages. In determining the allocations to Members for any quarterly period during a fiscal year, the Manager may allocate to the Members all Profits and Losses realized by the Company during such quarter as of the close of business on the last day of such calendar quarter without regard to Profits and Losses realized for time periods within the quarter, or in such other manner selected by the Manager and permitted under Section 706 of the Code and the Treasury Regulations hereunder.

7.4 Reserved

7.5 Special Allocation Rules.

7.5.1: Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the Minimum Gain at a time no later than the time at which the Minimum Gain is reduced below the sum of the deficit Capital Account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-2(f).

7.5.2: If any Member unexpectedly receives any adjustment, allocation,or distribution described in Sections 1.704-1(b)(2)(ii)(d)(4) through 1.704-1(b)(2)(ii)(d)(6) of the Regulations which causes or increases a deficit in the Member’s Capital Account as of the end of the tax year to which the adjustment, allocation or distribution relates, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 7.5.2 shall be made if and only to the extent that the Member would have a Capital Account deficit after all other allocations provided for in Section 7.3 through 7.6 have been tentatively made as if this Section 7.5.2 were not in the Agreement.

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7.5.3: To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of his Interest in the Company, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis) and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

7.5.4: For purposes of determining the Profits, Losses or any other items allocable to any period, these other items shall be determined on a daily, monthly, quarterly or other basis, as determined by the Manager using any permissible method under Section 706 of the Code and the Treasury Regulations hereunder.

7.5.5: Notwithstanding Section 7.3, Profits and Losses, if any, allocable to the period before the admission of any Members shall be allocated to the Initial Member. Profits or Losses allocable to the period commencing with the admission of Members and all subsequent periods shall be allocated in accordance with Section 7.3.

7.5.6: Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for the year.

7.5.7: The Members are aware of the income tax consequences of the allocations made by this Article 7 and hereby agree to be bound by the provisions of this Article 7 in reporting their shares of Company Profits, Losses and other allocable items for income tax purposes.

7.6 Code Section 704(c) Allocations.

7.6.1: Income, gains, losses and deductions, as determined for Federal income tax purposes, for any Company asset which has a Gross Asset Value that differs from its adjusted basis for Federal income tax purposes shall, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the Company asset to the Company for Federal income tax purposes and its initial Gross Asset Value in accordance with Code Section 704(c) and the Treasury Regulations hereunder. In furtherance of the foregoing, it is understood and agreed that any income, gain, loss, or deduction attributable to Code Section 704(c) property shall be allocated to the Members in accordance with the traditional method of making Code Section 704(c) allocations, in accordance with Treasury Regulation Section 1.704-3(b).

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7.6.2: If the Gross Asset Value of any Company asset is adjusted, subsequent allocations of income, gain, losses and deductions, as determined for Federal income tax purposes, for the Company asset shall, solely for Federal income tax purposes, take account of any variation between the adjusted basis of the Company asset for Federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations hereunder.

7.6.3: Allocations under this Section 7.6 are solely for purposes of Federal, state and local income taxes and shall not affect, or in any way be taken into account in computing any Member’s Capital Account.

7.6.4: Except as otherwise set forth in this Agreement, any elections or other decisions relating to allocations under this Section 7.6 shall be made by the Manager, with the review and concurrence of the Company’s accountants, in a manner that reasonably reflects the purpose and intention of this Agreement.

7.7 Intent of Allocations. It is the intent of the Company that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those Sections, including the qualified income offset and minimum gain charge- back, which are hereby incorporated by reference. If, for whatever reasons, the Company is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the Manager is granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of allocations and distributions provided in this Agreement. In addition, if the Manager is required to make any special allocations of Company Profits, Losses, income, gain or deductions to comply with the requirements of the Regulations, the Manager shall make such special allocations in whatever manner it determines appropriate so that, after such allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the allocations mandated by the Regulations were not required to be made. The Manager shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate for the admission of Members to reflect Members’ Participation Percentages in the Company at the close of the years.

7.8 Quarterly Valuation of Assets. For each of the Company’s Note Investments and other investments, the Manager shall review the investments at the end of each calendar quarter and determine if a Write-down is required with respect thereto. The Manager shall cause the Company’s accountants, within thirty (30) days of the end of each calendar quarter, to verify that the Manager’s determination was made in compliance with generally accepted accounting principles. Any Write-down of an asset resulting from the valuation shall be effective on the last day of the respective calendar quarter during the term of this Agreement.

7.9 Limitation on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

ARTICLE 8

[RESERVED]

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ARTICLE 9

BOOKS AND RECORDS, REPORTS AND RETURNS

9.1 Books and Records. At the expense of the Company, the Manager shall: (a) cause the Company to keep all books and records required by Delaware Statutes; and (b) shall cause the Company to keep adequate books and records at its principal place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Company. Upon five (5) day written notice all books and records shall be available for inspection and copying by, and at the sole expense of, any Member, or any Member’s duly authorized representatives, during the Company’s normal business hours.

9.2 Annual Statements.

9.2.1: The Manager shall cause to be prepared at least annually, at the Company’s expense, financial statements prepared in accordance with generally accepted accounting principles. The financial statements will include: (i) a balance sheet, (ii) statements of income or loss, (iii) Members’ equity and (iv) a statement of cash flows.

9.2.2: The Company’s accountants will itemize the costs of any verification performed by them and may be reimbursed to the Manager by the Company only to the extent that the reimbursement when added to the costs for administrative services rendered, does not exceed the competitive rate for the services as determined under Article 9.2.1.

9.2.3: Notwithstanding the 120-day period specified in Section 9.2.3(b) below, the Manager shall cause to be prepared and distributed to the Members not later than seventy-five (75) days after the close of each Fiscal Year of the Company all Company information necessary in the preparation of the Members’ federal income tax returns.

9.3 Filings. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall also cause to be prepared and timely filed with and/or delivered to appropriate federal and state regulatory and administrative bodies and/or the Members applicable, all reports required to be filed with or delivered to those entities or Members under applicable law, including those described in the Company’s undertakings in any securities filing. The reports shall be prepared using the accounting or reporting basis required by the relevant regulatory bodies. The Company will provide a copy of the reports to each Member who requests one, without expense to the Member. The Manager, at Company expense, shall file, with the appropriate agency in the states in which this Company is registered, as required by these states, a copy of each report referred to under this Article 9.

9.4 Suitability Requirements. The Manager, at Company expense, shall maintain for a period of at least six (6) years, a record of the documentation indicating that a Member complies with the suitability standards set forth in the Memorandum.

9.5 Fiscal Matters.

9.5.1: The Company has adopted the Fiscal Year for tax and accounting purposes. Subject to the provisions of Section 706 of the Code and approval by the Internal Revenue Service and the applicable state taxing authorities, in the Manager’s sole discretion and without the approval of the Members, from time to time the Manager may change the Company’s fiscal year to a period to be determined by the Manager.

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9.5.2: The Company shall continue to use the cash basis method of accounting for both income tax purposes and financial reporting purposes. We may exclude C corporations as potential members (except for personal holding companies), if they will jeopardize our cash basis method of accounting.

9.5.3: Upon the transfer of a unit in the Company, the Company may, at the sole discretion of the Manager, elect under Code Section 754, to adjust the basis of the Company property as allowed by Sections 734(b) and 743(b) thereof.

9.5.4: The Manager shall act as the “Tax Matters Partner” (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6234 of the Code and the Treasury Regulations hereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations hereunder to designate the Manager as the TMP.

ARTICLE 10

TRANSFER OF COMPANY UNITS

10.1 Intentionally left blank

10.2 Transfer of Member’s Unit. To the extent any of the following restrictions are not necessary to the Company, in the discretion of the Manager reasonably exercised; the Manager may eliminate or modify any restriction. Subject to the immediately preceding sentence, no assignee of the whole or any portion of a Member’s interest in the Company shall have the right to become a substituted Member in place of his assignor, unless the following conditions are first met:

10.2.1: Members may only transfer whole units unless the Member is transferring his entire Membership Interest;

10.2.2: The assignor shall designate its intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the Manager;

10.2.3: The transferring Member shall first obtain written consent of the Manager to the substitution. The Manager shall not unreasonably withhold its consent, but the Manager will withhold its consent to the extent necessary to prohibit transfers that could cause the Company to be classified as a publicly traded partnership. The Manager will also withhold consent if it determines that the sale or transfer will otherwise jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that the sale or transfer may violate any applicable securities laws (including any investment suitability standards);

10.2.4: The assignor and assignee named therein shall execute and acknowledge any other instruments as the Manager may deem necessary or desirable to effect the substitution, including, but not limited to, a power of attorney;

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10.2.5: The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

10.2.6: The assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses connected with the substitution, including, but not limited to, reasonable attorneys’ fees associated therewith; and

10.2.7: The Company has received, if required by the Manager, a legal opinion satisfactory to the Manager that the transfer will not violate the registration provisions of the Securities Act of 1933, as amended, or any applicable state securities laws, which opinion shall be furnished at the Member’s expense.

Assignments complying with the above shall be recognized by the Company on the first day of the calendar month following the month in which the above conditions are met.

A Person who acquires an unit but who is not admitted as a substitute Member by the Manager pursuant to the provisions of this Section 10.2 shall be entitled only to allocations and distributions with respect to such unit in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books and records of the Company, and shall not have any of the rights of a member under Delaware Statutes or this Agreement.

10.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained in this Agreement, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of units, and any proposed sale, assignment or transfer in violation of same shall be void and of no effect:

10.3.1: No Member shall make any transfer or assignment of all or any part of his unit if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Company for federal or Delaware state income tax (if any) purposes;

10.3.2: Notice to California residents: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY UNIT THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.

10.3.3: Appropriate legends (including the legend above) under applicable securities laws shall be affixed to any certificates evidencing the units and issued or transferred to purchasers in other states. For a detailed list, see pages 1-7 of the Company’s Private Placement Memorandum.

10.3.4: No Member shall make any transfer or assignment of all or any of his interest if the Manager determines that the transfer or assignment would result in the Company being classified as a “publicly traded partnership” with the meaning of Section 7704(b) of the Code or Treasury Regulations. To prevent that:

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(a) The Manager will not permit trading of units on an established securities market within the meaning of Section 7704(b);

(b) The Manager will prohibit any transfer of unit which would not comply with any applicable safe harbors; and

(c) The Manager will not permit any withdrawal of any unit.

10.4 Distributions and Allocations with Respect to Transferred Units. If any unit is assigned during any accounting period in compliance with the provisions of this Section 10, all Profits, Losses, each item thereof, and all other items attributable to the assigned unit for such period shall be divided and allocated between the assignee and the assignor by taking into account their varying rights during the period in accordance with Code Section 706(d), using any convention permitted by law and selected by the Manager. All distributions on or before the date of such assignment shall be made to the assignor and all distributions thereafter shall be made to the assignee.

ARTICLE 11 

WITHDRAWAL OF A MEMBER;

PLANNED TERMINATION OF THE FUND

11.1 Withdrawal of Members. Absent extreme circumstances, members may not withdraw from the Fund. After the Fund Termination Date the assets of the Fund will be sold and the Fund will be wound up in orderly fashion as set forth in Article 12 below. The Manager may, at its discretion, allow withdrawal of a member if conditions dictate such.

11.2 Planned Existence and Termination of Fund. The Fund is intended to have a limited existence as follows.

11.2.1: The Subscription Period for the Fund, during which time Persons who meet the suitability standards set forth in the Memorandum and the Subscription Agreement may subscribe for units in the Company, shall last from the date of the Memorandum until December 31, 2012. The Investment Manager, may, if it is determined to be in the best interest of the Fund and its investors, extend the subscription period for an additional six months ending June 30, 2013.

11.2.2: The Active Investment Period begins July 1, 2012 and ends when all funds have been utilized to purchase mortgage notes and land contracts. Depending upon the amount, additional principal generated by early pay-offs of loans held in the Fund may be distributed to investors in accordance with their pro-rata ownership or reinvested in additional assets.

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11.2.3: The Fund will terminate its existence after all loans have been liquidated and the proceeds thereof have been distributed to investors/members. The Investment Manager intends to begin liquidating the loans held in the Fund at a point established as 36 months from the date of receipt of the last subscription but no later than June 30, 2016 and expects to complete liquidation and distribution of the resulting proceeds by June 30, 2018 with due regard to market conditions and the effect thereof on pricing. The termination date may be extended at the discretion of the Investment Manager for up to one year to June 30, 2019. In the event the Investment Manager deems it necessary to extend the termination date beyond June 30, 2018 he shall provide the reason or reasons for doing so in writing to all members. The liquidation of loan assets will take place on a “first in, first out” basis with due regard to the subscription dates of investors/members.

ARTICLE 12

DISSOLUTION OF THE COMPANY

12.1 Events Causing Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (“Liquidating Events”):

12.1.1: The Fund Termination Date: June 30, 2018 or if extended by the Manager, June 30, 2019.

12.1.2: The sale of or other disposition of all or substantially all of the Company Property (without receipt of an exchange property);

12.1.3: Affirmative vote or consent of a Super Majority to dissolve, wind up, and liquidate the Company;

12.1.4: The happening of any other event that makes it unlawful or impossible to carry on the business of the Company;

12.1.5: The resignation or removal of the sole Manager without appointing a replacement therefore in accordance with Sections 3.5 or 3.6 above;

12.1.6: The entry of a judgment of dissolution under Section 1335 of the Act.

The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Liquidating Event.

As soon as possible following the occurrence of a Liquidating Event, Manager shall comply with the provisions of Section 1336 of the Act, giving notice of the dissolution of the Company and the commencement of the winding up of its affairs.

12.2 Winding Up. Upon the occurrence of a Liquidating Event, the Company shall immediately be dissolved, but shall continue until its affairs have been wound up according to the provisions of the Delaware Statutes. Upon dissolution of the Company, the Manager will wind up the Company’s affairs as follows:

12.2.1: No new Note Investments shall be invested in or purchased;

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12.2.2: The Manager(s) shall liquidate the assets of the Company by sale to third parties;

12.2.3: All sums of cash held by the Company as of the date of dissolution, together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be distributed as follows:

(a) first, to the payment and discharge of all of the Company’s debts and liabilities, if any, to creditors other than Members;

(b) second, to the payment and discharge of all of the Company’s debts and liabilities, if any, to Members; then

(c) the balance, if any, to the Members in accordance with their Participation Percentage as of the Fund Termination Date.

12.3 Compliance with Timing Requirements of Regulations. If the Company is “liquidated” within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), distributions shall be made under this Article 12 (if such liquidation constitutes a dissolution of the Company) or Article 7 hereof (if it does not) to the Members who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).

12.4 Distributions Held in Trust Reserves. In the discretion of the Manager, a pro rata share of the distributions that would otherwise be made to the Members pursuant to this Section 12 may be:

12.4.1: Distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Members arising out of or in connection with the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Manager in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or

12.4.2: Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

12.5 Deemed Distribution and Re-contribution. Notwithstanding any other provision of this Section 12, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(i), but no Liquidating Event has occurred, the Company property shall not be liquidated, the Company's liabilities shall not be paid or discharged, and the Company's affairs shall not be wound up. Instead, the Company shall be deemed to have distributed the Company Property in kind to the Members, who shall be deemed to have assumed and taken subject to all Company liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Members shall be deemed to have re-contributed the Company property in kind to the Company, which shall be deemed to have assumed and taken subject to all such liabilities.

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12.6 Certificate of Dissolution. At such time as all of the debts, liabilities and obligations of the Company have been paid, discharged or otherwise provided for, a certificate of dissolution shall be prepared, signed, and filed by the Manager as provided in Section 1340 of the Act.

12.7 No Recourse to Manager. Upon dissolution and winding up under the Act, each Member shall look solely to the assets of the Company for the return of his Capital Account, and if a Member’s Participation Percentage of the Company assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return the amounts of the Capital Account of Members, Members shall have no recourse against the Manager or any other Member. The winding-up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Manager. The Manager is hereby authorized to do any and all acts and things authorized by law for these purposes. If the Manager is removed or resigns and no replacement Manager is appointed by the Super Majority, the winding-up of the affairs of the Company and the distribution of its assets shall be conducted by the person or entity selected by a vote of a Super Majority, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes.

ARTICLE 13

[RESERVED]

ARTICLE 14

[RESERVED]

ARTICLE 15

MISCELLANEOUS

15.1 Covenant to Sign Documents. Each Member covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Company and to achieve its purposes, including, without limitation, any amendments to the Articles of Organization and any filings, records or publications necessary or appropriate under the laws of any jurisdiction in which the Company shall conduct its business.

15.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Members shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Members shall be addressed to the Members at the last address shown on the Company records. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 2.5 above or as hereafter changed as provided herein.

15.3 Right to Engage in Competing Business. Nothing contained in this Agreement shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for using for its own benefit information received as a consequence of the Manager’s management of the affairs of the Company. This Section 15.3 shall be subject in its entirety to the fiduciary duty of the Manager set forth in Section 3.4.

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15.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Super Majority in accordance with Section 6.2; provided, however, that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Member or materially adversely affect any Member’s interest in Profits, Losses, Company assets, distributions, management rights or voting rights, except as agreed by that Member. In addition, and notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, if, in the reasonable judgment of the Manager, such amendment does not adversely affect the rights of the Members, including, without limitation, an amendment:

15.4.1: To grant to Members (and not solely the Manager in its capacity as an Initial Member) additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon them;

15.4.2: To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions for matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

15.4.3: To conform this Agreement to applicable laws and regulations, including, without limitation, federal and state securities and tax laws and regulations;

15.4.4: In the form of a revision to or updating of Schedule A in accordance with Section 5.1 hereof; and

15.4.5: To elect for the Company to be governed by any successor Delaware statute governing limited liability companies. The Manager shall notify the Members within a reasonable time of the adoption of any amendment.

15.5 Entire Agreement. This Agreement and the Memorandum constitutes the entire agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto regarding the subject matter contained herein.

15.6 Waiver. No waiver by any party hereto of any breach of, or default under, any provision of this Agreement by any party shall be construed or deemed a waiver of any breach of or default under any other provision of this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement for any future breach or default of the same provision of this Agreement.

15.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

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15.8 Application of Delaware Law. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of Delaware.

15.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement.

15.10 Number and Gender. Whenever the singular form is used in this Agreement it includes the plural when required by the context, and the masculine gender shall include the feminine and neutral genders.

15.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by Manager on behalf of the Members as their attorney-in-fact.

15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives, during the term of the Company, any right that it may have to maintain any action for partition for any property of the Company.

15.13 Binding on Assignees. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the provisions of Section 10.2, which control the assignment or other transfer of units.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first set forth above.

COMPANY:	MEMBER:
Opportunity Fund VII, LLC	__________________________________
By: Bayou City Exploration, Inc., Manager	By: _______________________________
By: ____________________________

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Schedule 1.1

Definitions

Act means the Delaware Limited Liability Company Law

Affiliate means: (a) any person directly or indirectly controlling, controlled by or under common control with the Person; (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person; (c) any officer, director or Member of the Person or (d) if the other Person is an officer, director or Manager, any company for which the Person acts in any similar capacity.

Agreement means this Operating Agreement, as amended from time to time.

Acquisition Expenses means all expenses, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, broker price opinions, tax checks, accounting fees and expenses, title insurance funded by the Company, commissions, and other miscellaneous expenses, related to the evaluation, selection and acquisition of Note Investments, whether or not a Note Investment is acquired.

Amortization Ratio means the ratio applied to voluntary principal payments and pre- payments received by the Company for purposes of allocating amortization of the Note Investment Cost. It shall be calculated as the ratio of the Note Investment Cost to the total unpaid principal balance of the Mortgage Loan or Land Contract outstanding at the time of purchase. By way of example, if the Amortization Ratio is 70%, then 70% of an applicable principal payment amortizes the Note Investment Cost and the remaining 30% is treated as an Investment Gain. Involuntary principal pre-payments received shall be applied first to fees and expenses associated with the individual Mortgage Loan or Land Contract, then to amortization of the Note Investment Cost to Members, and then, remaining proceeds, if any, shall be shared as Investment Gains.

Basis means the total cost to the Company for the acquisition of the Note Investment, including the purchase price for the Note Investment, the Acquisition Expenses, and the Transaction Fee.

Capital Account means, for any Member, the Capital Account maintained for the Member in accordance with the following provisions:

(a) The Manager shall credit to each Member’s Capital Account: (i) on the Closing Date, the Member’s Capital Contribution, (ii) the Member’s distributive share of Profits, (iii) any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member, and (iv) the amount of any Company liabilities that are assumed by the Member or that are secured by any Company property distributed to the Member.

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(b) The Manager shall debit from each Member’s Capital Account: (i) the amount of cash and the fair market value of any Company property distributed to the Member under any provision of this Agreement, (ii) the Member’s distributive share of Losses, (iii) any items in the nature of expenses or losses that are specially allocated to a Member and (iv) the amount of any liabilities of the Member that are assumed by the Company or that are secured by any property contributed by the Member to the Company.

If the Gross Asset Value of a Company asset is adjusted as a result of a Write-down, the Manager shall concurrently adjust the Capital Accounts of all Members in order to reflect the aggregate net adjustment that would have occurred if the Company had recognized Losses equal to the Write-down Amount and the Losses were allocated under Article 7.

If any unit in the Company is transferred in accordance with Section 10.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred unit.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with the Regulation. If the Manager determines that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the Manager may make the modification, provided that it is not likely to have a material effect on the amounts distributable to any Member under Articles 7 and 12 of this Agreement upon the dissolution of the Company. The Manager shall make any appropriate modification if unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-

1(b) as provided for in Sections 7.7 and 15.4.

Capital Contribution means the total investment and contribution to the capital of the Company made by a Member.

Cash for Distribution means that portion of the Cash Flow available for distribution to Members consisting of, to the extent received and available for distribution, (a) un- amortized Note Investment Cost in accordance with the Amortization Ratio, (b) 90% of the actual interest income received and (c) 90% of the Investment Gains received, subject to recovery of unrecovered losses of Note Investment Cost. Only actual interest income received (versus scheduled) will be distributed to Members and the Loan Servicer.

Cash Flow means for any calendar quarter period the cash funds received by the Company for that calendar quarter period.

Member means a Person who owns one or more units of the Company.

Initial Member means Bayou City Exploration, Inc., a Nevada corporation.

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Code means the Internal Revenue Code of 1986, as amended from time to time and corresponding provisions of subsequent revenue laws.

Company means Opportunity Fund VII, LLC, the Delaware limited liability company to which this Agreement pertains.

Expenses means all expenses in connection with the operation of the Company’s business, including, but not limited to, all Acquisition Expenses, but specifically excluding Manager’s office overhead.

Fiscal Year means, subject to the provisions of Section 706 of the Code and Section 9.6.1, (i) the period commencing on the date of formation of the Company and ending on December 31, 2011 (ii) any subsequent twelve (12) month period beginning on January 1 and ending on December 31 and (iii) the period commencing January 1 and ending on the date on which all Company assets are distributed to the Members under Article 12.

Gross Asset Value means, for any Company asset, the following:

(a) The initial Gross Asset Value of any Company asset at the time that it is contributed by a Member to the capital of the Company shall be an amount equal to the fair market value of the Company asset (without regard to the provisions of Code Section 7701(g)), as determined by the contributing Member and the Manager;

(b) The Gross Asset Values of all Company assets shall be adjusted, as determined by the distributed Member and the Manager, to equal their respective fair market values upon the distribution to a Member by the Company of more than a de minimis amount of Company assets (other than money), unless all Members simultaneously receive distributions of undivided units in the distributed Company assets in proportion to their respective Capital Accounts;

(c) The Gross Asset Values of all Company assets shall be adjusted to equal their respective fair market values (as determined by the Manager, in its reasonable discretion) upon the termination of the Company for Federal income tax purposes under Code Section 708(b)(1)(B); and

(d) The Gross Asset Value of a Company asset shall be adjusted in the case of a Write-down of the Company asset in accordance with the provisions of this Agreement.

HSLLC as used in this agreement means Home Servicing, LLC.

Investment Gains shall be equal to the amount by which a principal prepayment, after considering the Amortization Ratio exceeds the Company’s un-amortized Note Investment Cost on the Mortgage Loans and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Manager).

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Investment Manager means the Fund’s Investment Manager is Bayou City Exploration, Inc., a Nevada corporation (which we refer to as “Manager” or the Investment Manager”), organized on November 30, 1994. Bayou City’s executive offices are at 625 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

Units means, as the context requires, ownership of equity in the Company that are (a) issued to Members upon their admission to the Company under the Subscription Agreement and the Memorandum or (b)transferred to those who become substituted Members under Section 12.2 hereof.

Land Contracts as used in this Agreement are contracts between a buyer and the Company of a property, wherein the Company holds the title or deed to the property until all agreed upon payments have been made in full.

Delaware Statutes means the Delaware laws with respect to limited liability companies including the Act, as amended from time to time, unless indicated to the contrary by the context.

Manager means Bayou City Exploration, Inc., a Nevada Corporation, in that capacity or any Person replacing Bayou City Exploration, Inc. under this Agreement.

Member means a Member or the Initial Member.

Membership Unit(s) means the entire ownership interest of a Member in the Company at any particular time, including the right of the Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of the Member to comply with all of the terms and provisions of this Agreement.

Memorandum means the July 1, 2012 Private Placement Memorandum of the Company offering the units for sale, a copy of which is available from Manager.

Mortgage means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Note Investments, whether in the form of a deed of trust, mortgage or otherwise.

Mortgage Notes means investments of the Company that are notes, debentures, bonds and other evidences of indebtedness or obligations that are negotiable or non-negotiable and secured or collateralized by Mortgages.

Note Investment(s) means the Mortgage Notes and Land Contracts or an interest in a Mortgage Note or Land Contract that are held by the Company.

Note Investment Cost means the purchase price paid by the Company for the Note Investment, not including Acquisition Costs and the Transaction Fee.

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Offering means the offer and sale of units of the Company made under the Memorandum.

Participation Percentage means the percentage that the amount of a Member’s Capital Account represents as compared to the aggregate amount of all Member’s Capital Accounts.

Person means any natural person, partnership, corporation, unincorporated association or other legal entity.

Profits and Losses mean, for each Fiscal Year or any other period, an amount equal to the Company’s taxable income or loss for the Fiscal Year or other given period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately under Code Section 703(a) (1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses under this section shall be added to the taxable income or loss;

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures under Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses under this section, shall be subtracted from the taxable income or loss. If any Company asset has a Gross Asset Value which differs from its adjusted cost basis, gain or loss resulting from the disposition of the Company asset shall be computed using the Gross Asset Value (rather than adjusted cost basis) of the Company asset. Notwithstanding any other provision of this Section, any items in the nature of income, gain, expenses or losses, which are specially allocated under Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or Losses.

Real Property means and includes: (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that is located on or used as part of land.

Servicing Fee means a monthly Servicing Fee to HSLLC in an amount equal to (a) the greater of $30 per month per Mortgage Note and Land Contract or one-twelfth of 1% of the sum of the unpaid principal balance for all performing Note Investments during the relevant calendar month plus all cash on hand, plus (b) for each non-performing Note Investment, if any, $175.00 per month.

Subscription Agreement means the document that is an exhibit to and part of the Memorandum that every Person who buys units of the Company must execute and deliver with full payment for the units and which, among other provisions, contains the written consent of each Member to the adoption of this Agreement.

Super Majority means any group of Members who together hold 80% of the total outstanding units of the Company as of a particular date (or if no date is specified, the first day of the then current calendar month).

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Transaction Fee means a transaction fee equal to 2.5% of the Note Investment Cost for each Note Investment purchased by the Company.

Treasury Regulations means, except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the U.S. Department of the Treasury under the Code, as the regulations may be lawfully changed from time to time.

Unit(s) means a Membership Unit.

Write-down means a determination by the Manager for a particular Note Investment or other Company investment (which determination has been verified by the Company’s accountants as being in conformity with generally accepted accounting principles) that the fair market value of the investment at the time the determination is made is less than the amount actually paid or allocated to the purchase of the investment, which determination shall be made by the Company and its accountants within thirty (30) days of the end of each calendar quarter and any Write-down shall be effective on the last day of the relevant calendar quarter during the term of this Agreement.

Write-down Amount means, for any Note Investment or other Company investment, the amount by which, at the time that a Write-down is determined for the Note Investment, the amount actually paid or allocated to the purchase of the investment exceeds its fair market value.

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EX-10.34

EXHIBIT 10.34

EXHIBIT A – FUND OPERATING AGREEMENT

THE UNITS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE LAWS OF CERTAIN STATES. THE UNITS MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE UNITS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED, OR OTHER EVIDENCE SATISFACTORY TO THE MANAGER THAT SUCH REGISTRATION IS NOT REQUIRED. ADDITIONAL RESTRICTIONS ON TRANSFER OF THE UNITS ARE SET FORTH IN THIS AGREEMENT.

OPERATING AGREEMENT OF OPPORTUNITY FUND VIII, LLC

THIS OPERATING AGREEMENT (this “Agreement”) was made and entered into as of the 1st day of February, 2013, by and among Bayou City Exploration, Inc., a Nevada Corporation (the “Manager and “Initial Member”), and Opportunity Fund VIII, LLC, a Delaware limited liability company (the “Company” or “Fund”).

WITNESSETH

WHEREAS, the Manager and Initial Member and the Company desire to enter into an Operating Agreement to govern the Company’s operations;

NOW, WHEREFORE, in consideration for the mutual agreements, covenants and premises set forth herein, the Operating Agreement is hereby adopted:

ARTICLE 1

DEFINITIONS

Defined Terms. Unless otherwise stated, the terms used in this Agreement shall have the usual and customary meanings associated with their use, and shall be interpreted in the context of this Agreement. Certain capitalized terms which are used in this Agreement shall have the meanings given in this Agreement or Schedule 1.1.

ARTICLE II

FORMATION; PURPOSE

2.1 Organization; Governance. The Initial Member has caused the formation of the Company on February 1, 2013 (the “Effective Date”) as a limited liability company effective with the filing of the Articles of Organization (the “Articles”) with the Delaware Secretary of State. The Company has been formed pursuant to the provisions of the Delaware Statutes and upon the terms and conditions set forth in the Articles and in this Agreement. The Initial Member together with all Persons who may hereafter become Members of the Company from time to time in accordance with this Agreement (collectively, the “Members”) are and shall be bound by the terms and provision of this Agreement. The Manager is authorized to execute and cause to be filed additional Amendments to the Articles whenever required by the Act or this Agreement. Except as otherwise required by the Act, this Agreement shall govern the business and affairs of the Company and the relationships of the Members to one another as members of the Company. The Members intend that the Company be treated as a partnership for federal and state income tax purposes but that the Company shall not be treated as a partnership for purposes of Section 303 of the Federal Bankruptcy Code. No Member shall act inconsistently with this intent.

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2.2 Term. The term of the Company commenced on the date the Articles were filed as described in Section 2.1 and continue perpetually unless earlier terminated under the provisions of this Agreement or by operation of law.

2.3 Name. The business of the Company shall be carried on under the name “Opportunity Fund VIII, LLC.”

2.4 Purpose. The primary purpose of the Company is to invest in and purchase Note Investments, and do all things reasonably related thereto. The Company seeks to provide Members with a high level of quarterly income. The Company seeks to achieve this objective by investing in a managed portfolio comprised of a blend of Mortgage Notes secured by real estate and Land Contracts secured by full ownership of the underlying collateral.

2.5 Place of Business. The principal place of business of the Company is and will be located at 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101, until the Manager changes it after giving the Members notice. In addition, the Company may maintain such other offices and places of business in the United States as the Manager may deem advisable. The Manager will file all necessary or desirable documents to permit the Company to conduct its business lawfully in any state or territory of the United States.

