10-Q 1 pocqtr-b.txt PYRAMID OIL COMPANY FORM 10Q JUNE 30, 2008 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-5525 PYRAMID OIL COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 94-0787340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2008 - 21ST. STREET, BAKERSFIELD, CALIFORNIA 93301 (Address of principal executive offices) (Zip Code) (661) 325-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. (Class) (Outstanding at June 30,2008) COMMON STOCK WITHOUT PAR VALUE 4,677,728 2 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements PYRAMID OIL COMPANY BALANCE SHEETS ASSETS
June 30, December 31, 2008 2007 (Unaudited) (Audited) ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $1,381,425 $ 618,448 Short-term investments 1,505,325 1,478,979 Trade accounts receivable 1,059,244 643,340 Interest receivable 2,225 2,251 Employee loan receivable 600 -- Crude oil inventory 74,857 71,298 Prepaid expenses 84,393 170,913 Deferred taxes 64,000 -- ------------ ------------ TOTAL CURRENT ASSETS 4,172,069 2,985,229 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Oil and gas properties and equipment (successful efforts method) 15,593,748 14,734,929 Capitalized asset retirement costs 310,579 310,579 Drilling and operating equipment 2,073,137 2,050,556 Land, buildings and improvements 1,045,649 1,010,847 Automotive, office and other property and equipment 1,162,324 1,141,451 ------------ ------------ 20,185,437 19,248,362 Less: accumulated depletion, depreciation, amortization and valuation allowance (14,394,669) (14,040,610) ------------ ------------ 5,790,768 5,207,752 ------------ ------------ OTHER ASSETS Deposits 250,000 250,000 Other assets 7,380 7,380 Assets held for resale 9,633 9,633 ------------ ------------ $10,229,850 $8,459,994 ============ ============ The Accompanying Notes Are an Integral Part of These Financial Statements.
3 PYRAMID OIL COMPANY BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31, 2008 2007 (Unaudited) (Audited) ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 98,350 $ 108,500 Accrued professional fees 53,223 54,165 Accrued taxes, other than income taxes -- 61,684 Accrued payroll and related costs 64,444 57,647 Accrued royalties payable 280,643 212,916 Accrued insurance 26,399 65,999 Accrued income taxes 190,206 145,815 Current maturities of long-term debt 24,734 26,868 ------------ ------------ TOTAL CURRENT LIABILITIES 737,999 733,594 ------------ ------------ LONG-TERM DEBT, net of current maturities 32,707 44,542 ------------ ------------ DEFERRED TAXES 25,000 -- ------------ ------------ LIABILITY FOR SHARE BASED COMPENSATION -- 67,000 ------------ ------------ LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,022,524 1,010,903 ------------ ------------ COMMITMENTS (Note 3) STOCKHOLDERS' EQUITY: Preferred stock - no par value; 10,000,000 authorized shares; no shares issued or outstanding -- -- Common stock - no par value; 50,000,000 authorized shares; 4,677,728 shares issued and outstanding 1,137,010 1,071,610 Retained earnings 7,274,610 5,532,345 ------------ ------------ 8,411,620 6,603,955 ------------ ------------ $10,229,850 $8,459,994 ============ ============ The Accompanying Notes Are an Integral Part of These Financial Statements.
4 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30,
--------------------------- 2008 2007 ------------ ------------ REVENUES $2,123,186 $1,110,413 ------------ ------------ COSTS AND EXPENSES: Operating expenses 461,477 408,650 Exploration costs -- 816 General and administrative 209,088 175,775 Taxes, other than income and payroll taxes 21,100 21,455 Provision for depletion, depreciation and amortization 191,239 120,907 Accretion expense 5,811 5,490 Other costs and expenses 56,020 15,360 ------------ ------------ 944,735 748,453 ------------ ------------ OPERATING INCOME 1,178,451 361,960 ------------ ------------ OTHER INCOME (EXPENSE): Interest income 19,934 18,391 Other income 9,152 8,381 Interest expense (593) (1,783) ------------ ------------ 28,493 24,989 ------------ ------------ INCOME BEFORE INCOME TAX PROVISION 1,206,944 386,949 Income taxes Current 182,850 29,600 Deferred 116,100 -- ----------- ------------ 298,950 29,600 ------------ ------------ NET INCOME $907,994 $357,349 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements.
