1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-5525
PYRAMID OIL COMPANY
(Exact name of small business issuer 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)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or
for such shorter periods 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 [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the close of the last practicable date:
COMMON STOCK WITHOUT PAR VALUE 3,741,721
(Class) (Outstanding at September 30, 2007)
2
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
PYRAMID OIL COMPANY
BALANCE SHEETS
ASSETS
September 30, December 31,
2007 2006
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $1,437,275 $ 619,001
Short-term investments 1,465,802 1,450,910
Trade accounts receivable, net 449,371 324,495
Interest receivable 4,579 --
Employee loan receivable 400 --
Crude oil inventory 74,951 56,539
Prepaid expenses 48,813 152,899
Income taxes receivable 36,260 193,130
------------ ------------
TOTAL CURRENT ASSETS 3,517,451 2,796,974
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Oil and gas properties and equipment
(successful efforts method) 13,549,426 12,891,756
Capitalized asset retirement costs 306,359 304,199
Drilling and operating equipment 2,050,556 2,008,397
Land, buildings and improvements 976,006 978,702
Automotive, office and other
property and equipment 1,091,851 1,068,670
------------ ------------
17,974,198 17,251,724
Less: accumulated depletion,
depreciation, amortization
and valuation allowance (13,944,320) (13,620,171)
------------ ------------
4,029,878 3,631,553
------------ ------------
OTHER ASSETS
Deposits 250,000 250,000
Other assets 7,380 7,380
Assets held for resale 9,633 9,633
------------ ------------
$7,814,342 $6,695,540
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
3
PYRAMID OIL COMPANY
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2007 2006
(Unaudited) (Audited)
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 105,862 $ 69,060
Accrued professional fees 81,384 50,114
Accrued taxes, other than income taxes 25,874 45,570
Accrued payroll and related costs 44,162 60,374
Accrued royalties payable 151,977 136,826
Accrued insurance 10,059 62,857
Accrued termination costs 142,157 142,157
Current maturities of long-term debt 8,948 25,965
------------ ------------
TOTAL CURRENT LIABILITIES 570,423 592,923
------------ ------------
LONG-TERM DEBT, net of current maturities -- 11,334
------------ ------------
LIABILITY FOR SHARE BASED COMPENSATION 66,200 --
------------ ------------
LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,001,135 982,389
------------ ------------
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;
3,741,721 shares issued and
outstanding 1,071,610 1,071,610
Retained earnings 5,104,974 4,037,284
------------ ------------
6,176,584 5,108,894
------------ ------------
$7,814,342 $6,695,540
============ ============
The Accompanying Notes Are an Integral Part of These Financial Statements.
4 PYRAMID OIL COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
--------- --------- --------- ---------
REVENUES
Oil and gas sales $1,168,440 $1,080,199 $3,105,033 $3,089,074
Gain on sale of real property 440,473 -- 440,473 --
--------- --------- --------- ---------
1,608,913 1,080,199 3,545,506 3,089,074
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 417,901 432,907 1,189,214 1,113,110
Exploration costs 1,036 -- 6,687 --
General and administrative 265,685 209,457 716,614 471,763
Taxes, other than income
and payroll taxes 30,301 27,127 78,912 60,255
Provision for depletion,
depreciation and
amortization 113,976 75,087 332,553 211,250
Accretion expense 5,466 5,331 16,587 15,339
Other costs and expenses 7,589 30,469 31,641 54,508
--------- --------- --------- ---------
841,954 780,378 2,372,208 1,926,225
--------- --------- --------- ---------
OPERATING INCOME 766,959 299,821 1,173,298 1,162,849
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 20,873 33,580 63,053 49,513
Other income 4,305 3,600 16,286 12,619
Interest expense ( 75) (4,648) (1,872) (6,771)
--------- --------- --------- ---------
25,103 32,532 77,467 55,361
--------- --------- --------- ---------
INCOME BEFORE TAX PROVISION 792,062 332,353 1,250,765 1,218,210
Income tax provision 139,650 -- 183,075 236,025
--------- --------- --------- ---------
NET INCOME $ 652,412 $ 332,353 $1,067,690 $ 982,185
========= ========= ========= =========
BASIC INCOME PER COMMON SHARE $0.17 $0.09 $0.29 $0.26
========= ========= ========= =========
DILUTED INCOME PER
COMMON SHARE $0.17 $0.09 $0.29 $0.26
========= ========= ========= =========
Weighted average number of
common shares outstanding 3,741,721 3,741,721 3,741,721 3,741,721
(Basic and Diluted) ========= ========= ========= =========
The Accompanying Notes Are an Integral Part of These Financial Statements.