2.6 Agent for Service of Process. The name and business address of the agent for service of process for the Company is Travis Creed, 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101, or such other person as the Manager shall appoint from time to time, utilizing the Manager’s reasonable discretion.

2.7 Nature of Members' Membership Units. The Membership Units of the Members in the Company shall be personal property for all purposes. All property owned by the Company, whether real or personal, tangible or intangible, shall be owned by the Company as an entity, and no Member shall have any direct ownership of such property or any right to use such property for any purpose other than a purpose of the Company.

2.8 Power of Attorney.

2.8.1: Each of the Members irrevocably constitutes and appoints the Manager as his true and lawful attorney-in-fact, with full power and authority for him, and in his name, place and stead, to execute, acknowledge, publish and file:

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(a) This Agreement, the Articles, as well as any and all amendments thereto required under the laws of the State of Delaware or of any other state, or which the Manager deems advisable to prepare, execute and file;

(b) Any certificates, instruments and documents, including, without limitation, Fictitious Business Name Statements, as may be required to be filed by the Company by any governmental agency or by the laws of any state or other jurisdiction in which the Company is doing or intends to do business, or which the Manager deems advisable to file; and

(c) Any documents which may be required to effect the continuation of the Company, the admission of an additional or substituted Member, or the dissolution and termination of the Company, provided that the continuation, admission, substitution or dissolution or termination, as applicable, is in accordance with the terms of this Agreement.

2.8.2: The grant of authority in Section 2.8.1:

(a) Is a Special Power of Attorney coupled with a unit, is irrevocable, survives the death of a Member and shall not be affected by the subsequent incapacity of the Member;

(b) May be exercised by the Manager for each Member by a facsimile signature of or on behalf of the Manager or by listing all of the Members and by executing any instrument with a single signature of or on behalf of the Manager, acting as attorney-in-fact for all of them; and

(c) Shall survive the delivery of an assignment by a Member of the whole or any portion of his Membership Unit; except that where the assignee thereof has been approved by the Manager for admission to the Company as a substituted Member, the Special Power of Attorney shall survive the delivery of the assignment for the sole purpose of enabling the person to execute, acknowledge, and file any instrument necessary to effect the substitution.

ARTICLE 3

THE MANAGER

3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as otherwise expressly stated elsewhere in this Agreement, the Manager has exclusive control over the business of the Company (with all acts and decisions being in its sole discretion except as specifically set forth in this Agreement), including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, assignments, security agreements, documents evidencing Note Investments and contracts, and to assume direction of the business operations. As Manager of the Company and its business, the Manager has all duties generally associated with that position, including dealing with Members, being responsible for all accounting, tax and legal matters, performing internal reviews of the Company’s investments and loans, determining how and when to invest the Company’s capital, and determining the course of action to take for Company loans and land contracts that are in default. The Manager also has all of these powers for ancillary matters. Without limiting the generality of the foregoing, the powers include the right (except as specifically set forth in Section 3.2 and elsewhere in this Agreement):

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3.1.1: To evaluate potential Company investments, to expend the capital of the Company in furtherance of the Company’s business;

3.1.2: To acquire, hold, lease, sell, trade, exchange, or otherwise dispose of all or any portion of Company property or any interest therein at a price and upon the terms and conditions as the Manager may deem proper;

3.1.3: To cause the Company to become a joint venturer, general or limited partner or member of an entity formed to own, develop, operate and dispose of real and personal properties owned or co-owned by the Company acquired through foreclosure of a Note Investment.

3.1.4: To manage, operate and develop Company property, including Real Property acquired by the Company in connection with the foreclosure of the Mortgage securing a Mortgage Note, or to employ and supervise managers who may, or may not, be an Affiliate of the Manager;

3.1.5: To maintain, at the expense of the Company, adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of account as of the end of each calendar year, together with all necessary tax-reporting information;

3.1.6: To purchase, at the expense of the Company, liability and other insurance to protect the property of the Company and its business;

3.1.7: To refinance, recast, modify, consolidate, extend or permit the assumption of a Note Investment or other investment owned by the Company;

3.1.8: To pay all expenses incurred in the operation of the Company;

3.1.9: To file tax returns on behalf of the Company and to make any and all elections available under the Code;

3.1.10: To modify, delete, add to or correct from time to time any provision of this Agreement as permitted under Section 15.4 hereof; and

3.1.11: To admit Persons as additional members of the Company in Manager’s sole discretion.

3.2 Limitations on Manager’s Authority. The Manager has no authority to:

3.2.1: Do any act in contravention of this Agreement;

3.2.2: Do any act which would make it impossible to carry on the ordinary business of the Company;

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3.2.3: Confess a judgment against the Company;

3.2.4: Possess Company property or assign the rights of the Company in the property for other than a Company purpose;

3.2.5: Admit a person as a Manager without the prior affirmative vote or consent of a Majority or any higher vote as may be required by applicable law;

3.2.6: Sell all or a majority of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of a Majority;

3.2.7: Amend this Agreement without the prior affirmative vote or consent of a Majority, except as permitted by Section 15.4 of this Agreement;

3.2.8: Dissolve or terminate the Company without the prior affirmative vote or consent of a Super Majority except as otherwise provided in this Agreement;

3.2.9: Cause the merger or other reorganization of the Company without the prior affirmative vote or consent of a Super Majority;

3.2.10: Grant to the Manager or any of its Affiliates an exclusive right to sell any Company assets;

3.2.11: Commingle Manager will not allow the funds paid by investing members for the purchase of units in Opportunity Fund VIII, LLC to be commingled with the funds of the Manager or any other person. Said funds shall remain in the account established for Fund VIII until they are transferred for the purpose of purchasing loans;

3.2.12: Use or permit another Person to use the Company’s assets in any manner that is contrary to the stated objectives of the Fund.

3.2.13: Pay or award, directly or indirectly, any commissions or other compensation to any Person engaged by a potential investor for investment advice as an inducement to the advisor to advise the purchase of units in the Company; or

3.2.14: Make loans to the Manager or an Affiliate of the Manager.

3.3 Extent of Manager’s Obligation and Fiduciary Duty. The Manager shall devote the portion of its time to the business of the Company as it determines, in good faith, to be reasonably necessary to conduct the Company’s business. The Manager shall not be bound to devote all of its business time to the affairs of the Company, and the Manager and its Affiliates may engage for their own account and for the account of others in any other business ventures and employments, including ventures and employments having a business similar or identical or competitive with the business of the Company. Bayou City has fiduciary responsibility for the safekeeping and use of all funds and assets and will not use, or permit another to use funds or assets in any manner that is contrary to the stated objectives of the Fund. Bayou City will not allow the funds paid by investing members for the purchase of units in Opportunity Fund VIII, LLC to be commingled with the funds of the Manager or any other person. Said funds shall remain in the account established for Fund VIII until they are transferred for the purpose of purchasing loans. The Manager, as the Initial Member, waives its right to vote for removal of the Manager or for amendment of this Agreement (except as provided in Sections 3.1.10 and 15.4) or otherwise.

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3.4 Indemnification of Manager. Except as limited by law, the Fund shall indemnify Manager for all expenses, losses, liabilities and damages the Manager actually and reasonably incurs in connection with the defense or settlement of any action arising out of or relating to the conduct of the Fund’s activities, except an action with respect to which the Manager is adjudged to be liable for breach of a fiduciary duty owed to the Fund or the Members under the Act or this Agreement. The Fund shall advance the costs and expenses of defending actions against the Manager arising out of or relating to the management of the Fund, provided it first receives the written undertaking of the Manager to reimburse the Fund if ultimately found not to be entitled to indemnification.

3.5 Resignation of Manager. The Manager may resign from the Company provided, however, that the resignation shall not be effective until the earlier of the appointment of a replacement Manager by a Majority or 120 days following the date that Manager gave written notice to the Members of its resignation. Failure of a Majority to designate and admit a new Manager within said 120 days shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The resigning Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the resignation.

3.6 Removal of Manager. The Members may remove the Manager (i) upon Manager’s dissolution or bankruptcy or (ii) by written consent or vote of a Majority (excluding any Units of the Manager being removed). This removal of the Manager, if there is no other Manager, shall not become effective until the earlier of the appointment of a replacement Manager by a Majority or 120 days following the date that the Majority consented to the removal. Failure of a Majority to designate and admit a new Manager within 120 days from the date that the Majority elected to remove the Manager shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The removed Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the removal. The appointment of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. The new Manager shall thereupon execute, acknowledge and file an amendment to the Articles of Organization of the Company in the manner required by Delaware Statutes.

3.7 Payments at Resignation or Removal. Upon the resignation or removal of the Manager, the Company shall pay to the Manager a sum equal to all amounts then accrued and owing to the Manager.

3.8 Appointment of Additional Manager(s). An additional Manager may be admitted to the Company with the consent of all Managers and a Majority.

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3.9 Right to Rely on Manager. Any person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by the Manager as to:

3.9.1: The identity of the Manager or any Member;

3.9.2: The existence or non-existence of any fact or facts which constitute a condition precedent to acts by the Manager or which are in any further manner germane to the affairs of the Company;

3.9.3: The persons who are authorized to execute and deliver any instrument or document of the Company; and

3.9.4: Any act or failure to act by the Company or any other matter whatsoever involving the Company or any Member.

3.10 Amendment to the Manager’s Duties. Any amendment to this Operating Agreement modifying the rights and/or duties of the Manager shall require the Manager’s consent.

3.11 Compensation to Manager. Manager will earn compensation for managing the Company as outlined below:

3.11.1: Trading Profits:

In an effort to create a mechanism for profit consistent with Fund operations and objectives, the managing member and portfolio manager established a related / affiliated entity called Loanmod, LLC (“Loanmod”). Loanmod is operated by the managing member and seeks to create a trading profit by contracting to purchase loans or loan pools at a price lower than that to be paid by the Fund. Where practicable and in keeping with the Fund’s overall objective, the manager will purchase loan assets from Loanmod generating a trading profit. Any such purchase is subject to the duty owed by the Managing Member to the Fund or Funds and based upon the overall quality of the portfolio purchased, the seasoning of the loan(s) and the value of the collateral securing the loans. Any trading profit realized by Loanmod will reduce the net return to investors and, therefore, is subject to a self imposed “cap” or limit as follows: Trading profits as described herein shall not, under any circumstances, exceed 10% of the pool’s total aggregate unpaid balances at the time of purchase. For example, trading profit from a loan pool with aggregate unpaid balances totaling 1 million dollars cannot exceed $100,000 (10% of 1,000,000). In most cases, pricing is determined on a loan by loan basis (aka “loan level pricing”). Each loan in a pool is evaluated based on the underwriting standards described herein to determine the amount, if any, of trading profit available. Loanmod will not be included in the assignment chain and, therefore, functions as a “riskless principal” in the transactions described above.

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ARTICLE 4

INVESTMENT AND OPERATING POLICIES

4.1 Investment Policy. In making investments, the Manager shall follow the investment policy described in the Memorandum.

ARTICLE 5

CAPITAL CONTRIBUTIONS; LOANS TO COMPANY

5.1 Contributions of Members. Members shall acquire units in accordance with the terms of the Subscription Agreement or any future subscription materials approved by the Manager. The names, addresses, date of admissions and Capital Contributions of the Members shall be set forth in a schedule maintained by the Manager. The Manager shall update the schedule to reflect the then-current ownership of units without any further need to obtain the consent of any Member, and the schedule, as revised from time to time by the Manager, shall be presumed correct absent manifest error. Any Member shall have a right to inspect such schedule upon written request to the Manager.

5.2 Limitations Pertaining to Capital Contributions.

5.2.1: Except as otherwise specifically provided in this Agreement, or as otherwise provided by law, no Member shall have the right to withdraw from the Company or to demand or receive a return of his capital without the consent of the Manager. Upon return of any Capital Contributions, no Member shall have the right to receive property other than cash except as may be specifically provided herein.

5.2.2: No Member shall receive any interest, salary or draw with respect to his Capital Contributions or his Capital Account or for services rendered on behalf of the Company or otherwise in his capacity as a Member.

5.2.3: None of the provisions of this Agreement, whether in regard to contributions or otherwise, is intended for the benefit of, nor shall such provisions be enforceable by, creditors of the Company.

5.2.4: No Member shall receive a credit to his Capital Account for his Capital Contribution until the Closing Date.

5.3 Loans. Any Member or Affiliate of a Member may, with the written consent of the Manager, lend or advance money to the Company. If the Manager or, with the written consent of the Manager, any Member shall make any loans to the Company or advance money on its behalf, the amount of any loan or advance shall not be treated as a contribution to the capital of the Company, but shall be a debt due from the Company. The amount of any loan or advance by a lending Member or an Affiliate of a Member shall be repayable out of the Company’s cash and shall bear interest at a rate of not in excess of the lesser of: (i) the prime rate established, from time to time, by any major bank selected by the Manager for loans to the bank’s most creditworthy commercial borrowers or (ii) the maximum rate permitted by applicable law. The inability of the Company to obtain more favorable loan terms shall be a condition to obtaining such loans from a Member or affiliate of a Member. None of the Members or their Affiliates shall be obligated to make any loan or advance to the Company.

5.4 Initial Member. The Initial Member’s Capital Contribution is listed on a schedule maintained by the Manager.

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ARTICLE 6

VOTING AND OTHER RIGHTS OF MEMBERS

6.1 No Participation in Management. Except as expressly provided in this Agreement, no Member shall take part in the conduct or control of the Company’s business or have any right or authority to act for or bind the Company.

6.2 Rights and Powers of Members. In addition to the rights of the Members to remove and replace the Manager and as otherwise provided for in Section 3.2, the Members shall have the right to vote upon and take any of the following actions upon the approval of a Majority, without the concurrence of the Manager, and an affirmative vote of a Majority shall be required to allow or direct the Manager to:

6.2.1: Dissolve and windup the Company except as provided in this Agreement;

6.2.2: Amend this Agreement, subject to the rights to the Manager granted in Section 15.4 of this Agreement and subject also to the prior consent of the Manager if either the distributions due to the Manager or the duties of the Manager are affected;

6.2.3: Merge the Company or sell all or substantially all of the assets of the Company, otherwise than in the ordinary course of its business;

6.2.4: Change the nature of the Company’s business; and

6.2.5: Those matters set forth in Section 3.2 above.

6.3 Meetings.

6.3.1: The Members may hold meetings of Members within or outside the State of Delaware at any place selected by the Person or Persons calling the meeting. If no other place is stated, meetings shall be held at the Company’s principal place of business as established in accordance with Section 2.5 of this Agreement. The Members may approve by written consent of a Super Majority any matter upon which the Members are entitled to vote at a duly convened meeting of the Members, which consents will have the same effect as a vote held at a duly convened meeting of the Members.

6.3.2: The Manager, or Members representing more than ten percent (10%) of the outstanding Units for any matters on which the Members may vote, may call a meeting of the Company. If Members representing the requisite Units present to the Manager a statement requesting a Company meeting, or the Manager calls the meeting, the Manager shall fix a date for a meeting and shall (within ten (10) days after receipt of a statement, if applicable) give personal or mailed notice or notice by any other means of written communication, addressed to each Member at the respective address of the Member appearing on the books of the Company or given to the Company for the purpose of notice, not less than fifteen (15) or more than sixty (60) days before the date of the meeting, to all Members of the date, place and time of the meeting and the purpose for which it has been called. Unless otherwise specified, all meetings of the Company shall be held at 2:00 p.m. local time at the principal office of the Company.

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6.3.3: For the purpose of determining the Members entitled to vote on a matter, or to vote at any meeting of the Members or any adjournment thereof, the Member requesting such meeting may fix, in advance, a date as the record date for any such determination. Such date shall not be more than thirty (30) days nor less than ten (10) business days before any such meeting. Members may vote in person or by proxy. A Majority, whether present in person or by proxy, shall constitute a quorum at any meeting of Members. Every proxy must be signed by the Member or the Member’s attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it. Any question relating to the Company which may be considered and acted upon by the Members may be considered and acted upon by vote at a Company meeting, and any vote required to be in writing shall be deemed given if approved by a vote by written ballot.

6.4 Limited Liability of Members. Units are non-assessable. No Member shall be personally liable for any of the expenses, liabilities, or obligations of the Company or for any Losses beyond the amount of the Member’s Capital Contribution to the Company and the Member’s share of any undistributed net income and gains of the Company.

6.5 Access to Books and Records. The Members and their designated representatives shall have access to books and records of the Company during the Company’s normal business hours. An alphabetical list of the names, addresses and business telephone numbers, to the extent such are available, of all Members, together with the number of units held by each of them, will be maintained as a part of the books and records of the Company. The Company shall make the list available on request to any Member or his representative for a stated purpose including, without limitation, matters relating to Members’ voting rights. However, the Company need not exhibit, produce or mail a copy of the Member list if the actual purpose and reason for the request therefore is to secure the list or other information for the purpose of selling the list or copies thereof, or of using it for a commercial purpose other than in the interest of the Person as a Member in the Company. The Manager may require the Person requesting the list to represent that the list is not requested for any commercial purpose.

6.6 Representation of Company. Each of the Members hereby acknowledges and agrees that the attorneys representing the Company and the Manager and its Affiliates do not represent and shall not be deemed under the applicable codes of professional responsibility to have represented or be representing any or all of the Members in any respect at any time. Each of the Members further acknowledges and agrees that the attorneys shall have no obligation to furnish the Members with any information or documents obtained, received or created in connection with the representation of the Company, the Manager and its Affiliates.

ARTICLE 7

DISTRIBUTIONS; PROFITS AND LOSSES

7.1 Distributions.

7.1.1: Distributions of “Cash for Distribution”. Except as otherwise provided in Sections 7.2 and 12 of this Agreement, Cash for Distribution shall be distributed to the Members for each calendar quarter in arrears, to each Member in proportion to the Participation Percentage of the Member as of the last day of the quarter to which the distribution pertains.

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7.1.2: Reserved

7.1.3: Cash Distributions Upon Dissolution. Upon dissolution and winding up of the Company, the Company shall thereafter distribute all Cash for Distribution available for distribution, if any, to the Members in accordance with the provisions of Section 12.3 of this Agreement.

7.2 Restriction on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

7.3 Allocation of Profits and Losses. After giving effect to the special allocations set forth in Section 7.5, the Manager shall allocate all Company Profits and Losses for any fiscal year to the Members in proportion to their respective Participation Percentages. In determining the allocations to Members for any quarterly period during a fiscal year, the Manager may allocate to the Members all Profits and Losses realized by the Company during such quarter as of the close of business on the last day of such calendar quarter without regard to Profits and Losses realized for time periods within the quarter, or in such other manner selected by the Manager and permitted under Section 706 of the Code and the Treasury Regulations hereunder.

7.4 Reserved

7.5 Special Allocation Rules.

7.5.1: Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the Minimum Gain at a time no later than the time at which the Minimum Gain is reduced below the sum of the deficit Capital Account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-2(f).

7.5.2: If any Member unexpectedly receives any adjustment, allocation or distribution described in Sections 1.704-1(b)(2)(ii)(d)(4) through 1.704-1(b)(2)(ii)(d)(6) of the Regulations which causes or increases a deficit in the Member’s Capital Account as of the end of the tax year to which the adjustment, allocation or distribution relates, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 7.5.2 shall be made if and only to the extent that the Member would have a Capital Account deficit after all other allocations provided for in Section 7.3 through 7.6 have been tentatively made as if this Section 7.5.2 were not in the Agreement.

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7.5.3: To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of his Interest in the Company, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis) and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

7.5.4: For purposes of determining the Profits, Losses or any other items allocable to any period, these other items shall be determined on a daily, monthly, quarterly or other basis, as determined by the Manager using any permissible method under Section 706 of the Code and the Treasury Regulations hereunder.

7.5.5: Notwithstanding Section 7.3, Profits and Losses, if any, allocable to the period before the admission of any Members shall be allocated to the Initial Member. Profits or Losses allocable to the period commencing with the admission of Members and all subsequent periods shall be allocated in accordance with Section 7.3.

7.5.6: Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for the year.

7.5.7: The Members are aware of the income tax consequences of the allocations made by this Article 7 and hereby agree to be bound by the provisions of this Article 7 in reporting their shares of Company Profits, Losses and other allocable items for income tax purposes.

7.6 Code Section 704(c) Allocations.

7.6.1: Income, gains, losses and deductions, as determined for Federal income tax purposes, for any Company asset which has a Gross Asset Value that differs from its adjusted basis for Federal income tax purposes shall, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the Company asset to the Company for Federal income tax purposes and its initial Gross Asset Value in accordance with Code Section 704(c) and the Treasury Regulations hereunder. In furtherance of the foregoing, it is understood and agreed that any income, gain, loss, or deduction attributable to Code Section 704(c) property shall be allocated to the Members in accordance with the traditional method of making Code Section 704(c) allocations, in accordance with Treasury Regulation Section 1.704-3(b).

7.6.2: If the Gross Asset Value of any Company asset is adjusted, subsequent allocations of income, gain, losses and deductions, as determined for Federal income tax purposes, for the Company asset shall, solely for Federal income tax purposes, take account of any variation between the adjusted basis of the Company asset for Federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations hereunder.

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7.6.3: Allocations under this Section 7.6 are solely for purposes of Federal, state and local income taxes and shall not affect, or in any way be taken into account in computing any Member’s Capital Account.

7.6.4: Except as otherwise set forth in this Agreement, any elections or other decisions relating to allocations under this Section 7.6 shall be made by the Manager, with the review and concurrence of the Company’s accountants, in a manner that reasonably reflects the purpose and intention of this Agreement.

7.7 Intent of Allocations. It is the intent of the Company that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those Sections, including the qualified income offset and minimum gain charge- back, which are hereby incorporated by reference. If, for whatever reasons, the Company is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the Manager is granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of allocations and distributions provided in this Agreement. In addition, if the Manager is required to make any special allocations of Company Profits, Losses, income, gain or deductions to comply with the requirements of the Regulations, the Manager shall make such special allocations in whatever manner it determines appropriate so that, after such allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the allocations mandated by the Regulations were not required to be made. The Manager shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate for the admission of Members to reflect Members’ Participation Percentages in the Company at the close of the years.

7.8 Quarterly Valuation of Assets. For each of the Company’s Note Investments and other investments, the Manager shall review the investments at the end of each calendar quarter and determine if a Write-down is required with respect thereto. The Manager shall cause the Company’s accountants, within thirty (30) days of the end of each calendar quarter, to verify that the Manager’s determination was made in compliance with generally accepted accounting principles. Any Write-down of an asset resulting from the valuation shall be effective on the last day of the respective calendar quarter during the term of this Agreement.

7.9 Limitation on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

ARTICLE 8

[RESERVED]

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ARTICLE 9

BOOKS AND RECORDS, REPORTS AND RETURNS

9.1 Books and Records. At the expense of the Company, the Manager shall: (a) cause the Company to keep all books and records required by Delaware Statutes; and (b) shall cause the Company to keep adequate books and records at its principal place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Company. Upon five (5) day written notice all books and records shall be available for inspection and copying by, and at the sole expense of, any Member, or any Member’s duly authorized representatives, during the Company’s normal business hours.

9.2 Annual Statements.

9.2.1: The Manager shall cause to be prepared at least annually, at the Company’s expense, financial statements prepared in accordance with generally accepted accounting principles. The financial statements will include: (i) a balance sheet, (ii) statements of income or loss, (iii) Members’ equity and (iv) a statement of cash flows.

9.2.2: The Company’s accountants will itemize the costs of any verification performed by them and may be reimbursed to the Manager by the Company only to the extent that the reimbursement when added to the costs for administrative services rendered, does not exceed the competitive rate for the services as determined under Article 9.2.1.

9.2.3: Notwithstanding the 120-day period specified in Section 9.2.3(b) below, the Manager shall cause to be prepared and distributed to the Members not later than seventy-five (75) days after the close of each Fiscal Year of the Company all Company information necessary in the preparation of the Members’ federal income tax returns.

9.3 Filings. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall also cause to be prepared and timely filed with and/or delivered to appropriate federal and state regulatory and administrative bodies and/or the Members applicable, all reports required to be filed with or delivered to those entities or Members under applicable law, including those described in the Company’s undertakings in any securities filing. The reports shall be prepared using the accounting or reporting basis required by the relevant regulatory bodies. The Company will provide a copy of the reports to each Member who requests one, without expense to the Member. The Manager, at Company expense, shall file, with the appropriate agency in the states in which this Company is registered, as required by these states, a copy of each report referred to under this Article 9.

9.4 Suitability Requirements. The Manager, at Company expense, shall maintain for a period of at least six (6) years, a record of the documentation indicating that a Member complies with the suitability standards set forth in the Memorandum.

9.5 Fiscal Matters.

9.5.1: The Company has adopted the Fiscal Year for tax and accounting purposes. Subject to the provisions of Section 706 of the Code and approval by the Internal Revenue Service and the applicable state taxing authorities, in the Manager’s sole discretion and without the approval of the Members, from time to time the Manager may change the Company’s fiscal year to a period to be determined by the Manager.

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9.5.2: The Company shall continue to use the cash basis method of accounting for both income tax purposes and financial reporting purposes. We may exclude C corporations as potential members (except for personal holding companies), if they will jeopardize our cash basis method of accounting.

9.5.3: Upon the transfer of a unit in the Company, the Company may, at the sole discretion of the Manager, elect under Code Section 754, to adjust the basis of the Company property as allowed by Sections 734(b) and 743(b) thereof.

9.5.4: The Manager shall act as the “Tax Matters Partner” (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6234 of the Code and the Treasury Regulations hereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations hereunder to designate the Manager as the TMP.

ARTICLE 10

TRANSFER OF COMPANY UNITS

10.1 Intentionally left blank

10.2 Transfer of Member’s Unit. To the extent any of the following restrictions are not necessary to the Company, in the discretion of the Manager reasonably exercised; the Manager may eliminate or modify any restriction. Subject to the immediately preceding sentence, no assignee of the whole or any portion of a Member’s interest in the Company shall have the right to become a substituted Member in place of his assignor, unless the following conditions are first met:

10.2.1: Members may only transfer whole units unless the Member is transferring his entire Membership Interest;

10.2.2: The assignor shall designate its intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the Manager;

10.2.3: The transferring Member shall first obtain written consent of the Manager to the substitution. The Manager shall not unreasonably withhold its consent, but the Manager will withhold its consent to the extent necessary to prohibit transfers that could cause the Company to be classified as a publicly traded partnership. The Manager will also withhold consent if it determines that the sale or transfer will otherwise jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that the sale or transfer may violate any applicable securities laws (including any investment suitability standards);

10.2.4: The assignor and assignee named therein shall execute and acknowledge any other instruments as the Manager may deem necessary or desirable to effect the substitution, including, but not limited to, a power of attorney;

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10.2.5: The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

10.2.6: The assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses connected with the substitution, including, but not limited to, reasonable attorneys’ fees associated therewith; and

10.2.7: The Company has received, if required by the Manager, a legal opinion satisfactory to the Manager that the transfer will not violate the registration provisions of the Securities Act of 1933, as amended, or any applicable state securities laws, which opinion shall be furnished at the Member’s expense.

Assignments complying with the above shall be recognized by the Company on the first day of the calendar month following the month in which the above conditions are met.

A Person who acquires a unit but who is not admitted as a substitute Member by the Manager pursuant to the provisions of this Section 10.2 shall be entitled only to allocations and distributions with respect to such unit in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books and records of the Company, and shall not have any of the rights of a member under Delaware Statutes or this Agreement.

10.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained in this Agreement, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of units, and any proposed sale, assignment or transfer in violation of same shall be void and of no effect:

10.3.1: No Member shall make any transfer or assignment of all or any part of his unit if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Company for federal or Delaware state income tax (if any) purposes;

10.3.2: Notice to California residents: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY UNIT THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.

10.3.3: Appropriate legends (including the legend above) under applicable securities laws shall be affixed to any certificates evidencing the units and issued or transferred to purchasers in other states. For a detailed list, see pages 1-7 of the Company’s Private Placement Memorandum.

10.3.4: No Member shall make any transfer or assignment of all or any of his interest if the Manager determines that the transfer or assignment would result in the Company being classified as a “publicly traded partnership” with the meaning of Section 7704(b) of the Code or Treasury Regulations. To prevent that:

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(a) The Manager will not permit trading of units on an established securities market within the meaning of Section 7704(b);

(b) The Manager will prohibit any transfer of unit which would not comply with any applicable safe harbors; and

(c) The Manager will not permit any withdrawal of any unit.

10.4 Distributions and Allocations with Respect to Transferred Units. If any unit is assigned during any accounting period in compliance with the provisions of this Section 10, all Profits, Losses, each item thereof, and all other items attributable to the assigned unit for such period shall be divided and allocated between the assignee and the assignor by taking into account their varying rights during the period in accordance with Code Section 706(d), using any convention permitted by law and selected by the Manager. All distributions on or before the date of such assignment shall be made to the assignor and all distributions thereafter shall be made to the assignee.

ARTICLE 11

WITHDRAWAL OF A MEMBER;

PLANNED TERMINATION OF THE FUND

11.1 Withdrawal of Members. Absent extreme circumstances, members may not withdraw from the Fund. After the Fund Termination Date the assets of the Fund will be sold and the Fund will be wound up in orderly fashion as set forth in Article 12 below. The Manager may, at its discretion, allow withdrawal of a member if conditions dictate such.

11.2 Planned Existence and Termination of Fund. The Fund is intended to have a limited existence as follows.

11.2.1: The Subscription Period for the Fund, during which time Persons who meet the suitability standards set forth in the Memorandum and the Subscription Agreement may subscribe for units in the Company, shall last from the date of the Memorandum until December 31, 2013. The Investment Manager, may, if it is determined to be in the best interest of the Fund and its investors, extend the subscription period for an additional six months ending June 30, 2014.

11.2.2: The Active Investment Period begins February 1, 2013 and ends when all funds have been utilized to purchase mortgage notes and land contracts. Depending upon the amount, additional principal generated by early pay-offs of loans held in the Fund may be distributed to investors in accordance with their pro-rata ownership or reinvested in additional assets.

11.2.3: The Fund will terminate its existence after all loans have been liquidated and the proceeds thereof have been distributed to investors/members. The Investment Manager intends to begin liquidating the loans held in the Fund at a point established as 36 months from the date of receipt of the last subscription but no later than June 30, 2016 and expects to complete liquidation and distribution of the resulting proceeds by June 30, 2017 with due regard to market conditions and the effect thereof on pricing. The termination date may be extended at the discretion of the Investment Manager for up to one year to June 30, 2018. In the event the Investment Manager deems it necessary to extend the termination date beyond June 30, 2017 he shall provide the reason or reasons for doing so in writing to all members.

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ARTICLE 12

DISSOLUTION OF THE COMPANY

12.1 Events Causing Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (“Liquidating Events”):

12.1.1: The Fund Termination Date: June 30, 2017 or if extended by the Manager, June 30, 2018.

12.1.2: The sale of or other disposition of all or substantially all of the Company Property (without receipt of an exchange property);

12.1.3: Affirmative vote or consent of a Majority to dissolve, wind up, and liquidate the Company;

12.1.4: The happening of any other event that makes it unlawful or impossible to carry on the business of the Company;

12.1.5: The resignation or removal of the sole Manager without appointing a replacement therefore in accordance with Sections 3.5 or 3.6 above;

12.1.6: The entry of a judgment of dissolution under Section 1335 of the Act.

The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Liquidating Event.

As soon as possible following the occurrence of a Liquidating Event, Manager shall comply with the provisions of Section 1336 of the Act, giving notice of the dissolution of the Company and the commencement of the winding up of its affairs.