5 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended June 30,
--------------------------- 2008 2007 ------------ ------------ EARNINGS PER COMMON SHARE - Post Split Basic and Diluted Income Per Common Share $ 0.19 $ 0.08 ============ ============ Basic and diluted weighted average number of common shares outstanding 4,677,728 4,677,728 ============ ============ EARNINGS PER COMMON SHARE - Pre-Split Basic and Diluted Income Per Common Share $ 0.24 $ 0.10 ============ ============ Basic and diluted weighted average number of common shares outstanding 3,741,721 3,741,721 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements.
6 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Six months ended June 30,
--------------------------- 2008 2007 ------------ ------------ REVENUES $3,713,082 $1,936,593 ------------ ------------ COSTS AND EXPENSES: Operating expenses 884,283 771,313 Exploration costs ( 28,812) 5,651 General and administrative 441,600 450,929 Taxes, other than income and payroll taxes 56,610 48,611 Provision for depletion, depreciation and amortization 354,059 218,577 Accretion expense 11,621 11,121 Other costs and expenses 75,572 24,052 ------------ ------------ 1,794,933 1,530,254 ------------ ------------ OPERATING INCOME 1,918,149 406,339 ------------ ------------ OTHER INCOME (EXPENSE): Interest income 42,011 42,180 Other income 18,814 11,981 Interest expense (1,234) (1,797) ------------ ------------ 59,591 52,364 ------------ ------------ INCOME BEFORE INCOME TAX PROVISION 1,977,740 458,703 Income taxes Current 274,475 43,425 Deferred ( 39,000) -- ----------- ------------ 235,475 43,425 ------------ ------------ NET INCOME $1,742,265 $415,278 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements.
7 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Six months ended June 30,
--------------------------- 2008 2007 ------------ ------------ EARNINGS PER COMMON SHARE - Post Split Basic and Diluted Income Per Common Share $ 0.37 $ 0.09 ============ ============ Basic and diluted weighted average number of common shares outstanding 4,677,728 4,677,728 ============ ============ EARNINGS PER COMMON SHARE - Pre-Split Basic and Diluted Income Per Common Share $ 0.47 $ 0.11 ============ ============ Basic and diluted weighted average number of common shares outstanding 3,741,721 3,741,721 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements.
8 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30,
--------------------------- 2008 2007 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,742,265 $ 415,278 Adjustments to reconcile net income to cash provided by (used in) operating activities: Provision for depletion, depreciation and amortization 354,059 218,577 Accretion expense 11,621 11,121 Exploration costs (28,812) 5,651 Severance award agreement ( 1,600) 67,400 Deferred taxes ( 39,000) -- Changes in assets and liabilities: Increase in trade accounts and interest receivable (415,879) ( 94,165) Increase in crude oil inventories (3,559) (3,567) Decrease in prepaid expenses 86,521 76,026 Increase (decrease) in accounts Payable and accrued liabilities 6,539 (90,250) --------- -------- Net cash provided by operating activities 1,712,155 606,071 --------- -------- The Accompanying Notes Are an Integral Part of These Financial Statements.
9 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Six months ended June 30,
--------------------------- 2008 2007 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $(908,263) $(613,527) Redemption of certificate of deposit -- 200,000 Increase in short-term investments ( 26,346) ( 23,316) -------- --------- Net cash used in investing activities (934,609) (436,843) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit -- 150,000 Principal payments on line of credit -- (150,000) Loans to employees (2,100) (2,000) Principal payments on loans to employees 1,500 500 Principal payments on long-term debt ( 13,969) ( 19,587) -------- -------- Net cash used in financing activities (14,569) (21,087) -------- -------- Net increase in cash 762,977 148,141 Cash at beginning of period 618,448 619,001 --------- --------- Cash at end of period $1,381,425 $ 767,142 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the six months for interest $ 1,234 $ 1,797 ======== ======== Cash paid during the six months for income taxes $230,085 $ 1,125 ======== ======== The Accompanying Notes Are an Integral Part of These Financial Statements.