5 PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,067,690 $ 982,185
Adjustments to reconcile net income
to cash provided by
operating activities:
Provision for depletion,
depreciation and amortization 332,553 211,250
Gain on sale of real property (440,473) --
Accretion expense 16,587 15,339
Costs incurred for asset
retirement obligations -- (2,722)
Exploration costs 6,687 --
Severance award agreement 66,200 --
Changes in assets and liabilities:
Increase in trade accounts
and interest receivable (7,479) (107,174)
Increase in crude oil inventories (18,412) (13,654)
Decrease in prepaid expenses 104,086 50,983
Decrease in accounts payable
and accrued liabilities (5,483) (96,451)
--------- ---------
Net cash provided by operating activities 1,121,956 1,039,756
--------- ---------
The Accompanying Notes Are an Integral Part of These Financial Statements.
6
PYRAMID OIL COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
2007 2006
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemption of
certificate of deposit $ 200,000 $ 100,000
Purchase of short-term investments (180,000) (100,000)
Proceeds from sale of fixed assets 448,471 --
Increase in deposits -- (1,380)
Capital expenditures (743,402) (1,838,789)
-------- ---------
Net cash used in investing activities (274,931) (1,840,169)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 150,000 452,000
Principal payments on line of credit (150,000) (452,000)
Loans to employees (2,000) (3,300)
Principal payments on loans to employees 1,600 9,619
Proceeds from issuance of long-term debt -- 32,393
Principal payments on long-term debt ( 28,351) ( 42,580)
-------- --------
Net cash used in financing activities ( 28,751) ( 3,868)
-------- --------
Net increase (decrease) in cash 818,274 (804,281)
Cash at beginning of period 619,001 1,300,475
--------- ---------
Cash at end of period $1,437,275 $ 496,194
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the nine months for interest $ 1,872 $ 6,771
======== ========
Cash paid during the nine months for income taxes $ 26,125 $268,955
======== ========
The Accompanying Notes Are an Integral Part of These Financial Statements.
7 PYRAMID OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(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, 2006 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, 2006 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 September 30, 2007 and the results of its operations
and its cash flows for the nine month periods ended September 30, 2007 and
2006. 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.
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(2) IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115 (SFAS No. 159). SFAS No. 159 permits us to choose to
measure certain financial assets and liabilities at fair value that are not
currently required to be measured at fair value (i.e. the Fair Value Option).
Election of the Fair Value Option is made on an instrument-by-instrument basis
and is irrevocable. At the adoption date, unrealized gains and losses on
financial assets and liabilities for which the Fair Value Option has been
elected would be reported as a cumulative adjustment to beginning retained
earnings. If we elect the Fair Value Option for certain financial assets and
liabilities, we will report unrealized gains and losses due to changes in
their fair value in earnings at each subsequent reporting date. SFAS No. 159
is effective for the Company as of January 1, 2008. We are currently
evaluating the potential impact of adopting SFAS No. 159 on our financial
statements.
On December 31, 2006, the Company adopted the recognition requirements of SFAS
Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other
Post-retirement Plans (an amendment of FASB Statements No. 87, 88, 106, and
132R). Issued in September 2006, SFAS No. 158 completed the first phase of
FASB's comprehensive project to improve the accounting and reporting for
defined benefit pension and other post-retirement plans. FAS No. 158 requires
an employer to:
Recognize the funded status of a benefit plan - measured as the
difference between plan assets at fair value (with limited exceptions) and the
benefit obligation - in its consolidated balance sheet. For a pension plan,
the benefit obligation is the projected benefit obligation; for any other
post-retirement benefit plan, such as a retiree health care plan, the benefit
obligation is the accumulated post-retirement benefit obligation.
Recognize as a component of other comprehensive income (loss), net of
tax, the gains or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic benefit cost
pursuant to FASB Statement No. 87, Employers Accounting for Pensions, or No.