12.2 Winding Up. Upon the occurrence of a Liquidating Event, the Company shall immediately be dissolved, but shall continue until its affairs have been wound up according to the provisions of the Delaware Statutes. Upon dissolution of the Company, the Manager will wind up the Company’s affairs as follows:

12.2.1: No new Note Investments shall be invested in or purchased;

12.2.2: The Manager(s) shall liquidate the assets of the Company by sale to third parties;

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12.2.3: All sums of cash held by the Company as of the date of dissolution, together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be distributed as follows:

(a) First, to the payment and discharge of all of the Company’s debts and liabilities, if any, to creditors other than Members;

(b) Second, to the payment and discharge of all of the Company’s debts and liabilities, if any, to Members; then

(c) The balance, if any, to the Members in accordance with their Participation Percentage as of the Fund Termination Date.

12.3 Compliance with Timing Requirements of Regulations. If the Company is “liquidated” within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), distributions shall be made under this Article 12 (if such liquidation constitutes a dissolution of the Company) or Article 7 hereof (if it does not) to the Members who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).

12.4 Distributions Held in Trust Reserves. In the discretion of the Manager, a pro rata share of the distributions that would otherwise be made to the Members pursuant to this Section 12 may be:

12.4.1: Distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Members arising out of or in connection with the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Manager in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or

12.4.2: Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

12.5 Deemed Distribution and Re-contribution. Notwithstanding any other provision of this Section 12, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(i), but no Liquidating Event has occurred, the Company property shall not be liquidated, the Company's liabilities shall not be paid or discharged, and the Company's affairs shall not be wound up. Instead, the Company shall be deemed to have distributed the Company Property in kind to the Members, who shall be deemed to have assumed and taken subject to all Company liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Members shall be deemed to have re-contributed the Company property in kind to the Company, which shall be deemed to have assumed and taken subject to all such liabilities.

12.6 Certificate of Dissolution. At such time as all of the debts, liabilities and obligations of the Company have been paid, discharged or otherwise provided for, a certificate of dissolution shall be prepared, signed, and filed by the Manager as provided in Section 1340 of the Act.

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12.7 No Recourse to Manager. Upon dissolution and winding up under the Act, each Member shall look solely to the assets of the Company for the return of his Capital Account, and if a Member’s Participation Percentage of the Company assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return the amounts of the Capital Account of Members, Members shall have no recourse against the Manager or any other Member. The winding-up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Manager. The Manager is hereby authorized to do any and all acts and things authorized by law for these purposes. If the Manager is removed or resigns and no replacement Manager is appointed by the Super Majority, the winding-up of the affairs of the Company and the distribution of its assets shall be conducted by the person or entity selected by a vote of a Super Majority, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes.

ARTICLE 13

[RESERVED]

ARTICLE 14

[RESERVED]

ARTICLE 15

MISCELLANEOUS

15.1 Covenant to Sign Documents. Each Member covenants, for himself and his successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Company and to achieve its purposes, including, without limitation, any amendments to the Articles of Organization and any filings, records or publications necessary or appropriate under the laws of any jurisdiction in which the Company shall conduct its business.

15.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Members shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Members shall be addressed to the Members at the last address shown on the Company records. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 2.5 above or as hereafter changed as provided herein.

15.3 Right to Engage in Competing Business. Nothing contained in this Agreement shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for using for its own benefit information received as a consequence of the Manager’s management of the affairs of the Company. This Section 15.3 shall be subject in its entirety to the fiduciary duty of the Manager set forth in Section 3.4.

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15.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority in accordance with Section 6.2; provided, however, that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Member or materially adversely affect any Member’s interest in Profits, Losses, Company assets, distributions, management rights or voting rights, except as agreed by that Member. In addition, and notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, if, in the reasonable judgment of the Manager, such amendment does not adversely affect the rights of the Members, including, without limitation, an amendment:

15.4.1: To grant to Members (and not solely the Manager in its capacity as an Initial Member) additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon them;

15.4.2: To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions for matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

15.4.3: To conform this Agreement to applicable laws and regulations, including, without limitation, federal and state securities and tax laws and regulations;

15.4.4: In the form of a revision to or updating of Schedule A in accordance with Section 5.1 hereof; and

15.4.5: To elect for the Company to be governed by any successor Delaware statute governing limited liability companies. The Manager shall notify the Members within a reasonable time of the adoption of any amendment.

15.5 Entire Agreement. This Agreement and the Memorandum constitutes the entire agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto regarding the subject matter contained herein.

15.6 Waiver. No waiver by any party hereto of any breach of, or default under, any provision of this Agreement by any party shall be construed or deemed a waiver of any breach of or default under any other provision of this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement for any future breach or default of the same provision of this Agreement.

15.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

15.8 Application of Delaware Law. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of Delaware.

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15.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement.

15.10 Number and Gender. Whenever the singular form is used in this Agreement it includes the plural when required by the context, and the masculine gender shall include the feminine and neutral genders.

15.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by Manager on behalf of the Members as their attorney-in-fact.

15.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives, during the term of the Company, any right that it may have to maintain any action for partition for any property of the Company.

15.13 Binding on Assignees. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the provisions of Section 10.2, which control the assignment or other transfer of units.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first set forth above.

COMPANY:	MEMBER:
Opportunity Fund VIII, LLC	__________________________________
By: Bayou City Exploration, Inc., Manager	By: _______________________________
By: ____________________________

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Schedule 1.1

Definitions

Acquisition Expenses means all expenses, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, broker price opinions, tax checks, accounting fees and expenses, title insurance funded by the Company, commissions, and other miscellaneous expenses, related to the evaluation, selection and acquisition of Note Investments, whether or not a Note Investment is acquired.

Act means the Delaware Limited Liability Company Law.

Affiliate means: (a) any person directly or indirectly controlling, controlled by or under common control with the Person; (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person; (c) any officer, director or Member of the Person or (d) if the other Person is an officer, director or Manager, any company for which the Person acts in any similar capacity.

Agreement means this Operating Agreement, as amended from time to time.

Amortization Ratio means the ratio applied to voluntary principal payments and pre- payments received by the Company for purposes of allocating amortization of the Note Investment Cost. It shall be calculated as the ratio of the Note Investment Cost to the total unpaid principal balance of the Mortgage Loan or Land Contract outstanding at the time of purchase. By way of example, if the Amortization Ratio is 70%, then 70% of an applicable principal payment amortizes the Note Investment Cost and the remaining 30% is treated as an Investment Gain. Involuntary principal pre-payments received shall be applied first to fees and expenses associated with the individual Mortgage Loan or Land Contract, then to amortization of the Note Investment Cost to Members, and then, remaining proceeds, if any, shall be shared as Investment Gains.

Basis means the total cost to the Company for the acquisition of the Note Investment, including the purchase price for the Note Investment, the Acquisition Expenses, and the Transaction Fee.

Capital Account means, for any Member, the Capital Account maintained for the Member in accordance with the following provisions:

(a) The Manager shall credit to each Member’s Capital Account: (i) on the Closing Date, the Member’s Capital Contribution, (ii) the Member’s distributive share of Profits, (iii) any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member, and (iv) the amount of any Company liabilities that are assumed by the Member or that are secured by any Company property distributed to the Member.

(b) The Manager shall debit from each Member’s Capital Account: (i) the amount of cash and the fair market value of any Company property distributed to the Member under any provision of this Agreement, (ii) the Member’s distributive share of Losses, (iii) any items in the nature of expenses or losses that are specially allocated to a Member and (iv) the amount of any liabilities of the Member that are assumed by the Company or that are secured by any property contributed by the Member to the Company.

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If the Gross Asset Value of a Company asset is adjusted as a result of a Write-down, the Manager shall concurrently adjust the Capital Accounts of all Members in order to reflect the aggregate net adjustment that would have occurred if the Company had recognized Losses equal to the Write-down Amount and the Losses were allocated under Article 7.

If any unit in the Company is transferred in accordance with Section 10.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred unit.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with the Regulation. If the Manager determines that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the Manager may make the modification, provided that it is not likely to have a material effect on the amounts distributable to any Member under Articles 7 and 12 of this Agreement upon the dissolution of the Company. The Manager shall make any appropriate modification if unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-

1(b) as provided for in Sections 7.7 and 15.4.

Capital Contribution means the total investment and contribution to the capital of the Company made by a Member.

Cash for Distribution means that portion of the Cash Flow available for distribution to Members consisting of, to the extent received and available for distribution, (a) un- amortized Note Investment Cost in accordance with the Amortization Ratio, (b) 90% of the actual interest income received and (c) 90% of the Investment Gains received, subject to recovery of unrecovered losses of Note Investment Cost. Only actual interest income received (versus scheduled) will be distributed to Members and the Loan Servicer.

Cash Flow means for any calendar quarter period the cash funds received by the Company for that calendar quarter period.

Code means the Internal Revenue Code of 1986, as amended from time to time and corresponding provisions of subsequent revenue laws.

Company means Opportunity Fund VIII, LLC, the Delaware limited liability company to which this Agreement pertains.

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Delaware Statutes means the Delaware laws with respect to limited liability companies including the Act, as amended from time to time, unless indicated to the contrary by the context.

Expenses means all expenses in connection with the operation of the Company’s business, including, but not limited to, all Acquisition Expenses, but specifically excluding Manager’s office overhead.

Fiscal Year means, subject to the provisions of Section 706 of the Code and Section

9.6.1, (i) the period commencing on the date of formation of the Company and ending on December 31, 2011 (ii) any subsequent twelve (12) month period beginning on January 1 and ending on December 31 and (iii) the period commencing January 1 and ending on the date on which all Company assets are distributed to the Members under Article 12.

Gross Asset Value means, for any Company asset, the following:

(a) The initial Gross Asset Value of any Company asset at the time that it is contributed by a Member to the capital of the Company shall be an amount equal to the fair market value of the Company asset (without regard to the provisions of Code Section 7701(g)), as determined by the contributing Member and the Manager;

(b) The Gross Asset Values of all Company assets shall be adjusted, as determined by the distributed Member and the Manager, to equal their respective fair market values upon the distribution to a Member by the Company of more than a de minimis amount of Company assets (other than money), unless all Members simultaneously receive distributions of undivided units in the distributed Company assets in proportion to their respective Capital Accounts;

(c) The Gross Asset Values of all Company assets shall be adjusted to equal their respective fair market values (as determined by the Manager, in its reasonable discretion) upon the termination of the Company for Federal income tax purposes under Code Section 708(b)(1)(B); and

(d) The Gross Asset Value of a Company asset shall be adjusted in the case of a Write-down of the Company asset in accordance with the provisions of this Agreement.

HSLLC as used in this agreement means Home Servicing, LLC.

Initial Member means Bayou City Exploration, Inc., a Nevada corporation.

Investment Gains shall be equal to the amount by which a principal prepayment, after considering the Amortization Ratio exceeds the Company’s un-amortized Note Investment Cost on the Mortgage Loans and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Manager).

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Investment Manager means the Fund’s Investment Manager is Bayou City Exploration, Inc., a Nevada corporation (which we refer to as “Manager” or the Investment Manager”), organized on November 30, 1994. Bayou City’s executive offices are at 625 Adams Street, Suite 700, Bowling Green, Kentucky 42101.

Land Contracts as used in this Agreement are contracts between a buyer and the Company of a property, wherein the Company holds the title or deed to the property until all agreed upon payments have been made in full.

Majority means any group of Members who together greater than 50% of the total outstanding units of the Company as of a particular date (or if no date is specified, the first day of the then current calendar month).

Manager means Bayou City Exploration, Inc., a Nevada Corporation, in that capacity or any Person replacing Bayou City Exploration, Inc. under this Agreement.

Member means a Person who owns one or more units of the Company.

Membership Unit(s) means the entire ownership interest of a Member in the Company at any particular time, including the right of the Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of the Member to comply with all of the terms and provisions of this Agreement.

Memorandum means the February 1, 2013 Private Placement Memorandum of the Company offering the units for sale, a copy of which is available from Manager.

Mortgage means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Note Investments, whether in the form of a deed of trust, mortgage or otherwise.

Mortgage Notes means investments of the Company that are notes, debentures, bonds and other evidences of indebtedness or obligations that are negotiable or non-negotiable and secured or collateralized by Mortgages.

Note Investment(s) means the Mortgage Notes and Land Contracts or an interest in a Mortgage Note or Land Contract that are held by the Company.

Note Investment Cost means the purchase price paid by the Company for the Note Investment, not including Acquisition Costs and the Transaction Fee.

Offering means the offer and sale of units of the Company made under the Memorandum.

Participation Percentage means the percentage that the amount of a Member’s Capital Account represents as compared to the aggregate amount of all Member’s Capital Accounts.

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Person means any natural person, partnership, corporation, unincorporated association or other legal entity.

Profits and Losses means, for each Fiscal Year or any other period, an amount equal to the Company’s taxable income or loss for the Fiscal Year or other given period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately under Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses under this section shall be added to the taxable income or loss;

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures under Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses under this section, shall be subtracted from the taxable income or loss. If any Company asset has a Gross Asset Value which differs from its adjusted cost basis, gain or loss resulting from the disposition of the Company asset shall be computed using the Gross Asset Value (rather than adjusted cost basis) of the Company asset. Notwithstanding any other provision of this Section, any items in the nature of income, gain, expenses or losses, which are specially allocated under Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or Losses.

Real Property means and includes: (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that is located on or used as part of land.

Servicing Fee means a monthly Servicing Fee to HSLLC in an amount equal to (a) the greater of $30 per month per Mortgage Note and Land Contract or one-twelfth of 1% of the sum of the unpaid principal balance for all performing Note Investments during the relevant calendar month plus all cash on hand, plus (b) for each non-performing Note Investment, if any, $175.00 per month.

Subscription Agreement means the document that is an exhibit to and part of the Memorandum that every Person who buys units of the Company must execute and deliver with full payment for the units and which, among other provisions, contains the written consent of each Member to the adoption of this Agreement.

Transaction Fee means a transaction fee equal to 2.5% of the Note Investment Cost for each Note Investment purchased by the Company.

Treasury Regulations means, except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the U.S. Department of the Treasury under the Code, as the regulations may be lawfully changed from time to time.

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Unit(s) means, as the context requires, ownership of equity in the Company that are (a) issued to Members upon their admission to the Company under the Subscription Agreement and the Memorandum or (b)transferred to those who become substituted Members under Section 12.2 hereof.

Write-down means a determination by the Manager for a particular Note Investment or other Company investment (which determination has been verified by the Company’s accountants as being in conformity with generally accepted accounting principles) that the fair market value of the investment at the time the determination is made is less than the amount actually paid or allocated to the purchase of the investment, which determination shall be made by the Company and its accountants within thirty (30) days of the end of each calendar quarter and any Write-down shall be effective on the last day of the relevant calendar quarter during the term of this Agreement.

Write-down Amount means, for any Note Investment or other Company investment, the amount by which, at the time that a Write-down is determined for the Note Investment, the amount actually paid or allocated to the purchase of the investment exceeds its fair market value.

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EX-10.35

EXHIBIT 10.35

LEASE OF COMMERCIAL BUILDING (TRIPLE NET)

Effective Date: January 1, 2013	County & State where property is located:
	Warren County, Kentucky
LESSOR	LESSEE
GC Royalty & Investment, LP (26-2157904)	Bayou City Exploration, Inc. (61-1306702)
632 Adams Street	632 Adams Street
Bowling Green, KY 42101	Bowling Green, KY 42101
Leased Premises address or location:
632 Adams Street, Bowling Green, KY 42101
Leased Premises legal description: See Attached.
Alterations to be made by Lessor: NONE

SECTION I

SPECIFIC PROVISIONS

1. Consideration,.

For valuable consideration Lessor leases to Lessee the leased premises, with improvements and personal property described above according to the terms herein set forth, a copy of which the Lessee acknowledged receipt,

2.Term of Lease.

This lease shall be effective for the term of three years. Beginning on January 1, 2013 and ending on December 31, 2015.

3.Rent for Standard Lease.

Rent shall be due on the 5th day of each month. Beginning with the month of February, 2013. Lessee shall prepay the first and last months rent in advance. The total monthly amount for rent is calculated as follows:

Base monthly rent $15,000.00; Plus

Increase in real estate taxes or other taxes charged by the Lessor as a result of the ownership of the building; Plus

Sales or Transaction tax charged by any governmental entity on the rental transaction; Plus

Late payment penalty of 5% of each rent payment when the payment is made more than 10 days after it is due.

4.Base Rent.

The Base Rent, as prescribed in paragraph three may be increased by percentage rent, cost of living increases, increase in the cost of fire insurance paid by Lessor, increases in taxes paid by Lessor, taxes on the transaction of the rental, and common area maintenance charges, if any, The base rent for the term shall be the monthly base rent multiplied by the number of months in the term of this lease.

5. Percentage of Rent: N/A

6. Cost of Living Escalation.

If paragraph three provides for increases in base rent because of cost of living increases, then this paragraph shall be applicable, Since the base rent is predicated upon the retail cost of living index remaining constant, then, should this lease be for more than one year, and should the Statistical Abstract of the United States, as published by the United States Government, evidence that on the January next following the first year of this lease the retail cost of living index has increased, then the amount of each rent payment shall be increased in that same percentage, beginning with the first payment due following the date that Lessor serves written notice to Lessee of this increase, with a copy or citation of the governmental reference reflecting and verifying the increase. Any increase in base rent from cost of living increases shall be retroactive to the date that the cost of living increase first became effective according to the government publication.

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7. Cost of Fire and Casualty Insurance.

Because this is a triple net lease, Lessor shall have no duty to pay, process or otherwise deal with fire and casualty insurance. Lessee shall provide fire and casualty insurance as provided in paragraph 15 (Provisions of Fire and Casualty Insurance). Lessor may pay the same on Lessee's behalf, and Lessee shall reimburse Lessor for the same or Lessor may reimburse itself therefor out of the rental payable hereunder by Lessee. Lessee shall save and hold Lessor harmless on account of any of these premiums. Lessee shall pay Lessor maximum legal interest on any monies that Lessor may advance on behalf of Lessee until these monies are repaid.

8.Costs of Taxes and Assessments.

Because this is a triple net lease, Lessee shall be responsible for all taxes and assessments levied against the real property, improvements thereon and personal property contained therein and all other taxes and assessments which may relate to the real property improvements or personal property contained therein and all increases related to all of these. Lessor may pay the same on the Lessee's behalf, and Lessee shall reimburse Lessor for the same or Lessor may reimburse itself therefore out of the rental payable hereunder by Lessee. Lessee shall hold harmless the Lessor on account of any of these taxes and assessments. Lessee shall pay Lessor maximum legal interest on my monies that Lessors may advance on behalf of Lessee until these monies are repaid.

If at any time during this lease the method or scope of taxation used at the commencement of this lease is changed so as to cause the method of taxation to be changed in whole or in part, so that in substitution for the real-estate taxes now assessed there may be in whole or in part a capitol levy or other imposition based on the value of the leased premises, or the rents received therefrom, or some other form of assessment based in whole or in part on some other valuation of the Lessor's real property comprising the demised premises, then and in such event, substituted tax or imposition shall be payable and discharged by the Lessee in the manner required pursuant to such la promulgated which shall authorize such change in the scope of the taxation, and as required by the terms and conditions within the lease.

Nothing in this lease contained shall require the Lessee to pay any franchise, estate, inheritance, succession, capital levy or transfer tax of the Lessor, or Federal Income Tax, State Income Tax, or excess profits or revenue tax, unless such taxes are in substitution for real property taxes as a result of such change in the manner and scope of taxation.

9.Tax Protests by Lessee.

If the Lessee wishes to contest any assessment or levy of taxes on the leased premises, the Lessor covenants and agrees that it will lend its name and execute all necessary papers to aid the Lessee in contesting or litigating said assessment, provided, however, that said litigation or contest shall be at the cost and expense of the Lessee. Any resultant reduction or rebate of taxes, paid or to be paid by the Lessee, shall belong to the Lessee.

10.Sales and Transaction Tax.

If paragraph three provides that Lessee shall pay sales or transaction taxes, then this paragraph is applicable. Lessee shall pay with each rent payment the amount of any sales or transaction tax on the rental transaction. If any sales or similar tax shall be levied or assessed by the United State of America, any state, county, city, town, district or agency or instrumentality thereof, upon or against Lessor by reason of the execution of this lease, or upon the rentals thereby reserved, then and in such event, Lessee shall forthwith, upon demand by Lessor, reimburse Lessor for the amount of any such taxes or assessments paid by Lessor.

11.Security Deposit.

To insure the Lessee's prompt and full payment of the rent, and the faithful and timely performance of all provisions of this lease, and any extension or renewal thereof, Lessee shall pay a security deposit as set forth in paragraph 3 above. This deposit shall be provided by the purchase of an interest bearing Certificate of Depositor its equivalent or by placing the fund in an interest bearing savings account in the joint name of the Lessor and Lessee as provided in Section 4 paragraph 2. If any default shall be made on the performance of any of the covenants on the part of Lessee herein contained with respect to any item or items of the leased premises, Lessor shall be entitled to that portion of the fund as it is required to cover the default. Any such releasing of money from the fund for this purpose shall not be a defense to any action by Lessor arising out of said default; and, upon demand, Lessee shall restore the fund to the full amount set forth in this provision. Upon the expiration or earlier termination of this lease, or any extension or renewal thereof; provided that the Lessee has paid all the rent herein called for and fully preformed all of the other provisions of this lease on its part to be preformed, Lessor will release to Lessee any remaining balance in the fund, The party who is eventually entitled to the fund in whole or in part shall also be entitled to all the interest accrued or his pro rata share of the interest accrued.

12.Place of Paying Rent.

Lessee shall pay rent to the address of the Lessors as designated on page one of this lease, or to any newer address of which Lessor gives written notice to Lessee.

13.Lessee pays all expenses.

This lease shall in all respects be treated as a triple net lease with all costs and expenses paid for by Lessee, including, but not limited to, real and personal property taxes; fire, casualty, theft, and liability insurance; trash removal; water, gas, electricity and other utilities; repairs and maintenance and all improvements.

14.Maximum Legal Interest.

If any monies are owed under the terms of this lease, all of the provisions of the lease notwithstanding, the parties that the party owing sums to the other as a result of performances under the lease, shall incur as a penalty of the maximum legal rate of interest that is in effect at the actual time of the charge. Interest thus imposed shall also be charged on any costs, legal fees, or any other obligations arising out of this lease. If the laws of the state which govern this lease have no maximum legal interest rate, the rate shall be 10%.

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15.Provisions of Fire and Casualty Insurance Policies.

Lessee shall continually keep in force, during the term of this lease and during any extension or renewal thereof, fire and extended coverage insurance in the amount of no less than 80% of the full insurable value of the leased premises. Lessee shall provide fire insurance protection on Lessee's stock in trade, furniture, fixtures and other property within the leased premises, in an amount equal to the full insurable value thereof, and promise that any insurance coverage in this regard shall contain a waiver of the insurer’s right of subornation against Lessor.

16.Waiver of Subornation on Casualty Insurance.

Lessor hereby releases Lessee, to the extent of its insurance coverage, from any and all liability of any loss or damage caused by fire or any of the extended coverage casualties, notwithstanding such fire or other casualty shall be due to the fault or negligence of Lessee or its agents, provided, however, this release shall be in full force and effect only with respect to loss or damage occurring during such time as Lessor's policies of fire and extended coverage insurance shall contain a clause to the effect that this release shall, not effect such policies or the right of Lessor to recover thereunder. Lessee agrees that such insurance policies shall include such clause as long as the same is includeable without extra costs.

Lessee shall promptly deliver to the Lessor, the original(s), or true and correct copies of any and all such policies of insurance.

Lessee shall not carry any stock of goods or do or omit to do any act in or about the leased premises which will in any way impair or . invalidate the obligation of any policy of insurance on or in reference to the leased premises.

The parties shall use good faith efforts to have any and all fire, extended coverage, or any and all material damage insurance which may be carried endorsed with the following subornation clause:

This insurance shall not be invalid should the insured waive in writing, prior to a loss, any and all right of the coverage against any party for a loss occurring to the property described herein.

Lessor and Lessee mutually agree that any right of subornation afforded to the insurance carriers of their respective property insurance policies of relative to real or personal property situated in or on the leased premises is waived; and the parties undertake to give their respective insurance carriers notice of this waiver.

17.Liability Insurance.

Lessee shall, at its own cost and expense, during the term of this lease, procure and maintain in force policies of liability insurance, with Lessor as an additional assured thereunder, insuring Lessee to the amount of $2,500,000 against any loss or damage, or any claim thereof, resulting from injury or death of any one person, and to the amount of $ $2,500,000 against any loss or damage, or any claim thereof, resulting from the injury to or death of any number of persons from any one accident, as a result of or by reason of the ownership by Lessee of the leased premises, parking lot and adjacent areas owned by Lessor, and the use and occupancy thereof by Lessee; and to procure and maintain in full force and effect, during the term herein specified, a policy or policies of insurance, with Lessor as additional assured thereunder, in an amount not less than $1,000,000, insuring Lessor against any loss or damage or any claim thereof resulting from the damage to or destruction of any property belonging to any person or persons whomsoever, as a result or by reason of the ownership of Lessor of the leased premises, parking lot, or adjacent areas owned by Lessor, and the use and occupancy thereof by Lessee.

Lessee shall promptly deliver to Lessor the original or originals, or a true and exact copy, of any and all such policy or policies of insurance.

All policies shall contain a written obligation of the insurer to notify Lessor in writing at lease 10 days prior to any cancellation thereof.

18.Non-Liability of Lessor.

Lessor shall not be liable for any damage occasioned by failure to keep the premises in repair, and shall not be liable for any damage done or occasioned by or from plumbing, gas, water, steam, or other pipes, tanks, washstand or wastepipe, in, above, upon or about the premises, nor for damage occasioned by water, snow, or ice being upon or coming through the roof, skylight, trap-door, or otherwise, or of any owners or occupants of adjacent or contiguous property.

19.Indemnification.

Lessor shall not be responsible or liable for any loss, theft, or damage to property or injury to or death of Lessee or any person on or about the leased premises, and Lessee agrees to indemnify and hold Lessor harmless therefrom unless it was caused or resulted from the negligent or willful acts of Lessor. Lessee shall hold Lessor harmless during the term of this lease, during any extension or renewal thereof, from and against any and all claims, suits, actions, demands and judgments arising out of an event or events occurring after the commencement of the primary term hereof when the proximate cause of injury to person or damage to property was not the negligence of Lessor or the negligence of an agent or employee of Lessor or of Lessor's successor. Lessee agrees not to make any claim against Lessor, and it will hold Lessor harmless therefrom, for any loss or damage to any personal property belonging to Lessee or any of its guests, customers, or occupants, or for any injuries to Lessee or any of its guests, customers, or occupants unless such loss or damage was caused or resulted from the negligent or willful conduct of Lessor.

20.Renewal.

Lessee shall have the right to renew for an additional 5 years term upon 90 days written notice to Lessor upon: Same Terms :

21.Purchase Option.

Lessee shall have the right to purchase the leased premises upon the giving of 60 days written notice for the total purchase price of $ 2.75 million, all in accordance with a real property purchase contract, receipt and escrow instructions which are attached hereto.

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22.Use by Lessee.

The premises shall be used for a reasonable office, warehousing, commercial or industrial use which is specifically described as: Administrative Offices of Blue Ridge Group, Inc. and Source Capital Group, Inc.

23.Tax on Property of Lessor.

Lessee shall pay before delinquent all taxes and assessments levied and assessed upon or against the leased premises during the term of this lease.

24.Tax on Property of Lessee.

Lessee shall pay or cause to be paid, before delinquency, throughout the primary, term of this lease and any renewals or extensions thereof, all taxes on any and all personal property owned by Lessee and situated upon the leased premises. If the Lessee fails to pay the taxes levied on or against its property as aforesaid when due and payable, Lessor may pay the same on Lessee's behalf, and Lessee shall reimburse Lessor for the same forthwith or Lessor may reimburse itself therefore out of rental payable hereunder by. Lessee, or Lessor may reimburse itself from the security deposit. Lessee shall save and hold Lessor harmless on account of any of these taxes. Lessee shall pay the Lessor the maximum legal interest rate per annum on any monies that Lessor may advance on behalf of Lessee until these monies are repaid.

25.Initial Construction and Repairs. N/A

26.Additional Space.

Lessor agrees that, in the event that Lessee desires to lease additional space from Lessor during the term of this lease, and provided that lease shall not be in default under the provisions of this lease, and provided that Lessor shall have space available, Lessor shall provide additional space upon the following terms and conditions:

a. Space will be provided in other buildings belonging to Lessor, if any, that may be hereafter described;

b. The terms of the lease for the additional space shall be negotiated between Lessor and Lessee at the time the space is provided;

c. Lessee shall deliver written notice in writing to Lessor of the needed for additional space not less than 180 days before the space is provided to the Lessor.

27.Reasonable Rules and Regulations.

In the interest of uniformity, to conform to such reasonable and non-discriminatory rules and regulations in the use of the leased premises as may be established from time to time by Lessor for the general use of the premises, Lessee agrees to abide by all rules and regulations of the building imposed by the Lessor.

The regulations are imposed for the cleanliness, good appearance, proper maintenance, good order and reasonable use of the premises and the building.

The rules and regulations may be changed from time to time on reasonable notice to Lessee. Breach of building rules and regulations shall not be termination of the lease unless Lessee continues to breach them after ten days written notice by Lessor, and then in the event such rules and regulations have been made for the above-stated purpose.

28.Common Areas and parking.

The term Common Area means the entire area designated for common use or benefit within the outer property limits of the building area, including but not limited to, parking lots, landscaped and vacant areas, passages for trucks and other vehicles, areaways, roads, walks, curbs, garden court and arcades, together with public stairs, ramps, shelters, porches, bus stations and loading docks, with facilities appurtenant to each, if any such areas exist or may later exist on the real property of Lessor, but excluding any area which the Lessor may have designated as a restricted area.

Subject to reasonable rules and regulations to be promulgated by Lessor, the public portions of the common area are hereby made accessible to the Lessee and its employees, agents, customers, and invitees for reasonable use in common with Lessor for the purposes for which constructed.

Lessor hereby grants to Lessee and Lessee's agents, employees and invitees the right during the term hereof, to use, in common with others entitled to the use thereof, such truckways, service corridors, service elevators and loading docks subject to such reasonable regulations as Lessor shall make from time to time.

Lessee further agrees to receive and deliver goods and merchandise and to remove all garbage and refuse only by way of the truckways and loading docks designated by Lessor for Lessee's use.

Lessor from time to time temporarily close portions of the common areas, erect private boundary marks or take further appropriate action to prevent the acquisition of public rights and such action shall not be deemed an eviction or disturbance of Lessee's use of the leased premises.

Lessee shall have, and is hereby granted, such possession and control over all portions of the entire common area, whether at the front or rear of the leased premises, as will authorize Lessee to exclude therefrom all persons who are not customers or patrons of the Lessee of the building area, who are or who may be creating a nuisance or disturbance thereon, and in particular as will authorize Lessee to maintain an action in trespass against such persons who are not patrons or customers and who are or who may be picketing thereon.

Subject to reasonable rules and regulations of the Lessor, Lessee and its employees, agents, customers and invitees shall have the use of parking areas specifically designated by Lessor for that purpose. Lessee agrees that upon written notice from Lessor, it will, within five days, furnish to Lessor the automobile license numbers assigned to Lessee's vehicles and the vehicles of all of its agents and employees.

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Lessee agrees that it shall not at any time park or permit the parking of its trucks or vehicles of others in truck passages or adjacent loading docks so as to interfere in any way with the use thereof.

Lessee, in common with Lessor and the patrons and customers of Lessee and Lessor shall have the right to use for parking purposes the parking areas adjacent to the building(s) located on the real property hereinbefore described. Nothing herein contained shall be construed in such manner as to imply that any portion of that parking area is hereby leased to that Lessee.

29. Construction and Repairs.

Lessor shall not be responsible for construction or repairs during this lease except as otherwise provided on page one of this lease.

