UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                              to                                             

 

Commission File Number:     0-27443

 

BAYOU CITY EXPLORATION, INC.

(Exact name of registrant as specified in its charter)

 

Nevada	61-1306702
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
632 Adams Street, Suite-700, Bowling Green, Kentucky	42101
(Address of principal executive offices)	(Zip Code)

 

(800) 798-3389

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes    o No

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer ¨	Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    þ No

 

Shares outstanding for each class of stock as of the latest practicable date:

 

Title or Class	Shares Outstanding on August 10, 2013
Common Stock, $0.005 par value	990,230

 

 

 

	PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
	BALANCE SHEETS AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012	1
	STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012 (UNAUDITED)	2
	STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012 (UNAUDITED)	3
	NOTES TO FINANCIAL STATEMENTS (UNAUDITED)	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	8
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14
ITEM 4.	CONTROLS AND PROCEDURES	14
	PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	15
ITEM 1A.	RISK FACTORS	15
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	15
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	15
ITEM 4.	MINE SAFETY DISCLOSURES	15
ITEM 5.	OTHER INFORMATION	15
ITEM 6.	EXHIBITS	16

 

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2013				December 31, 2012
		(Unaudited)				(Audited)
ASSETS:
CURRENT ASSETS:
Cash		$	1,361,611			$	2,087,480
Accounts receivable:
Trade and other			59,639				60,790
Receivable due from affiliates			523,614				104,167
Prepaid expenses and other			478,612				117,142
TOTAL CURRENT ASSETS			2,423,476				2,369,579
OIL AND GAS PROPERTIES, NET			407,405				340,053
OTHER FIXED ASSETS, NET			16,102				19,680
OTHER INVESTMENTS AT COST			126,128				126,128
INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY			36,800				150,099
INVESTMENTS HELD FOR SALE			190,000				190,000
TOTAL ASSETS		$	3,199,911			$	3,195,539
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	48,686			$	53,953
Accounts payable – minority shareholder			84,906				84,906
Turnkey partnership obligation			1,168,383				582,746
Accounts payable – related party			–				530,611
Notes payable – minority shareholder			100,000				100,000
Federal income taxes payable			–				32,697
TOTAL CURRENT LIABILITIES			1,401,975				1,384,913
TOTAL LIABILITIES			1,401,975				1,384,913
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2013 and December 31, 2012			–				–
Common stock, $0.005 par value; 150,000,000 shares authorized; 990,230 shares outstanding at June 30, 2013 and December 31, 2012			4,951				4,951
Additional paid in capital			13,912,814				13,912,814
Accumulated deficit			(12,119,829	)			(12,107,139	)
TOTAL STOCKHOLDERS' EQUITY			1,797,937				1,810,626
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	3,199,911			$	3,195,539

 

The accompanying notes are an integral part of these consolidated financial statements.

 

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2013				2012				2013				2012
OPERATING REVENUES:
Oil and gas sales		$	75,036			$	22,626			$	183,342			$	92,194
Turnkey drilling contract revenue			215,858				–				559,726				1,578,697
TOTAL OPERATING REVENUES			290,894				22,626				743,068				1,670,891
OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes			(4,737	)			25,016				(6,721	)			44,132
Abandonment and dry hole costs			24,469				–				24,469				–
Depletion, depreciation, and amortization			28,694				5,884				60,379				33,873
Turnkey drilling contract costs			104,300				7,562				273,768				661,746
Marketing costs			11,894				179,656				58,019				254,074
General and administrative costs			244,614				188,610				392,947				326,830
TOTAL OPERATING COSTS			409,234				406,728				802,861				1,320,655
OPERATING INCOME (LOSS)			(118,340	)			(384,102	)			(59,793	)			350,236
OTHER INCOME (EXPENSE):
Miscellaneous income (expense)			200				–				10,303				–
Equity in earnings from affiliated company			8,725				80,781				36,800				80,781
NET INCOME (LOSS) BEFORE INCOME TAX PROVISION			(109,415	)			(303,321	)			(12,690	)			431,017
Income tax benefit			29,686				–				–				–
NET INCOME (LOSS)		$	(79,729	)		$	(303,321	)		$	(12,690	)		$	431,017
NET INCOME (LOSS) PER COMMON SHARE - BASIC		$	(0.08	)		$	(0.31	)		$	(0.01	)		$	0.61
NET INCOME (LOSS) PER COMMON SHARE - DILUTED		$	(0.08	)		$	(0.31	)		$	(0.01	)		$	0.61
Weighted average common shares outstanding -
Basic			990,230				990,036				990,230				704,710
Diluted			990,230				990,036				990,230				704,710

