UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT F 1934

 

Commission File Number:  333-140806

 

Capital City Energy Group, Inc.

 (Exact Name of Registrant as specified in its Charter)

 

 

Nevada		20-5131044
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Nos.)
1335 Dublin Road, Suite 122-D Columbus, Ohio		43215
(Address of Principal Executive Offices)		(Zip code)

Registrants’ telephone number, including area code:  614-485-3110

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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

 

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

 

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

 

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

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

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large Accelerated Filer o		Accelerated Filer ¨		Non-Accelerated Filer  ¨		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).    ¨  Yes    þ  No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of our common stock held by non-affiliates as of June 30, 2014 was $1,718,983. As of June 19, 2015, there were 85,949,061 shares of voting and non-voting common stock issued and outstanding

 

DOCUMENTS INCORPORATED BY REFERENCE

 

  List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).  None.

TABLE OF CONTENTS

 

PART I
Item 1		Business		4
Item 1A		Risk Factors		10
Item 1B		Unresolved Staff Comments		10
Item 2		Properties		10
Item 3		Legal Proceedings		10
Item 4		Mine Safety Disclosures		10
PART II
Item 5		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		11
Item 6		Selected Financial Data		12
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 7A		Quantitative and Qualitative Disclosures About Market Risk		13
Item 8		Financial Statements and Supplementary Data		17
Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		18
Item 9A		Controls and Procedures		18
Item 9B		Other Information		19
PART III
Item 10		Directors, Executive Officers and Corporate Governance		19
Item 11		Executive Compensation		24
Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		24
Item 13		Certain Relationships and Related Transactions, and Director Independence		25
Item 14		Principal Accountant Fees and Services		25
PART IV
Item 15		Exhibits, Financial Statement Schedules		26

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 This 2014 Annual Report on Form 10-K contains statements, which constitute forward-looking statements. Such statements can often be identified by the use words such as “believe,” “expect,” “may,” “might,” “will,” “should,” “seek,” “on-track,” “plan,” “intend” or “anticipate,” or the negative thereof or comparable terminology.  In addition, expressions or discussions of our strategy, plans, prospects or future results are forward-looking statements. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties, both known and unknown.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date, and that any such forward-looking statements are not guarantees of future performance.  Our business and operations are subject to a variety of risks and uncertainties and, consequently, our actual results may materially differ from those projected or implied by any forward-looking statements. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made.

PART I

Item 1.

Business

Background

The Company was originally formed on June 27, 2006 as The Baby Dot Company to engage in the business of designing, marketing and distributing handcrafted baby blankets and other accessories made from quality fabrics. Our business operations had been conducted through a wholly owned subsidiary, Baby Dot LLC, a limited liability company formed under the laws of the State of Nevada. As used in this Annual Report, references to “the Company” or to “we,” “us” or “our” refer to Capital City Energy Group, Inc., together with its consolidated subsidiaries, Capital City Petroleum, Inc., Avanti Energy Partners, LLC, Eastern Well Services, LLC and Hotwell Services, Inc., unless the context otherwise requires.

On March 11, 2008, the Company merged with Capital City Energy Group, Inc.  Capital City Energy Group, Inc., was founded in 2003 and is headquartered in its offices in Columbus, Ohio, from where it conducts its growing energy business that is principally in the upstream oil and gas exploration and production (“E&P”) industry.  Its business has evolved from its beginnings to where it recently resumed its core pursuits as an innovative leader in the design, management and sponsorship of retail and institutional, direct participation energy programs. With fractional and wholly owned well holdings diversified across the United States, the Company opportunistically seeks out conventional and unconventional projects, occasionally self-operated and from among its historic and developing list of operator affiliates and partners. 

During 2010, the Company elected a new board of directors, who determined to dispose of the Company’s subsidiary, Hotwell Services, Inc. (“Hotwell”). Hotwell operated an unprofitable wireline company within the oilfield services portion of the upstream industry (discussed briefly, below).  The Company successfully executed an asset sale of Hotwell and its business. With the disposition of Hotwell, the Company returned to its core business that currently accounts for more than 90% of revenues, which is principally conducted through the Company’s subsidiary, Capital City Petroleum, Inc. (“CCP”).  Avanti Energy Partners, LLC, another wholly owned division of the Company, serves as the Company’s licensed well operator, not only developing and occasionally operating well projects, but also serving as strategic project manager for the Company and external investors. While the Company’s core business model remains one of opportunistic investment in domestic, developmental oil and gas wells, it continues to occasionally consider selected exploratory projects, both domestically and internationally, where its Eastern Well Services, LLC subsidiary has previously been engaged as a consultant.