30. Maintenance of Heater, Cooler, Drinking Water and Locks.

Lessee shall, at its own expense, be responsible for the installation, care, maintenance and replacement of all refrigerated air conditioning, coolers, and heating equipment and parts thereof saving the leased premises whether or not such equipment is located on the leased premises and whether such equipment was installed by Lessee or Lessor.

Lessee shall be responsible for locks and maintenance of locks and doors.

SECTION II

GENERAL PROVISIONS

1. Quiet Possession.

Lessor agrees that Lessee, upon paying the rentals and on performing all terms of this lease, shall peaceably have the leased premises during the term of this lease. Lessee agrees that in the event of the inability of Lessor to deliver to Lessee possession of the leased premises within 60 days of the commencement of the term as above specified, Lessor shall not be liable for any damage caused thereby, nor shall this lease be void, but the term hereof shall be extended for a period of equal to the delay in such delivery, but Lessee shall not be liable for rent until such time as Lessor offers to deliver possession of the leased premises to the Lessee, By occupying the leased premises as a tenant, or installing fixtures, facilities, or equipment or performing finished work, Lessee shall be deemed to have accepted the same and to have acknowledged that the premises are in the condition required by this lease. In the event of any dispute, the certificate of Lessor's architect or contractor shall be conclusive that the leased premises are in the condition required by this lease and are ready for occupancy.

2. Use of Premises.

Lessee has examined and knows the condition of the leased premises, and has received the same in good order and repair, and agrees:

1. To use these premises for reasonable office, warehousing, commercial or industrial uses which do not materially damage the leased premises.

2. To surrender possession of these leased premises at the expiration of this lease without further notice to quit, in as good condition as reasonable use will permit.

3.	To keep the premises in good condition and repair at Lessee's own expense and not to commit or permit any waste or nuisance.
4.	Not to use the leased premises for living quarters or residence.
5.	Not to make any unlawful, immoral or improper use of the leased premises, or any occupancy thereof contrary to law or contrary to any directions, rules, regulations, regulatory bodies, or officials having jurisdiction thereof or which shall be injurious to any person or property.

3. Damages to Interior or Structure.

Lessee shall pay (a) for any expense, damage or repair occasioned by the stopping of waste pipes or overflow from bathtubs, closets, washbasins, basins or sinks, and (b) for any damage to window panes, window shades, curtain rods, wallpaper, furnishings, or any other damage to the interior of the leased premises.

4. Repairs, Maintenance and Alterations by Lessee.

The Lessee has promised that the leased premises shall at all times be kept in good order, condition and repair by Lessee, at its own expense and in accordance with all laws, directions, rules and regulations of regulatory bodies or officials having jurisdiction.

If Lessee refuses or neglects to commence repairs within 10 days after receipt of written demand from Lessor, or adequately to complete such repairs without liability to Lessor for any loss or damages that may accrue to Lessee's stock or business by reason thereof, and if Lessor shall make such repairs, Lessee shall pay to Lessor, on demand, as additional rent, the costs thereof with interest at the maximum legal rate from the date of commencement of those repairs.

Lessee shall make no changes, improvements, alterations, or additions to the leased premises unless such changes, improvements, alterations, or additions: (a) are first approved in writing by Lessor; (b) are not in violation of restrictions placed thereon by the investor financing the construction of the building; and (c) will not materially alter the character of such premises and will not substantially lessen the value thereof, Lessor may not unreasonably withhold approval, and if there is a dispute as to reasonableness, it shall be determined by arbitration.

If structural alterations become necessary because of the application to the business carried on by Lessee of any law, ordinance, .rule or regulation of any regulatory body, or because of any act or default on the part of Lessee, or because Lessee has overloaded any electrical or other facility, Lessee shall make such structural alterations at its own cost and expense, after first obtaining Lessor's written approval of plans and specifications and furnishing such indemnification against liens, costs, damages and expenses as Lessor may reasonably require.

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Lessee may place partitions and fixtures (including light fixtures) and make improvements and other alterations in the interior of the leased premises at its own expense. These improvements or alterations installed or made by Lessee, other than those of a structural nature, shall remain the property or the Lessee provided, however, that prior to commencing any such work Lessee shall first obtain the written consent of Lessor to the proposed work.

Lessor may require that such work be done by Lessor's own employees or under Lessor's direction but at the expense of the Lessee, and Lessor may, as a condition to consenting to such work, require that Lessee give security that the premises will be completed, free and clear of liens and in a matter satisfactory to Lessor, and that the premises will be repaired by Lessee or restored by Lessee to its former condition at the termination of the lease at Lessee's sole cost and expense.

5. Mechanics and Other Liens Imposed by Lessee.

Lessee shall keep the leased premises and the improvements thereon at all times during the term hereof free of mechanics and materialmen's liens and other liens of like nature, other than liens created and claimed by reason of any work done by or at the instance of Lessor, and at all times shall fully protect and indemnify Lessor against all such liens or claims and against all attorneys' fees and other costs and expenses growing out of or incurred by reason or on account of any such liens or claims. Should Lessee fail to fully discharge any such lien or claim, Lessor, at its option, may pay the same or any part thereof, and Lessor shall be the sole judge of the validity of such lien or claim.

All amounts so paid by Lessor, together with interest thereon at the maximum legal rate from the time of payment by Lessor until repayment by Lessee, shall be paid by Lessee upon demand, and if not so paid, shall continue to bear interest at the aforesaid rate interest payable monthly, as additional rent.

6.No Signs without Approval of Lessor.

Any and all signs placed by or for Lessee on the exterior of the leased premises, or on the real property on which the leased premises are located, shall be so placed and allowed to remain in place only with the approval of Lessor in writing.

Nor shall Lessor, or its successor or the owner of the leased premises, be charged with the costs of installing, maintaining, changing, or removing such sign or signs. Lessor shall have the right to approve the design, type, size, lettering and location of every sign to be erected in, upon or about the leased premises.

Any signs placed upon or about such leased premises shall, upon the end of the term of the lease or upon the earlier termination thereof, be removed by Lessee, and Lessee shall repair any damage to the leased premises which shall he occasioned thereto by reason of such removal.

7.No Exterior Paint Without Lessor Approval.

Lessee shall not decorate or paint the exterior of the leased premises, or any part thereof, except in the manner, and of a color, approved by Lessor.

8.Trash Control.

Lessee shall provide and maintain sanitary and rat-proof receptacles with covers at or about the leased premises in which to place any and all refuse or trash, and to place this refuse and trash in receptacles. Lessee shall make Lessee's own arrangements and pay for garbage and trash pick-up service on or from the leased premises, and shall not permit the same to accumulate and remain on the premises except during reasonable intervals between pick-up service.

9.Sidewalk Maintenance.

At all times, Lessee shall keep the sidewalks in front of the leased premises clean and in a sightly and sanitary condition, and not exhibit or display any goods, wares or merchandise thereon.

10. Replacement of Glass.

At Lessee's own cost and expense, Lessee shall replace all glass in, upon or about the leased premises that shall be broken during the term herein specified unless caused by Lessor, an agent or employee of Lessor, or Lessor's successor.

11. Right of Re-Entry.

Lessor shall have the right, by itself or agent or with others, to enter the premises at reasonable hours to examine or exhibit the .premises, or to make such repairs and alterations as shall be deemed necessary for the safety and preservation of the building, to inspect and examine, to post such notices as Lessor may deem necessary to protect Lessor against loss from liens of laborers, materialmen or others, and for the purpose of permitting or facilitating Lessor's performance of its obligations hereunder, or for any other reasonable purpose which does not materially diminish Lessee's enjoyment or use of the leased premises.

Lessee expressly waives any claim for damages, including loss of business, resulting from Lessor's entry, from the erecting of scaffolding or other structures to facilitate repairs, or from Lessor's other reasonable activities for the purpose of altering, improving, or repairing the leased premises in conformity herewith.

Lessee agrees to permit Lessor, at any time within 60 days prior to the expiration of this lease, to place upon or in the window of the leased premises any usual or ordinary For Rent or similar sign and to allow prospective tenants, applicants or agents of Lessor to enter and examine the leased premises during the last 60 days of the term hereof, and to permit Lessor or Lessor's agents, at any time during the term hereof, to conduct prospective purchasers through the leased premises during reasonable business hours.

12. Assignment or Sub-Letting.

No assignment, sublease or sale of this lease or any interest therein may be made by Lessee without the written consent of Lessor having first been obtained thereto, which consent Lessor shall grant unless Lessor has a valid reason, which can be substantiated, If there is a dispute as to whether Lessor has a valid reason for withholding consent, it shall be determined by arbitration.

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Any attempted assignment, sublease or sale of this lease or any interest therein shall be null and void and have no effect unless such consent shall have been obtained. Any assignment by operation of law shall be subject to the same conditions and restrictions as an assignment by Lessee. If such consent is given by Lessor, any and all sub-Lessees shall be responsible tenants, and Lessee shall not be relieved of any liability hereunder by Lessee's assignment, vacation or subletting thereof.

It is agreed that one of the conditions moving Lessor to make this lease is the personal confidence reposed by it in Lessee, combined with the belief that Lessee will be a tenant and occupant satisfactory to Lessor.

Nothing herein shall prevent the. Lessor from assigning its interest under this lease, provided, however, that any assignee Shall be subject to the same obligations and duties as the original Lessor.

13. Right of Lessor to Pay Obligations of Lessee to Others.

If Lessee shall fail or refuse to pay any sums due to be paid by it under the provisions of this lease, or fail or refuse to. maintain the leased promises or any part thereof as herein provided, then, and hi such event, Lessor, after 10 days notice in writing by Lessor to Lessee, shall have the right to pay any such sum or sums due to be paid by Lessee and to do and perform any work necessary to the proper maintenance of the leased premises; and the amount of such sum or sums paid by Lessor for the account of Lessee and the cost . of any such work, together with interest thereon at the maximum legal rate from the date of payment thereof by Lessor until the repayment thereof to Lessor by Lessee, shall forthwith be paid by Lessee upon demand in writing.

The payment by Lessor of any such sum or sums Or the performance by Lessor of any such work shall be prima facie evidence of the necessity therefor.

14. Surrender and Return of Leased Premises.

On the last day of the term hereby created or on the sooner termination thereof, Lessee shall peaceably surrender the leased premises on good order, condition and repair, broom clean-fire and other unavoidable casualty, reasonable wear and tear only excepted. On or before the last day of the term hereby created or on the sooner termination thereof, Lessee shall, at its expense, remove its trade fixtures, signs and carpeting from the leased premises and any property not removed shall be deemed abandoned. All alternations, additions, improvements and fixtures (other than Lessee's trade fixtures, signs and carpeting) which shall have been made or installed by either Lessor or Lessee upon the leased premises and all hard surface bonded or adhesively affixed flooring shall, without charge, remain upon and be surrendered with the leased premises as a part thereof, without disturbance, molestation or injury.

If the leased premises be not surrendered on the last day of the term hereby created or on the sooner termination thereof, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the premises, including, without limitation, claims made by any succeeding tenant founded on such delay. Lessee shall promptly surrender all keys for the leased premises, at the place then fixed for payment of rent and shall inform Lessor of combinations on any locks and safes on the leased premises.

15. Event of Default.

Each of the following shall be deemed an Event of Default:

1. Default in the payment of rent or other payments hereunder,

b.              If Lessee shall default in the performance or observance of any covenant or condition of this lease by the Lessee to be
performed or observed, or if Lessee shall fail to make reasonable efforts in the light of the surrounding circumstances to keep substantially all the premises occupied and open for business following the expiration of the period of 10 days giving notice. of such default or defaults or failure to Lessee by Lessor.

c.              Abandonment of the premises.

d.              The filing or execution or occurrence of:

(1)A petition in bankruptcy by or against Lessee.

(2)A petition or answer seeking a reorganization, arrangement, composition, readjustment, liquidation, dissolution or other relief of the same or different kind under any provision of the Bankruptcy Act.

(3)              Adjudication of Lessee as a bankrupt or insolvent: or insolvency in the bankruptcy equity sense.

(4)              An assignment for the benefit of creditors whether by trust, mortgage, or otherwise.

(5)              A petition or other proceeding by or against Lessee for, or the appointment of, a trustee, receiver, guardian, conservator or liquidator of Lessee with respect to all or substantially all its property.

(6)              A petition or other proceeding by or against Lessee for its dissolution or liquidation, or the taking of possession of the property of the Lessee by any governmental authority in connection with dissolution or liquidation.

(7)              The taking by any person of the leasehold created hereby or any part thereof upon execution, attachment, or other process of law or equity.

16. Fair Notice of Default.

The parties are desirous of giving one another fair notice of any default before sanctions are imposed. In the event of an act of default with respect to any provision of this lease, neither party can institute legal action with respect to such default without first complying with the following conditions:

a.              Notice of such event of default must be in writing and mailed to the other party by U.S. Certified Mail, return receipt requested;

b.              Such written notice shall set forth the nature of the alleged default in the performance of the terms of this lease and shall designate the specific paragraph(s) therein which relate to the alleged act of default;

c.              Such notice shall also contain a reasonably understandable description of the action to be taken or performed by the other party in order to cure the alleged default and the date by which the default must be remedied, which date can be not less than ten business days from the date of mailing the notice of default.

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17. Termination.

Upon occurrence of any Event of Default, and after proper notice of default has been given, Lessor may, at its option, in addition to any other remedy or right given hereunder or by law;

a.              Give notice to Lessee that this lease shall terminate upon the date specified in the notice, which date shall not be earlier than five days after the giving of such notice; or,

b.              Immediately after ten days of default, and without further notice or demand, enter upon the leased premises or any part thereof, in the name of the whole, and upon the date specified hi such notice, or any other notice pursuant to law, or upon Such entry, this lease and the term thereof shall terminate.

18. Repossession.

Upon termination of this lease .as hereinabove provided, or pursuant to statute, or by summary proceedings or otherwise, the Lessor, may enter forthwith, without further demand or notice upon any part of the premises, in the name of the whole, if he has not theretofore done so, and resume possession wither by summary proceedings, or by action at law or in equity, or by force or otherwise, as Lessor may determine, without being liable in trespass or for any damages. In no event shall such re-entry or resumption of possession or reletting as hereafter provided be deemed to be acceptance or surrender of this lease or a waiver of the rights or remedies of Lessor hereunder.

19. Court Action, Attorneys Fees and Costs.

If, upon failure of either party to comply with any of the covenants, conditions, rules or regulations of and in this lease, suitor arbitration should be brought for damages on account thereof, or to enforce the payment of rent herein stipulated, or to recover possession of the premises or to enforce any provision hereof; the losing party agrees to pay to the prevailing party reasonable costs and expenses incurred in prosecuting these suits or arbitration, as determined by the court or arbitrator, including attorneys? fees and the value of time lost by the prevailing party or any of its employees in preparing for or participating in any arbitration or litigation in connection therewith, Interest shall accrue on that award at the maximum legal rate on all monetary amounts awarded for principal, interest, attorney fees, costs and all other amounts, from the date of that award until paid.

20. Default by Lessor

In the event of any default by Lessor, Lessee, before exercising any rights that it may have at law to cancel this lease, must first send notice by registered or certified mail to Lessor, and shall have offered Lessor fifteen (15) days in which to correct and cure the default or commence a good faith effort to cure such default.

21.Reletting after Termination.

Upon termination of this lease in any manner above provided, Lessor shall use reasonable efforts to relet the premises.

Lessor shall be deemed to use reasonable efforts if it leases the whole or any part of the premises, separately, or with other premises, for any period equal to or less than or extending beyond the remainder of the original term, for any sum or to any Lessee or for any use it deems reasonably satisfactory or appropriate.

22.Damages.

Upon termination of this lease in any manner above provided, or by summary proceedings or otherwise, Lessee shall pay to Lessor forthwith without demand or notice the sum of the following:

a.All rent, additional rent and other payments accrued to the date of such termination and a proportionate part of the rent otherwise payable payable for the month in which such termination occurs.

b.The costs of making all repairs, alterations and improvements required to be made by Lessor hereunder, and of performing all covenants of Lessee relating to the condition of the premises during the term and upon expiration or sooner termination of this lease, such costs to be deemed prima facie to be the costs estimated by a reputable architect or contractor selected by Lessor or the amounts actually expended or incurred thereafter by Lessor.

c.              The attorneys' fees and other costs detailed in paragraph 19 (Court Action, Attorneys' Fees and Costs).

d.              An amount equal to liquidation damages or indemnity payments whichever is larger, determined and payable as set forth below:

(1)              Liquidation damages means an amount equal to the excess of the rent, additional rent and other payments reserved in this lease for the portion of the term remaining after termination of the lease (Hereinafter referred to as the unexpired term) over the then fair and reasonable rental value of the premises for such period of the term.

(2)Indemnity payments means all the rent, additional rent and other payments reserved under this lease which would have become due and owing thereunder from time to time during the unexpired term, less, to the extent not previously deducted or credited, the rent, additional rent and other payments actually collected and allocable to the premises or to the portions thereof relet by Lessor, and plus, to the extent not previously charged, the costs and expenses, including but not limited to reasonable attorneys’ and brokers’ fees and expenses, paid or incurred by Lessor in connection with:

(a)              Obtaining possession of the premises.

(b)Removal and storage of Lessee's or other occupant's property.

(c)Care, maintenance and repair of the premises while vacant,

(d)Reletting the whole or any part of the premises (which reletting may be for a period or periods of time less than the unexpired term hereof or extending beyond the term hereof.)

(e)              Repairing, altering, renovating, partitioning, enlarging, remodeling or otherwise putting the premises, either separately or as part of larger premises, into condition acceptable to, and reasonably necessary to obtain new tenants,

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Such costs and expenses shall be deemed prima facie to be the amounts therefor invoiced to Lessor or actually expended or incurred therefor by Lessor.

Lessee shall, without prior demand or notice, make indemnity payments monthly on arrears with respect to such portion thereof as includes rent (as distinguished from additional rent and other payments) and upon the respective dates provided therefor in the lease with, respect to additional rent and other payments, Lessor may sue for all such indemnity payments as they accrue without waiting until the date fixed in the lease as the expiration date thereof. Any action or proceeding to recover liquidated damages shall not be a waiver of Lessor's right to recover indemnity payments and vice versa, but in any action or proceeding to recover indemnity payments to the extent that they include rent (as distinguished from additional rent and other payments), brought contemporaneously With or after an action or proceeding to recover liquidated damages which has not been discontinued, there shall be deducted from the claim for indemnity payments (to the extent not previously deducted or credited) such portion of the liquidated damages as is in the same proportion to such liquidated damages as the portion of the unexpired term from which monthly indemnity payments have accrued bears to the unexpired term.

23.Operating Costs.

All operating expenses of Lessee of whatever nature, are the sole obligation of Lessee.

24.Landlord’s Lien.

Upon the termination of this lease in any of the manners herein provided, or upon default by Lessee under any of the provisions hereof, Lessor may enter the leased premises and remove any and all personal property of Lessee and may retain possession of such personal property until all charges of any kind, including rent, storage or damages, shall be paid in full.

25. Abandonment.

If Lessee shall be in default in the payment of the rental and shall vacate or abandon the premises or any part thereof (an absence of Lessee therefrom for a period of five days after such default shall be considered such an abandonment thereof), Lessor may, if it so elects, re-enter the leased premises and remove. the contents and take possession of the leased premises and relet the same or any part thereof, at such rental and upon such terms and conditions as it may deem proper and apply the proceeds thereof, less the expenses, including the usual agent’s commission so incurred, upon the amount due from Lessor hereunder, and Lessee shall be liable for any deficiency.

If Lessor shall take possession of the premises and relet the same, such reletting shall not operate as a termination of this lease unless Lessor so elects, such election to be evidenced by written notice to Lessee; nor shall such action by Lessor operate as a waiver of any rights or remedies or Lessor hereunder.

26.Holdover

If Lessee shall holdover after the expiration of the term hereof, with the consent of Lessor, express or implied, such tenancy shall be from month to month only, and not a renewal hereof; and Lessee agrees to pay rent and all other charges as hereinabove provided, and also to comply with all covenants of this lease for the time Lessee holds over. If Lessee shall hold over without the consent of Lessor, express or implied, then Lessee shall be construed to be a tenant at sufferance at double the rent herein provided, prorated by the day until possession is returned to Lessor, If Lessee shall hold over with the consent of Lessor. Lessee shall be entitled to possession until Lessor has given Lessee 30 days notice that such month to month tenancy shall be terminated; otherwise, notice is only required as hereinafter provided as notice of default.

27.Destruction of Leased Premises.

If the leased premises shall, at any time during the term herein specified, be damaged or destroyed by fire or other unavoidable casualty to the extent that the leased premises shall be unfit for occupancy and use by Lessee, and to the extent that the same cannot be rebuilt or restored by Lessor within 120 days thereafter, then and in such event, either Lessor or Lessee may, at their respective option, terminate this lease by notice in writing to the other of them within ten days after such damage or destruction; provided, however if the leased premises can be rebuilt or restored within 120 days, Lessor shall, at its own cost and expense and with due diligence, rebuild and restore the leased premises, and a just and proportionate part only of the rentals hereby reserved shall be paid by Lessee to Lessor until such work shall have been completed. During such reconstruction, should the Lessee be forced to lease other premises, such amount paid for the other premises shall be deducted from the amount owed to Lessor, provided that such deduction shall not exceed the amount owed Lessor.

If Lessor shall rebuild or restore the leased premises, then and in such event, the full amount of the insurance payable under policies of fire insurance shall be paid to Lessor for use in the rebuilding and restoration of the leased premises.

28. Removal of Trade Fixtures.

Lessee shall have the right, upon the expiration of the term of this lease, or at any time during such term if Lessee shall not be in default, to remove from the leased premises all fixtures and equipment placed thereon by Lessee, even though permanently affixed to the leased premises; provided, however, that Lessee, in effecting removal, shall restore the leased premises to a good, safe, sound, orderly and sightly condition.

29. Eminent Domain.

If the leased premises or any part thereof shall be taken by eminent domain, which taking shall render the remainder of the leased promises unsuitable for occupancy and use by Lessee for the purpose intended by Lessee, then and in such event, the full current amount payable to the date of taking, or the prorated amount of that month’s rent to the date of taking, shall be paid to Lessor, and this lease shall terminate as of the date of taking.

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If only a part of the leased premises shall be taken by eminent domain, and such taking shall not unduly interfere with the occupancy and use of the leased premises for the purpose intended by Lessee, then and in such event, the full amount payable for and upon such taking shall be paid to Lessor, and from and after the date of such taking only a just and proportionate part of the rentals for the leased premises hereby reserved shall be paid by Lessee.

Lessee shall have the right to claim and recover from the condemning authority, but not from Lessor, such compensation as may be separately awarded or recoverable by Lessee in Lessee's own right on account of any and all damage to Lessee's leasehold interest, to Lessee's business by reason of the condemnation, and for or on account of any cost or loss to which Lessee might be put in removing Lessee's merchandise, furniture, fixtures, leasehold improvements and equipment.

30. Subordination.

If Lessor shall desire at any time, and from time to time to secure a loan or loans upon the security of the real property and the improvements thereon, including the leased premises, then and in such event, Lessee hereby agrees to make and enter into a subordination agreement or agreements with any responsible lending agency that Lessor shall, designate, wherein and whereby Lessee's rights, titles and interests in and to the real property and the improvements are subordinated to the lien of any mortgage or mortgages to be made, executed and delivered by Lessor as security for that loan or loans; provided, however, that the subordination shall be upon the following conditions:

a.              The execution of the subordination agreement or agreements by Lessor shall impose no personal liability whatsoever upon Lessee.

b.              Any such mortgage or mortgages shall provide that the mortgagee shall agree to give to Lessee all notices required to be given to Lessor as mortgagor under the terms and conditions of those mortgages, or any loan agreement or agreements, or under the laws of the state where the leased premises are situated,

c.              The mortgage or mortgages shall further provide that in the event of any default on the part of Lessor under the terms and conditions thereof or the obligation secured, Lessee may, at its own election, cure such default, and any amount expended by Lessee in so doing shall be paid by Lessor to Lessee, with interest thereon at the maximum legal rate per annum from the time or times any expenditure or expenditures for such purpose were made, upon demand by Lessee therefor.

d.              Lessor shall indemnify and hold harmless the Lessee of and from any and all liability, cost or expense to which Lessee may be put by reason of the failure of Lessor to keep and perform any of the covenants and agreements set forth and contained in such mortgage or mortgages and the obligations thereby secured.

31. Sale by Lessor.

In the event of a sale or conveyance by Lessor of all or part of the leased premises, the same shall operate to release Lessor from any future liability upon any of the covenants or conditions, express or implied, herein contained in favor of Lessee, and in such event Lessee agrees to look solely to the responsibility of the successor in interest of Lessor in and to this lease, This lease shall not be affected by any such sale, and Lessee agrees to attorn to the purchaser or assignee.

32. Applicable Law.

This lease shall be subject to and governed by the laws of the state where the leased premises are situated, regardless of the fact that one or more of the parties now is or may become a resident of a different state.

33.Assignment of Personal Property Warranties.

Lessor hereby assigns to Lessee any and all rights it has under any manufacturers' or dealers' warranties covering the personal property and fixtures leased herein.

34.If any prorations are required to be made under the terms of this lease, the prorations shall be made as of the first day of the lease term.

SECTION III

GENERAL PROVISIONS

1. Arbitration

At the option of either party, disputes may be settled by arbitration. The manner of arbitration shall be as follows:

The parties adopt by reference the provisions of the Uniform Arbitration Act and agree that, should any bona fide disputes arise out of this agreement or out of the agreed performances of the parties pursuant thereto, the parties may elect to arbitrate that dispute by the Lessor and Lessee selecting and agreeing upon a disinterested attorney to serve as arbitrator.

Should one of the parties or his attorney refuse or delay the selection of an arbitrator for more than ten days after the mailing of written notice, mailed to its last known address, stating a desire to arbitrate, then the party desiring arbitration may petition the court or a court commissioner ex parte to have an arbitrator selected, and the costs and reasonable attorneys' fees for this shall be charged against the delinquent party in the arbitration award.

The parties shall share the costs of the arbitrator’s services, comply with his arbitration procedures, and abide by his award within ten days after receiving a copy of his decision.

If, for some reason, the parties cannot agree on a disinterested attorney, then the parties shall each select one attorney apiece, and these two attorneys shall select a disinterested attorney.

The arbitrator shall assess the fees of the arbitrator against the losing party based upon the prevailing hourly rates and out-of-pocket expenses.

After the award by the arbitrator, should the losing party take the matter to court, then the arbitrator shall set an amount as reasonable attorneys' fees and costs of the contemplated court proceedings for the losing party to pay to the other party as a prerequisite to the filing of a court action by the losing party.

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Should it be necessary for either party to seek the assistance of a court to enforce the arbitration award, then, in that event, the losing party shall pay to the winning party an amount which is determined by the court for the court costs, reasonable attorneys' fees, and the time lost to the winning party for his or his agents' having to prepare for and appear in a court action.

2.Corporate Lessee.

If Lessee is a corporation, then if, at any time during the term of this lease, any part or all the corporate shares shall be transferred by sale, assignment, bequest, inheritance, operation. of law or other disposition, so as to result in a change in the present control of the corporation by the person or persons now owning a majority of the corporate shares, Lessor may terminate this lease and the demised term at any time after such change in control by giving Lessee 60 days prior written notice of such termination.

3. Corporate Authority.

If Lessee is a corporation, each person executing this lease represents and warrants that he is duly authorized to execute and deliver this lease on behalf of the corporation. Those persons further represent that the tents of this lease are binding upon the corporation. The corporation shall deliver to Lessor a certified copy of its Board of Directors resolution ratifying or authorizing the execution of this lease within thirty (30) after its execution.

4.Nature of Relationship Between Parties.

The sole relationship between the parties created by this agreement is that of Lessor and Lessee, Nothing contained in this lease shall be deemed, held, or construed as creating a joint venture or partnership between the parties.

5.Notices.

Copies of all notices and communications concerning this lease shall be mailed to the parties at the, addresses written on page one of this lease, and any change of address shall be communicated to the other party in writing. Any documents which may adversely affect the rights of any party to this lease shall be dispatched by certified mail, return receipt requested. For all documents mailed to persons in the continental United States, the time period on all notices shall begin running on the day following the date that the document is postmarked. For documents mailed to persons outside the continental United States, the time period begins to run on the date that the document is received by the other party.

6.Waiver and Consent.

Lessor's consent to or waiver of any of the terms or conditions of the lease on any one occasion shall not be deemed a waiver or consent with regard to any such term or condition for any other occasion or to any other act or conduct. The waiver by Lessor of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition.

Whenever under this lease provision is made for Lessee to secure the written consent or approval by Lessor, such consent or approval shall be in writing and shall not be unreasonably withheld.

No covenant, term or condition of this lease shall be waived except by written consent of the Lessor and the forbearance by Lessor in any regard whatsoever shall not constitute a waiver of the covenant, term or condition to be performed.

7. Provisions of Lease.

Each term and each provision of this lease to be performed by Lessee shall be construed to be both a covenant and a condition.

SECTION IV

CONSTRUCTION AND INTERPRETATION

1.Entire Agreement.

The terms of this document constitute the entire agreement between the parties, and the parties represent that there are no collateral agreements not otherwise provided within the terms of this agreement.

2.Stakeholding.

If any earnest money or security deposit or bond is required by this agreement, it shall be provided by the purchase of an interest-bearing certificate of deposit or its equivalent or by placing the funds in an interest-bearing saving account in the joint names of the adverse contracting parties. The certificate of deposit or the savings account passbook shall be placed in escrow with a stakeholder other than the parties until the conditions or performance occur which permit the release of the funds or require the return of the funds, at which time the parties shall jointly sign the necessary documents to release the funds. The party who is eventually entitled to the funds in whole or in part shall also be entitled to all the interest accrued on his pro rata share of such funds.

3.Interpretation.

Whenever any word is used in this agreement in the masculine gender, it shall also be construed as being used in the feminine and neuter genders, and singular usage shall include the plural and vice versa, all as the context shall require.

4.Partial Invalidity.

If any provision of the contract is held to be invalid or unenforceable, all the remaining provisions shall nevertheless continue in full force and effect.

5. Marginal Headings.

The marginal and topical headings of the paragraphs of this agreement are for convenience only, and are not to be considered a part of this agreement or used in determining its content or context.

6. Modification.

Any modification or amendment off this agreement shall be in writing and shall be executed by all parties.  

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/s/ Robert Burr		/s/ Stephen Larkin
Signature of Lessor		Signature of Lessee
Signature of Lessor		Signature of Lessee
State of Kentucky	)
County of Warren	)ss

Subscribed and sworn before me this 27th day of November, 2012,

by Robert Burr 

Notary Public Kimberly Dawn Flora (Seal)

my commission expires 04/12/2016

State of Kentucky	)
County of Warren	)ss

Subscribed and sworn before me this 27th day of November, 2012,

by Stephen Larkin 

Notary Public Kimberly Dawn Flora (Seal)

my commission expires 04/12/2016

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Exhibit A

BUILDING SKETCH

 

Office Square Feet- 10,782

Warehouse,Gym

Print Room, Other

Square Feet - 13,423

Total- 24,205

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EX-10.36

EXHIBIT 10.36

OPERATING AGREEMENT

OPERATING AGREEMENT OF 2011-12 OPPORTUNITY FUND 6-1, LLC

THIS OPERATING AGREEMENT (this “Agreement”) was made and entered into as of the 10th day of October, 2012, by and among Bayou City Exploration, Inc. and Blue Ridge Group, Inc. as managing members of Opportunity Fund VI, LLC, Bayou City Opportunity Fund I, LLC and Opportunity Fund VII, LLC (the “Members”), and 2011-12 Opportunity Fund 6-1, LLC, a Delaware limited liability company (the “Company” or “Fund”).