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the six months ended June 30,
		2013				2012
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)		$	(12,690	)		$	431,017
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation, depletion, and amortization			60,379				33,873
Abandonments and dry holes			24,469				–
Equity in earnings of affiliated company			(36,800	)			–
Stock issued for services			–				22,500
Change in operating assets and liabilities:
Accounts receivable - trade			1,151				(10,477	)
Receivable from partnerships			(419,447	)			–
Prepaid expenses and other			(361,470	)			–
Accounts payable and accrued liabilities			(5,267	)			(138,420	)
Turnkey partnership obligation			585,637				183,855
Accounts payable – related party			(530,611	)			–
Federal income tax payable			(32,697	)			–
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(727,346	)			522,348
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties			(148,622	)			(4,568	)
Purchase of investments			–				(209,947	)
Cash received from unconsolidated affiliated company			150,099				–
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			1,477				(214,513	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock			–				327,500
NET CASH PROVIDED BY FINANCING ACTIVITIES			–				327,500
NET INCREASE (DECREASE) IN CASH			(725,869	)			635,335
CASH AT BEGINNING OF PERIOD			2,087,480				1,259,934
CASH AT END OF PERIOD		$	1,361,611			$	1,895,269

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

BAYOU CITY EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

1.

BASIS OF PRESENTATION

 

The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2012 and subsequent filings with the SEC.

 

The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

 

Accounts Receivable

 

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of June 30, 2013, there were no accounts receivable considered potentially uncollectible.

 

Managed Limited Partnerships

 

The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of each limited partnership as its Managing General Partner, and accounts for the investment under proportionate consolidation. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively.

 

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 its 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.

 

Oil and Gas Properties

 

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

 

(1)

the costs of acquiring mineral interest in properties,

 

(2)

costs to drill and equip exploratory wells that find proved reserves,

 

 

(3)

costs to drill and equip development wells, and

 

(4)

costs for support equipment and facilities used in oil and gas producing activities.

 

These costs are depreciated, depleted or amortized on the unit of production method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

 

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.

 

The costs of drilling exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired and its costs are charged to expense. At June 30, 2013 and December 31, 2012 the Company had $0 in capitalized costs pending determination.

 

Other Dispositions

 

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

 

Impairment of Long-Lived Assets

 

The Company follows the provisions of ASC Subtopic 360-35, “Property, Plant and Equipment – Subsequent Measurement.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with ASC 932-235, “Disclosures about Oil and Gas Producing Activities.”

 

Stock Options

 

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statements of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

 

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

 

 

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

 

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

 

The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At June 30, 2013, the cash balances were at $1,361,611.

 

Offering Related Expenses

 

The Company expenses marketing-related offering expenses as these are incurred. Marketing expenses totaled $58,019 and $254,074 in the six months ended June 30, 2013 and 2012, respectively.

 

Fair Value of Financial Instruments

 

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

 

3.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Sale of Common Stock to Related Parties

 

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 700,000 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 former President and a former member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s President and Chief Financial Officer as well as a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder, and G2 International, Inc., a consultant to the Company. Of the $350,000, $327,500 was collected in cash and $22,500 was issued in satisfaction of payment for consulting services.

 

As of June 30, 2013, there were 990,230 shares of Common Stock issued and outstanding. Stephen C. Larkin, President, Director and Chief Financial Officer of the Company, beneficially owns approximately 27.06% of the issued and outstanding Common Stock as a result of his purchase in the Offering.

 

Payables and Notes Payable to Related Parties

 

As of June 30, 2013 and December 31, 2012, the Company had the following debts and obligations to related parties:

 

		June 30, 2013				December 31, 2012
Note Payable to a minority shareholder			100,000				100,000
Total Note Payable to a minority shareholder		$	100,000			$	100,000

 

During the fourth quarter 2007, Peter Chen, a minority shareholder, loaned the Company $100,000 to finance the Company’s operations. The Company executed a written promissory note on October 4, 2007 which is due on demand and bears an interest rate of 0%.