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Capital City Petroleum, Inc.

Prior to the extended bull market in energy prices, the Company, through CCP, recognized the need to provide investors with some exposure to alternative asset classes, such as commodities including oil and natural gas resources.  This intention led to the formation of several oil and gas funds over a four-year period from 2003 – 2007.  These funds were direct participation, blind pools that invested in oil, natural gas and lease acreage opportunities across the United States.  The funds were structured as diversified and balanced collections of small working interest investments in a variety of energy properties, including existing production, developmental drilling, lease acreage, pipeline holdings and exploration opportunities with established and successful oil and natural gas operating companies. Distributions were paid to investors from the production revenue generated by the wells and occasional pipeline interest, whereby investors also received substantial tax benefits allocated to them. Since inception, CCP formed a total of ten  funds with total investment capital of approximately $17,000,000 subscribed.

In 2007, the first seven  funds contributed their assets to CCP. The fund investors received preferred and common stock in CCP in exchange for their interests in the funds. On December 11, 2008, CCEF XIV, LLC and CCEF XVI, LP merged with CCP, resulting in the fund investors receiving 733,491 and 860,221 shares of Company common stock, respectively, valued at $1,466,982 and $1,720,442, respectively, based upon the closing stock price of CETG immediately prior to the acquisition date.

As of the date of the filing of this report, the Company derives approximately 99% of its revenues from the net revenues it receives from the varying fractional working interests it owns across the oil and gas well holdings of CCP.

Hotwell Services, Inc.

Acquired on December 31, 2008, the Company’s Hotwell subsidiary was a full service wireline company servicing the northeast region of the U.S.  The Company disposed of all Hotwell assets in a February 15, 2011 asset sale and as of December 31, 2012, Hotwell had no business operations and nominal remaining liabilities.

All Other Operations

The Company’s financial statements include the accounts of the Company and its wholly owned subsidiaries: Eastern Well Services, LLC, Capital City Petroleum, Inc. Avanti Energy Partners, Inc. and Hotwell, Inc. All significant intercompany transactions have been eliminated in the consolidation.

During 2008, Eastern Well Services, LLC (“Eastern”), an Ohio limited liability company, provided consulting services to oil and gas companies, internationally (e.g., the Republic of Botswana, Africa). However, it is not currently conducting operations.

Avanti Energy Partners, LLC (“Avanti”) is an Ohio limited liability company, which manages Fund XVII, LP and the Homer-Woody Joint Venture.  Principally, the current responsibilities of Avanti are to be the Manager of Fund XVII and to operate the Westfall #1 well within the Homer-Woody project (“Homer-Woody”). Avanti also serves the Company in its ongoing efforts to opportunistically locate, screen, evaluate and select energy properties across all strategic prospects for the Company, its investors and customers.  In this role, as an operator and also in non-operated capacities, Avanti acts in a principal capacity and utilizes strategic business relationships with oil and gas operators across the United States to generate investment opportunities. These relationships have strengthened over time, due to synergies within the business goals of the Company and its industry relationships.

In 2008, the Company, through Avanti, identified certain lands located in Medina, Ashland and Wayne counties, in the State of Ohio, which Avanti believed to have significant, commercial oil and gas production potential.  Avanti acquired certain oil and gas leases for the drilling and completion of oil and gas wells, known as Homer-Woody.  The Company, through Avanti, obtained funds from outside investors for participation in drilling initiatives designed to develop the Homer-Woody lease holds. Through the private placements of interests in these drilling partnerships, net proceeds were to have been used to fund the investors’ share of drilling and completion costs under joint venture drilling contracts. This program offered investors a direct interest in the wells projected and/or drilled in Homer-Woody.

The Homer-Woody project drilled and completed a single well within the Homer Township of the project, located in Medina County, Ohio. This Westfall #1 well, drilled to the Clinton sandstone formation, remains marginally productive as of the date of this filing.  The Woody portion of the joint venture, located in Ashland County (Ohio), drilled a single well into the Berea sandstone formation, which was not subsequently completed due to its demonstrated, commercial non-viability.

Employees

As of December 31, 2014, we had no full-time employees. Our Company engages third-party professionals experienced in geology, petroleum engineering, land acquisition, finance, accounting and law on an external basis as outside consultants.  The Company has three officers, two of whom are engaged full-time on a consulting basis.

Research and Development Activities

During each of the last two fiscal years, we have not spent any funds on research and development activities.