10 PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS JUNE 30, 2008 (UNAUDITED) 1. Summary of Significant Accounting Policies The financial statements include the accounts of Pyramid Oil Company (the Company). Such financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. A summary of the Company's significant accounting policies is contained in its December 31, 2007 Form 10-KSB which is incorporated herein by reference. The financial data presented herein should be read in conjunction with the Company's December 31, 2007 financial statements and notes thereto, contained in the Company's Form 10-KSB. In the opinion of the Company, the unaudited financial statements, contained herein, include all adjustments necessary to present fairly the Company's financial position as of June 30, 2008 and December 31, 2007 and the results of its operations and its cash flows for the six month periods ended June 30, 2008 and 2007. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. Income taxes: When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. 11 2. Impact of Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Boards (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 focuses on creating consistency and comparability in fair value measurements. With the exception of certain nonfinancial assets and liabilities, SFAS No. 157 is effective for financial assets and liabilities that are measured at fair value within the financial statements for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2 to defer SFAS No. 157's effective date for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. We currently are evaluating the impact that the provisions of SFAS No. 157 for nonfinancial assets and liabilities may have on our financial statements. In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115, which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to reduce volatility in reported earnings, caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting rules. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings as of each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We adopted SFAS No. 159 on January 1, 2008 and elected not to apply the fair value option. In April 2008, the FASB issued Financial Statement Position (FSP) No. EITF 03- 6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP No. EITF 03-6-1 states that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders and should be included in basic and diluted earnings per share calculations. FSP No. EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. We currently are evaluating the impact of adoption that FSP No. EITF 03-6-1 may have on our financial statements. In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under 12 SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other GAAP. FSP No. FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. We do not expect the adoption of FSP No. FAS 142-3 to have an impact on our financial statements. In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. SFAS No. 162 will be effective 60 days after the SEC's approval of the Public Company Accounting Oversight Board (PCAOB's) amendments to AU Section 411. We do not expect the adoption of SFAS No. 162 to have an impact on our financial statements. 3. Dividends No cash dividends were paid during the six months ended June 30, 2008 and 2007. 4. Income Taxes The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders equity. The Company files income tax returns in the U.S. federal jurisdiction, California and New York states. With few exceptions, the Company is no longer subject to U.S. federal tax examination for the years before 2004. State jurisdictions that remain subject to examination range from 2003 to 2007. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter. 5. Commitments In February 2002, the Company entered into an employment agreement with John H. Alexander pursuant to which Mr. Alexander agreed to serve as the Company's Vice President. On June 3, 2004, Mr. Alexander was appointed as the Company's President and Chief Executive Officer. The employment agreement is for an initial term of six years, which term automatically renews annually if written notice is not tendered. 13 Pursuant to the employment agreement, the Company may terminate Mr. Alexander's employment with or without cause at any time before its term expires upon providing written notice. In the event the Company terminates Mr. Alexander's employment without cause, Mr. Alexander would be entitled to receive a severance amount equal to his annual base salary and benefits for the balance of the term of his employment agreement. In the event of termination by reason of Mr. Alexander's death or permanent disability, his legal representative will be entitled to receive his annual salary and benefits for the remaining term of his employment agreement. In the event of, or termination following, a change in control of the Company, as defined in the agreement, Mr. Alexander would be entitled to receive his annual salary and benefits for the remainder of the term of his agreement. In the event that Mr. Alexander is terminated the Company would incur approximately $600,000 in costs. 