 

 

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 companies 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 in connection with its acquisition of mortgage notes and land contracts for the Opportunity Funds. In the event that an Opportunity Fund 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.

 

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.

 

4.

OIL AND GAS PROPERTIES

 

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

 

		June 30, 2013				December 31, 2012
Proved oil and gas properties		$	900,693			$	776,540
Total oil and gas properties			900,693				776,540
Less accumulated depletion and amortization			(493,288	)			(436,487	)
Less impairment			–				–
Net oil and gas properties		$	407,405			$	340,053

 

5.

COMMITMENTS AND CONTINGENCIES

 

Commitments

 

As of June 30, 2013, neither the Company nor any of its properties is subject to any material pending legal proceedings.

 

Contingencies

 

As the managing general partner of the Company’s investment partnerships, the Company’s operations are subject to environmental protection regulations established by federal, state, and local agencies that may necessitate significant capital outlays that, in turn, would materially affect the financial position and business operations of the Company. These regulations, enacted to protect against waste, conserve natural resources and prevent pollution, could necessitate spending funds on environmental protection measures, rather than on drilling operations. Because these laws and regulations change frequently and are becoming increasingly more stringent, the costs to the Company of compliance with existing and future environmental regulations and the overall impact on the Company’s operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed on the Company for violating such regulations, the Company’s operations could be adversely affected.

 

 

6.

STOCKHOLDERS’ EQUITY

 

Authorization to Issue Shares — Preferred and Common

 

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As of June 30, 2013, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as Common Stock, of which 990,230 were outstanding, and 5,000,000 shares designated as preferred stock, of which no shares were outstanding.

 

Issuance of Equity Securities

 

As described in Note 3 above, on March 8, 2012, the Company conducted a private offering pursuant to which the Company sold 700,000 shares of the Company’s Common Stock for total consideration to the Company valued at $350,000.  The consideration for the Common Stock was paid primarily in cash, however, the shares issued to one Investor were issued in exchange for settlement of outstanding invoices for consulting services rendered.

 

During the six months ended June 30, 2013, the Company did not issue any equity securities.

 

Stock Options

 

During the six months ended June 30, 2013, the Company did not issue any options to purchase shares of the Company’s Common Stock, and no outstanding options were exercised during this period.

 

Reverse Split of Common Stock

 

On 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 June 30, 2013, the Company had 990,230 shares of Common Stock outstanding. 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.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We urge you to read the following discussion in conjunction with management’s discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012 as well as with our condensed consolidated financial statements and the notes thereto included elsewhere herein.

 

Caution Regarding Forward-Looking Statements

 

Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q (this “Report”), we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance and our anticipated growth, descriptions of our strategies, and other objectives, expectations and intentions, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.

 

We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC or changes in costs associated with our operations. We undertake no obligation to revise or update any forward-looking statement for any reason.

 

 

Overview

 

Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated, and subsequently changed its name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name again to Bayou City Exploration, Inc. The Company’s corporate headquarters are located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101.

 

The Company is 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.

 

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

 

As of June 30, 2013, the Company had total assets of $3,199,911, total liabilities of $1,401,975 and stockholders’ equity of $1,797,937. The Company had a net loss of $12,690 for the six months ended June 30, 2013 compared to a net income of $431,017 during the six months ended June 30, 2012. The net loss per common share was $0.01 per share during the six months ended June 30, 2013 as compared to net income per common share of $0.61 during the same period in 2012. All per share data in this report has been adjusted to give effect to applicable stock issuances and conversions and the Company’s 2012 reverse stock split.

 

All of the Company’s periodic report filings with the SEC pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101 or call (800) 798-3389.

 

Formation of Investment Partnerships

 

During the six months ended June 30, 2013, we served as the managing general partner of eight limited partnerships formed for the purpose of oil and gas exploration and drilling. The Company has entered into Turnkey Contracts with each of the partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).