Taxation

Our operations, as is the case in the petroleum industry, generally, are significantly affected by federal tax laws. Federal, as well as state, tax laws have many provisions applicable to corporations which could affect the future tax liability of the Company.

Availability of Information

The public may obtain our periodic reports and other information we file with the SEC on the SEC’s website http://www.sec.gov. Our periodic reports and other information, once filed with the SEC, are available to interested parties on the Company’s website at http://www.capcityenergy.com and upon written request addressed to the Company at the Company’s executive offices.

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Oil and Gas Disclosures

General.  Through Petroleum and Avanti, the Company engages in oil and gas operations which require certain detailed disclosures.  Unless indicated, the information presented herein is for properties and activities under Petroleum.

Producing Activities

Production Volumes. Our production volumes for 2014 totaled 10,426 BOE, representing an increase of five percent from the 9,888 BOE produced in 2013. The following table shows our total net oil and gas production volumes during the last two years.

		Year Ended December 31,
Production:		2014				2013
Natural Gas (MCF)			17,727				18,981
Oil (Bbl)			7,370				6,615
Total barrels of oil equivalents (BOE)			10,426				9,888

Production Prices and Costs. Our production revenues and estimated oil and gas reserves are substantially dependent on prevailing market prices for natural gas. The following table shows the average sales prices for our oil and gas production during the last two years.

		Year Ended December 31,
Sales Prices and Production Costs:		2014				2013
Average sales prices:
Natural Gas (MCF)			3.19				3.67
Oil (Bbl)			83.25				86.69

Proved Oil and Gas Reserves

General. The estimates of our proved oil and gas reserves as of December 31, 2014 were prepared by James Engineering, independent petroleum engineers, in accordance with regulations of the Securities and Exchange Commission (“SEC”). Under those regulations, proved reserves are limited to estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, using prices and costs as of the date the estimate is made. These prices and costs are held constant over the estimated life of the reserves. Our reserve estimates should be read in conjunction with the supplementary disclosure on our oil and gas development and producing activities and oil and gas reserve data included in the footnotes to our consolidated financial statements at the end of this report.

There are many uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. Reservoir engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate is dependent on the quality of available data and is subject to engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of an estimate may justify revision of the estimate. As a result, reserve estimates are often materially different from the quantities of oil and gas that are ultimately recovered.

Reserve Quantities. The following table summarizes the estimates by Mackenzie Land and Exploration, Ltd. of our proved developed producing reserve volumes as of December 31, 2014, and 2013.  Developed producing reserves are the estimated amounts of oil and gas that can be expected to be recovered from existing wells with existing equipment and operating methods.

Estimated Proved Developed Reserves:		As of December 31,
		2014				2013
Natural gas (Mcf)
Proved properties			12,498				12,593
Unproved properties			--				—
Total natural gas (Mcf)			12,498				12,593
Crude oil
Proved properties			13,913				19,170
Unproved properties			—				—
Total crude oil (Bbl)			13,913				19,170
Total gas equivalents (Mcfe)			16,068				21,342

 

 

Reserve Values. The supplemental future cashflow tables included in the notes to the financial statements summarize the estimates of future net cash flows from the production and sale of our proved developed producing reserves as of December 31, 2014 and 2013, and the present value of those cash flows, discounted at 10% per year in accordance with SEC regulations to reflect the timing of net cash flows. The future net cash flows were computed after giving effect to estimated future development and production costs, based on year-end costs and assuming the continuation of economic conditions at the time of the estimates. The standardized measure of future net cash flows gives effect to future income taxes on discounted future cash flows based on year-end statutory rates, adjusted for any operating loss carryforwards and tax credits.

The prices used in the Company’s cashflow estimates were based on prices we received for our oil and gas production at the end of each reported period, without escalation. The prices as of December 31, 2014 had a weighted average of $4.35 per Mcf of natural gas and $94.99 per barrel of crude oil, and the prices as of December 31, 2013 had a weighted average of $3.67 per Mcf of natural gas and $86.69 per barrel of crude oil.  The estimates are highly dependent on the year-end prices used in the computation and are subject to considerable uncertainty.

Oil and Gas Properties

Oil and Gas Interests. Our leases are for varying primary terms and are generally subject to specified royalty or overriding royalty interests, development obligations and other commitments and restrictions. Our ownership interests as of December 31, 2014 are associated with multiple parcels of varying acreage.

Competition

Although we are not in direct competition with other oil and gas entities engaged in the exploration and production of oil and gas, the Company is engaged in numerous, drilling and income programs and partnerships exploring various areas of the United States and elsewhere competing for properties.