106, Employers Accounting for Post-retirement Benefits Other Than Pensions.
Amounts recognized in accumulated other comprehensive income, including the
gains or losses, prior service costs or credits, and the transition assets or
obligations remaining from the initial application of Statements 87 and 106,
are adjusted as they are subsequently recognized as components of net periodic
benefit cost pursuant to the recognition and amortization provisions of those
Statements.
Measure defined benefit plan assets and obligations as of the date of the
employers fiscal year-end consolidated balance sheet (with limited
exceptions).
9
Disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses, prior service costs or
credits, and transition assets or obligations.
An employer with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit post-retirement
plan and to provide the required disclosures as of the end of the fiscal year
ending after December 15, 2006. The Company does not expect the adoption to
have a material impact on the Company's financial position or results of
operations, since the Company has not participated in such activities covered
under this pronouncement.
(3) DIVIDENDS
No cash dividends were paid during the nine months ended September 30, 2007
and 2006.
(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 2003. State
jurisdictions that remain subject to examination range from 2002 to 2006. 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.
10
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's income tax provision consists mainly of the current provision
for Federal and California income taxes. Differences exist between certain
accounting policies and the related provisions included in federal income tax
rules. The amounts of these differences and other factors cause the total
income tax provision to differ from an amount computed by applying the federal
and state statutory income tax rate to financial income. The federal and
state income tax expense at the statutory rate at September 30, 2007 is
approximately $548,000. The federal and state income tax provision for tax
return purposes at September 30, 2007 is approximately $183,000. The
difference of $365,000 is due primarily to timing differences and statutory
depletion which were fully reserved..
(7) STOCK SPLIT
On March 28, 2006, the Company's Board of Directors approved a 3 for 2 stock
split payable on May 1, 2006, to shareholders of record as of April 17, 2006.
Common Stock
---------
Shares outstanding at December 31, 2005 2,494,430
Shares issued 3 for 2 stock split May 1, 2006 1,247,291
---------
Shares outstanding at September 30, 2007 3,741,721
=========
(8) CHANGE IN AUTHORIZED SHARES
At the Annual Meeting of Shareholders held on June 1, 2006, the Shareholders
approved an amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock from 10,000,000 to 50,000,000
and to authorize the issuance of up to 10,000,000 shares of a newly created
class of Preferred Stock.
11
(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) 20,000 shares of the Company's common stock or the
then-fair market value of the shares. The closing price of a share of the
Company's common stock on September 30, 2007 was $3.31 for a total of $66,200.
(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.
(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 $244,000 during the first
nine months of 2007.
(12) GAIN ON SALE OF FIXED ASSETS
Effective July 9, 2007, the Company entered into an escrow agreement with a
third-party for the sale of real property (160 acres of grazing land). The
closing date for the sale was August 17, 2007. Proceeds from the sale were
$448,471 for a gain on the sale of real property before taxes of $440,473.
12
(13) SUBSEQUENT EVENT
On September 28, 2007, at a meeting of the Board of Directors, the Board
approved the Company's participation in a natural gas drilling prospect
containing 5,700 contiguous acres in McMullen County Texas. The Company
purchased a twelve and one half percent gross interest (before payout) in this
prospect for $415,000. The initial phase of this prospect is the re-drilling
of an existing well sometime in the forth quarter of 2007 and the drilling of
a new well scheduled for the first quarter of 2008. The Company estimates
that its portion of the re-drilling operations in the forth quarter of 2007
will be approximately $95,000 and its share of the drilling of a new well in
early 2008 will be approximately $315,000. The Company executed a Joint
Venture Agreement and is a non-operator in this prospect.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 third quarter of 2007 increased
by approximately $8.00 when compared with the same period for 2006. Average
crude oil prices for the first nine months of 2007 increased by approximately
ninety cents per equivalent barrel when compared with the same period for
2006. At the end of the third quarter of 2007, crude oil prices had increased
by approximately $21.45 per barrel when compared with crude oil prices at
December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased by $818,274 for the nine months ended September 30, 2007.
During the first nine months of 2007, operating activities provided cash of
$1,121,956. The cash proved by operating activities includes a gain of
$440,473 from the sale of fixed assets. Cash was used by capital expenditures
of $743,402 and principal payments on long-term debt totaling $28,351. See
the Statements of Cash Flows for additional detailed information. A $500,000
line of credit and short-term investments of $1,465,802 provided additional
liquidity during the nine months ended September 30, 2007.