WITNESSETH

WHEREAS, the Members and the Company desire to enter into an Operating Agreement to govern the Company’s operations;

NOW, WHEREFORE, in consideration for the mutual agreements, covenants and premises set forth herein, the Operating Agreement is hereby adopted:

ARTICLE 1

DEFINITIONS

Defined Terms. Unless otherwise stated, the terms used in this Agreement shall have the usual and customary meanings associated with their use, and shall be interpreted in the context of this Agreement. Certain capitalized terms which are used in this Agreement shall have the meanings given in this Agreement or Schedule 1.1.

ARTICLE II

FORMATION; PURPOSE

2.1 Organization; Governance. The Members have caused the formation of the Company on October 10th, 2012 (the “Effective Date”) as a limited liability company effective with the filing of the Articles of Organization (the “Articles”) with the Delaware Secretary of State. The Company has been formed pursuant to the provisions of the Delaware Statutes and upon the terms and conditions set forth in the Articles and in this Agreement. The Initial Member(s) together with all Persons who may hereafter become Members of the Company from time to time in accordance with this Agreement (collectively, the “Members”) are and shall be bound by the terms and provision of this Agreement. The Manager is authorized to execute and cause to be filed additional Amendments to the Articles whenever required by the Act or this Agreement. Except as otherwise required by the Act, this Agreement shall govern the business and affairs of the Company and the relationships of the Members to one another as members of the Company. The Members intend that the Company be treated as a partnership for federal and state income tax purposes but that the Company shall not be treated as a partnership for purposes of Section 303 of the Federal Bankruptcy Code. No Member shall act inconsistently with this intent.

2.2 Term. The term of the Company commenced on the date the Articles were filed as described in Section 2.1 and continue perpetually unless earlier terminated under the provisions of this Agreement or by operation of law.

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2.3 Name. The business of the Company shall be carried on under the name “2011-12 Opportunity Fund 6-1, LLC.”

2.4 Purpose. The primary purpose of the Company is to house and manage the loan assets purchased by Opportunity Fund VI, VII and BYCX I and to distribute revenue based on pro-rata ownership and do all things reasonably related thereto.

2.5 Place of Business. The principal place of business of the Company is and will be located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, until the Manager changes it after giving the Members notice. In addition, the Company may maintain such other offices and places of business in the United States as the Manager may deem advisable. The Manager will file all necessary or desirable documents to permit the Company to conduct its business lawfully in any state or territory of the United States.

2.6 Agent for Service of Process. The name and business address of the agent for service of process for the Company is Travis Creed, 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101, or such other person as the Manager shall appoint from time to time, utilizing the Manager’s reasonable discretion.

2.7 Nature of Members' Membership Units. The Membership Units of the Members in the Company shall be directly proportionate to the member’s contributions.

THE MANAGER

3.1 Control in Manager. Subject to the provisions of Section 3.2 and except as otherwise expressly stated elsewhere in this Agreement, the Manager has exclusive control over the business of the Company (with all acts and decisions being in its sole discretion except as specifically set forth in this Agreement), including the power to assign duties, to determine how to invest the Company’s assets, to sign bills of sale, title documents, leases, notes, assignments, security agreements, documents evidencing Note Investments and contracts, and to assume direction of the business operations. As Manager of the Company and its business, the Manager has all duties generally associated with that position, including dealing with Members, being responsible for all accounting, tax and legal matters, performing internal reviews of the Company’s investments and loans, determining how and when to invest the Company’s capital, and determining the course of action to take for Company loans and land contracts that are in default. The Manager also has all of these powers for ancillary matters. Without limiting the generality of the foregoing, the powers include the right (except as specifically set forth in Section 3.2 and elsewhere in this Agreement):

3.1.1: To evaluate potential Company investments, to expend the capital of the Company in furtherance of the Company’s business;

3.1.2: To acquire, hold, lease, sell, trade, exchange, or otherwise dispose of all or any portion of Company property or any interest therein at a price and upon the terms and conditions as the Manager may deem proper;

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3.1.3: To cause the Company to become a joint venturer, general or limited partner or member of an entity formed to own, develop, operate and dispose of real and personal properties owned or co-owned by the Company acquired through foreclosure of a Note Investment.

3.1.4: To manage, operate and develop Company property, including Real Property acquired by the Company in connection with the foreclosure of the Mortgage securing a Mortgage Note, or to employ and supervise managers who may, or may not, be an Affiliate of the Manager;

3.1.5: To maintain, at the expense of the Company, adequate records and accounts of all operations and expenditures and furnish the Members with annual statements of account as of the end of each calendar year, together with all necessary tax-reporting information;

3.1.6: To purchase, at the expense of the Company, liability and other insurance to protect the property of the Company and its business;

3.1.7: To refinance, recast, modify, consolidate, extend or permit the assumption of a Note Investment or other investment owned by the Company;

3.1.8: To pay all expenses incurred in the operation of the Company;

3.1.9: To file tax returns on behalf of the Company and to make any and all elections available under the Code;

3.1.10: To modify, delete, add to or correct from time to time any provision of this Agreement as permitted under Section 15.4 hereof; and

3.1.11: To admit Persons as additional members of the Company in Manager’s sole discretion.

3.2 Limitations on Manager’s Authority. The Manager has no authority to:

3.2.1: Do any act in contravention of this Agreement;

3.2.2 : Do any act which would make it impossible to carry on the ordinary business of the Company;

3.2.3: Confess a judgment against the Company;

3.2.4: Possess Company property or assign the rights of the Company in the property for other than a Company purpose;

3.2.5: Admit a person as a Manager without the prior affirmative vote or consent of a Super Majority or any higher vote as may be required by applicable law;

3.2.6: Sell all or a majority of the assets of the Company in one or a series of related transactions that is not in the ordinary course of business, without the prior affirmative vote or consent of a Super Majority;

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3.2.7: Amend this Agreement without the prior affirmative vote or consent of a Majority, except as permitted by Section 15.4 of this Agreement;

3.2.8: Dissolve or terminate the Company without the prior affirmative vote or consent of a Super Majority except as otherwise provided in this Agreement;

3.2.9: Cause the merger or other reorganization of the Company without the prior affirmative vote or consent of a Super Majority;

3.2.10: Grant to the Manager or any of its Affiliates an exclusive right to sell any Company assets;

3.2.11: Use or permit another Person to use the Company’s assets in any manner, except for the exclusive benefit of the Company or permit the Company to engage in any activities inconsistent with or in addition to the stated purposes of the Company;

3.2.12: Pay or award, directly or indirectly, any commissions or other compensation to any Person engaged by a potential investor for investment advice as an inducement to the advisor to advise the purchase of units in the Company; or

3.2.13: Make loans to the Manager or an Affiliate of the Manager.

3.3 Extent of Manager’s Obligation and Fiduciary Duty. The Manager shall devote the portion of its time to the business of the Company as it determines, in good faith, to be reasonably necessary to conduct the Company’s business. The Manager shall not be bound to devote all of its business time to the affairs of the Company, and the Manager and its Affiliates may engage for their own account and for the account of others in any other business ventures and employments, including ventures and employments having a business similar or identical or competitive with the business of the Company. The Manager has fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Manager’s possession or control, and the Manager will not employ, or permit another to employ the Company’s funds or assets in any manner except for the exclusive benefit of the Company.

3.4 Indemnification of Manager. Except as limited by law, the Fund shall indemnify the Manager for all expenses, losses, liabilities and damages the Manager actually and reasonably incurs in connection with the defense or settlement of any action arising out of or relating to the conduct of the Fund’s activities, except an action with respect to which the Manager is adjudged to be liable for breach of a fiduciary duty owed to the Fund or the Members under the Act or this Agreement. The Fund shall advance the costs and expenses of defending actions against the Manager arising out of or relating to the management of the Fund, provided it first receives the written undertaking of the Manager to reimburse the Fund if ultimately found not to be entitled to indemnification.

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3.5 Resignation of Manager. The Manager may resign from the Company provided, however, that the resignation shall not be effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that Manager gave written notice to the Members of its resignation. Failure of a Super Majority to designate and admit a new Manager within said 120 days shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The resigning Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the resignation.

3.6 Removal of Manager. The Members may remove the Manager (i) upon Manager’s dissolution or bankruptcy or (ii) by written consent or vote of a Super Majority (excluding any Units of the Manager being removed). This removal of the Manager, if there is no other Manager, shall not become effective until the earlier of the appointment of a replacement Manager by a Super Majority or 120 days following the date that the Super Majority consented to the removal. Failure of a Super Majority to designate and admit a new Manager within 120 days from the date that the Super Majority elected to remove the Manager shall dissolve the Company, in accordance with the provisions of Article 12 of this Agreement. The removed Manager shall not be liable for any debts, obligations or other responsibilities of the Company or this Agreement arising after the effective date of the removal. The appointment of a new Manager, if any, shall be effective upon written acceptance of the duties and responsibilities of a Manager by the new Manager. The new Manager shall thereupon execute, acknowledge and file an amendment to the Articles of Organization of the Company in the manner required by Delaware Statutes.

3.7 Payments at Resignation or Removal. Upon the resignation or removal of the Manager, the Company shall pay to the Manager a sum equal to all amounts then accrued and owing to the Manager.

3.8 Appointment of Additional Manager(s). An additional Manager may be admitted to the Company with the consent of all Managers and a Super Majority.

ARTICLE 4

DISTRIBUTIONS; PROFITS AND LOSSES

4.1 Distributions.

4.1.1: Distributions of “Cash for Distribution”. Except as otherwise provided in Sections 7.2 and 12 of this Agreement, Cash for Distribution shall be distributed to the Members for each calendar quarter in arrears, to each Member in proportion to the Participation Percentage of the Member as of the last day of the quarter to which the distribution pertains.

4.1.2: Reserved

4.1.3: Cash Distributions Upon Dissolution. Upon dissolution and winding up of the Company, the Company shall thereafter distribute all Cash for Distribution available for distribution, if any, to the Members in accordance with the provisions of Section 12.3 of this Agreement.

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4.2 Restriction on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

4.3 Allocation of Profits and Losses. After giving effect to the special allocations set forth in Section 7.5, the Manager shall allocate all Company Profits and Losses for any fiscal year to the Members in proportion to their respective Participation Percentages. In determining the allocations to Members for any quarterly period during a fiscal year, the Manager may allocate to the Members all Profits and Losses realized by the Company during such quarter as of the close of business on the last day of such calendar quarter without regard to Profits and Losses realized for time periods within the quarter, or in such other manner selected by the Manager and permitted under Section 706 of the Code and the Treasury Regulations hereunder.

4.4 Reserved

4.5 Special Allocation Rules.

4.5.1: Any Member with a deficit Capital Account balance resulting in whole or in part from allocations of loss or deduction (or item thereof) attributable to non-recourse debt which is secured by Company property shall, to the extent possible, be allocated income or gain (or item thereof) in an amount not less than the Minimum Gain at a time no later than the time at which the Minimum Gain is reduced below the sum of the deficit Capital Account balances. This section is intended and shall be interpreted to comply with the requirements of Treasury Regulation Section 1.704-2(f).

4.5.2: If any Member unexpectedly receives any adjustment, allocation,or distribution described in Sections 1.704-1(b)(2)(ii)(d)(4) through 1.704-1(b)(2)(ii)(d)(6) of the Regulations which causes or increases a deficit in the Member’s Capital Account as of the end of the tax year to which the adjustment, allocation or distribution relates, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account deficit of the Member as quickly as possible, provided that an allocation pursuant to this Section 7.5.2 shall be made if and only to the extent that the Member would have a Capital Account deficit after all other allocations provided for in Section 7.3 through 7.6 have been tentatively made as if this Section 7.5.2 were not in the Agreement.

4.5.3: To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of his Interest in the Company, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis) and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

4.5.4: For purposes of determining the Profits, Losses or any other items allocable to any period, these other items shall be determined on a daily, monthly, quarterly or other basis, as determined by the Manager using any permissible method under Section 706 of the Code and the Treasury Regulations hereunder.

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4.5.5: Notwithstanding Section 7.3, Profits and Losses, if any, allocable to the period before the admission of any Members shall be allocated to the Initial Member. Profits or Losses allocable to the period commencing with the admission of Members and all subsequent periods shall be allocated in accordance with Section 7.3.

4.5.6: Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for the year.

4.5.7: The Members are aware of the income tax consequences of the allocations made by this Article 7 and hereby agree to be bound by the provisions of this Article 7 in reporting their shares of Company Profits, Losses and other allocable items for income tax purposes.

4.6 Code Section 704(c) Allocations.

4.6.1: Income, gains, losses and deductions, as determined for Federal income tax purposes, for any Company asset which has a Gross Asset Value that differs from its adjusted basis for Federal income tax purposes shall, solely for Federal income tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of the Company asset to the Company for Federal income tax purposes and its initial Gross Asset Value in accordance with Code Section 704(c) and the Treasury Regulations hereunder. In furtherance of the foregoing, it is understood and agreed that any income, gain, loss, or deduction attributable to Code Section 704(c) property shall be allocated to the Members in accordance with the traditional method of making Code Section 704(c) allocations, in accordance with Treasury Regulation Section 1.704-3(b).

4.6.2: If the Gross Asset Value of any Company asset is adjusted, subsequent allocations of income, gain, losses and deductions, as determined for Federal income tax purposes, for the Company asset shall, solely for Federal income tax purposes, take account of any variation between the adjusted basis of the Company asset for Federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations hereunder.

4.6.3: Allocations under this Section 7.6 are solely for purposes of Federal, state and local income taxes and shall not affect, or in any way be taken into account in computing any Member’s Capital Account.

4.6.4: Except as otherwise set forth in this Agreement, any elections or other decisions relating to allocations under this Section 7.6 shall be made by the Manager, with the review and concurrence of the Company’s accountants, in a manner that reasonably reflects the purpose and intention of this Agreement.

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4.7 Intent of Allocations. It is the intent of the Company that this Agreement comply with the safe harbor test set out in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those Sections, including the qualified income offset and minimum gain charge- back, which are hereby incorporated by reference. If, for whatever reasons, the Company is advised by counsel or its accountants that the allocation provisions of this Agreement are unlikely to be respected for federal income tax purposes, the Manager is granted the authority to amend the allocation provisions of this Agreement, to the minimum extent deemed necessary by counsel or its accountants to effect the plan of allocations and distributions provided in this Agreement. In addition, if the Manager is required to make any special allocations of Company Profits, Losses, income, gain or deductions to comply with the requirements of the Regulations, the Manager shall make such special allocations in whatever manner it determines appropriate so that, after such allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the allocations mandated by the Regulations were not required to be made. The Manager shall have the discretion to adopt and revise rules, conventions and procedures as it believes appropriate for the admission of Members to reflect Members’ Participation Percentages in the Company at the close of the years.

4.8 Quarterly Valuation of Assets. For each of the Company’s Note Investments and other investments, the Manager shall review the investments at the end of each calendar quarter and determine if a Write-down is required with respect thereto. The Manager shall cause the Company’s accountants, within thirty (30) days of the end of each calendar quarter, to verify that the Manager’s determination was made in compliance with generally accepted accounting principles. Any Write-down of an asset resulting from the valuation shall be effective on the last day of the respective calendar quarter during the term of this Agreement.

4.9 Limitation on Distributions. The Company shall make no distribution to the Members unless the assets of the Company following such distribution will exceed the total liabilities of the Company, excluding liabilities to Members based on their contributions.

ARTICLE 5

[RESERVED]

ARTICLE 6

BOOKS AND RECORDS, REPORTS AND RETURNS

6.1 Books and Records. At the expense of the Company, the Manager shall: (a) cause the Company to keep all books and records required by Delaware Statutes; and (b) shall cause the Company to keep adequate books and records at its principal place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Company. Upon five (5) day written notice all books and records shall be available for inspection and copying by, and at the sole expense of, any Member, or any Member’s duly authorized representatives, during the Company’s normal business hours.

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6.2 Annual Statements.

6.2.1: The Manager shall cause to be prepared at least annually, at the Company’s expense, financial statements prepared in accordance with generally accepted accounting principles. The financial statements will include: (i) a balance sheet, (ii) statements of income or loss, (iii) Members’ equity and (iv) a statement of cash flows.

6.2.2: The Company’s accountants will itemize the costs of any verification performed by them and may be reimbursed to the Manager by the Company only to the extent that the reimbursement when added to the costs for administrative services rendered, does not exceed the competitive rate for the services as determined under Article 9.2.1.

6.2.3: Notwithstanding the 120-day period specified in Section 9.2.3(b) below, the Manager shall cause to be prepared and distributed to the Members not later than seventy-five (75) days after the close of each Fiscal Year of the Company all Company information necessary in the preparation of the Members’ federal income tax returns.

6.3 Filings. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall also cause to be prepared and timely filed with and/or delivered to appropriate federal and state regulatory and administrative bodies and/or the Members applicable, all reports required to be filed with or delivered to those entities or Members under applicable law, including those described in the Company’s undertakings in any securities filing. The reports shall be prepared using the accounting or reporting basis required by the relevant regulatory bodies. The Company will provide a copy of the reports to each Member who requests one, without expense to the Member. The Manager, at Company expense, shall file, with the appropriate agency in the states in which this Company is registered, as required by these states, a copy of each report referred to under this Article 9.

6.4 Suitability Requirements. The Manager, at Company expense, shall maintain for a period of at least six (6) years, a record of the documentation indicating that a Member complies with the suitability standards set forth in the Memorandum.

6.5 Fiscal Matters.

6.5.1: The Company has adopted the Fiscal Year for tax and accounting purposes. Subject to the provisions of Section 706 of the Code and approval by the Internal Revenue Service and the applicable state taxing authorities, in the Manager’s sole discretion and without the approval of the Members, from time to time the Manager may change the Company’s fiscal year to a period to be determined by the Manager.

6.5.2: The Company shall continue to use the cash basis method of accounting for both income tax purposes and financial reporting purposes. We may exclude C corporations as potential members (except for personal holding companies), if they will jeopardize our cash basis method of accounting.

6.5.3: Upon the transfer of a unit in the Company, the Company may, at the sole discretion of the Manager, elect under Code Section 754, to adjust the basis of the Company property as allowed by Sections 734(b) and 743(b) thereof.

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6.5.4: The Manager shall act as the “Tax Matters Partner” (“TMP”) and shall have all the powers and duties assigned to the TMP under Sections 6221 through 6234 of the Code and the Treasury Regulations hereunder. The Members agree to perform all acts necessary under Section 6231 of the Code and Treasury Regulations hereunder to designate the Manager as the TMP.

ARTICLE 7

TRANSFER OF COMPANY UNITS

7.1 Intentionally left blank

7.2 Transfer of Member’s Unit. To the extent any of the following restrictions are not necessary to the Company, in the discretion of the Manager reasonably exercised; the Manager may eliminate or modify any restriction. Subject to the immediately preceding sentence, no assignee of the whole or any portion of a Member’s interest in the Company shall have the right to become a substituted Member in place of his assignor, unless the following conditions are first met:

7.2.1: Members may only transfer whole units unless the Member is transferring his entire Membership Interest;

7.2.2: The assignor shall designate its intention in a written instrument of assignment, which shall be in a form and substance reasonably satisfactory to the Manager;

7.2.3: The transferring Member shall first obtain written consent of the Manager to the substitution. The Manager shall not unreasonably withhold its consent, but the Manager will withhold its consent to the extent necessary to prohibit transfers that could cause the Company to be classified as a publicly traded partnership. The Manager will also withhold consent if it determines that the sale or transfer will otherwise jeopardize the continued ability of the Company to qualify as a “partnership” for federal income tax purposes or that the sale or transfer may violate any applicable securities laws (including any investment suitability standards);

7.2.4: The assignor and assignee named therein shall execute and acknowledge any other instruments as the Manager may deem necessary or desirable to effect the substitution, including, but not limited to, a power of attorney;

7.2.5: The assignee shall accept, adopt and approve in writing all of the terms and provisions of this Agreement as the same may have been amended;

7.2.6: The assignee shall pay or, at the election of the Manager, obligate himself to pay all reasonable expenses connected with the substitution, including, but not limited to, reasonable attorneys’ fees associated therewith; and

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7.2.7: The Company has received, if required by the Manager, a legal opinion satisfactory to the Manager that the transfer will not violate the registration provisions of the Securities Act of 1933, as amended, or any applicable state securities laws, which opinion shall be furnished at the Member’s expense.

Assignments complying with the above shall be recognized by the Company on the first day of the calendar month following the month in which the above conditions are met.

A Person who acquires an unit but who is not admitted as a substitute Member by the Manager pursuant to the provisions of this Section 7.2 shall be entitled only to allocations and distributions with respect to such unit in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books and records of the Company, and shall not have any of the rights of a member under Delaware Statutes or this Agreement.

7.3 Further Restrictions on Transfers. Notwithstanding any provision to the contrary contained in this Agreement, the following restrictions shall also apply to any and all proposed sales, assignments and transfer of units, and any proposed sale, assignment or transfer in violation of same shall be void and of no effect:

7.3.1: No Member shall make any transfer or assignment of all or any part of its unit if said transfer or assignment would, when considered with all other transfers during the same applicable twelve month period, cause a termination of the Company for federal or Delaware state income tax (if any) purposes;

7.3.2: Notice to California residents: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY UNIT THEREIN OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.

7.3.3: Appropriate legends (including the legend above) under applicable securities laws shall be affixed to any certificates evidencing the units and issued or transferred to purchasers in other states. For a detailed list, see pages 1-7 of the Company’s Private Placement Memorandum.

7.3.4: No Member shall make any transfer or assignment of all or any of its interest if the Manager determines that the transfer or assignment would result in the Company being classified as a “publicly traded partnership” with the meaning of Section 7704(b) of the Code or Treasury Regulations. To prevent that:

(a) The Manager will not permit trading of units on an established securities market within the meaning of Section 7704(b);

(b) The Manager will prohibit any transfer of unit which would not comply with any applicable safe harbors; and

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(c) The Manager will not permit any withdrawal of any unit.

7.4 Distributions and Allocations with Respect to Transferred Units. If any unit is assigned during any accounting period in compliance with the provisions of this Section 7, all Profits, Losses, each item thereof, and all other items attributable to the assigned unit for such period shall be divided and allocated between the assignee and the assignor by taking into account their varying rights during the period in accordance with Code Section 706(d), using any convention permitted by law and selected by the Manager. All distributions on or before the date of such assignment shall be made to the assignor and all distributions thereafter shall be made to the assignee.

ARTICLE 8 

WITHDRAWAL OF A MEMBER;

PLANNED TERMINATION OF THE FUND

8.1 Withdrawal of Members. Absent extreme circumstances, members may not withdraw from the Fund. After the Fund Termination Date the assets of the Fund will be sold and the Fund will be wound up in orderly fashion as set forth in Article 12 below. The Manager may, at its discretion, allow withdrawal of a member if conditions dictate such.

8.2 Planned Existence and Termination of Fund. The Fund is intended to have a limited existence as follows.

8.2.1: The Fund will terminate its existence after all loans have been liquidated and the proceeds thereof have been distributed to investors/members. The Investment Manager intends to begin liquidating the loans held in the Fund in accordance with the operating agreements of the contributing members.

 ARTICLE 9

DISSOLUTION OF THE COMPANY

9.1 Events Causing Dissolution. The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (“Liquidating Events”):

9.1.1: The Fund Termination Date as established by the participating members.

9.1.2: The sale of or other disposition of all or substantially all of the Company Property (without receipt of an exchange property);

9.1.3: Affirmative vote or consent of a Super Majority to dissolve, wind up, and liquidate the Company;

9.1.4: The happening of any other event that makes it unlawful or impossible to carry on the business of the Company;

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9.1.5: The resignation or removal of the sole Manager without appointing a replacement therefore in accordance with Sections 3.5 or 3.6 above;

9.1.6: The entry of a judgment of dissolution under Section 1335 of the Act.

The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Liquidating Event.

As soon as possible following the occurrence of a Liquidating Event, Manager shall comply with the provisions of Section 1336 of the Act, giving notice of the dissolution of the Company and the commencement of the winding up of its affairs.

9.2 Winding Up. Upon the occurrence of a Liquidating Event, the Company shall immediately be dissolved, but shall continue until its affairs have been wound up according to the provisions of the Delaware Statutes. Upon dissolution of the Company, the Manager will wind up the Company’s affairs as follows:

9.2.1: No new Note Investments shall be invested in or purchased;

9.2.2: The Manager(s) shall liquidate the assets of the Company by sale to third parties;

9.2.3: All sums of cash held by the Company as of the date of dissolution, together with all sums of cash received by the Company during the winding up process from any source whatsoever, shall be distributed as follows:

(a) first, to the payment and discharge of all of the Company’s debts and liabilities, if any, to creditors other than Members;

(b) second, to the payment and discharge of all of the Company’s debts and liabilities, if any, to Members; then

(c) the balance, if any, to the Members in accordance with their Participation Percentage as of the Fund Termination Date.

9.3 Compliance with Timing Requirements of Regulations. If the Company is “liquidated” within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g), distributions shall be made under this Article 12 (if such liquidation constitutes a dissolution of the Company) or Article 7 hereof (if it does not) to the Members who have positive Capital Accounts in compliance with Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2).

9.4 Distributions Held in Trust Reserves. In the discretion of the Manager, a pro rata share of the distributions that would otherwise be made to the Members pursuant to this Section 12 may be:

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9.4.1: Distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Members arising out of or in connection with the Company. The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Manager in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or

9.4.2: Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

9.5 Deemed Distribution and Re-contribution. Notwithstanding any other provision of this Section 12, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(i), but no Liquidating Event has occurred, the Company property shall not be liquidated, the Company's liabilities shall not be paid or discharged, and the Company's affairs shall not be wound up. Instead, the Company shall be deemed to have distributed the Company Property in kind to the Members, who shall be deemed to have assumed and taken subject to all Company liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the Members shall be deemed to have re-contributed the Company property in kind to the Company, which shall be deemed to have assumed and taken subject to all such liabilities.

9.6 Certificate of Dissolution. At such time as all of the debts, liabilities and obligations of the Company have been paid, discharged or otherwise provided for, a certificate of dissolution shall be prepared, signed, and filed by the Manager as provided in Section 1340 of the Act.

9.7 No Recourse to Manager. Upon dissolution and winding up under the Act, each Member shall look solely to the assets of the Company for the return of his Capital Account, and if a Member’s Participation Percentage of the Company assets remaining after the payment or discharge of the debts and liabilities of the Company are insufficient to return the amounts of the Capital Account of Members, Members shall have no recourse against the Manager or any other Member. The winding-up of the affairs of the Company and the distribution of its assets shall be conducted exclusively by the Manager. The Manager is hereby authorized to do any and all acts and things authorized by law for these purposes. If the Manager is removed or resigns and no replacement Manager is appointed by the Super Majority, the winding-up of the affairs of the Company and the distribution of its assets shall be conducted by the person or entity selected by a vote of a Super Majority, which person or entity is hereby authorized to do any and all acts and things authorized by law for such purposes.

ARTICLE 10

[RESERVED]

ARTICLE 11

[RESERVED]

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ARTICLE 12

MISCELLANEOUS

12.1 Covenant to Sign Documents. Each Member covenants, for itself and its successors and assigns, to execute, with acknowledgment or verification, if required, any and all certificates, documents and other writings which may be necessary or expedient to form the Company and to achieve its purposes, including, without limitation, any amendments to the Articles of Organization and any filings, records or publications necessary or appropriate under the laws of any jurisdiction in which the Company shall conduct its business.

12.2 Notices. Except as otherwise expressly provided for in this Agreement, all notices which any Member may desire or may be required to give any other Members shall be in writing and shall be deemed duly given when delivered personally or when deposited in the United States mail, first-class postage pre-paid. Notices to Members shall be addressed to the Members at the last address shown on the Company records. Notices to the Manager or to the Company shall be delivered to the Company’s principal place of business, as set forth in Section 2.5 above or as hereafter changed as provided herein.

12.3 Right to Engage in Competing Business. Nothing contained in this Agreement shall preclude any Member from purchasing or lending money upon the security of any other property or rights therein, or in any manner investing in, participating in, developing or managing any other venture of any kind, without notice to the other Members, without participation by the other Members, and without liability to them or any of them. Each Member waives any right he may have against the Manager for using for its own benefit information received as a consequence of the Manager’s management of the affairs of the Company. This Section 15.3 shall be subject in its entirety to the fiduciary duty of the Manager set forth in Section 3.4.

12.4 Amendment. This Agreement is subject to amendment by the affirmative vote of a Majority in accordance with Section 6.2; provided, however, that no amendment shall be permitted if the effect of such amendment would be to increase the duties or liabilities of any Member or materially adversely affect any Member’s interest in Profits, Losses, Company assets, distributions, management rights or voting rights, except as agreed by that Member. In addition, and notwithstanding anything to the contrary contained in this Agreement, the Manager shall have the right to amend this Agreement, without the vote or consent of any of the Members, if, in the reasonable judgment of the Manager, such amendment does not adversely affect the rights of the Members, including, without limitation, an amendment:

12.4.1: To grant to Members (and not solely the Manager in its capacity as an Initial Member) additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon them;

12.4.2: To cure any ambiguity, to correct or supplement any provision which may be inconsistent with any other provision, or to make any other provisions for matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement;

12.4.3: To conform this Agreement to applicable laws and regulations, including, without limitation, federal and state securities and tax laws and regulations;

12.4.4: In the form of a revision to or updating of Schedule A in accordance with Section 5.1 hereof; and

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12.4.5: To elect for the Company to be governed by any successor Delaware statute governing limited liability companies. The Manager shall notify the Members within a reasonable time of the adoption of any amendment.

12.5 Entire Agreement. This Agreement and the Memorandum constitutes the entire agreement between the parties and supersedes any and all prior agreements and representations, either oral or in writing, between the parties hereto regarding the subject matter contained herein.

12.6 Waiver. No waiver by any party hereto of any breach of, or default under, any provision of this Agreement by any party shall be construed or deemed a waiver of any breach of or default under any other provision of this Agreement, and shall not preclude any party from exercising or asserting any rights under this Agreement for any future breach or default of the same provision of this Agreement.

12.7 Severability. If any term, provision, covenant or condition of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

12.8 Application of Delaware Law. This Agreement and the application or interpretation thereof shall be governed, construed, and enforced exclusively by its terms and by the law of the State of Delaware.

12.9 Captions. Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement.

12.10 Number and Gender. Whenever the singular form is used in this Agreement it includes the plural when required by the context, and the masculine gender shall include the feminine and neutral genders.

12.11 Counterparts. This Agreement may be executed in counterparts, any or all of which may be signed by Manager on behalf of the Members as their attorney-in-fact.

12.12 Waiver of Action for Partition. Each of the parties hereto irrevocably waives, during the term of the Company, any right that it may have to maintain any action for partition for any property of the Company.

12.13 Binding on Assignees. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the successors and assigns of the respective parties hereto, subject to the provisions of Section 10.2, which control the assignment or other transfer of units.

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IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first set forth above.

COMPANY:	MEMBER:
2011-12 Opportunity Fund 6-1, LLC	Opportunity Fund VI, LLC
By:  Bayou City Exploration, Inc., Manager
	By: _______________________________
By: ____________________________
	MEMBER:
	BYCX I, LLC
	By: _______________________________
	MEMBER:
	Opportunity Fund VII, LLC
	By: ______________________________

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Schedule 1.1

Definitions

Act means the Delaware Limited Liability Company Law

Affiliate means: (a) any person directly or indirectly controlling, controlled by or under common control with the Person; (b) any other Person owning or controlling ten percent (10%) or more of the outstanding voting securities of the Person; (c) any officer, director or Member of the Person or (d) if the other Person is an officer, director or Manager, any company for which the Person acts in any similar capacity.