Regulation

General. Although our business operations are not directly subject to regulation by state, federal regulatory bodies or environmental regulations, the oil and gas business is subject to broad federal and state laws that are routinely under review for amendment or expansion. Various federal, state and local departments and agencies that administer these laws have issued extensive regulations that are binding on industry participants. Many of these laws and

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regulations, particularly those affecting the environment, have become more stringent in recent years, and some impose penalties for noncompliance, creating the risk of greater liability on a larger number of potentially responsible parties. The following overview of oil and gas industry regulation is summary in nature and is not intended to cover all regulatory matters that could affect our operations.

State Regulation. State statutes and regulations require permits for drilling operations and construction of gathering lines, as well as drilling bonds and reports on operations. These requirements often create delays in drilling and completing new wells and connecting completed wells. Ohio and other states in which we conduct operations also have statutes and regulations governing conservation matters. These include regulations affecting the size of drilling and spacing or proration units, the density of wells that may be drilled and the unitization or pooling of oil and gas properties. State conservation laws generally prohibit the venting or flaring of gas and impose requirements on the ratability of production. None of the existing statutes or regulations in states where we operate currently imposes restrictions on the production rates of our wells or the prices received for our production.

Federal Regulation. In the United States, legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. These laws and regulations have a significant impact on oil and gas drilling, gas processing plants and production activities, increasing the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, the Company may be unable to predict the future cost or impact of complying with these laws and regulations. The Company considers the cost of environmental protection a necessary and manageable part of its business. The Company should be able to plan for and comply with new environmental initiatives without materially altering its operating strategies.

The sale and transportation of natural gas in interstate commerce is subject to regulation under various federal laws administered by the FERC Historically, these laws included restrictions on the selling prices for specified categories of natural gas sold in first sales, both in interstate and intrastate commerce. While these restrictions were removed in 1993, enabling sales by producers of natural gas and crude oil to be made at market prices, federal legislation reinstituting price controls could be adopted in the future.

During the last decade, a series of initiatives were undertaken by FERC to remove various barriers and practices that historically limited producers from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers. These regulations have had a profound influence on domestic natural gas markets, primarily by increasing access to pipelines, fostering the development of a large short term or spot market for gas and creating a regulatory framework designed to put gas sellers into more direct contractual relations with gas buyers. These changes in the federal regulatory environment have greatly increased the level of competition among suppliers. They have also added substantially to the complexity of marketing natural gas, prompting many producers to rely on highly specialized experts for the conduct of gas marketing operations.

Environmental Regulation. Participants in the oil and gas industry are subject to numerous federal, state and local laws and regulations designed to protect the environment, including comprehensive regulations governing the treatment, storage and disposal of hazardous wastes. Liability for some violations of these laws and regulations may be unlimited in cases of willful negligence or misconduct, and there is no limit on liability for environmental cleanup costs or damages on claims by the state or private parties. Under regulations adopted by the Environmental Protection Agency and similar state agencies, producers must prepare and implement spill prevention control and countermeasure plans to deal with the possible discharge of oil into navigable waters. State and local permits or approvals may also be needed for waste-water discharges and air pollutant emissions. Violations of environment regulations or permits can result in substantial liabilities, penalties and injunctive restraints.

We invest in wells that are operated by third-party operators. Those third-party operators may be subject to certain oil and gas regulation and oversight.  To the best of our knowledge, their production activities comply with all applicable environmental regulations, permits and lease conditions. While we believe their operations conform to those conditions, we remain at risk for inadvertent noncompliance, conditions beyond our control and undetected conditions resulting from activities by prior owners or operators of properties in which we own interests. In any of

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those events, we could be exposed to liability for cleanup costs or damages in excess of insurance coverage, and we could be required to remove improperly disposed waste, remediate property contamination or undertake plugging operations to prevent future contamination.

Item 1A.              RISK FACTORS

Not applicable to smaller reporting company.

Item 1B.              Unresolved Staff Comments

The Company’s Form 10-K for its fiscal year ended December 31, 2008 did not include an audit report with the financial statements. The Commission issued a comment letter to the Company dated July 29, 2009 (“July 2009 Comment Letter”), with specific comments regarding the financial statements included in the 2008 Form 10K. In response to the July 2009 Comment Letter, the Company requested an extension of time to respond because of financial constraints. The Commission issued a comment letter dated September 2, 2009 (“September 2009 Comment Letter”), requesting that the Company file a Form 8-K to disclose the information as unaudited under Item 4.02, as applicable considering the financial reporting issues identified in the July 2009 Comment Letter. Because financial and other reasons beyond the Company’s control, the Company failed to make the requested Form 8-K filing or otherwise amend the 2008 Form 10K or make any other periodic report filings.