FORWARD LOOKING INFORMATION
Crude oil prices have increased by approximately $12.15 per barrel as of
November 12, 2007, when compared to prices at September 30, 2007.
In the last week of October the Company began drilling operations on its
Anderson property located in Carneros Creek, in Kern County. The new well,
Anderson No. 7, penetrated all of the expected oil zones on this property and
13
was successfully completed and hydraulically oil fraced in late October. As
of November 13, 2007, the well is choked back and producing at the rate of 38
barrels of clean 31 gravity oil per day. At the same time the Anderson No. 7
was fraced, the Company re-fraced an existing well on the Anderson property
and that well is currently choked back and producing approximately 18 barrels
per day, up from a previous 5 barrels per day.
On September 28, 2007, at a meeting of the Board of Directors, the Board
approved the Company's participation in a natural gas drilling prospect
containing 5,700 contiguous acres in McMullen County Texas. The Company
purchased a twelve and one half percent gross interest (before payout) in this
prospect for $415,000. The initial phase of this prospect is the re-drilling
of an existing well sometime in the forth quarter of 2007 and the drilling of
a new well scheduled for the first quarter of 2008. The Company estimates
that its portion of the re-drilling operations in the forth quarter of 2007
will be approximately $95,000 and its share of the drilling of a new well in
early 2008 will be approximately $315,000. The Company executed a Joint
Venture Agreement and is a non-operator in this prospect.
The Company's growth in 2007 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 2007, 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 2006 and 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
14
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
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.
Item 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based
on their evaluation as of the end of the period covered by this report, that
our disclosure controls and procedures (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that
information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.
There was no change in our internal control over financial reporting that
occurred during the quarter ended September 30, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2007
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2006
REVENUES
Oil and gas revenues increased by 8% for the three months ended September 30,
2007 when compared with the same period for 2006. Oil and gas revenues
increased by 12% due to higher average crude oil prices for the third quarter
of 2007. The average price of the Company's oil and gas for the third
quarter of 2007 increased by approximately $8.00 per equivalent barrel when
15
compared to the same period of 2006. Revenues decreased by 4% due to lower
crude oil production/shipments. The Company's net revenue share of crude oil
production/sales decreased by approximately 700 barrels for the third
quarter of 2007.
Gain on Sale of Fixed Assets - Reflects the gain on the sale of real property.
Effective July 9, 2007, the Company entered into an escrow agreement with a
third-party for the sale of real property (160 acres of grazing land). The
closing date for the sale was August 17, 2007. Proceeds from the sale were
$448,471 for a gain on the sale of real property before taxes of $440,473.
OPERATING EXPENSES
Operating expenses decreased by approximately 3.5% for the third quarter of
2007. The cost to produce an equivalent barrel of crude oil increased by
approximately eighteen cents per barrel (total cost of approximately $24.94
per equivalent barrel) for the third quarter of 2007 when compared with the
third quarter of 2006.
Equipment rental decreased by approximately 7% due primarily to the rental of
equipment for the Anderson #6 well in the third quarter of 2006. The Company
rented a temporary crude oil storage tank, blowout prevention equipment and
gas flare for this well. No similar costs were incurred during the same period
of 2007 for the Anderson lease.
Labor costs increased by approximately 3.8% due primarily to a decrease in
capitalized labor costs. In the third quarter of 2006 labor costs of $13,300
were capitalized as a result of drilling a new well. In the same period of
2007, the Company capitalized $2,900 in labor costs. This resulted in an
increase of 2.4% in labor costs for 2007.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by approximately 27% for the
third quarter of 2007 when compared with the same period of 2006.
Accounting services increased by 29% for the three months ended September 30,
2007. The Company has retained an outside consulting firm to provide
assistance and guidance for its efforts to comply with Sarbanes-Oxley's
requirements for management's assessment of internal controls. The fees paid
for this project have increased accounting services by 26% during the third
quarter of 2007 when compared with the same period of 2006.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 52%
for the third quarter of 2007, when compared with the same period of 2006.
The increase is due primarily to a 49% 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.