Agreement means this Operating Agreement, as amended from time to time.

Acquisition Expenses means all expenses, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, broker price opinions, tax checks, accounting fees and expenses, title insurance funded by the Company, commissions, and other miscellaneous expenses, related to the evaluation, selection and acquisition of Note Investments, whether or not a Note Investment is acquired.

Amortization Ratio means the ratio applied to voluntary principal payments and pre- payments received by the Company for purposes of allocating amortization of the Note Investment Cost. It shall be calculated as the ratio of the Note Investment Cost to the total unpaid principal balance of the Mortgage Loan or Land Contract outstanding at the time of purchase. By way of example, if the Amortization Ratio is 70%, then 70% of an applicable principal payment amortizes the Note Investment Cost and the remaining 30% is treated as an Investment Gain. Involuntary principal pre-payments received shall be applied first to fees and expenses associated with the individual Mortgage Loan or Land Contract, then to amortization of the Note Investment Cost to Members, and then, remaining proceeds, if any, shall be shared as Investment Gains.

Basis means the total cost to the Company for the acquisition of the Note Investment, including the purchase price for the Note Investment, the Acquisition Expenses, and the Transaction Fee.

Capital Account means, for any Member, the Capital Account maintained for the Member in accordance with the following provisions:

(a) The Manager shall credit to each Member’s Capital Account: (i) on the Closing Date, the Member’s Capital Contribution, (ii) the Member’s distributive share of Profits, (iii) any items in the nature of income or gain (from unexpected adjustments, allocations or distributions) that are specially allocated to a Member, and (iv) the amount of any Company liabilities that are assumed by the Member or that are secured by any Company property distributed to the Member.

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(b) The Manager shall debit from each Member’s Capital Account: (i) the amount of cash and the fair market value of any Company property distributed to the Member under any provision of this Agreement, (ii) the Member’s distributive share of Losses, (iii) any items in the nature of expenses or losses that are specially allocated to a Member and (iv) the amount of any liabilities of the Member that are assumed by the Company or that are secured by any property contributed by the Member to the Company.

If the Gross Asset Value of a Company asset is adjusted as a result of a Write-down, the Manager shall concurrently adjust the Capital Accounts of all Members in order to reflect the aggregate net adjustment that would have occurred if the Company had recognized Losses equal to the Write-down Amount and the Losses were allocated under Article 7.

If any unit in the Company is transferred in accordance with Section 10.2 of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred unit.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with the Regulation. If the Manager determines that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with the then existing Treasury Regulation, the Manager may make the modification, provided that it is not likely to have a material effect on the amounts distributable to any Member under Articles 7 and 12 of this Agreement upon the dissolution of the Company. The Manager shall make any appropriate modification if unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulation Section 1.704-1(b) as provided for in Sections 7.7 and 15.4.

Capital Contribution means the total investment and contribution to the capital of the Company made by a Member.

Cash for Distribution means that portion of the Cash Flow available for pro-rata distribution to Members consisting of, to the extent received and available for distribution, (a) un-amortized Note Investment Cost in accordance with the Amortization Ratio, (b) 90% of the actual interest income received and (c) 90% of the Investment Gains received, subject to recovery of unrecovered losses of Note Investment Cost. Only actual interest income received (versus scheduled) will be distributed to Members and the Loan Servicer.

Cash Flow means for any calendar quarter period the cash funds received by the Company for that calendar quarter period.

Member means a Person who owns one or more units of the member company.

Initial Member means BYCX Opportunity Fund I, LLC, Opportunity Fund VI, LLC and Opportunity Fund VII, LLC

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Code means the Internal Revenue Code of 1986, as amended from time to time and corresponding provisions of subsequent revenue laws.

Company means 2011-12 Opportunity Fund 6-1, LLC, the Delaware limited liability company to which this Agreement pertains.

Expenses means all expenses in connection with the operation of the Company’s business, including, but not limited to, all Acquisition Expenses, but specifically excluding Manager’s office overhead.

Fiscal Year means, subject to the provisions of Section 706 of the Code and Section

9.6.1, (i) the period commencing on the date of formation of the Company and ending on December 31, 2012 (ii) any subsequent twelve (12) month period beginning on January 1 and ending on December 31 and (iii) the period commencing January 1 and ending on the date on which all Company assets are distributed to the Members under Article 12.

Gross Asset Value means, for any Company asset, the following:

(a) The initial Gross Asset Value of any Company asset at the time that it is contributed by a Member to the capital of the Company shall be an amount equal to the fair market value of the Company asset (without regard to the provisions of Code Section 7701(g)), as determined by the contributing Member and the Manager;

(b) The Gross Asset Values of all Company assets shall be adjusted, as determined by the distributed Member and the Manager, to equal their respective fair market values upon the distribution to a Member by the Company of more than a de minimis amount of Company assets (other than money), unless all Members simultaneously receive distributions of undivided units in the distributed Company assets in proportion to their respective Capital Accounts;

(c) The Gross Asset Values of all Company assets shall be adjusted to equal their respective fair market values (as determined by the Manager, in its reasonable discretion) upon the termination of the Company for Federal income tax purposes under Code Section 708(b)(1)(B); and

(d) The Gross Asset Value of a Company asset shall be adjusted in the case of a Write-down of the Company asset in accordance with the provisions of this Agreement.

HSLLC as used in this agreement means Home Servicing, LLC.

Investment Gains shall be equal to the amount by which a principal prepayment, after considering the Amortization Ratio exceeds the Company’s un-amortized Note Investment Cost on the Mortgage Loans and Land Contracts (after payment of Fund expenses and fees, except office expenses, which will be paid by the Manager).

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Investment Manager means the Fund’s Investment Manager is Bayou City Exploration, Inc., a Nevada corporation (which we refer to as “Manager” or the Investment Manager”), organized on November 30, 1994. Bayou City’s executive offices are at 625 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

Units means, as the context requires, ownership of equity in the Company that are (a) issued to Members upon their admission to the Company or (b)transferred to those who become substituted Members under Section 12.2 hereof.

Land Contracts as used in this Agreement are contracts between a buyer and the Company of a property, wherein the Company holds the title or deed to the property until all agreed upon payments have been made in full.

Delaware Statutes means the Delaware laws with respect to limited liability companies including the Act, as amended from time to time, unless indicated to the contrary by the context.

Manager means Bayou City Exploration, Inc., a Nevada Corporation, in that capacity or any Person replacing Bayou City Exploration, Inc. under this Agreement.

Member means a Member or the Initial Member(s).

Membership Unit(s) means the entire ownership interest of a Member Company and its members in the Company at any particular time, including the right of the Member Company and its members to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of the Member Company and its members to comply with all of the terms and provisions of this Agreement.

Mortgage means the lien(s) created on the Real Property of borrowers securing their respective obligations to the Company to repay Note Investments, whether in the form of a deed of trust, mortgage or otherwise.

Mortgage Notes means investments of the Member Companies held by the Company that are notes, debentures, bonds and other evidences of indebtedness or obligations that are negotiable or non-negotiable and secured or collateralized by Mortgages.

Note Investment(s) means the Mortgage Notes and Land Contracts or an interest in a Mortgage Note or Land Contract that are held by the Company.

Note Investment Cost means the purchase price paid by the Member for the Note Investment, not including Acquisition Costs and the Transaction Fee.

Offering means the offer and sale of units of the Member Companies made under their Memorandums.

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Participation Percentage means the percentage that the amount of a Member Company’s Capital Account apportioned among the members as compared to the aggregate amount of all such Capital Accounts.

Person means any natural person, partnership, corporation, unincorporated association or other legal entity.

Profits and Losses mean, for each Fiscal Year or any other period, an amount equal to the Company’s taxable income or loss for the Fiscal Year or other given period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately under Code Section 703(a) (1) shall be included in taxable income or loss), with the following adjustments (without duplication):

(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses under this section shall be added to the taxable income or loss;

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures under Treasury Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses under this section, shall be subtracted from the taxable income or loss. If any Company asset has a Gross Asset Value which differs from its adjusted cost basis, gain or loss resulting from the disposition of the Company asset shall be computed using the Gross Asset Value (rather than adjusted cost basis) of the Company asset. Notwithstanding any other provision of this Section, any items in the nature of income, gain, expenses or losses, which are specially allocated under Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing Profits or Losses.

Real Property means and includes: (a) land and any buildings, structures, and improvements, and (b) all fixtures, whether in the form of equipment or other personal property, that is located on or used as part of land.

Servicing Fee means a monthly Servicing Fee to HSLLC in an amount equal to (a) the greater of $30 per month per Mortgage Note and Land Contract or one-twelfth of 1% of the sum of the unpaid principal balance for all performing Note Investments during the relevant calendar month plus all cash on hand, plus (b) for each non-performing Note Investment, if any, $175.00 per month.

Super Majority means any group of Members who together hold over 80% of the total outstanding units of the Company as of a particular date (or if no date is specified, the first day of the then current calendar month).

Treasury Regulations means, except where the context indicates otherwise, the permanent, temporary, proposed, or proposed and temporary regulations of the U.S. Department of the Treasury under the Code, as the regulations may be lawfully changed from time to time.

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Unit(s) means a Membership Unit.

Write-down means a determination by the Manager for a particular Note Investment or other Company investment (which determination has been verified by the Company’s accountants as being in conformity with generally accepted accounting principles) that the fair market value of the investment at the time the determination is made is less than the amount actually paid or allocated to the purchase of the investment, which determination shall be made by the Company and its accountants within thirty (30) days of the end of each calendar quarter and any Write-down shall be effective on the last day of the relevant calendar quarter during the term of this Agreement.

Write-down Amount means, for any Note Investment or other Company investment, the amount by which, at the time that a Write-down is determined for the Note Investment, the amount actually paid or allocated to the purchase of the investment exceeds its fair market value.

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EX-23.1

Exhibit 23.1

April 15, 2013

Bayou City Exploration, Inc.

632 Adams Street

Suite 700

Bowling Green, KY 42101

CONSENT OF PRESSLER PETROLEUM CONSULTANTS, INC.

Gentlemen:

Pressler Petroleum Consultants, Inc. hereby consents to the use of our name, to references to our name, and to the inclusion of information taken from our letter report, dated April 5, 2013, under the section “Item 2 Description of Properties – Net Proved Oil and Gas Reserves,” in the Annual Report on Form 10-K of Bayou City Exploration, Inc.  We also consent to the inclusion of our letter report and summary reserve information in the Annual Report on Form 10-K of Bayou City Exploration, Inc.as Exhibit 99.1.

Sincerely,

Pressler Petroleum Consultants, Inc.

Firm Registration No. 7807

By: /s/ Stan Valdez, P.E.

Stan Valdez, P.E.

TBPE #110367

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Stephen C. Larkin, CERTIFY THAT:

1.	I have reviewed this 10-K for the year ended December 31, 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 small business issuer as of, and for, the periods presented in this report;
4.	The small business issuer’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 Rules 13a-15(f) and 15d-15(f)) for the small business issuer 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 small business issuer, 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 control over financial reporting, or caused such internal 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 small business issuer’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 small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.	The small business issuer’s certifying officer(s) have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’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 small business issuer’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 small business issuer’s internal controls over financial reporting.

Date: April 16, 2013

/s/ Stephen C. Larkin  

Stephen C. Larkin 

Principal Executive Officer and Principal Financial Officer

EX-32.1

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 Annual Report of Bayou City Exploration, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen C. Larkin, Principal Executive Officer and Principal 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 

Principal Executive Officer and Principal Financial Officer 

April 16, 2013

EX-99.1

Exhibit 99.1

 

April 5, 2013

Mr. Stephen C. Larkin, CFO

Bayou City Exploration,

Inc. 632 Adams Street, Suite

700 Bowling Green, Ky.

42101

RE: Bayou City Exploration, Inc. Evaluation of Proved Oil and Gas Assets As of December 31, 2012

Dear Mr. Larkin:

Pursuant to your request, Pressler Petroleum Consultants, Inc. (Pressler) has estimated proved reserves and prepared a projection of future production and cash flow attributable to certain oil and gas interests owned by Bayou City Exploration, Inc. (Bayou City). Projections of the reserves and cash flow to the evaluated interests were based on applicable economic parameters and operating conditions pursuant to the financial reporting requirements of the Securities and Exchange Commission (SEC). It is the understanding of Pressler that the purpose of this evaluation is for year-end financial reporting.

The properties evaluated are located in the Gulf Coast Area of South Texas and Cameron Parish, Louisiana. As of December 31, 2012 the properties consist of interests in a total of 6 active oil and gas wells, all of which are producing. All properties were evaluated by Pressler along with their associated total proved net reserves and values as of December 31, 2012. It is the understanding of Pressler that the reserves contained herein represent 100% of Bayou City's reserves as of the effective date of this report.

Oil and gas reserves were evaluated for proved developed producing (PDP) only.

All data utilized in the preparation of this report with respect to interests, oil and gas prices, operating expenses, investments and current operating conditions were provided by Bayou City.

It should be emphasized that revisions to the projection of reserves and economics included in this report may be required if the production data are revised for any reason. No inspection of the properties was made as this was not considered to be within the scope of this evaluation.

Oil reserves are expressed in United States (U.S.) barrels of 42 U.S. gallons. Gas volumes are expressed in thousands of standard cubic feet (Mcf) at the official temperature and pressure base of the areas in which the gas reserves are located.

The ownership interests and property identification were accepted as provided by Bayou City and incorporated into our analysis. We were provided with updated Lease Operating Statements and Check Stubs with which we calculated price differentials and operating costs. Additionally, we obtained performance information from the operators of the subject properties. We projected the future production performance for each well using production data reported to state regulatory bodies, as well as the provided accounting data and ownership interests to generate future net reserves and cash flows. The results of these calculations are summarized below:

Page 2 of 4

Estimated Oil and Gas Reserves and Future Net Revenue
As of December 31, 2012

Net to Bayou City Exploration, Inc.

	Net Oil		Net Gas		Undiscounted		FNR Discounted
Reserve Category	(Bbls)		(Mcf)		FNR, $		at 10%, $
Producing (PDP)		5,400		68,180		612,240		544,710
Total Proved		5,400		68,180		612,240		544,710

Included in this report is a one-line summary, and individual well estimated production and cash flow projections.

COMMODITY PRICE

As specified by the SEC regulations, when calculating economic producibility, the base product price must be the 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the-month price for each month within the prior 12-month period. The benchmark base prices used for this evaluation were $94.71 per barrel of oil for West Texas Intermediate oil at Cushing, OK, and $2.849 per thousand standard cubic feet of natural gas at Henry Hub, LA. The oil and gas prices were adjusted on each well based on deductions such as quality, energy content, and basis differential, as appropriate. Prices for oil and natural gas were held constant throughout the remaining life of the properties.

No attempt has been made to account for oil and gas price fluctuations that have occurred in the market subsequent to the effective date of this report. It should be emphasized that with current economic uncertainties, fluctuations in market conditions could significantly change the economics in this report.

OPERATING EXPENSE

Operating expenses were provided by Bayou City. The evaluation utilized up to twelve months of operating expense records depending upon when the wells were completed. Detailed joint interest billing statements were provided and reviewed. Operating costs were held constant for the life of the properties. Standard state severance taxes have been deducted as appropriate.

This report includes only cost and revenues which were provided by Bayou City that are directly attributable to the individual leases and areas. All workover costs and operating costs have been deducted as applicable. These costs were supplied by Bayou City. No adjustments were made to account for the potential effect of inflation on these costs.

ENVIRONMENTAL & REGULATORY

The wells evaluated herein, which Bayou City owns an interest, may be subject to various levels of governmental controls and regulations. These controls and regulations may include matters relating to land tenure, drilling, production practices, environmental protection, marketing and pricing policies, and various taxes and are subject to change from time to time. Such changes in governmental regulations and policies may cause volumes of reserves actually recovered and amounts of income actually received to differ significantly from the estimated quantities in this report.

No consideration was given in this report to potential environmental liabilities that may exist concerning the properties evaluated. There are no costs included in this evaluation for potential liability for restoration and to clean up damages, if any, caused by past or future operating practices.

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RESERVE ESTIMATES

The estimates of reserves obtained in this report were determined by accepted industry methods and in accordance with the attached Definitions of Oil and Gas Reserves. Methods utilized in this report include extrapolation of historical production trends and analogy to similar producing properties. Pressler believes the assumptions, data, methods and procedures utilized in this report are appropriate for the purpose served by this report, and that it utilized all methods and procedures it considered necessary to prepare this report.

There are significant uncertainties in estimating reserves, future rates of production, and the timing and amount of future costs. Oil and gas reserves estimates must be recognized as a subjective process that cannot be measured in an exact way and estimates of others may differ materially from those of Pressler. Production data subsequent to the date of these estimates may warrant revisions of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and gas that are ultimately recovered.

Pressler is an independent petroleum consulting firm founded in 1985 and does not own any interests in the oil and gas properties covered by this report or this evaluation. No employee, officer, or director of Pressler is an employee, officer, or director of Bayou City. Neither the employment of nor the compensation received by Pressler is contingent upon the values assigned to the properties covered by the report or this evaluation.

This report should be considered in its entirety and should not be used for any purpose other than that outlined herein without the express written consent of an officer of Pressler.

SUMMARY

The estimates of reserves obtained in this report were determined by accepted industry methods and in accordance with the attached Definitions of Oil and Gas Reserves. There are significant uncertainties in estimating reserves, future rates of production, and the timing and amount of future costs. The professional qualifications of the petroleum consultants responsible for the evaluation of the reserves and economics information contained in this report meet the standards of Reserves Estimator as defined in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" as promulgated by the Society of Petroleum Engineers.

Thank you for the opportunity to prepare this evaluation. Should you have any questions concerning the report, please do not hesitate to contact us.

Yours truly,

PRESSLER PETROLEUM CONSULTANTS, INC.

Firm Registration No. 7807

By: /s/ Andrew Tharp

Andrew Tharp, E.I.T.

/s/ Stan Valdez

Stan Valdez, P.E.

TBPE # 110367

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Professional Qualifications
Stan S. Valdez, P.E.

I, Stan S. Valdez, am the primary technical person responsible for the resulting estimate of reserves and associated cash flow and economics presented herein on behalf of Pressler Petroleum Consultants, Inc. (Pressler) to Bayou City Exploration, Inc. I have a Bachelor of Science degree in Petroleum Engineering from Texas A&M University.

I am a qualified Reserves Estimator as set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the Society of Petroleum Engineers. This qualification is based on more than 16 years of practical experience in the estimation and evaluation of petroleum reserves, as well as continuing education concerning the estimating and auditing of oil and gas reserves.

I am a registered Professional Engineer in the state of Texas (TBPE # 110367).

Professional Qualifications
Andrew Tharp, E.I.T.

I, Andrew Tharp, am a qualified Reserves Estimator as set forth in the "Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information" promulgated by the Society of Petroleum Engineers. This qualification is based on more than 1 year of practical experience in the estimation and evaluation of petroleum reserves, as well as continuing education concerning the estimating and auditing of oil and gas reserves. I have a Bachelor of Science degree in Petroleum Engineering from The University of Texas at Austin.

Reserve Definitions Tables 2 and 3 excerpted from the Society of
Petroleum Engineers Petroleum Resources Management System
(SPE-PRMS) approved 2007.

Table 2: Reserves Status Definitions and Guidelines

Status	Definition	Guidelines
Developed Reserves	Developed Reserves are expected quantities to be recovered from existing wells and facilities.	Reserves are considered developed only after the necessary equipment has been installed, or when the costs to do so are relatively minor compared to the cost of a well. Where required facilities become unavailable, it may be necessary to reclassify Developed Reserves as Undeveloped. Developed Reserves may be further sub-classified as Producing or Non-Producing.
Developed Producing Reserves	Developed Producing Reserves are expected to be recovered from completion intervals that are open and producing at the time of the estimate.	Improved recovery reserves are considered producing only after the improved recovery project Is in operation.
Developed Non- Producing Reserves	Developed Non-Producing Reserves include shut-in and behind-pipe Reserves.	Shut-in Reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not yet started producing, (2) wells which were shut-in for market conditions or pipeline . connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe Reserves are expected to be recovered from zones in existing wells which will require additional completion work or future re-completion prior to start of production. In all cases, production can be initiated or restored with relatively low expenditure compared to the cost of drilling a new well.
Undeveloped Reserves	Undeveloped Reserves are quantities expected to be recovered through future investments:	(1)    from new wells on undrilled acreage In known accumulations, (2)  from deepening existing wells to a different (but known) reservoir, (3) from infill wells that will increase recovery, or (4) where a relatively large expenditure (e.g. when compared to the cost of drilling a new well) is required to (a) recomplete an existing well or (b) install production or transportation facilities for primary or improved recovery projects.

Table 3: Reserves Category Definitions and Guidelines

Category	Definition	Guidelines
Proved Reserves	Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations.	If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. The area of the reservoir considered as Proved includes (1) the area delineated by drilling and defined by fluid contacts, if any, and (2) adjacent undrilled portions of the reservoir that can reasonably be judged as continuous with it and commercially productive on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, Proved quantities in a reservoir are limited by the lowest known hydrocarbon (LKH) as seen in a well penetration unless otherwise indicated by definitive geoscience, engineering, or performance data. Such definitive information may include pressure gradient analysis and seismic indicators. Seismic data alone may not be sufficient to define fluid Contacts for Proved reserves (see "2001 Supplemental Guidelines," Chapter 8). Reserves in undeveloped locations may be classified as Proved provided that: ·      The locations are in undrilled areas of the reservoir that can be judged with reasonable certainty to be commercially productive. ·      Interpretations of available geoscience and engineering data indicate with reasonable certainty that the objective formation is laterally continuous with drilled Proved locations. For Proved Reserves, the recovery efficiency applied to these reservoirs should be defined based on a range of possibilities supported by analogs and sound engineering judgment considering the characteristics of the Proved area and the applied development program.
Probable Reserves	Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves.	It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate. Probable Reserves may be assigned to areas of a reservoir adjacent to Proved where data control or interpretations of available data are less certain. The interpreted reservoir continuity may not meet the reasonable certainty criteria. Probable estimates also include incremental recoveries associated with project recovery efficiencies beyond that assumed for Proved,

Category	Definition	Guidelines
Possible Reserves	Possible Reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recoverable than Probable Reserves.	The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenario. When probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate. Possible Reserves may be assigned to areas of a reservoir adjacent to Probable where data control and interpretations of available data are progressively less certain. Frequently, this may be in areas where geoscience and engineering data are unable to dearly define the area and vertical reservoir limits of commercial production from the reservoir by a defined project. Possible estimates also include incremental quantities associated With project recovery efficiencies beyond that assumed for Probable.
Probable and Possible Reserves	(See above for separate criteria for Probable Reserves and Possible Reserves.)	The 2P and 3P estimates may be based on reasonable alternative technical and commercial interpretations within the reservoir and/or
		subject project that are dearly documented, including comparisons
		to results in successful similar projects.
		In conventional accumulations, Probable and/or Possible Reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within the same accumulation that may be separated from Proved areas by minor faulting or other geological discontinuities and have not been penetrated by a wellbore but are interpreted to be in communication with the known (Proved) reservoir. Probable or
		Possible Reserves may be assigned to areas that are structurally higher than the Proved area. Possible (and in some cases, Probable) Reserves may be assigned to areas that are structurally lower than the adjacent Proved or 2P area.
		Caution should be exercised in assigning Reserves to adjacent reservoirs isolated by major, potentially sealing, faults until this reservoir is penetrated and evaluated as commercially productive.
		Justification for assigning Reserves in such cases should be clearly documented. Reserves should not be assigned to areas that are dearly separated from a known accumulation by non-productive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test results); such areas may contain Prospective Resources. In conventional accumulations, where drilling has defined a highest known oil (HKO) elevation and there exists the potential for an associated gas cap, Proved oil Reserves should only be assigned in the structurally higher portions of the reservoir if there is reasonable certainty that such portions are initially above bubble point pressure based on documented engineering analyses. Reservoir portions that do not meet this certainty may be assigned as Probable and Possible oil and/or gas based on reservoir fluid properties and pressure gradient interpretations.

4/1/2013       10:34:23AM

Economic One-Liners

Project Name :       Bayou City Reserve Report 2/2013       As of Date: 1/1/2013

Ownership Group :       All Cases Lease Name  

		Net Reserves		Net Revenue			Expense		Cash Flow
Lease Name Risked / UnRisked	Reserve Category	Oil (Mbbl)	Gas (MMcf)	Oil (M$)	Gas (M$)	Other (M$)	& Tax (M$)	Invest. (M$)	Non-Disc. (M$)	Disc. CF (M$)	Life (years)
Grand Total	Total	5.40	68.18	522.59	289.09	0.00	199.43	0.00	612.24	544.71	19.74
Koehn #2	P-DP	3.95	33.93	381.82	146.20	0.00	88.60	0.00	439.42	399.26	4.73
Wells #2 (Kleimann #1)	P-DP	1.09	16.16	105.38	78.03	0.00	79.08	0.00	104.33	89.88	7.90
Squeeze Box (D. Theriot/Trahan) - 001	P-DP	0.07	13.88	7.66	47.45	0.00	10.49	0.00	44.62	35.05	19.74
Glasscock E-1	P-DP	0.10	2.91	9.80	13.08	0.00	5.42	0.00	17.46	14.44	13.49
Trad #3 (Taylor #1)	P-DP	0.02	1.31	1.51	4.32	0.00	2.45	0.00	3.38	3.17	3.01
Rooke #2	P-DP	0.17	0.00	16.43	0.00	0.00	13.40	0.00	3.03	2.91	1.35

1

Year	Gross Oil (Mbbl)		Gross Gas (MMcf)		Net Oil (Mbbl)		Net Gas (MMcf)		Oil Price ($/bbl)		Gas Price ($/Mcf)		Oil Revenue (M$)		Gas Revenue (M$)		Misc. Revenue (M$)
2013		40.34		776.52		2.76		26.89		96.76		4.25		267.17		114.35		0.00
2014		19.20		425.42		1.31		15.07		96.78		4.25		126.67		64.12		0.00
2015		9.46		263.18		0.61		9.22		96.84		4.26		59.13		39.27		0.00
2016		5.24		172.06		0.32		6.10		96.86		4.29		30.69		26.16		0.00
2017		3.08		118.06		0.17		3.90		96.91		4.30		16.18		16.77		0.00
2018		1.85		76.02		0.08		1.85		97.02		4.32		8.12		8.00		0.00
2019		1.54		60.36		0.07		1.54		96.99		4.34		6.93		6.67		0.00
2020		1.29		48.91		0.06		1.23		96.99		4.33		5.55		5.35		0.00
2021		0.90		37.36		0.00		0.41		99.42		3.59		0.45		1.48		0.00
2022		0.79		31.39		0.00		0.35		99.32		3.59		0.39		1.24		0.00
2023		0.70		26.74		0.00		0.30		99.23		3.59		0.34		1.06		0.00
2024		0.62		23.11		0.00		0.26		99.15		3.59		0.30		0.92		0.00
2025		0.56		20.08		0.00		0.22		99.08		3.59		0.27		0.80		0.00
2026		0.28		13.70		0.00		0.18		100.31		3.51		0.15		0.64		0.00
2027		0.03		8.49		0.00		0.15		105.30		3.42		0.06		0.50		0.00
Rem		0.11		29.81		0.00		0.52		105.30		3.42		0.21		1.76		0.00
Total		86.00		2,131.19		5.40		68.18		96.80		4.24		522.59		289.09		0.00
Ult		139.99		3,358.28

Year	Well Count	Net Tax Production (M$)	NetTax AdValorem (M$)	Net Investment (M$)	Net Lease Costs (M$)	Net Well Costs (M$)	Other  Costs  (M$)	Net Profits (M$)	Annual Cash Flow (M$)	Cum Disc. Cash Flow (M$)
2013	6.00	17.29	0.00	0.00	30.68	0.00	0.00	0.00	333.56	319.81
2014	6.00	10.50	0.00	0.00	27.41	0.00	0.00	0.00	152.88	453.21
2015	5.00	5.58	0.00	0.00	24.17	0.00	0.00	0.00	68.65	507.66
2016	5.00	3.32	0.00	0.00	23.49	0.00	0.00	0.00	30.04	529.34
2017	4.00	1.97	0.00	0.00	19.60	0.00	0.00	0.00	11.38	536.81
2018	3.00	0.98	0.00	0.00	9.29	0.00	0.00	0.00	5.85	540.28
2019	3.00	0.82	0.00	0.00	9.29	0.00	0.00	0.00	3.48	542.17
2020	3.00	0.66	0.00	0.00	8.46	0.00	0.00	0.00	1.77	543.04
2021	2.00	0.15	0.00	0.00	0.59	0.00	0.00	0.00	1.18	543.57
2022	2.00	0.12	0.00	0.00	0.59	0.00	0.00	0.00	0.91	543.93
2023	2.00	0.11	0.00	0.00	0.59	0.00	0.00	0.00	0.70	544.19
2024	2.00	0.09	0.00	0.00	0.59	0.00	0.00	0.00	0.53	544.37
2025	2.00	0.08	0.00	0.00	0.59	0.00	0.00	0.00	0.39	544.49
2026	2.00	0.06	0.00	0.00	0.44	0.00	0.00	0.00	0.29	544.57
2027	1.00	0.05	0.00	0.00	0.29	0.00	0.00	0.00	0.22	544.62
Rem.		0.16	0.00	0.00	1.39	0.00	0.00	0.00	0.42	0.09
Total		41.93	0.00	0.00	157.50	0.00	0.00	0.00	612.24	544.71

 

2

 

	Gross	Gross	Net	Net	Oil	Gas	Oil	Gas	Misc.
Year	Oil	Gas	Oil	Gas	Price	Price	Revenue	Revenue	Revenue
	(Mbbl)	(MMcf)	(Mbbl)	(MMcf)	($/bbl)	($/Mcf)	(M$)	(M$)	(M$)
2013	26.16	186.84	2.22	15.57	96.71	4.31	214.29	67.10	0.00
2014	12.17	104.15	1.03	8.68	96.71	4.31	99.71	37.40	0.00
2015	5.24	59.52	0.44	4.96	96.71	4.31	42.90	21.37	0.00
2016	2.26	37.40	0.19	3.12	96.71	4.31	18.49	13.43	0.00
2017	0.78	19.20	0.07	1.60	96.71	4.31	6.42	6.90	0.00
Rem	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total	46.61	407.10	3.95	33.93	96.71	4.31	381.82	146.20	0.00
Ult	55.12	446.38

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	low	Flow
	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	11.19	0.00	0.00	11.29	0.00	0.00	0.00	258.91	248.17
2014	1.00	7.21	0.00	0.00	14.19	0.00	0.00	0.00	115.72	349.20
2015	1.00	3.47	0.00	0.00	14.19	0.00	0.00	0.00	46.62	386.22
2016	1.00	1.79	0.00	0.00	14.19	0.00	0.00	0.00	15.94	397.76
2017	1.00	0.78	0.00	0.00	10.30	0.00	0.00	0.00	2.24	399.26
Rem.		0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total		24.44	0.00	0.00	64.16	0.00	0.00	0.00	439.42	399.26

3

 