The Company filed its Form 10-K for its fiscal year ended December 31, 2013 that included financial statements for the Company’s two fiscal years ending December 31, 2013 and 2012, that are audited by an independent registered public accounting firm. The Company has also filed the quarterly reports on Form 10-Q for the three, six and nine month periods ended March 31, 2014, June 30, 2014 and September 30, 2014 (the “2014 Form 10-Qs”) that contain the Company’s unaudited financial statements for the quarterly periods ended March 31, June 30, and September 30, 2014 and 2013, respectively.

The Company believes that by filing the 2013 Form 10-K and the 2014 Form 10-Qs that any unresolved comments raised by the Commission in its July 2009 and September 2009 Comment Letters have been satisfied.

Item 2.

Properties

From January 1, 2012 to December 31, 2013 the Company informally occupied less than 200 square feet of accounting office space in Burbank, Ohio at the site of its bookkeeping and accounting consultant.  As of the date of this report, the Company solely occupies rental office space in Columbus Ohio on a sub-leased basis for both its headquarters and accounting operations at a monthly cost of approximately $1,200.  The current lease began in April, 2014 and is renewed on a month-to-month basis.

Item 3.

Legal Proceedings

The Company filed a complaint in the United States District Court, Southern District of Ohio, Eastern Division, titled Capital City Energy Group, Inc., et. al., Plaintiffs, vs Kelley Drye & Warren LLP, et. al., Defendants, Case No. 2:11-cv-00207 (the “Matter”). The Company settled the Matter with the defendants and a stipulation of dismissal with prejudice was entered by the parties on March 6, 2014.  From time to time, the Company may be a party to various legal actions in the normal course of our business.  Currently, Management believes that the Company is not party to any litigation that, if adversely determined, would have a material adverse effect on our business, financial condition, result of operations or cash flows.

Item 4.

Mine Safety Disclosures.

Not Applicable

PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol, CETG and trading in the common stock is extremely limited.  The following table sets forth the range of high and low closing prices for the common stock for the periods indicated as quoted on the OTC Pinks of the OTC Markets Group.  The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

2014
Quarter Ended		High $		Low $
December 31, 2014		$0.050		$0.025
September 30, 2014		$0.025		$0.019
June 30, 2014		$0.040		$0.015
March 31, 2014		$0.018		$0.012
2013
Quarter Ended		High $		Low $
December 31, 2013		$0.0200		$0.0120
September 30, 2013		$0.0300		$0.0155
June 30, 2013		$0.0500		$0.0110
March 31, 2013		$0.0813		$0.0110

(b)

Holders

At December 31, 2014, there were 85,949,061 shares of Common Stock issued and outstanding as of December 31, 2014, there were 436 holders of shares of Common Stock. This does not include an indeterminate number of stockholders whose shares may be held by brokers in street name.  The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.  Holders of the Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities.  There are no redemption or sinking fund provisions applicable to the Common Stock.

Transfer Agent and Registrar

Our independent stock transfer agent is Empire Stock Transfer, 1859 Whitney Mesa Drive, Henderson, NV 89014, Telephone: 702-818-5898.

(c)

Dividend Policy

We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the expansion of our business, and we do not anticipate paying any cash dividends for the foreseeable future following this offering. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.

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(d)

Securities Authorized for Issuance under Equity Compensation Plans

None.

(e)

Recent Sales of Unregistered Securities

On May 12, 2014 the Company issued 250,000 shares of common stock to an unrelated third party as payment for services rendered.  The shares were valued at $0.03 per share, being the market price of the stock on the date of issuance, resulting in a total value of $6,602.

(f)

Issuer Purchases of Equity Securities

None.

Item 6.

Selected Financial Data

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-K.

Item 7.                  Management’s Discussion and Analysis and Plan Of Operation

This discussion and analysis contains forward-looking statements relating to future events, our future financial performance and financial condition.  Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. The historical results set forth in this discussion and analysis are not necessarily indicative of trends with respect to any actual or projected future financial performance.  This discussion and analysis should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this report.

 

Overview

Our Company, through our subsidiaries, is an expanding energy company that has evolved from the design, management and sponsorship of the Funds to become an integrated, independent energy company building a portfolio of core E&P assets which provide attractive returns on investment and growth opportunities through the development and ownership of both various, non-operated well interests and wells developed and operated by itself.  Additionally, the Company will occasionally utilize its historic fund management experience in developing and managing upstream investment opportunities for others, through the various investment models with which it is familiar and the comprise the most advantageous structures. This business plan will continue to opportunistically evolve, along with emerging developments in contemporary energy markets.