 

The 2011 Bayou City Two Well Drilling Program, L.P. (the “2011 Drilling Program”) was formed in Kentucky on January 10, 2011, and planned to acquire up to a 2.125% working interest in two oil and gas wells known as the Miller Prospect Well and the Squeeze Box Prospect Well in Colorado County, Texas. The 2011 Drilling Program has acquired a 1.78% working interest in the wells. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $327,750 in Turnkey Fees associated with the 2011 Drilling Program. The Company has realized a profit of $197,253 from the Turnkey Fees received as of June 30, 2013.

 

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 Drilling Program. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $529,000 in Turnkey Fees associated with the Drilling and Production Program. The Company realized a profit of $343,677 from the Turnkey Fees received as of June 30, 2013.

 

 

The 2011-C Bayou City Offset Drilling Program, L.P. (the “2011-C Drilling Program”) was formed in Kentucky on April 12, 2011 to acquire up to a 5% working interest in the Kleimann #1 Well, located in Colorado County, Texas. The 2011-C Drilling Program ended up only acquiring a 2.625% working interest in the Kleimann #1 well. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership well. At March 31, 2013, the Company had received $234,938 in Turnkey Fees associated with the 2011-C Drilling Program. The Company realized a profit of $137,865 from the Turnkey Fees received as of June 30, 2013.

 

The 2011-D Bayou City Two Well Drilling Program, L.P. (the “2011-D Drilling Program) was formed in Kentucky on May 10, 2011 to acquire a 5% working interest in the Prairie Bell West Prospect Well and the Prairie Bell East Prospect Well located in Colorado County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $949,924 in Turnkey Fees associated with the 2011-D Drilling Program. The Company realized a profit of $524,958 from the Turnkey Fees received as of June 30, 2013.

 

The 2011 Bayou City Year End Drilling Program, L.P. (“2011 Year End Program”) was formed in Kentucky on September 13, 2011 to acquire a 6.48% working interest in the Loma Blanca Well located in Brooks County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $1,801,500 in Turnkey Fees associated with the 2011 Year End Program. The Company realized a profit of $956,462 from the Turnkey Fees received as of June 30, 2013.

 

The 2012-A Bayou City 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. However, the Company made a decision and received a majority vote from the partnership to acquire interest in three different wells, the McCarthy Trust #2 with a 4.1667% working interest, the Seabreeze #1 Well with a 4.1667% working interest, and the Seabreeze #3 Well with a 0.833%, all located in Chambers County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $1,303,512 in Turnkey Fees associated with the 2012-A Year End Program. The Company realized a profit of $674,618 from the Turnkey Fees received as of June 30, 2013.

 

The 2012 Bayou City Year End Drilling Program, L.P. (“2012 Year End Program”) was formed in Kentucky on October 9, 2012 to acquire an 2.5% working interest in the Galveston Bay Well located in Galveston County, Texas. The Company paid for and holds a 1% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At June 30, 2013, the Company had received $337,121 in Turnkey Fees associated with the 2012 Year End Program. The Company realized a profit of $165,519 from the Turnkey Fees received as of June 30, 2013.

 

The 2013 Bayou City Seabreeze Offset Drilling Program, L.P. (“2013 Seabreeze Offset Program”) was formed in Kentucky on February 12, 2013 to acquire an 4.167% working interest in the Seabreeze #2 Well and a 3.33% working interest in the Seabreeze #3 Well, both of which are located in Chambers County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At June 30, 2013, the partnership had received $1,106,039 in Turnkey Fees associated with the 2013 Seabreeze Offset Program. The Company has not realized a profit as of June 30, 2013.

 

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 (“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 BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and Opportunity Fund VIII, LLC (“Opportunity Fund VIII,” and collectively with the other managed funds, “Opportunity Funds”), established in February 2013, both of which are also Delaware limited liability companies 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 June 30, 2013, Fund VI owns approximately 46% of the Holding Fund, BYCX Fund I owns approximately 24% of the Holding Fund and Opportunity Fund VII owns approximately 30% of the Holding Fund. The Holding Fund has acquired 463 Mortgage Notes and Land Contracts with unpaid balances totaling approximately $17,108,526. 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. During the six months ended June 30, 2013, approximately $800,599 was distributed to Holding Fund members.