	Gross	Gross	Net	Net	Oil	Gas	Oil	Gas	Misc.
Year	Oil	Gas	Oil	Gas	Price	Price	Revenue	Revenue	Revenue
	(Mbbl)	(MMcf)	(Mbbl)	(MMcf)	($/bbl)	($/Mcf)	(M$)	(M$)	(M$)
2013	1.57	25.62	0.34	5.31	96.73	4.83	33.15	25.63	0.00
2014	0.94	14.75	0.21	3.06	96.73	4.83	19.89	14.76	0.00
2015	0.67	10.26	0.15	2.12	96.73	4.83	14.08	10.26	0.00
2016	0.51	7.83	0.11	1.62	96.73	4.83	10.86	7.83	0.00
2017	0.41	6.28	0.09	1.30	96.73	4.83	8.76	6.28	0.00
2018	0.35	5.23	0.08	1.08	96.73	4.83	7.33	5.23	0.00
2019	0.30	4.48	0.07	0.93	96.73	4.83	6.29	4.48	0.00
2020	0.24	3.56	0.05	0.74	96.73	4.83	5.02	3.56	0.00
Rem	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total	4.98	78.00	1.09	16.16	96.73	4.83	105.38	78.03	0.00
Ult	8.20	146.72

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	Flow	Flow
		(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	3.32	0.00	0.00	8.70	0.00	0.00	0.00	46.76	44.87
2014	1.00	1.95	0.00	0.00	8.70	0.00	0.00	0.00	24.00	65.78
2015	1.00	1.37	0.00	0.00	8.70	0.00	0.00	0.00	14.27	77.07
2016	1.00	1.05	0.00	0.00	8.70	0.00	0.00	0.00	8.94	83.50
2017	1.00	0.84	0.00	0.00	8.70	0.00	0.00	0.00	5.49	87.09
2018	1.00	0.70	0.00	0.00	8.70	0.00	0.00	0.00	3.16	88.97
2019	1.00	0.60	0.00	0.00	8.70	0.00	0.00	0.00	1.47	89.77
2020	1.00	0.48	0.00	0.00	7.87	0.00	0.00	0.00	0.23	89.88
Rem.		0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total		10.31	0.00	0.00	68.77	0.00	0.00	0.00	104.33	89.88

4

 

	Gross	Gross	Net	Net	Oil	Gas	Oil	Gas	Misc.
Year	Oil	Gas	Oil	Gas	Price	Price	Revenue	Revenue	Revenue
	(Mbbl)	(MMcf)	(Mbbl)	(MMcf)	($/bbl)	($/Mcf)	(M$)	(M$)	(M$)
2013	1.55	242.37	0.03	4.20	105.30	3.42	2.88	14.35	0.00
2014	0.76	140.76	0.01	2.44	105.30	3.42	1.41	8.33	0.00
2015	0.45	91.98	0.01	1.59	105.30	3.42	0.84	5.45	0.00
2016	0.30	64.96	0.01	1.13	105.30	3.42	0.56	3.85	0.00
2017	0.21	48.09	0.00	0.83	105.30	3.42	0.39	2.85	0.00
2018	0.16	37.13	0.00	0.64	105.30	3.42	0.29	2.20	0.00
2019	0.12	29.53	0.00	0.51	105.30	3.42	0.23	1.75	0.00
2020	0.10	24.11	0.00	0.42	105.30	3.42	0.18	1.43	0.00
2021	0.08	19.95	0.00	0.35	105.30	3.42	0.15	1.18	0.00
2022	0.07	16.83	0.00	0.29	105.30	3.42	0.12	1.00	0.00
2023	0.06	14.39	0.00	0.25	105.30	3.42	0.10	0.85	0.00
2024	0.05	12.47	0.00	0.22	105.30	3.42	0.09	0.74	0.00
2025	0.04	10.86	0.00	0.19	105.30	3.42	0.08	0.64	0.00
2026	0.04	9.56	0.00	0.17	105.30	3.42	0.07	0.57	0.00
2027	0.03	8.49	0.00	0.15	105.30	3.42	0.06	0.50	0.00
Rem	0.11	29.81	0.00	0.52	105.30	3.42	0.21	1.76	0.00
Total	4.13	801.30	0.07	13.88	105.30	3.42	7.66	47.45	0.00
Ult	10.44	1,272.09

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	Flow	Flow
		(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	1.49	0.00	0.00	0..29	0.00	0.00	0.00	15.44	14.81
2014	1.00	0.83	0.00	0.00	0..29	0.00	0.00	0.00	8.62	22.31
2015	1.00	0.53	0.00	0.00	0..29	0.00	0.00	0.00	5.46	26.63
2016	1.00	0.37	0.00	0.00	0..29	0.00	0.00	0.00	3.74	29.31
2017	1.00	0.27	0.00	0.00	0..29	0.00	0.00	0.00	2.67	31.06
2018	1.00	0.21	0.00	0.00	0..29	0.00	0.00	0.00	1.99	32.24
2019	1.00	0.17	0.00	0.00	0..29	0.00	0.00	0.00	1.52	33.06
2020	1.00	0.14	0.00	0.00	0..29	0.00	0.00	0.00	1.18	33.64
2021	1.00	0.11	0.00	0.00	0..29	0.00	0.00	0.00	0.93	34.05
2022	1.00	0.09	0.00	0.00	0..29	0.00	0.00	0.00	0.73	34.34
2023	1.00	0.08	0.00	0.00	0..29	0.00	0.00	0.00	0.58	34.56
2024	1.00	0.07	0.00	0.00	0..29	0.00	0.00	0.00	0.47	34.72
2025	1.00	0.06	0.00	0.00	0..29	0.00	0.00	0.00	0.37	34.83
2026	1.00	0.05	0.00	0.00	0..29	0.00	0.00	0.00	0.29	34.91
2027	1.00	0.05	0.00	0.00	0.29	0.00	0.00	0.00	0.22	34.96
Rem.		0.16	0.00	0.00	1.39	0.00	0.00	0.00	0.42	0.09
Total		4.69	0.00	0.00	5.880	0.00	0.00	0.00	44.62	35.05

5

 

Year	Gross Oil (Mbbl)		Gross Gas (MMcf)		Net Oil (Mbbl)		Net Gas (MMcf)		Oil Price ($/bbl)		Gas Price ($/Mcf)		Oil Revenue (M$)		Gas Revenue (M$)		Misc. Revenue (M$)
2013		8.66		280.82		0.03		1.05		96.72		4.50		3.14		4.74		0.00
2014		4.57		147.46		0.02		0.55		96.72		4.50		1.66		2.49		0.00
2015		2.98		90.87		0.01		0.34		96.72		4.50		1.08		1.53		0.00
2016		2.17		61.75		0.01		0.23		96.72		4.50		0.79		1.04		0.00
2017		1.67		44.49		0.01		0.17		96.72		4.50		0.61		0.75		0.00
2018		1.35		33.66		0.01		0.13		96.72		4.50		0.49		0.57		0.00
2019		1.12		26.35		0.00		0.10		96.72		4.50		0.41		0.44		0.00
2020		0.95		21.24		0.00		0.08		96.72		4.50		0.35		0.36		0.00
2021		0.82		17.40		0.00		0.07		96.72		4.50		0.30		0.29		0.00
2022		0.72		14.55		0.00		0.05		96.72		4.50		0.26		0.25		0.00
2023		0.64		12.35		0.00		0.05		96.72		4.50		0.23		0.21		0.00
2024		0.58		10.64		0.00		0.04		96.72		4.50		0.21		0.18		0.00
2025		0.52		9.22		0.00		0.03		96.72		4.50		0.19		0.16		0.00
2026		0.24		4.14		0.00		0.02		96.72		4.50		0.09		0.07		0.00
Rem		0.00		0.00		0.00		0.00		0.00		0.00		0.00		0.00		0.00
Total		26.99		774.94		0.10		2.91		96.72		4.50		9.80		13.08		0.00
Ult		48.86		1,315.48

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	Flow	Flow
		(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	0.48	0.00	0.00	0.30	0.00	0.00	0.00	7.11	6.82
2014	1.00	0.25	0.00	0.00	0.30	0.00	0.00	0.00	3.60	9.95
2015	1.00	0.16	0.00	0.00	0.30	0.00	0.00	0.00	2.16	11.66
2016	1.00	0.11	0.00	0.00	0.30	0.00	0.00	0.00	1.42	12.68
2017	1.00	0.08	0.00	0.00	0.30	0.00	0.00	0.00	0.98	13.32
2018	1.00	0.06	0.00	0.00	0.30	0.00	0.00	0.00	0.69	13.73
2019	1.00	0.05	0.00	0.00	0.30	0.00	0.00	0.00	0.50	14.00
2020	1.00	0.04	0.00	0.00	0.30	0.00	0.00	0.00	0.36	14.18
2021	1.00	0.03	0.00	0.00	0.30	0.00	0.00	0.00	0.26	14.30
2022	1.00	0.03	0.00	0.00	0.30	0.00	0.00	0.00	0.18	14.37
2023	1.00	0.03	0.00	0.00	0.30	0.00	0.00	0.00	0.12	14.41
2024	1.00	0.02	0.00	0.00	0.30	0.00	0.00	0.00	0.07	14.43
2025	1.00	0.02	0.00	0.00	0.30	0.00	0.00	0.00	0.02	14.44
2026	1.00	0.01	0.00	0.00	0.15	0.00	0.00	0.00	0.00	14.44
Rem.		0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total		1.37	0.00	0.00	4.05	0.00	0.00	0.00	17.46	14.44

 

6

 

Year	Gross Oil (Mbbl)		Gross Gas (MMcf)		Net Oil (Mbbl)		Net Gas (MMcf)		Oil Price ($/bbl)		Gas Price ($/Mcf)		Oil Revenue (M$)		Gas Revenue (M$)		Misc. Revenue (M$)
2013		0.47		40.89		0.01		0.76		98.98		3.31		0.88		2.53		0.00
2014		0.21		18.29		0.00		0.34		98.98		3.31		0.40		1.13		0.00
2015		0.12		10.55		0.00		0.20		98.98		3.31		0.23		0.65		0.00
2016		0.00		0.11		0.00		0.00		98.98		3.31		0.00		0.01		0.00

Rem	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total	0.81	69.85	0.02	1.31	98.98	3.31	1.51	4.32	0.00
Ult	1.40	111.96

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	Flow	Flow
		(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	0.22	0.00	0.00	0.69	0.00	0.00	0.00	2.50	2.41
2014	1.00	0.10	0.00	0.00	0.69	0.00	0.00	0.00	0.74	3.06
2015	1.00	0.06	0.00	0.00	0.69	0.00	0.00	0.00	0.14	3.17
2016	1.00	0.00	0.00	0.00	0.01	0.00	0.00	0.00	0.00	3.17
Rem.		0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total		0.37	0.00	0.00	2.07	0.00	0.00	0.00	3.38	3.17

 

7

 

Year	Gross Oil (Mbbl)		Gross Gas (MMcf)		Net Oil (Mbbl)		Net Gas (MMcf)		Oil Price ($/bbl)		Gas Price ($/Mcf)		Oil Revenue (M$)		Gas Revenue (M$)		Misc. Revenue (M$)
2013		1.93		0.00		0.13		0.00		95.72		0.00		12.83		0.00		0.00
2014		0.54		0.00		0.04		0.00		95.72		0.00		3.60		0.00		0.00

Rem	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total	2.48	0.00	0.17	0.00	95.72	0.00	16.43	0.00	0.00
Ult	15.96	65.65

	Well	Net Tax	Net Tax	Net	Net Lease	Net Well	Other	Net	Annual Cash	Cum Disc. Cash
Year	Count	Production	AdValorem	Investment	Costs	Costs	Costs	Profits	Flow	Flow
		(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)	(M$)
2013	1.00	0.59	0.00	0.00	9.41	0.00	0.00	0.00	2.84	2.73
2014	1.00	0.17	0.00	0.00	3.24	0.00	0.00	0.00	0.20	2.91
Rem.		0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Total		0.76	0.00	0.00	12.64	0.00	0.00	0.00	3.03	2.91

 

8

XML

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Capitalized Costs Relating to Oil and Gas Producing Activities
Unproved oil and gas properties
Proved oil and gas properties	776,540	572,458
Less accumulated depreciation, depletion amortization, and impairment	(436,487)	(416,420)
Net capitalized costs	$ 340,053	$ 156,038

XML

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Net income (loss) from operations	$ 816,410	$ 257,114
Less preferred stock dividends	0	0
Income (loss) available to common stockholders	$ 816,410	$ 257,114
Weighted average shares outstanding, basic	862,034	290,176
Assumed exercise of stock options	12,732	0
Weighted average shares outstanding, diluted	874,766	290,176

XML

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Supplemental Information On Oil Gas Details
Beginning of year	$ 69,860	$ 41,611
Sales of oil and gas produced, net of production costs	(104,569)	(86,334)
Net changes in prices and production costs	(18,235)	(45,608)
Extensions, discoveries, and improved recovery, less related costs	651,414	152,927
Development costs incurred during the year which were previously estimated
Net change in estimated future development costs		(480)
Revisions of previous quantity estimates
Net change from purchases and sales of minerals in place		7,744
Accretion of discount	(53,760)
Net change in income taxes
Other
End of year	$ 544,710	$ 69,860

XML

3. OIL AND GAS PROPERTIES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 3 - OIL AND GAS PROPERTIES

Oil and gas properties, stated at cost, consisted of the following:

	December 31
	2012			2011
Proved oil and gas properties	$	776,540		$	572,458
Total oil and gas properties		776,540			572,458
Less accumulated depletion and amortization		(436,487	)		(416,420	)
Less impairment		–			–
Net oil and gas properties	$	340,053		$	156,038

Depletion, depreciation, and amortization expense was $68,689 and $101,906 during the years ended 2012 and 2011, respectively. The decrease of $33,217 was due mainly to the fact that the wells producing in 2011 produced very little in 2012 and the wells that began production in 2012 were had very little production according to their respective anticipated life of the well.

During 2012 and 2011, the Company provided for abandonment and dry hole costs of $128,344 and $35,035, respectively. The large increase is due to the fact that six wells that produced in 2011 dried up and were abandoned in 2012. The 2011 amount represents charges for the same well that were not invoiced until 2011, in the amount of $23,705 and a dry hole drilled by one of the partnerships in the amount of $11,330.

XML

5. INCOME TAXES (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Income tax expense computed at the statutory rate, Amount	$ 288,756	$ 87,419
State and local income taxes, net of federal tax effect, Amount		10,285
Adjustment for book to tax changes, Amount	115,089
Permanent items, Amount		10,317
Valuation allowance decrease, Amount	(370,973)	(87,387)
Income tax expense, Amount	$ 32,872
Income tax expense computed at the statutory rate	34.00%	34.00%
Increase (reduction) in tax benefit resulting from:
State and local income taxes, net of federal tax effect		4.00%
Adjustment for book to tax changes	6.00%	0.00%
Permanent items	0.00%	0.00%
Valuation allowance decrease	(38.00%)	(38.00%)
Income tax expense

XML

5. INCOME TAXES (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Net operating loss carry forward	$ 2,469,932	$ 2,781,864
Well Costs	(6,075)	(6,075)
Partnership differences	(160,330)	(101,289)
Valuation allowance	(2,303,527)	(2,674,500)
Net deferred tax liability

XML

7. STOCKHOLDERS' EQUITY (Details) (USD $)	12 Months Ended
	Dec. 31, 2012
Notes to Financial Statements
Estimated Fair Value, Minimum	$ 0.014
Estimated Fair Value, maximum	$ 0.048
Expected Life	10 years
Risk Free Interest Rate, Minimum	1.09%
Risk Free Interest Rate, Maximum	5.00%
Volatility, Minimum	100.00%
Volatility, Maximum	303.00%
Dividend Yield

XML

7. STOCKHOLDERS' EQUITY (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012
Number of Weighted Average
Options at December 31, 2011	25,000
Options expired or cancelled in 2012	(10,000)
Options exercised in 2012
Options issued 2012
Options at December 31, 2012	15,000
Options exercisable at December 31, 2012	15,000
Options Exercise Price
Options at December 31, 2011	$ 1.8
Options expired or cancelled in 2012	$ (3.00)
Options exercised in 2012
Options issued 2012
Options at December 31, 2012	$ 1
Options exercisable at December 31, 2012	$ 1

XML

2. RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 2 - RELATED PARTY TRANSACTIONS

A. Common Stock Transactions

As of December 31, 2012, there are 990,176 shares of common stock issued and outstanding. Of all the stockholders of record two entities own 5% or more, Stephen C. Larkin owns 27.3% and Robert and Doris Burr own 29.8%.

B. Payables and Notes Payable to Related Parties

As of December 31, 2012 and December 31, 2011, the Company had the following debts and obligations to related parties:

	2012		2011
Accounts payable to minority stockholder for operating capital	$	84,906	$	84,906
Note payable to minority stockholder		100,000		100,000
Total Payable and Note Payable to Related Parties	$	184,906	$	184,906

During the second and third quarters of 2007, the Company received $84,906 from a minority shareholder. No documents were executed to document the terms of advances. These advances are classified as a current liability on the Company’s consolidated balance sheet at December 31, 2012 and 2011.

During the fourth quarter of 2007, Peter Chen, a minority stockholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a promissory note on October 4, 2007; the note is due on demand, unsecured and bears an interest rate of 0%. The Company charges interest at 8.0% or $8,000 and records it as interest expense and additional paid in capital.

The Company also has accounts payable to Blue Ridge Group of $530,611 for their interest in the purchasing of three wells for the 2012-A Bayou City Drilling Program, L.P.

C. Receivables from Related Parties

As of December 31, 2012, the Company has a receivable from their managed limited partnerships in the amount of $104,167 for billed turnkey fees that have not been received. All fees were received in the first quarter of 2013.

D. Non-Employee Compensation

While serving on the Company’s Board of Directors, Kevin Cline was paid $27,375 in non-employee compensation related to fees earned by Source Capital in connection with the Company’s offerings.

XML

8. FAIR VALUE ESTIMATES (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Options		$ 11,008
Quoted Active Markets for Identical Assets Level 1 [Member]
Options
Significant Other Observable Inputs Level 2 [Member]
Options		11,008
Significant Unobservable Inputs Level 3 [Member]
Options

XML

BALANCE SHEETS (USD $)	Dec. 31, 2012	Dec. 31, 2011
CURRENT ASSETS:
Cash	$ 2,087,480	$ 1,259,934
Accounts receivable:
Trade and other	60,790	13,778
Receivable due from partnerships	104,167
Prepaid expenses and other	117,142	504,428
TOTAL CURRENT ASSETS	2,369,579	1,778,140
OIL AND GAS PROPERTIES, NET	340,053	156,038
OTHER FIXED ASSETS, NET	19,680	25,047
OTHER INVESTMENTS AT COST	126,128	69,111
INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY	150,099
INVESTMENTS HELD FOR SALE	190,000	190,000
TOTAL ASSETS	3,195,539	2,218,336
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses	53,953	154,705
Accounts payable - minority shareholder	84,906	84,906
Net turnkey partnership obligation	582,746	1,242,509
Accounts payable - related party	530,611
Notes payable - minority shareholders	100,000	100,000
Federal income taxes payable	32,697
TOTAL CURRENT LIABILITIES	1,384,913	1,582,120
TOTAL LIABILITIES	1,384,913	1,582,120
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; No shares issued and outstanding as of December 31, 2012 and December 30, 2011
Common stock, $0.005 par value; 150,000,000 shares authorized; 990,176 and 290,176 shares issued and outstanding at December 31, 2012 and 2011, respectively	4,951	1,451
Additional paid in capital	13,912,814	13,558,314
Accumulated deficit	(12,107,139)	(12,923,549)
TOTAL STOCKHOLDERS' EQUITY	1,810,626	636,216
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 3,195,539	$ 2,218,336

XML

STATEMENTS OF CASH FLOWS (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)	$ 816,410	$ 257,114
Adjustments to reconcile net income to net cash flows used in operating activities:
Depreciation, depletion, and amortization	68,689	101,906
Interest contributed as capital by shareholder	8,000	8,000
Abandonments and dry holes	128,344
Equity in earnings of affiliated company	(150,099)
Stock issued for services	22,500
Stock option expense		11,008
Change in operating assets and liabilities:
Accounts receivable - trade	(47,012)	6,340
Receivable from partnerships	(104,167)
Prepaid expenses and other	387,286
Accounts payable and accrued liabilities	(100,752)	67,514
Net turnkey partnership obligation	(659,763)	743,601
Accounts payable--related party	530,611
Federal income tax payable	32,697
NET CASH PROVIDED BY OPERATING ACTIVITIES	932,744	1,195,483
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties	(375,681)	(402,210)
Purchase of other fixed assets		(25,047)
Purchase of investments in BYCX opportunity fund	(57,017)
NET CASH USED IN INVESTING ACTIVITIES	(432,698)	(427,257)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock	327,500
NET CASH PROVIDED BY FINANCING ACTIVITIES	327,500
NET INCREASE IN CASH	827,546	768,226
CASH AT BEGINNING OF YEAR	1,259,934	491,708
CASH AT END OF YEAR	2,087,480	1,259,934
Cash paid for interest
Cash paid for federal income taxes

XML

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Details 2)	12 Months Ended
	Dec. 31, 2012
Oil bbls [Member]
Beginning of year	640
Extensions and discoveries	6,051
Production	(1,291)
End of Year	5,400
Proved developed reserves Beginning of year	640
Proved developed reserves End of Year	5,400
Gas mcf [Member]
Beginning of year	12,975
Extensions and discoveries	65,993
Production	(10,788)
End of Year	68,180
Proved developed reserves Beginning of year	12,975
Proved developed reserves End of Year	68,180

XML

7. STOCKHOLDERS' EQUITY (Tables)

12 Months Ended

Dec. 31, 2012

Stockholders Equity Tables

Stock based compensation expense

The stock based compensation was valued using the Black-Scholes pricing model using the following assumptions:

Estimated Fair Value	$0.014  -  $0.048
Expected Life	10 years
Risk Free Interest Rate	1.09%  -  5.00%
Volatility	100%  -  303%
Dividend Yield	–

Stock option activity

The following table provides a summary of the stock option activity for all options for the year ended December 31, 2012.

	Number of Weighted Average			Options Exercise Price
Options at December 31, 2011	25,000		$	1.80
Options expired or cancelled in 2012	(10,000	)		(3.00	)
Options exercised in 2012	–			–
Options issued 2012	–			–
Options at December 31, 2012	15,000			1.00
Options exercisable at December 31, 2012	15,000		$	1.00

XML

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Details 3) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Supplemental Information On Oil Gas Details
Future cash inflows	$ 811,670	$ 114,540
Future production costs	(199,430)	(39,910)
Future development costs
Future income tax expenses
Net Cash Flows at December 31, 2012 and 2011	612,240	74,630
Future net cash flows 10% annual discount for estimated timing of cash flows	(67,530)	(13,770)
Standardized Measures of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves	$ 544,710	$ 60,860

XML

10. SUPPLEMENTAL INFORMATION ON OIL & GAS (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2012

Supplemental Information On Oil Gas Tables

Capitalized Costs Relating to Oil and Gas

Capitalized Costs Relating to Oil and Gas	December 31,			December 31,
Producing Activities	2012			2011
Unproved oil and gas properties	$	–		$	–
Proved oil and gas properties		776,540			572,458
Less accumulated depreciation, depletion amortization, and impairment		(436,487	)		(416,420	)
Net capitalized costs	$	340,053		$	156,038
Costs incurred in Oil and Gas Producing Activities
For the years ended
Property acquisition costs
Proved	$	212,560		$	51,437
Unproved		163,121			350,773
Exploration costs		–			–
Development costs		–			–
Amortization rate per equivalent barrel of production	$	36.12		$	41.65
Results of Operation for Oil and Gas Producing
Activities for the years ended
Oil and gas sales	$	180,096		$	133,354
Gain on drilling program		1,754,144			1,249,997
Gain on sale of oil and gas properties		–			–
Impairment, abandonment, and dry hole costs		(128,344	)		(35,035	)
Production costs		(75,527	)		(47,021	)
Depreciation, depletion and amortization		(68,689	)		(101,906	)
		1,661,680			1,199,389
Income tax expense		–			–
Results of operations for oil and gas producing Activities (excluding corporate overhead and Financing costs)	$	1,661,680		$	1,199,389

Estimated proved oil and gas reserves

The following table sets forth estimated proved oil and gas reserves together with the changes therein for the year ended December 31, 2012:

	Oil  (bbls)			Gas  (mcf)
Proved developed and undeveloped reserves
Beginning of year		640			12,975
Revisions of previous estimates		–			–
Improved recovery		–			–
Purchases of minerals in place		–			–
Extensions and discoveries		6,051			65,993
Production		(1,291	)		(10,788	)
Sales		–			–
End of Year		5,400			68,180
Proved developed reserves
Beginning of year		640			12,975
End of Year		5,400			68,180
Standardized measure of Discounted Future
Net Cash Flows at December 31, 2012 and 2011		2012			2011
Future cash inflows	$	811,670		$	114,540
Future production costs		(199,430	)		(39,910	)
Future development costs		–			–
Future income tax expenses		–			–
		612,240			74,630
Future net cash flows  10% annual discount for estimated timing of cash flows		(67,530	)		(13,770	)
Standardized Measures of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves	$	544,710		$	60,860

Change in standardized measure of discounted future net cash flow

The following reconciles the change in the standardized measure of discounted future net cash flow during 2012 and 2011:

	2012			2011
Beginning of year	$	69,860			41,611
Sales of oil and gas produced, net of production costs		(104,569	)		(86,334	)
Net changes in prices and production costs		(18,235	)		(45,608	)
Extensions, discoveries, and improved recovery, less related costs		651,414			152,927
Development costs incurred during the year which were previously estimated		–			–
Net change in estimated future development costs		–			(480	)
Revisions of previous quantity estimates		–			–
Net change from purchases and sales of minerals in place		–			7,744
Accretion of discount		(53,760	)		–
Net change in income taxes		–			–
Other		–			–
End of year	$	544,710			69,860

XML

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Bayou City Exploration, Inc., a Nevada corporation (the “Company”), was organized in November 1994, as Gem Source, Incorporated and in June 1996 changed the Company’s name to Blue Ridge Energy, Inc. On June 8, 2005, the Company again changed its name to Bayou City Exploration, Inc.

The Company is primarily engaged in the oil and gas exploration business, and focuses its operations in the gulf coast of Texas, east Texas, south Texas, and Louisiana.

The Company also serves as the Managing Member and Investment Manager of funds organized as limited liability companies to acquire portfolios of mortgage notes and land contracts secured by real estate (the “Mortgage Notes and Land Contracts”). Nevertheless, most of its business resources are focused upon the management of partnerships created to explore and develop oil and gas reserves. The Company manages partnerships that purchase interests in exploratory wells and/or interests in producing oil and gas properties with undrilled reserves. The Company’s growth strategy is based on sponsoring partnerships in which third party investors purchase an interest. These partnerships then assume the costs associated with the drilling of oil and gas wells in exchange for unit interests in a partnership that holds a portion of the working interest derived from the wells they finance. The Company acts as the Managing General Partner for these partnerships and typically maintains a partnership interest in such partnerships, but may also maintain a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project and subsequent operating expenses to the extent that we retain a portion of the working interest. The Company believes this strategy allows for a reduction of financial risk associated with drilling new wells, enabling us to earn income from present production in addition to income from any successful new drilling. As of December 31, 2012, the Company held interest in eight partnerships.

Oil and Gas Drilling Partnerships and Properties

When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the project well(s). The Company then forms and sells interest in a partnership that will acquire working interest in the well and undertake drilling operations. The Company typically enters into turnkey contracts with the partnerships it manages, pursuant to which we agree to undertake the drilling and completion of the partnerships’ well(s), for a fixed price, to a specific formation or depth (each, a “Turnkey Agreement”). As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells which the Company records as revenue.

As of December 31, 2012, the Company 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 Agreements with each of these partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).

In addition to our current business strategy described above, the Company also owns an interest in Affiliated Partners and manages certain Opportunity Funds (described below) in addition to certain oil and gas interests outside of the interests in the partnerships it sponsors that have developed into revenue producing properties as well as an interest in a lease development joint venture to develop properties located in the Illinois Basin. The Company uses the cash generated by these oil and gas interests in addition to the revenues from our direct investment partnerships to cover its ongoing operational needs and restructuring of the balance sheet.

The Opportunity Funds 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, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other 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 VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established February 2013, both of which are also Delaware limited liability company that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

Recent accounting pronouncements

During the year ended December 31, 2012 and through April 11, 2013, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

Consolidation Policy

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.

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 produced and sold during the reporting period but awaiting cash payment. Based upon a review of trade receivables as of December 31, 2012 and 2011, there were no receivables considered potentially uncollectible. Receivables are reviewed quarterly, and if any are deemed uncollectible, they are written off as bad debts.

Managed Limited Partnerships

Prior to 2004 and starting again in 2010, the Company managed limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of the limited partnerships as the Managing General Partner and accounts for the investment under the proportionate consolidation. Certain partnerships that have an interest in the Opportunity Fund, like the 2012 Bayou City Year End Drilling Program L.P., the Company has chosen to participate for the required 1%. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively. As of December 31, 2012, the Company held interest in eight partnerships.

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 units 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 exploration wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If after a year has passed, and the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired, and its costs are charged to expense. At December 31, 2012 and 2011, the Company had no capitalized costs pending determination.

Accounting for Asset Retirement Obligations

The Company follows the provisions of FASB ASC 410, Asset Retirement and Environmental Obligations. ASC 410 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Prior to 2005, management determined that any future costs related to plugging and abandonment of producing wells would be substantially offset by the value of equipment removed from the well site and such estimates were immaterial to the financial statements. Therefore, no liability was recorded prior to 2005. Due to continued rising rig and fuel costs, a detailed estimate was made in the second quarter of 2005 to determine how these rising service costs would affect future plugging and abandonment costs. As a result of this analysis, management concluded that a liability should be recorded within the financial statements under the provisions of ASC 410. These costs are evaluated annually and adjusted accordingly under the guidelines of ASC 410. As of December 31, 2012 the Company had no liability established for any of its wells that are currently in production as these amounts have been determined to be immaterial.

Surrender or Abandonment of Developed Properties

Normally, no separate gain or loss is recognized if only an individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortization base is abandoned or retired as long as the remainder of the property or group of properties continues to produce oil or gas. The asset being abandoned or retired is deemed to be fully amortized, and its cost is charged to accumulated depreciation, depletion or amortization. When the last well on an individual property or group of properties with common geological structures ceases to produce and the entire property or property group is abandoned, gain or loss, if any, is recognized. Abandonment and dry hole costs were $128,344 and $35,035 for the years ended December 31, 2012 and 2011, respectively.

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, “Extractive Activities – Oil and Gas – Notes to Financial Statements.”

Income (Loss) Per Common Share

The Company calculates basic earnings per common share (“Basic EPS”) using the weighted average number of common shares outstanding for the period.

The following table provides the numerators and denominators used in the calculation of Basic EPS for the years ended December 31, 2012 and 2011:

	2012		2011
Net income (loss) from operations	$	816,410	$	257,114
Less preferred stock dividends		-0-		-0-
Income (loss) available to common stockholders	$	816,410	$	257,114
Weighted average shares outstanding, basic		862,034		290,176
Assumed exercise of stock options		12,732		-0-
Weighted average shares outstanding, diluted		874,766		290,176

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with FASB ASC 505, “Equity,” and FASB ASC 718, “Compensation – Stock Compensation.” Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under ASC 718 and 505, the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

For purposes of the statements of cash flows, cash includes demand deposits, time deposits and short-term liquid investments with an original maturity of three months or less when purchased.  At December 31, 2012 and 2011, the Company had no such investments included in cash.  The Company maintains deposits in two financial institutions.  Beginning January 1, 2013, the Federal Deposit Insurance Corporation (FDIC) provides insurance coverage of $250,000 per depositor per bank, no longer insuring non-interest bearing transaction accounts separately from other accounts.  Based on the FDIC coverage in effect at January 1, 2013, approximately $1,046,000 of the Company’s cash at December 31, 2012 was in excess of federally insured limits.The Company has not experienced any losses in such accounts and does not believe that the Company is exposed to significant risks from excess deposits.