Summary of Our Plan

While we will continue to be opportunistic, the Company will continue to focus the majority of its attention on the oil and gas production activities of the CCP subsidiary as plans to obtain additional funding are finalized.  More details of our business plan are found in the “Description of Our Company” portion of this Annual Report.

It is also our plan to continue the non-operation for Eastern and significantly restrict Avanti’s activities to existing projects.

We do not currently have sufficient funding to implement all phases of our business plan for the next 12 months and do need to raise additional funding for this purpose.

Results Of Operations For The Year Ended December 31, 2014:

Revenues

On a consolidated basis oil and gas revenues decreased to $675,201 during year ended December 31, 2014, compared to oil and gas revenue of $720,332 recorded during the same period for 2013.  Revenues decreased primarily due to decreased oil and gas prices and decreased gas production volume.

Total net oil and gas production realized from principal investments was 7,370 barrels of oil and 17,727 thousand cubic feet (MCF) of natural gas for the year ended December 31, 2014.  The comparative data for the same period of 2013 was 6,615 barrels of oil and 18,981 thousand cubic feet (MCF) of natural gas.

Lease Operating Expenses and Dry Hole Expense

For the year ended December 31, 2014, lease operating expenses (LOE) decreased to $278,936 compared to $375,021 during the 2013 fiscal year.  These expenses decreased primarily as a result of decreased gas production during the year, particularly on wells with low yields.

Typical LOE expenses include operating labor, field supervision, water hauling and disposal fees, communications, fuel, leased vehicles, environmental and safety compliance.

Depreciation, Depletion, and Accretion

Depreciation, depletion and accretion expenses totaled $49,792 for the year ended December 31, 2014, compared to $94,669 for the year ended December 31, 2013. This decrease was expected due primarily to decreased oil and gas production during the 2014 fiscal year.  Additionally, the book value of certain producing wells was fully depleted during 2013 and 2014.  As a result, depletion as a percentage of production decreased in the 2014 calendar year.

Selling, General and Administrative Expenses

For the year ended December 31, 2014, the general and administrative expenses totaled $218,062 which was an increase from expenses of $171,773 posted during the same time period in 2013.  This increase resulted primarily from increases in rent expense, travel fees, and miscellaneous expenses, partially offset by decreases in automobile expenses and contract labor.  

Professional Fees

Professional fees totaled $454,816 for the year ended December 31, 2014, compared to $394,875 for the year ended December 31, 2013. This increase resulted primarily from an increase in officer consulting fees incurred, in addition to increased legal and accounting fees incurred during the period.

Other Income (Expenses)

For the year ended December 31, 2014 the Company recognized a loss of $82,486 compared to total other income of $719,106 in 2013.  This change resulted primarily from an $826,273 gain on sale of assets recognized in 2013, partially offset by a $41,871 gain on settlement of debt during the 2014 fiscal year.

Net Income (Loss)

Net loss for the year ended December 31, 2014 was $469,827 compared to net income of $403,100 for the same period in 2013. This change resulted primarily from the $826,273 gain on sale of assets recognized in 2013.

Liquidity and Capital Resources

As of December 31, 2014, we had total current assets of $401,316.  The current assets consisted mainly of cash in the amount of $389,775, accounts receivable of $2,629 and other current assets totaling $8,912.

Our total current liabilities as of December 31, 2014 were $5,242,189. The current liabilities consist of accounts payable and accrued expenses in the amount of $2,588,343, notes payable-current portion in the amount of $869,376, $1,480,000 of debt related to a participating interest financing arrangement, and a joint venture liability totaling $239,078.

 Cash Flow From Operating Activities

For the year ended December 31, 2014, net cash used in operating activities was $33,525 versus net cash provided by operating activities of $262,811 for the same twelve-month period ended December 31, 2013.

Cash Flow From Investing Activities

For the year ended December 31, 2014, net cash used in investing activities was $158,652, primarily attributed to the purchase of oil and gas properties.   For the year ended December 31, 2013, net cash provided by investing was $844,165, which resulted primarily from the sale of certain oil and gas properties.

Cash Flow From Financing Activities

For the year ended December 31, 2014, net cash used by financing activities was $58,930 versus net cash used in financing activities of $6,000 for the same period ended December 31, 2013. Financing activities principally consisted of proceeds from and payments on notes payable.