6. Income Tax Provision The Company recognized a net income tax expense of $235,475 for the first six months of 2008, compared to income tax expense of $43,425 for the same period in 2007. The current tax provision has increased due primarily to higher income as a result of significant market increases in the price of oil for the six months ended June 30, 2008. Income tax benefits were realized by the Company due to the utilization of statutory depletion allowance carryovers that became available to the Company as a result of the significant market increases in the price of oil. Income tax benefits were realized as a result of adjustments to the Company's deferred tax asset valuation allowance account. Net income tax benefit for the first six months was calculated as follows: Federal State Total -------- --------- -------- Current tax provision $ 216,900 $ 57,575 $ 274,475 Deferred tax benefit ( 30,000) ( 9,000) ( 39,000) ------- ------- ------- $ 186,900 $ 48,575 $ 235,475 ======= ====== ======= Deferred income taxes are recognized using the asset and liability method by applying income tax rates to cumulative temporary differences based on when and how they are expected to affect the tax returns. Deferred tax assets and liabilities are adjusted for income tax rate changes. Deferred income tax assets have been offset by a valuation allowance of $1,333,000 as of June 30, 2008. Management reviews deferred income taxes regularly throughout the year, and accordingly makes any necessary adjustments to properly reflect the valuation allowance based upon current financial trends and projected results. 14 7. Stock Split On June 5, 2008, the Company's Board of Directors approved a 5 for 4 stock split payable on July 3, 2008, to shareholders of record as of June 24, 2008. The effective date of the split is July 7, 2008. Common Stock --------- Shares outstanding at June 30, 2008 3,741,721 Shares issued 5 for 4 stock split July 3, 2008 936,007 --------- Shares outstanding at July 7, 2008 4,677,728 ========= All share and per share data for the periods presented have been retroactively restated to reflect this stock split. 9. Severance Award Agreement On January 9, 2007, the Company and John Alexander entered into a Severance Award Agreement pursuant to which the Company awarded Mr. Alexander a supplemental payment in connection with his future severance of employment with the Company. Mr. Alexander serves as the Company's Chief Executive Officer. Pursuant to the Severance Award Agreement and following the termination of Mr. Alexander's employment, he will be entitled to receive (at the Company's option) 25,000 shares of the Company's common stock or the then-fair market value of the shares. As of June 30, 2008, the Company intended to deliver the Company's common shares for the Severance Award. 10. Incentive and Retention Plan On January 9, 2007, the Company's Board of Directors adopted an Incentive and Retention Plan pursuant to which the Company's officers and other employees selected by the Company's Compensation Committee are entitled to receive payments if they are employed by the Company as of the date of a 'Corporate Transaction,' as defined in the Incentive and Retention Plan. A 'Corporate Transaction' includes certain mergers involving the Company, sales of Company assets, and other changes in the control of the Company, as specified in the Incentive and Retention Plan. In general, the amount that is payable to each plan participant will equal the number of plan units that have been granted to him or her, multiplied by the increase in the value of the Company between January 9, 2007 and the date of a Corporate Transaction. There has been no Corporate Transaction since the adoption of the Incentive and Retention Plan. 15 11. Related-party Transaction Effective January 1, 1990, John H. Alexander, an officer and director of the Company participated with a group of investors that acquired the mineral and fee interest on one of the Company's oil and gas leases (Santa Fe Energy lease) in the Carneros Creek field after the Company declined to participate. The thirty-three percent interest owned by Mr. Alexander represents a minority interest in the investor group. Royalties on oil and gas production from this property paid to the investor group approximated $201,000 during the first six months of 2008. 12. Investor Relations Consultants On March 12, 2008, the Company entered into an agreement with Pfeiffer High Investor Relations, Inc. (PHIR) pursuant to which PHIR will serve as an investor relations consultant to the Company. PHIR will receive a monthly fee of $5,000 and will be reimbursed for approved out-of-pocket expenses. The agreement also provides for the payment of a 1.5% finder's fee to PHIR upon the closing of a specified transaction, such as a merger, a sale of assets or a sale of equity securities, if PHIR is responsible for initiating the transaction. If Company and PHIR mutually decide to extend the agreement after its initial six-month term, the Company will grant to PHIR's two principals, for a total purchase price of $20.00, fully vested warrants to purchase a total of 20,000 shares of the Company's common stock at an exercise price of $4.00 per share. The warrants will have a two-year term, will be assignable and will have piggyback registration rights and cashless exercise provisions. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION Crude oil prices have decreased by approximately $24.25 per barrel as of August 8, 2008, when compared to prices at June 30, 2008. The Company's Board of Directors recently approved a five-for-four (5 for 4) stock split, which was paid to shareholders on July 3, 2008. Management believes the 25% increase in the number of outstanding shares and the larger public float will help attract additional shareholders. The Company is currently waiting on the arrival of a drilling rig at its Anderson property in California. The rig will be utilized to drill a new developmental well in the Carneros Creek field, and drilling is expected to begin late in the third quarter of 2008. The well has been designed to penetrate the point-of-rocks formation at a depth of approximately 3,100 feet. 16 During the week of August 4, 2008, the Company was notified by the Operator of its Texas joint venture that the pipeline and hook-up to the gas sales line has been completed, and the well was