 

As of June 30, 2013, Opportunity Fund VIII has a capitalization of approximately $760,000, and has invested approximately $366,000 in Mortgage Notes and Land Contracts with unpaid balances totaling approximately $366,000.

 

Description of Properties

 

The following are the primary properties held by the Company as of June 30, 2013:

 

Developed Properties

 

Rooke #2: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in May 2010. The well produces approximately 6 barrels of oil (“Bbls”) per day as of the date of this Report.

 

Kleimann #1: The Company owns a 0.26% working interest in the Kleimann #1, a well located in Colorado County, Texas, which began production in March 2012. The well is currently producing approximately 228 thousand cubic feet (“Mcf”) of natural gas and 6 Bbls per day as of the date of this Report.

 

Squeeze Box: The Company owns a 0.78% working interest in the Squeezebox well, a gas well located in Cameron Parish, Louisiana, which began production in November 2011. The well produces approximately 171 Mcf of natural gas and 41 Bbls per day as of the date of this Report.

 

Prairie Bell East: The Company owns a 0.49% working interest in the Prairie Bell East well, a gas well located in Colorado County, Texas, which began production in February 2012. The well produces approximately 981 Mcf of natural gas and 23 Bbls per day as of the date of this Report.

 

Koehn #2: The Company owns an 11.0% working interest in the Koehn #2 well, which is located in Colorado County, Texas. The well was completed and production began as of October 2012. The well produces approximately 83 Bbls per day and 745 Mcf of natural gas as of the date of this Report.

 

McCarthy Trust #2: The Company owns a 0.42% working interest in the McCarthy Trust #2 Well, which is located in Chambers County, Texas. The well produces approximately 34 Bbls per day and 148 Mcf of natural gas per day as of the date of this Report.

 

Seabreeze #1: The Company owns a 0.42% working interest in the Seabreeze #1 Well, which is located in Chambers County, Texas. The well produces approximately 79 Bbls per day and 458 Mcf of natural gas per day as of the date of this Report.

 

Key Undeveloped Properties (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 Next Energy JV is targeting up to 300,000 net acres of oil and gas leases. The investment entitles the Company to a 0.005% interest in the Next Energy JV. The Company does not own a direct interest in any of the acreage, but rather an interest in a joint venture that holds undeveloped acreage.

 

 

Critical Accounting Policies

 

Since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, there have been no changes to the Company’s Critical Accounting Policies.

 

Results of Operations

 

Comparison of Three Month Periods Ended June 30, 2013 and June 30, 2012

 

The Company had a net loss of $79,729 for the three months ended June 30, 2013 compared to a net loss of $303,321 for the same period in 2012. The loss per common share was $0.08 during the first quarter of 2013 compared to a loss per common share of $0.31 during the first quarter of 2012. The change in net loss in the first quarter of 2013 was primarily the result of more Turnkey Contract revenue being recognized in 2013 than in 2012, increased revenues from oil and gas sales and a large reduction in marketing costs. These changes were offset in part by increases in abandonment and dry hole costs, general and administrative costs, depletion, depreciation, and amortization costs, and turnkey drilling contract costs. Operating expenses during the second quarter of 2013 compared to the second quarter of 2012 include a $167,762 decrease in marketing costs, a $22,810 increase in depreciation, depletion and amortization expense, an increase of $24,469 in abandonment and dry hole costs, and a $29,753 decrease in lease operating expenses and production taxes. Turnkey drilling contract costs from period to period increased $96,738, from $7,562 for the three months ended June 30, 2012 to $104,300 for the same period of 2013.

 

Operating Revenues

 

The Company’s operating revenues increased $268,268 for the three months ended June 30, 2013 compared to the same period in 2012. This significant increase was primarily a result of $215,858 in Turnkey Fees in the second quarter of 2013, compared to zero during the second quarter of 2012. Revenues from oil and gas production also increased $52,410 during the three months ended June 30, 2013 over the same period in 2012 primarily due to production from the Koehn #2 well, which produced net revenue of $84,350 during the second quarter of 2013 and was not producing during the first quarter of 2012.

 

Operating Costs and Expenses

 

The Company’s total operating costs increased $2,406 from the three months ended June 30, 2012 to the three months ended June 30, 2013. The slight increase in total operating costs was primarily due to increases of $96,738 in Turnkey Contract costs, $56,004 in general and administrative costs and $22,810 in depletion, depreciation and amortization expense from the second quarter of 2012 to the second quarter of 2013, offset by decreases of $29,753 in lease operating expenses and $167,762 in marketing costs.