Marketing

During the years ended December 31, 2012 and 2011, marketing costs, which are expensed as incurred, totaled $223,574 and $297,911, respectively.

Income Taxes

There was no provision for income taxes for the year ended December 31, 2011 but there was $32,872 in federal and state income taxes to be paid in 2012 The Company had an estimated net operating loss carry forward of approximately $7,265,000 and $8,004,000 as of December, 31, 2012 and 2011, respectively.  However, the Company had an ownership change in March, 2012 with the issuance of additional shares in a private placement transaction.  This resulted in an Internal Revenue Code (IRC) Section 382 limitation on the availability of the Company’s net operating losses immediately before the ownership change to operational periods following the date of the ownership change.  The Section 382 limitation rule will limit the use of the Company’s current net operating loss carry forward to $30,193 per year in future years.  This annual limitation was allocated in the year 2012 to the period following the change date and resulted in net operating losses available for the time period of April – December, 2012 being limited to $22,645 and the above tax liability for 2012 of $32,872. Income taxes are provided for under the liability method in accordance with ASC 740 “Accounting for Income Taxes,” which takes into account the differences between financial statement treatment and tax treatment of certain transactions. It is uncertain as to whether the Company will generate sufficient future taxable income to utilize the net deferred tax assets, therefore for financial reporting purposes, a valuation allowance of $2,303,527 and $2,674,500 has been recognized to offset the net deferred tax assets at December 31, 2012 and December 31, 2011, respectively.

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 purchases of Mortgages Notes and Land 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 year ended December 31, 2012, the Company recognized income of $150,099 from its Affiliated Partners interest based upon the equity method of accounting.

Investments at Cost

The Company holds an interest in the BYCX Opportunity Fund I and the Opportunity Fund VII through their position as managing general partner for some of their limited partnerships. The investment accounts for these investments on a cost basis for which the Company will receive quarterly interest income. As of December 31, 2012, the Company had $126,128 invested in the Opportunity Funds collectively.

Assets Held for Sale

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 0.005% of the joint venture. 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. As of December 31, 2012 the investment remains valued at $190,000, even though the Company was unable to estimate the fair market value.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

Reclassifications

Certain accounts in prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.

XML

BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Balance Sheets Parenthetical
Preferred stock par value	$ 0.001	$ 0.001
Preferred stock shares authorized	5,000,000	5,000,000
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0
Common stock par value	$ 0.005	$ 0.005
Common stock shares authorized	150,000,000	150,000,000
Common stock shares issued	990,176	290,176
Common stock shares outstanding	990,176	290,176

XML

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2012

Operations And Summary Of Significant Accounting Policies Policies

General

Bayou City Exploration, Inc., a Nevada corporation (the “Company”), was organized in November 1994, as Gem Source, Incorporated and in June 1996 changed the Company’s name to Blue Ridge Energy, Inc. On June 8, 2005, the Company again changed its name to Bayou City Exploration, Inc.

The Company is primarily engaged in the oil and gas exploration business, and focuses its operations in the gulf coast of Texas, east Texas, south Texas, and Louisiana.

The Company also serves as the Managing Member and Investment Manager of funds organized as limited liability companies to acquire portfolios of mortgage notes and land contracts secured by real estate (the “Mortgage Notes and Land Contracts”). Nevertheless, most of its business resources are focused upon the management of partnerships created to explore and develop oil and gas reserves. The Company manages partnerships that purchase interests in exploratory wells and/or interests in producing oil and gas properties with undrilled reserves. The Company’s growth strategy is based on sponsoring partnerships in which third party investors purchase an interest. These partnerships then assume the costs associated with the drilling of oil and gas wells in exchange for unit interests in a partnership that holds a portion of the working interest derived from the wells they finance. The Company acts as the Managing General Partner for these partnerships and typically maintains a partnership interest in such partnerships, but may also maintain a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project and subsequent operating expenses to the extent that we retain a portion of the working interest. The Company believes this strategy allows for a reduction of financial risk associated with drilling new wells, enabling us to earn income from present production in addition to income from any successful new drilling. As of December 31, 2012, the Company held interest in eight partnerships.

Oil and Gas Drilling Partnerships and Properties

When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the project well(s). The Company then forms and sells interest in a partnership that will acquire working interest in the well and undertake drilling operations. The Company typically enters into turnkey contracts with the partnerships it manages, pursuant to which we agree to undertake the drilling and completion of the partnerships’ well(s), for a fixed price, to a specific formation or depth (each, a “Turnkey Agreement”). As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells which the Company records as revenue.

As of December 31, 2012, the Company 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 Agreements with each of these partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).

In addition to our current business strategy described above, the Company also owns an interest in Affiliated Partners and manages certain Opportunity Funds (described below) in addition to certain oil and gas interests outside of the interests in the partnerships it sponsors that have developed into revenue producing properties as well as an interest in a lease development joint venture to develop properties located in the Illinois Basin. The Company uses the cash generated by these oil and gas interests in addition to the revenues from our direct investment partnerships to cover its ongoing operational needs and restructuring of the balance sheet.

The Opportunity Funds 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, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other 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 VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established February 2013, both of which are also Delaware limited liability company that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

Recent accounting pronouncements

During the year ended December 31, 2012 and through April 11, 2013, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

Consolidation Policy

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.

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 produced and sold during the reporting period but awaiting cash payment. Based upon a review of trade receivables as of December 31, 2012 and 2011, there were no receivables considered potentially uncollectible. Receivables are reviewed quarterly, and if any are deemed uncollectible, they are written off as bad debts.

Managed Limited Partnerships

Prior to 2004 and starting again in 2010, the Company managed limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of the limited partnerships as the Managing General Partner and accounts for the investment under the proportionate consolidation. Certain partnerships that have an interest in the Opportunity Fund, like the 2012 Bayou City Year End Drilling Program L.P., the Company has chosen to participate for the required 1%. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively. As of December 31, 2012, the Company held interest in eight partnerships.

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 units 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 exploration wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If after a year has passed, and the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired, and its costs are charged to expense. At December 31, 2012 and 2011, the Company had no capitalized costs pending determination.

Accounting for Asset Retirement Obligations

The Company follows the provisions of FASB ASC 410, Asset Retirement and Environmental Obligations. ASC 410 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Prior to 2005, management determined that any future costs related to plugging and abandonment of producing wells would be substantially offset by the value of equipment removed from the well site and such estimates were immaterial to the financial statements. Therefore, no liability was recorded prior to 2005. Due to continued rising rig and fuel costs, a detailed estimate was made in the second quarter of 2005 to determine how these rising service costs would affect future plugging and abandonment costs. As a result of this analysis, management concluded that a liability should be recorded within the financial statements under the provisions of ASC 410. These costs are evaluated annually and adjusted accordingly under the guidelines of ASC 410. As of December 31, 2012 the Company had no liability established for any of its wells that are currently in production as these amounts have been determined to be immaterial.

Surrender or Abandonment of Developed Properties

Normally, no separate gain or loss is recognized if only an individual item of equipment is abandoned or retired or if only a single lease or other part of a group of proved properties constituting the amortization base is abandoned or retired as long as the remainder of the property or group of properties continues to produce oil or gas. The asset being abandoned or retired is deemed to be fully amortized, and its cost is charged to accumulated depreciation, depletion or amortization. When the last well on an individual property or group of properties with common geological structures ceases to produce and the entire property or property group is abandoned, gain or loss, if any, is recognized. Abandonment and dry hole costs were $128,344 and $35,035 for the years ended December 31, 2012 and 2011, respectively.

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, “Extractive Activities – Oil and Gas – Notes to Financial Statements.”

Income (Loss) Per Common Share

The Company calculates basic earnings per common share (“Basic EPS”) using the weighted average number of common shares outstanding for the period.

The following table provides the numerators and denominators used in the calculation of Basic EPS for the years ended December 31, 2012 and 2011:

	2012		2011
Net income (loss) from operations	$	816,410	$	257,114
Less preferred stock dividends		-0-		-0-
Income (loss) available to common stockholders	$	816,410	$	257,114
Weighted average shares outstanding, basic		862,034		290,176
Assumed exercise of stock options		12,732		-0-
Weighted average shares outstanding, diluted		874,766		290,176

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with FASB ASC 505, “Equity,” and FASB ASC 718, “Compensation – Stock Compensation.” Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under ASC 718 and 505, the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

For purposes of the statements of cash flows, cash includes demand deposits, time deposits and short-term liquid investments with an original maturity of three months or less when purchased.  At December 31, 2012 and 2011, the Company had no such investments included in cash.  The Company maintains deposits in two financial institutions.  Beginning January 1, 2013, the Federal Deposit Insurance Corporation (FDIC) provides insurance coverage of $250,000 per depositor per bank, no longer insuring non-interest bearing transaction accounts separately from other accounts.  Based on the FDIC coverage in effect at January 1, 2013, approximately $1,046,000 of the Company’s cash at December 31, 2012 was in excess of federally insured limits.The Company has not experienced any losses in such accounts and does not believe that the Company is exposed to significant risks from excess deposits.

Marketing

During the years ended December 31, 2012 and 2011, marketing costs, which are expensed as incurred, totaled $223,574 and $297,911, respectively.

Income Taxes

There was no provision for income taxes for the year ended December 31, 2011 but there was $32,872 in federal and state income taxes to be paid in 2012 The Company had an estimated net operating loss carry forward of approximately $7,265,000 and $8,004,000 as of December, 31, 2012 and 2011, respectively.  However, the Company had an ownership change in March, 2012 with the issuance of additional shares in a private placement transaction.  This resulted in an Internal Revenue Code (IRC) Section 382 limitation on the availability of the Company’s net operating losses immediately before the ownership change to operational periods following the date of the ownership change.  The Section 382 limitation rule will limit the use of the Company’s current net operating loss carry forward to $30,193 per year in future years.  This annual limitation was allocated in the year 2012 to the period following the change date and resulted in net operating losses available for the time period of April – December, 2012 being limited to $22,645 and the above tax liability for 2012 of $32,872. Income taxes are provided for under the liability method in accordance with ASC 740 “Accounting for Income Taxes,” which takes into account the differences between financial statement treatment and tax treatment of certain transactions. It is uncertain as to whether the Company will generate sufficient future taxable income to utilize the net deferred tax assets, therefore for financial reporting purposes, a valuation allowance of $2,303,527 and $2,674,500 has been recognized to offset the net deferred tax assets at December 31, 2012 and December 31, 2011, respectively.

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 purchases of Mortgages Notes and Land 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 year ended December 31, 2012, the Company recognized income of $150,099 from its Affiliated Partners interest based upon the equity method of accounting.

Investments at Cost

The Company holds an interest in the BYCX Opportunity Fund I and the Opportunity Fund VII through their position as managing general partner for some of their limited partnerships. The investment accounts for these investments on a cost basis for which the Company will receive quarterly interest income. As of December 31, 2012, the Company had $126,128 invested in the Opportunity Funds collectively.

Assets Held for Sale

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 0.005% of the joint venture. 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. As of December 31, 2012 the investment remains valued at $190,000, even though the Company was unable to estimate the fair market value.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

Reclassifications

Certain accounts in prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 21, 2013	Jun. 30, 2012
Document And Entity Information
Entity Registrant Name	BAYOU CITY EXPLORATION, INC.
Entity Central Index Key	0001050957
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 870,129
Entity Common Stock, Shares Outstanding		990,230
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2012

XML

1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2012

Operations And Summary Of Significant Accounting Policies Tables

Basic earnings per common share

The following table provides the numerators and denominators used in the calculation of Basic EPS for the years ended December 31, 2012 and 2011:

	2012		2011
Net income (loss) from operations	$	816,410	$	257,114
Less preferred stock dividends		-0-		-0-
Income (loss) available to common stockholders	$	816,410	$	257,114
Weighted average shares outstanding, basic		862,034		290,176
Assumed exercise of stock options		12,732		-0-
Weighted average shares outstanding, diluted		874,766		290,176

XML

STATEMENTS OF OPERATIONS (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
OPERATING REVENUES:
Oil and gas sales	$ 180,096	$ 133,354
Turnkey drilling contract revenue	3,132,676	1,839,915
TOTAL OPERATING REVENUES	3,312,772	1,973,269
OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes	75,527	47,021
Abandonment and dry hole costs	128,344	35,035
Depreciation, depletion and amortization	68,689	101,906
Turnkey drilling contract costs	1,378,532	589,918
Marketing Costs	223,574	297,911
General and administrative costs	716,124	636,995
TOTAL OPERATING COSTS	2,590,790	1,708,786
OPERATING INCOME	721,982	264,483
OTHER INCOME (EXPENSE):
Miscellaneous income (expense)	(22,799)	(7,369)
Equity in earnings from affiliated company	150,099
NET INCOME BEFORE INCOME TAX PROVISION	849,282	257,114
Income Tax Provision	(32,872)
NET INCOME	$ 816,410	$ 257,114
NET INCOME PER COMMON SHARE - BASIC	$ 0.95	$ 0.89
NET INCOME PER COMMON SHARE - DILUTED	$ 0.93	$ 0.89
Weighted average common shares outstanding -
Basic	862,034	290,176
Diluted	874,766	290,176

XML

6. COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 6 - COMMITMENTS AND CONTINGENCIES

Commitments

The Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

The oil and gas business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. The occurrence of any of these events could result in substantial losses to the Company due to severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. The occurrence of a significant event it could materially and adversely affect our future revenues from any given prospect.

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5. INCOME TAXES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 5 - INCOME TAXES

The tax effect of significant temporary differences representing the net deferred tax liability at December 31, 2012 and 2011 were as follows:

	2012			2011
Net operating loss carry forward	$	2,469,932		$	2,781,864
Well Costs		(6,075	)		(6,075	)
Partnership differences		(160,330	)		(101,289	)
Valuation allowance		(2,303,527	)		(2,674,500	)
Net deferred tax liability	$	–		$	–

The Company recorded $32,872 and $-0- as income tax expense for the years ended December 31, 2012 and 2011, respectively, as a result of net operating losses to offset its taxable income. Further, no income tax benefit has been recognized due to the uncertainty of the Company’s ability to recognize the benefit from the net operating losses and, therefore, has recorded a full valuation allowance against the deferred tax assets.

The income tax expense is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax income as follows:

	2012					2011
Income tax expense computed at the statutory rate	$	288,756		34.0%		$	87,419		34.0%
Increase (reduction) in tax benefit resulting from:
State and local income taxes, net of federal tax effect							10,285		4.0%
Adjustment for book to tax changes		115,089		6.0%			–		(0.0%	)
Permanent items		–		(0.0%	)		10,317		(0.0%	)
Valuation allowance decrease		(370,973	)	(38.0%	)		(87,387	)	(38.0%	)
Income tax expense	$	32,872		–		$	–		–

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8. FAIR VALUE ESTIMATES (Tables)

12 Months Ended

Dec. 31, 2012

Fair Value Estimates Tables

Fair value of options held for sale

The fair value of the options held for sale at December 31, 2012 and 2011, was as follows:

	Quoted Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
Options	(Level 1)		(Level 2)		(Level 3)
2012	$	–	$	–	$	–	$	–
2011	$	–	$	11,008	$	–	$	11,008

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2. RELATED PARTY TRANSACTIONS (Tables)

12 Months Ended

Dec. 31, 2012

Related Party Transactions Tables

Debts and obligations to related parties

As of December 31, 2012 and December 31, 2011, the Company had the following debts and obligations to related parties:

	2012		2011
Accounts payable to minority stockholder for operating capital	$	84,906	$	84,906
Note payable to minority stockholder		100,000		100,000
Total Payable and Note Payable to Related Parties	$	184,906	$	184,906

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9. SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 9 - SUBSEQUENT EVENTS

In May 2009, the FASB issued ASC 855, subsequent events. ASC 855 establishes general standards of accounting for and disclosure of events after the balance sheet date but before financial statements are issued or are available to be issued. The adoption in the fourth quarter of 2009 did not have any material impact on the Company’s financial statements. Accordingly, the Company evaluated subsequent events through the date the financial statements were issued.

Formation of New Opportunity Fund.

Subsequent to the year ended December 31, 2012, the Company has formed and serves as the Manger of a new Delaware limited liability com4pany known as Opportunity Fund VIII, LLC, which was formed on January 8, 2013.

Bonus Payment to Chief Executive Officer

In February 2013, the Company paid Stephen Larkin, its President, Chief Executive Officer and Chief Financial Officer, a bonus of $27,750 (the “2012 Bonus”). The 2012 Bonus was based upon the Company’s performance during the 2012 fiscal year.

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7. STOCKHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 7 - STOCKHOLDERS' EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. On October 8, 2004, a Special Meeting of Stockholders was held requesting the approval of an Amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock from 20,000,000 shares to 150,000,000 shares. The amendment was approved at the Special Meeting of Stockholders. As of December 31, 2012, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as common stock, $0.005 par value, and 5,000,000 shares designated as preferred stock, $0.001 par value.

Issuance of Equity Securities

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 at the time of the Offering, 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 current President, Chief Executive Officer, and 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. The consideration for the Common Stock was paid primarily in cash, however, the shares issued to G2 International, Inc. were issued in exchange for settlement of outstanding invoices for consulting services rendered.

Reverse Stock Split

On July 26, 2012, the Company effected a 1 for 100 reverse stock split of the Company’s Common Stock, resulting in a reduction of the number of shares outstanding of the Company from approximately 99,003,633 to approximately 990,000. At December 31, 2012, the Company had 990,176. Persons holding less than 100 shares of Common Stock received one share of Common Stock. The rights and privileges of the holders of shares of Common Stock were substantially unaffected by the reverse stock split. All issued and outstanding options, warrants and convertible securities were appropriately adjusted for the reverse stock split automatically on the effective date of the reverse stock split, and have been presented in the financial statements to adjust for the reverse stock split.

Stock Options

On February 22, 2005, the Board of Directors adopted the 2005 Plan, the purposes of which are to (i) attract and retain the best available personnel for positions of responsibility within the Company, (ii) provide additional incentives to employees of the Company, (iii) provide directors, consultants and advisors of the Company with an opportunity to acquire a proprietary interest in the Company to encourage their continuance of service to the Company and to provide such persons with incentives and rewards for superior performance more directly linked to the profitability of the Company’s business and increases in stockholder value, and (iv) generally to promote the success of the Company’s business and the interests of the Company and all of its stockholders, through the grant of options to purchase shares of the Company’s Common Stock and other incentives. Subject to adjustments upon changes in capitalization or merger, the maximum aggregate number of shares which may be optioned and sold or otherwise awarded under the 2005 Plan is seven million (70,000) common shares. The Board of Directors administers the 2005 Plan. Generally, awards of options under the 2005 plan vest immediately or on a graded basis over a 5 year term. The maximum contractual period of options granted is 10 years. The 2005 Plan will terminate on February 22, 2015. As of December 31, 2012, approximately 21,500 shares are available for grant. Issuance of common stock from the exercise of stock options will be made with new shares from authorized shares of the Company.

In 2009, the Board of Directors decided that with the current stock options strike price compared to the current market price, that the outstanding options were simply not an incentive anymore to the current employees and directors. Therefore, in May of 2009 the Company decided to cancel the outstanding options to the current employees and directors and issue new ones. As a result, the Company cancelled 29,688 options and issued 60,000 options to its current employees, directors and key consultants and advisors of the Company and expensed $71,000 in relation to issuance of these options. All options were issued at the strike price of $1.00, with varying vesting terms. In 2010, there were 5,000 shares issued to Mr. Bukowski at $5.00 strike price and 17,500 options expired. All options granted have a ten year term. In 2012 the Company had 5,000 options expire as Mr. Bukowski did not exercise his options after he resigned from the Company.

At December 31, 2012 there were options, fully vested and expected to vest, to purchase 15,000 shares with a weighted average exercise price of $1.00 having an intrinsic value of $15,000 and a weighted contractual term of 6.4 years. At December 31, 2011, there were options to purchase 25,000 shares with a weighted average exercise price of $1.80, an intrinsic value of $45,000 and a weighted average contractual term of 8.2 years.

For the years ended December 31, 2012 and 2011 there was $0 and $11,008 stock based compensation expense, respectively. The stock based compensation was valued using the Black-Scholes pricing model using the following assumptions:

Estimated Fair Value	$0.014  -  $0.048
Expected Life	10 years
Risk Free Interest Rate	1.09%  -  5.00%
Volatility	100%  -  303%
Dividend Yield	–

When calculating stock-based compensation expense the Company must estimate the percentage of non-vested stock options that will be forfeited due to normal employee turnover. Since its adoption of ASC 718 and 505 on January 1, 2006, the Company initially used a forfeiture rate of 20% and increased its forfeiture rate to 50% during the third quarter 2006. This was due to the Company experiencing a number of resignations of senior management personnel, each of whom had been awarded options which, in many cases, had not vested and therefore will be forfeited. In the future the Company will use an appropriate estimate for the forfeiture rate at the time options are being granted.

The following table provides a summary of the stock option activity for all options for the year ended December 31, 2012.

	Number of Weighted Average			Options Exercise Price
Options at December 31, 2011	25,000		$	1.80
Options expired or cancelled in 2012	(10,000	)		(3.00	)
Options exercised in 2012	–			–
Options issued 2012	–			–
Options at December 31, 2012	15,000			1.00
Options exercisable at December 31, 2012	15,000		$	1.00

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8. FAIR VALUE ESTIMATES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 8 - FAIR VALUE ESTIMATES

In February 2007 the FASB issued ASC 820 “Fair Value Measurements and Disclosures”. The objective of ASC 820 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.

The Company measures its options at fair value in accordance with ASC 820. ASC 820 specifies a valuation hierarchy based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when estimating fair value. The fair value of the options held for sale at December 31, 2012 and 2011, was as follows:

	Quoted Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
Options	(Level 1)		(Level 2)		(Level 3)
2012	$	–	$	–	$	–	$	–
2011	$	–	$	11,008	$	–	$	11,008

The Provisions of ASC 820 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. Options were valued using the Black-Scholes model.

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10. SUPPLEMENTAL INFORMATION ON OIL & GAS (UNAUDITED)

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Oil and Gas Properties

Capitalized Costs Relating to Oil and Gas	December 31,			December 31,
Producing Activities	2012			2011
Unproved oil and gas properties	$	–		$	–
Proved oil and gas properties		776,540			572,458
Less accumulated depreciation, depletion amortization, and impairment		(436,487	)		(416,420	)
Net capitalized costs	$	340,053		$	156,038
Costs incurred in Oil and Gas Producing Activities
For the years ended
Property acquisition costs
Proved	$	212,560		$	51,437
Unproved		163,121			350,773
Exploration costs		–			–
Development costs		–			–
Amortization rate per equivalent barrel of production	$	36.12		$	41.65
Results of Operation for Oil and Gas Producing
Activities for the years ended
Oil and gas sales	$	180,096		$	133,354
Gain on drilling program		1,754,144			1,249,997
Gain on sale of oil and gas properties		–			–
Impairment, abandonment, and dry hole costs		(128,344	)		(35,035	)
Production costs		(75,527	)		(47,021	)
Depreciation, depletion and amortization		(68,689	)		(101,906	)
		1,661,680			1,199,389
Income tax expense		–			–
Results of operations for oil and gas producing Activities (excluding corporate overhead and Financing costs)	$	1,661,680		$	1,199,389

Reserve Information

The estimates of proved oil and gas reserves utilized in the preparation of the financial statements were prepared by independent petroleum engineers. Such estimates are in accordance with guidelines established by the SEC and the FASB. All of our reserves are located in the United States.

In 2009, the SEC issued its final rule on the modernization of oil and gas reporting, and the FASB adopted conforming changes to ASC Topic 932, “Extractive Industries”, to align the FASB’s reserves requirements with those of the SEC. The final rule is now in effect for companies with fiscal years ending on or after December 31, 2009.

As it affects our reserve estimates and disclosures, the final rule:

· amends the definition of proved reserves to require the use of average commodity prices based upon the prior 12-month period rather than year-end prices (Oil - $94.71 Bbls; Gas – $2.849 Mcf for year ended December 31, 2012);

· expands the type of technologies available to establish reserve estimates and categories;

· modifies certain definitions used in estimating proved reserves;

· permits disclosure of probable and possible reserves;

· requires disclosure of internal controls over reserve estimations and the qualifications of technical persons primarily responsible for the preparation or audit of reserve estimates;

· permits disclosure of reserves based on different price and cost criteria, such as futures prices or management forecasts; and

· requires disclosure of material changes in proved undeveloped reserves, including a discussion of investments and progress made to convert proved undeveloped reserves to proved developed reserves

We emphasize that reserve estimates are inherently imprecise. Accordingly, the estimates are expected to change as more current information becomes available. In addition, a portion of our proved reserves are classified as proved developed nonproducing and proved undeveloped, which increases the imprecision inherent in estimating reserves which may ultimately be produced.

The following table sets forth estimated proved oil and gas reserves together with the changes therein for the year ended December 31, 2012:

	Oil  (bbls)			Gas  (mcf)
Proved developed and undeveloped reserves
Beginning of year		640			12,975
Revisions of previous estimates		–			–
Improved recovery		–			–
Purchases of minerals in place		–			–
Extensions and discoveries		6,051			65,993
Production		(1,291	)		(10,788	)
Sales		–			–
End of Year		5,400			68,180
Proved developed reserves
Beginning of year		640			12,975
End of Year		5,400			68,180
Standardized measure of Discounted Future
Net Cash Flows at December 31, 2012 and 2011		2012			2011
Future cash inflows	$	811,670		$	114,540
Future production costs		(199,430	)		(39,910	)
Future development costs		–			–
Future income tax expenses		–			–
		612,240			74,630
Future net cash flows  10% annual discount for estimated timing of cash flows		(67,530	)		(13,770	)
Standardized Measures of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves	$	544,710		$	60,860

The following reconciles the change in the standardized measure of discounted future net cash flow during 2012 and 2011:

	2012			2011
Beginning of year	$	69,860			41,611
Sales of oil and gas produced, net of production costs		(104,569	)		(86,334	)
Net changes in prices and production costs		(18,235	)		(45,608	)
Extensions, discoveries, and improved recovery, less related costs		651,414			152,927
Development costs incurred during the year which were previously estimated		–			–
Net change in estimated future development costs		–			(480	)
Revisions of previous quantity estimates		–			–
Net change from purchases and sales of minerals in place		–			7,744
Accretion of discount		(53,760	)		–
Net change in income taxes		–			–
Other		–			–
End of year	$	544,710			69,860

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10. SUPPLEMENTAL INFORMATION ON OIL & GAS (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Property acquisition costs
Proved	$ 212,560	$ 51,437
Unproved	163,121	350,773
Exploration costs
Development costs
Amortization rate per equivalent barrel of production	36.12	41.65
Results of Operation for Oil and Gas Producing Activities for the years ended
Oil and gas sales	180,096	133,354
Gain on drilling program	1,754,144	1,249,997
Gain on sale of oil and gas properties
Impairment, abandonment, and dry hole costs	(128,344)	(35,035)
Production costs	(75,527)	(47,021)
Depreciation, depletion and amortization	(68,689)	(101,906)
Results of Operation for Oil and Gas Producing Activities for the years ended	1,661,680	1,199,389
Income tax expense
Results of operations for oil and gas producing Activities (excluding corporate overhead and Financing costs)	$ 1,661,680	$ 1,199,389

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5. INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2012

Income Taxes Tables

Net deferred tax liability

The tax effect of significant temporary differences representing the net deferred tax liability at December 31, 2012 and 2011 were as follows:

	2012			2011
Net operating loss carry forward	$	2,469,932		$	2,781,864
Well Costs		(6,075	)		(6,075	)
Partnership differences		(160,330	)		(101,289	)
Valuation allowance		(2,303,527	)		(2,674,500	)
Net deferred tax liability	$	–		$	–

U.S. statutory corporate federal income tax rate to pre-tax income

The income tax expense is different from the amount computed by applying the U.S. statutory corporate federal income tax rate to pre-tax income as follows:

	2012					2011
Income tax expense computed at the statutory rate	$	288,756		34.0%		$	87,419		34.0%
Increase (reduction) in tax benefit resulting from:
State and local income taxes, net of federal tax effect							10,285		4.0%
Adjustment for book to tax changes		115,089		6.0%			–		(0.0%	)
Permanent items		–		(0.0%	)		10,317		(0.0%	)
Valuation allowance decrease		(370,973	)	(38.0%	)		(87,387	)	(38.0%	)
Income tax expense	$	32,872		–		$	–		–

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3. RELATED PARTY TRANSACTIONS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Related Party Transactions Details
Accounts payable to minority stockholder for operating capital	$ 84,906	$ 84,906
Note Payable to a minority shareholder	100,000	100,000
Total Note Payable to a minority shareholder	$ 184,906	$ 184,906

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STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $)	Common Stock	Additional Paid-In Capital	Retained Earnings / Accumulated Deficit	Total
Beginning balance, amount at Dec. 31, 2010	$ 145,018	$ 13,395,739	$ (13,180,663)	$ 360,094
Beginning balance, shares at Dec. 31, 2010	29,003,633
Reverse stock split (100 for 1), amount	(143,568)	143,568
Reverse stock split (100 for 1), shares	(28,713,597)
Partial shares issued for stock split, amount	1	(1)
Partial shares issued for stock split, shares	140
Balance adjusted at December 31, 2010, amount	1,451	13,539,306	(13,180,663)	360,094
Balance adjusted at December 31, 2010, shares	290,176
Interest on non-interest bearing note payable to shareholder		8,000		8,000
Stock options exercised		11,008		11,008
Net Loss			257,114	257,114
Ending balance, amount at Dec. 31, 2011	1,451	13,558,314	(12,923,549)	636,216
Ending balance, shares at Dec. 31, 2011	290,176
Interest on non-interest bearing note payable to shareholder		8,000		8,000
Stock Issued for cash, amount	3,275	324,225		327,500
Stock Issued for cash, shares	655,000
Stock Issued for services, amount	225	22,275		22,500
Stock Issued for services, shares	45,000
Net Loss			816,410	816,410
Ending balance, amount at Dec. 31, 2012	$ 4,951	$ 13,912,814	$ (12,107,139)	$ 1,810,626
Ending balance, shares at Dec. 31, 2012	990,176

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4. PROPERTY LEASE

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 4 - PROPERTY LEASE

The Company entered into an operating lease agreement on July 12, 2010 which expires on January 31, 2015 for the offices in Texas for $2,890 per month. Rental expense totaled $37,458 and $31,740 for the years ended December 31, 2012 and 2011, respectively. The Company’s future lease commitments are $35,778 for the years ending December 31, 2013 and 2014 and $2,890 for the year ending December 31, 2015.

Effective January 1, 2013, the Company leased its principal office space from GC Royalty, LLC. GC Royalty, LLC is owned by Robert and Doris Burr, who collectively beneficially own 29.79% of the Company’s Common Stock. The lease is for approximately 24,000 square feet of office and storage space, for $15,000 per month and has a three year term expiring on December 31, 2015. The Company’s future lease commitments are $180,000 annually for each of the years ending December 31, 2013 through December 31, 2015.

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4. OIL AND GAS PROPERTIES (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Proved oil and gas properties	$ 776,540	$ 572,458
Total oil and gas properties	776,540	572,458
Less accumulated depletion and amortization	(436,487)	(416,420)
Less impairment
Net oil and gas properties	$ 340,053	$ 156,038

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3. OIL AND GAS PROPERTIES (Tables)

12 Months Ended

Dec. 31, 2012

Oil And Gas Properties Tables

OIL AND GAS PROPERTIES

Oil and gas properties, stated at cost, consisted of the following:

	December 31
	2012			2011
Proved oil and gas properties	$	776,540		$	572,458
Total oil and gas properties		776,540			572,458
Less accumulated depletion and amortization		(436,487	)		(416,420	)
Less impairment		–			–
Net oil and gas properties	$	340,053		$	156,038