scheduled to be cleaned out and put on production during the week of August 11, 2008. The Company intends to issue a news release after gas sales have commenced. The Company's growth in 2008 will be highly dependant on the amount of success the Company has in its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's capital investment program may be modified during the year due to explorations and development successes or failures, market conditions and other variables. The production and sales of oil and gas involves many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions. The Company has positioned itself, over the past several years, to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties that provide the major revenue sources. The drilling of a new well and several limited work-overs of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2008, by drilling new wells and routine maintenance of its existing wells. The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company. The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2007. The Company retains outside consultants to assist the Company in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations. Portions of the Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise 17 any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations. ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2008 COMPARED TO THE QUARTER ENDED JUNE 30, 2007 REVENUES Oil and gas revenues increased by 91% for the three months ended June 30, 2008 when compared with the same period for 2007. Oil and gas revenues increased by 93% due to higher average crude oil prices for the second quarter of 2008. The average price of the Company's oil and gas for the second quarter of 2008 increased by approximately $57.19 per equivalent barrel when compared to the same period of 2007. Revenues decreased by 2% due to lower crude oil production/shipments. The Company's net revenue share of crude oil production/sales decreased by approximately 326 barrels for the second quarter of 2008. OPERATING EXPENSES Operating expenses increased by approximately 13% for the second quarter of 2008. The cost to produce an equivalent barrel of crude oil increased by approximately $3.33 (total cost of approximately $25.56 per equivalent barrel) for the second quarter of 2008 when compared with the second quarter of 2007. The increase in operating expenses of approximately $53,000 was caused by many factors. These include higher costs for down-hole pump repairs, equipment fuel and equipment rental. Down-hole pump repairs increased by 4.9% due to increased maintenance activity on several of the Company's oil and gas properties. Equipment fuel costs increased by 3.7% due primarily to the higher cost of gasoline and diesel fuel. Equipment rental increased by 3.5% due primarily to the rental of crude oil storage tanks for the Anderson and Santa Fe leases. These tanks were used during and after the fracing of three wells on these leases. GENERAL AND ADMINISTRATIVE General and administrative expenses increased by approximately 19% for the second quarter of 2008 when compared with the same period for 2007. Professional fees increased by 8.3% for the three months ended June 30, 2008, due to an increase in consulting services of 4.2%. This was the result of the Company retaining a website design firm to redesign its website. In addition, accounting/audit fees and legal fees each increased by 2%. 18 Salaries increased by 4.7% due primarily to an increase in salaries and the hiring of a part-time employee that was effective July 1, 2007. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization increased by 58% for the second quarter of 2008, when compared with the same period for 2007. The increase is due primarily to a 53.5% increase in depletion of the Companies oil and gas properties. The increase in depletion is due primarily to an increase in the depletable base of oil and gas properties which is due to the drilling of three new wells in 2006 and one new well in 2007 and 2008. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007 REVENUES Oil and gas revenues increased by 91.7% for the six months ended June 30, 2008 when compared with the same period for 2007. Oil and gas revenues increased due to higher average crude oil prices for the first half of 2008. The average price of the Company's oil and gas for the first six months of 2008 increased by approximately $47.81 per equivalent barrel when compared with the same period for 2007. The Company's net revenue share of crude oil production/sales increased by approximately 1,465 barrels for the six months ended June 30, 2008. The increase in production is due primarily to the new wells that had been drilled in prior years on the Company's Anderson lease. OPERATING EXPENSES Operating expenses increased by approximately 14.6% for the six months ended June 30, 2008, when compared with the same period for 2007. The cost to produce an equivalent barrel of crude oil increased by approximately $2.25 per barrel (total cost of approximately $24.97 per equivalent barrel) for the six months ended June 30, 2008. The increase in operating expenses of approximately $113,000 was caused by many factors. These include higher costs for down-hole pump repairs, labor, equipment fuel, parts and supplies, equipment rental and insurance. This was offset by lower costs for contract operations, gas engine repairs and outside services. Down-hole pump repairs increased by 4.3% due to increased maintenance activity on several of the Company's oil and gas properties. Labor costs increased by approximately 4% due primarily to higher overtime hours worked and the addition of two new field employees during the second quarter. Equipment fuel costs increased by 3.3% due primarily to the higher