 

Depletion, depreciation, and amortization for the three months ended June 30, 2013 were $28,864, compared to $5,884 during the three months ended June 30, 2012. These costs increased $22,810 between the periods as a result of the Koehn #2 well, in which the Company owns an 11% working interest, causing a larger than normal expense to be recognized.

 

Other Income

 

During the three months ended June 30, 2013, the Company recognized $8,725 in income from Affiliated Partners compared to $80,781 during the three months ended June 30, 2012. The income recognized during the period was the result of revenues generated by Loanmod in connection with acquisitions of Mortgage Notes and Land Contracts by the Opportunity Funds. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” to the Company’s unaudited consolidated financial statements included in this Report.

 

Comparison of Six Month Periods Ended June 30, 2013 and June 30, 2012

 

The Company had a net loss of $12,690 for the six months ended June 30, 2013 compared to a net income of $431,017 for the same period in 2012. The loss per common share was $0.01 during the first six months of 2013 compared to income per common share of $0.61 during the first six months of 2012. The change in net income in the first six months of 2013 was primarily the result of less Turnkey Contract revenue being recognized in 2013 than in 2012, offset by increases in oil and gas sales and decreases in total operating costs. Expenses from the first six months of 2012 to the first six months of 2013 included a $196,055 decrease in marketing costs, a $26,506 increase in depreciation, depletion and amortization expense, and a $50,853 decrease in lease operating expenses and production taxes. Turnkey drilling contract costs from period to period decreased $387,978, from $661,746 for the six months ended June 30, 2012 to $273,768 for the same period of 2013.

 

 

Operating Revenues

 

The Company’s operating revenues decreased $927,823 for the six months ended June 30, 2013 compared to the same period in 2012. This significant decrease was primarily a result of recognizing $1,018,971 less income from Turnkey Fees in the first six months of 2013 than the first six months of 2012. Revenues from oil and gas production also increased $91,148 between the first six months of 2012 and the same period in 2013 primarily due to production from the Koehn #2 well, which produced net revenue of $175,015 during the first six months of 2013 and was not producing during the first six months of 2012.

 

Operating Costs and Expenses

 

The Company’s total operating costs decreased $517,794 from the six months ended June 30, 2012 compared to the six months ended June 30, 2013. The decrease in total operating costs was primarily a result of $661,746 in Turnkey Contract costs in 2012 compared to $273,768 in 2013. In addition, the Company saw decreases of $50,853 in lease operating expenses and $196,055 in marketing costs during the six months ended June 30, 2013, compared to the six months ended June 30, 2012.

 

The Company’s decreases in operating costs and expenses were offset by an increase in depletion, depreciation, and amortization. Depletion, depreciation, and amortization for the six months ended June 30, 2013 were $60,379, compared to $33,873 during the six months ended June 30, 2012. These costs increased $26,506 during the period as a result of the Koehn #2 well, in which the Company owns an 11% working interest, causing a larger than normal expense to be recognized.

 

The Company’s general and administrative expenses also increased to $392,947 for the first six months 2013 as compared to $326,830 for the first six months of 2012. In addition, the Company recognized $10,303 in miscellaneous income attributable to our wholly owned subsidiary, Rivergreen Financial Group, LLC (“Rivergreen”). Planned Rivergreen operations were abandoned in 2012 and the Company had previously written off expenses associated with Rivergreen, however due to the consolidation method, the Company had to realize a gain due to an elimination entry booked during the six months ended June 30, 2013, which was not present during the first quarter of 2012.

 

Other Income

 

During the six months ended June 30, 2013, the Company recognized $36,800 in income from Affiliated Partners, compared to $80,781 during the six months ended June 30, 2012. The income recognized during the period was the result of revenues generated by Loanmod in connection with acquisitions of Mortgage Notes and Land Contracts by the Opportunity Funds. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” to the Company’s unaudited consolidated financial statements included in this Report.