16
INCOME TAX PROVISION
The Company's income tax provision consists mainly of current estimated taxes
for Federal and California state income taxes. The increase in the income tax
provision is due to higher projected income tax liabilities at September 30,
2007, when compared with the same period in 2006. The tax provision increased
due primarily to the additional tax liability generated by the gain on the
sale of fixed assets in the third quarter of 2007.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2006
REVENUES
Oil and gas revenues increased by approximately 1% for the nine months ended
September 30, 2007 when compared with the same period for 2006. Oil and gas
revenues increased due to higher average crude oil prices for the first nine
months of 2007. The average price of the Company's oil and gas for the first
six months of 2007 increased by approximately ninety cents per equivalent
barrel when compared with the same period for 2006. The Company's net revenue
share of crude oil production/sales decreased by approximately 500 barrels for
the nine months ended September 30, 2007.
OPERATING EXPENSES
Operating expenses increased by approximately 7% for the nine months ended
September 30, 2007, when compared with the same period for 2006. The cost to
produce an equivalent barrel of crude oil increased by approximately $1.70 per
barrel (total cost of approximately $23.45 per equivalent barrel) for the nine
months ended September 30, 2007.
Labor costs increased by approximately 6% due primarily to a decrease in
capitalized labor costs. In the first nine months of 2006 labor costs of
$62,800 were capitalized as a result of drilling three new wells. In the same
period of 2007, the Company capitalized $23,000 in labor costs for the
drilling of one new well. This resulted in an increase of 3.6% in labor costs
for 2007. The remaining increase in labor costs is due to an increase in
hourly wages that was effective July 1, 2006.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by approximately 52% for the
nine months ended September 30, 2007, when compared with the same period for
2006. Accounting services increased by 35% for the nine months ended
September 30, 2007. The Company's audit fees increased by 17% due to both an
increase in those fees and the timing of billings related to those fees. The
Company has also retained an outside consulting firm to provide assistance and
guidance for its efforts to comply with Sarbanes-Oxley's requirements for
17
management's assessment of internal controls. The fees paid for this project
increased accounting services by 18% during the first nine months of 2007.
This was offset by lower costs for legal and consulting services.
Compensation costs increased by 14% due primarily to the approval of the
Severance Award Agreement by the Board of Directors on January 9, 2007.
PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION
The provision for depletion, depreciation and amortization increased by 57%
for the nine months ended September 30, 2007, when compared with the same
period for 2006. The increase is due primarily to a 52% 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 due
to the drilling of three new wells in 2006 and one new well in 2007.
INCOME TAX PROVISION
The Company's income tax provision consists mainly of current estimated taxes
for Federal and California state income taxes. The decrease in the income tax
provision is due to lower projected income tax liabilities at September 30,
2007, when compared with the same period in 2006.
18
PYRAMID OIL COMPANY
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
None
Item 2. - Changes in Securities
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information -
None
Item 6. - Exhibits and Reports on Form 8-K -
a. Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350
99.2 Written Statement of the Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350
b. The following Form 8-K was filed during the three months ended
September 30, 2007.
September 25, 2007 Press Release - Pyramid Oil Company Begins
Drilling Operations
19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PYRAMID OIL COMPANY
(registrant)
Dated: November 14, 2007
JOHN H. ALEXANDER
---------------------
John H. Alexander
President
Dated: November 14, 2007
LEE G. CHRISTIANSON
---------------------
Lee G. Christianson
Chief Financial Officer
PAGE <20>
Certification By Principal Executive Officer Pursuant
to Rule 13A-14 or 15D-14 of the SEC Exchange Act of 1934,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John H. Alexander, the President of Pyramid Oil Company (the registrant),
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Pyramid Oil
Company;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
PAGE <21>
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2007
By: JOHN H. ALEXANDER
-----------------------
John H. Alexander
Chief Executive Officer
PAGE <22>
Certification By Principal Financial Officer Pursuant
to Rule 13A-14 or 15D-14 of the SEC Exchange Act of 1934,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Lee G. Christianson, the Chief Financial Officer of Pyramid Oil Company
(the registrant), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Pyramid Oil
Company;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
PAGE <23>
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 13, 2007
By: LEE G. CHRISTIANSON
------------------------
Lee G. Christianson
Chief Financial Officer