Going Concern

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.  The Company has incurred cumulative operating losses through December 31, 2014 of $35,172,245 and has a working capital deficit of $4,840,873 at December 31, 2014.  Revenues during the year ended December 31, 2014 were not sufficient to cover the Company’s operating costs and we continue to generate negative cash flows from operations.  There can be no assurance that the Company can or will be able to generate sufficient revenue or complete any debt or equity financing that might be needed to support operations in the future.

The Company’s audited consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by obtaining capital from the public markets and selected other investors sufficient to meet its minimal operating expenses, occasionally seeking additional equity and/or debt financing as warranted by future projects. However Management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.  An acceleration of acquisitions or our planned investments in energy properties and continued expansion of our various divisions over the next twelve months may require additional expenditures. Additional financing through partnering, public or private equity financings, lease transactions or other financing sources may not be available on acceptable terms, or at all. Any equity financing could result in significant dilution to our shareholders.  The Company continues to analyze its monthly cost structure to reduce the overall cash expenditures until additional capital is raised or cash flows from operations are generated. There can be no assurance that the Company can or will be able to generate sufficient revenue or complete any debt or equity financing that might be needed to support operations in the future.

Impact of Inflation

The impact of inflation on our operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse impact on our operating results.

Off-Balance Sheet Arrangements

As of December 31, 2014, we had no off-balance sheet arrangements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.  We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances.  These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

We believe the following accounting policies are our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that may be uncertain.  If actual results or events differ materially from those contemplated

8

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by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Revenue Recognition

Capital City recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold by Capital City is not significantly different from Capital City’s share of production.  Revenues from management fees are recognized in the preceding month at end of each calendar quarter and paid in arrears.

Accounts Receivable

The majority of the accounts receivable is comprised of oil and gas revenues related to production which took place on or prior to the end of accounting periods, payment for which was not received prior to the end of the year. Accounts receivable include the Company’s share of income from the managed energy funds and from investments the Company made on its own behalf.

The Company’s receives distributions from the Funds based partially on the amount of its oil and gas revenues, net of lease operating expenses and applicable severance taxes. Part of the management services provided to the Funds by the Company is to review the purchasers credit worthiness prior of all oil and gas purchasers prior to executing division orders for the sale of hydrocarbons. Receivables are generally due in 30 to 60 days. When collections of specific amounts due are no longer reasonably assured, an allowance for doubtful accounts is established.

Oil and Gas Properties

In accordance with Accounting Standards Codification Topic 932, Extractive Activities – Oil and Gas, the Company follows the successful efforts method of accounting for its oil and gas activities.  Accordingly, the cost associated with developmental oil and gas properties are capitalized and recovered using units of production cost depletion method.  Exploratory cost, including the cost of exploratory dry holes and related geological and geophysical cost are charged as current expense.  In instances where the status of a well is indeterminable at the end of the year, it is the Company’s practice to capitalize these costs as oil and gas properties, until such time as the outcome of drilling becomes known to the Company. Wells cannot remain in a status of indeterminable for a period greater than twelve months.

Impairment of Long Lived Assets and the Disposal of Long Lived Assets

Pursuant to Accounting Standards Codification Topic 932, the Company performs an impairment test (ceiling test) at each reporting date whereby the carrying value of the oil and gas properties is compared to the value of its proved reserves discounted at a ten percent interest rate of future net revenues.

The Company recognized $60,936 and $-0- in impairment of our reserves during the 2014 and 2013 fiscal years, respectively.

 

Recent Accounting Pronouncements

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position or statements.

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Report of HJ & Associates, LLC, Independent Registered Public Accounting Firm	F-2
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Stockholders' Equity (Deficit)	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-7

F-1

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Report of Independent Registered Public Accounting Firm

To the Board of Directors

Capital City Energy Group, Inc.

Columbus, Ohio

We have audited the accompanying consolidated balance sheets of Capital City Energy Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital City Energy Group, Inc. as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 3 to the consolidated financial statements, the Company has suffered losses from operations and its current cash flow is not enough to meet current needs.  This raises substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regards to this matter are also described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ HJ & Associates, LLC