 

Balance Sheet Review

 

Assets: The Company’s total assets increased $4,372 from $3,195,539 at December 31, 2012 to $3,199,911 at June 30, 2013. Although cash balances at June 30, 2013 decreased $725,869 from those on hand at December 31, 2012, these decreases in current assets were offset by increases to prepaid expenses of $361,470 and increases in receivables due from affiliates of $419,447.

 

In addition, the Company saw a significant decrease in Investment in Unconsolidated Affiliate Company in the amount of $113,299. The drop in the asset value was due to cash paid to the Company from Affiliated Partners during the first half of 2013.

 

Liabilities: The Company’s total liabilities increased $17,062 from $1,384,913 at December 31, 2012 to $1,401,975 at June 30, 2013. The increase in liabilities was primarily a result of an increase of $585,637 in turnkey partnership obligation, offset by decreases of $530,611 in accounts payable – related party and $32,697 in federal income tax payable owed by the Company at June 30, 2013 as compared to December 31, 2012.

 

 

Liquidity and Capital Resources

 

The Company sponsors and serves as managing general partner of limited partnerships formed for the purpose of conducting oil and gas exploration and production operations. As a result of its formation and sponsorship of such limited partnerships, the Company receives Turnkey Fees from Turnkey Contracts in addition to revenues from oil and gas production. The Company intends to continue to sponsor such partnerships and receive revenues from similar turnkey arrangements in order to fund its operations. The Company’s ability to continue and maintain operations is contingent upon its continued ability to sponsor additional partnerships and earn Turnkey Fees. In addition, the Company believes it will continue to earn revenue from its direct oil and gas holdings, including holdings from the oil and gas limited partnerships it manages. The total production capability of the currently producing wells and their cash flows is known, and diminishing. Revenues from currently producing wells will not be sufficient to sustain the Company’s operations on a going forward basis. Based on the Company’s projected expenses, we believe our current cash resources are sufficient to fund operations for at least the next twelve months.

 

As of June 30, 2013, the Company’s cash balance was $1,361,611 and its liabilities totaled $1,401,975, including $1,168,383 in partnership obligations pursuant to its Turnkey Contracts with the partnerships it manages, $48,686 in accounts payable and accrued expenses, $84,906 in related party accounts payable, and $100,000 in a note payable to a minority shareholder.

 

Net cash used in operating activities during the six months ended June 30, 2013 was $727,346 and accounted for the Company’s $725,869 net decrease in cash during the period. The 2013 net cash used in operations was primarily due to increased receivable from partnerships of $419,447 and prepaid expenses of $361,470, decreased accounts payable-related party of 530,611 and decreased turnkey partnership obligations of $585,637. Net cash provided by investing activities was $1,477 during the six months ended June 30, 2013, due to a distribution to the Company of its portion of Affiliated Partner’s income, offset by the purchase of oil and gas properties.

 

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

 

ITEM 4. 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.

 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, that occurred during the quarter ended June 30, 2013, that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of 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 or 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.

 

PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no unreported sales of unregistered securities during the quarter ended June 30, 2013.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS

 

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

 

Exhibit	Description
10.1	Limited Partnership Agreement of 2011-C Bayou City Offset Drilling Program, L.P. dated April 28, 2011
10.2	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011-C Bayou City Offset Drilling Program, L.P. dated April 28, 2011
10.3	Limited Partnership Agreement of 2011-D Bayou City Two Well Drilling Program, L.P. dated May 26, 2011
10.4	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011-D Bayou City Two Well Drilling Program, L.P. dated May 26, 2011
10.5	Limited Partnership Agreement of 2012 Bayou City Year End Program., L.P. dated October 22, 2012
10.6	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012 Bayou City Year End Program., L.P. dated October 22, 2012
10.7	Limited Partnership Agreement of 2013 Bayou City Seabreeze Offset Drilling Program, L.P. dated March 8, 2013
10.8	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2013 Bayou City Seabreeze Offset Drilling Program, L.P. dated March 8, 2013
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14a/Rule 14d-14(a).
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
101.1	Interactive data files pursuant to Rule 405 of Regulation S-T.

 

 

 

 

 

 

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.

 

Date: August 14, 2013	BAYOU CITY EXPLORATION, INC
	/s/ Stephen C. Larkin
	Stephen C. Larkin
	President and Chief Financial Officer