cost of gasoline and diesel fuel. Parts and supplies increased by 2.1% due primarily to increased maintenance activity on the Company's Anderson oil gas property. Equipment rental increased by 2.1% due primarily to the rental of crude oil storage tanks for the Anderson and Santa Fe leases. These tanks were used during and 19 after the fracing of three wells on these leases. Insurance costs increased by 2% due to higher premiums for workers' compensation and employee medical insurance. Contract operations decreased by 2.2% due to lower costs for the New York gas properties that were shut-in during the first six months of 2008. Gas engine repairs decreased by 1.2% and outside services decreased by 1.1%. EXPLORATION COSTS In the first quarter of 2008, the Company received a payment, from its joint venture partner, in the amount of $28,812 for its share of certain tangible completion equipment on an exploratory well that had been abandoned in 2006 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased by approximately 2% for the six months ended June 30, 2008, when compared with the same period for 2007. Professional fees increased by 8.8% due primarily to an increase in accounting fees. Accounting services increased by 6.6% for the six months ended June 30, 2008, due primarily to an increase in fees for the annual engineering oil and gas reserve report and the compliance costs associated with Sarbanes-Oxley Section 404, management's report on internal controls over financial reporting. In addition, the Company has also retained a third-party firm to prepare its Federal and state tax returns and to review the Company's preparation of its income tax provision. The remaining increase in professional fees is primarily the result of the Company retaining a website design firm to redesign its website. Compensation costs decreased by 12% due primarily to the severance award agreement (see footnote 9). The severance award agreement was effective January 9, 2007 and was recorded in the first quarter of 2007. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization increased by 62% for the six months ended June 30, 2008, when compared with the same period for 2007. The increase is due primarily to a 57.5% increase in depletion of the Company's oil and gas properties. The increase in depletion is due primarily to an increase in the depletable base of oil and gas properties due to the drilling of three new wells in 2006 and one new well in 2007 and 2008 and higher crude oil production sales during the first six months of 2008. 20 LIQUIDITY AND CAPITAL RESOURCES Cash increased by $762,977 for the six months ended June 30, 2007. During the first half of 2008, operating activities provided cash of $1,712,155. This was offset by capital expenditures of $908,263 and principal payments on long-term debt totaling $13,969 during the first six months of 2008. See the Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term investments of $1,505,325 that could have provided additional liquidity during the first six months of 2008. IMPACT OF CHANGING PRICES The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the second quarter of 2008 increased by approximately $57.19 when compared with the same period for 2007. Average crude oil prices for the first six months of 2008 increased by approximately $47.81 per equivalent barrel when compared with the same period for 2007. At the end of the second quarter of 2008, crude oil prices had increased by approximately $42.45 per barrel when compared with crude oil prices at December 31, 2007. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable Item 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. There was no change in our internal control over financial reporting that occurred during the six months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 21 PYRAMID OIL COMPANY PART II - OTHER INFORMATION Item 1. - Legal Proceedings None Item 1A. - Risk Factors See the risk factors that are included in the Company's Annual Report on Form 10KSB for the fiscal year ended December 31, 2007. Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. - Defaults Upon Senior Securities None Item 4. - Submission of Matters to a Vote of Security Holders On June 5, 2008, the Company held its Annual Meeting of Shareholders at the Corporate Offices in Bakersfield, California. At the meeting the holders of our outstanding common stock acted on the following matters: (1) The shareholders voted for 5 directors, each to serve for a term of one year. Each nominee received the following votes: Name of Nominee Votes For Withheld ---------------- --------- -------- Michael D. Herman 3,499,822 27,072 John H. Alexander 3,499,822 27,072 Thomas W. Ladd 3,480,823 46,071 John E. Turco 3,480,823 46,071 Gary L. Ronning 3,500,823 26,071 (2) The shareholders voted for the ratification of the appointment of SingerLewak, LLP as our independent auditors for our fiscal year ending December 31, 2008. Votes cast were as follows: Votes For 3,524,272 Votes Against 279 Abstain 2,343 Item 5. - Other Information - None 22 Item 6. - Exhibits a. Exhibits 3.1 Registrant's Amended Articles of Incorporation 31.1 Certification of the Registrant's Principal Executive Officer under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Registrant's Principal Financial Officer under Exchange Act Rules 13a-14(a) and 15-d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Registrant's Principal Executive Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Registrant's Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PYRAMID OIL COMPANY (registrant) Dated: August 12, 2008 JOHN H. ALEXANDER --------------------- John H. Alexander President Dated: August 12, 2008 LEE G. CHRISTIANSON --------------------- Lee G. Christianson Chief Financial Officer