HJ & Associates, LLC

Salt Lake City, Utah

July 8, 2015

CAPITAL CITY ENERGY GROUP, INC.
Consolidated Balance Sheets
ASSETS
			December 31,			December 31,
			2014			2013
CURRENT ASSETS
	Cash		$	389,775		$	640,342
	Accounts receivable			2,629			4,896
	Other current assets			8,912			9,299
		Total Current Assets		401,316			654,537
PROPERTY AND EQUIPMENT
	Oil and gas properties			5,632,632			5,534,535
	Accumulated depletion and depreciation			(5,312,829)			(5,267,990)
		Total Property and Equipment		319,803			266,545
OTHER PROPERTY AND EQUIPMENT, net				-			-
OTHER ASSETS
	Security deposits			375			375
		Total Other Assets		375			375
		TOTAL ASSETS	$	721,494		$	921,457
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
	Accounts payable and accrued expenses		$	2,588,343		$	2,254,310
	Participating interest			1,480,000			1,480,000
	ARO liability			65,392			60,061
	Joint venture liability			239,078			239,078
	Notes payable, current portion			869,376			940,167
		Total Current Liabilities		5,242,189			4,973,616
NON-CURRENT LIABILITIES
	Notes payable, long-term			37,304			42,615
		Total Non-Current Liabilities		37,304			42,615
		TOTAL LIABILITIES		5,279,493			5,016,231
STOCKHOLDERS' EQUITY (DEFICIT)
	Preferred Stock, $0.0001 par value,
	10,000,000 shares shares authorized, 3,062,234 shares
	issued and outstanding			3,062			3,062
	Common stock, $0.0001 par value, 500,000,000 shares
	authorized, 85,949,061 and 85,706,695 shares
	issued and outstanding, respectively			85,949			85,706
	Additional paid-in capital			30,525,235			30,518,876
	Retained earnings (deficit)			(35,172,245)			(34,702,418)
		Total Stockholders' Equity (Deficit)		(4,557,999)			(4,094,774)
		TOTAL LIABILITIES AND
		STOCKHOLDERS' EQUITY (DEFICIT)	$	721,494		$	921,457
The accompanying notes are an integral part of these financial statements.

CAPITAL CITY ENERGY GROUP, INC.
Consolidated Statements of Cash Flows
				For the Year Ended
				December 31,
				2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss			$	(469,827)		$	403,100
	Adjustments to reconcile net loss to net
	used in operating activities:
		Depreciation, depletion, and accretion			49,792			94,669
		(Gain) loss on disposal of assets			-			(826,273)
		Gain on settlement of debt			(41,871)			-
		Common stock issued for services			6,602			-
		Impairment of oil and gas properties			60,936			-
	Changes in operating assets and liabilities
		Accounts receivable			2,267			3,000
		Other current assets			387			(6,303)
		Accounts payable and accrued expenses			358,189			68,996
			Net Cash Used in Operating Activities		(33,525)			(262,811)
CASH FLOWS FROM INVESTING ACTIVITIES
		Purchase of fixed assets			(158,652)			-
		Sale of fixed assets			-			844,165
			Net Cash Used in Investing Activities		(158,652)			844,165
CASH FLOWS FROM FINANCING ACTIVITIES
	Payments on notes payable				(58,390)			(6,000)
			Net Cash Used in Financing Activities		(58,390)			(6,000)
NET (DECREASE) INCREASE IN CASH					(250,567)			575,354
CASH AT BEGINNING OF PERIOD					640,342			64,988
CASH AT END OF PERIOD				$	389,775		$	640,342
SUPPLEMENTAL DISCLOSURES OF
	CASH FLOW INFORMATION:
	CASH PAID FOR:
		Interest		$	84,700		$	84,700
		Income Taxes		$	-		$	-
	NON CASH FINANCING ACTIVITIES:
		Common shares cancelled		$	7		$	-
The accompanying notes are an integral part of these financial statements.

F-6

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CAPITAL CITY ENERGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

Note 1.     Organization and Business Operations

The Company was originally formed on June 27, 2006 as The Baby Dot Company to engage in the business of designing, marketing and distributing handcrafted baby blankets and other accessories made from quality fabrics. Our business operations had been conducted through a wholly owned subsidiary, Baby Dot LLC, a limited liability company formed under the laws of the State of Nevada. As used in this Annual Report, references to “the Company” or to “we,” “us” or “our” refer to Capital City Energy Group, Inc., together with its consolidated subsidiaries, Capital City Petroleum, Inc., Avanti Energy Partners, LLC, Eastern Well Services, LLC and Hotwell Services, Inc., unless the context otherwise requires.

On March 11, 2008, the Company merged with Capital City Energy Group, Inc.  Capital City Energy Group, Inc., was founded in 2003 and is headquartered in its offices in Columbus, Ohio, from where it conducts its growing energy business that is principally in the upstream oil and gas exploration and production (“E&P”) industry.  Its business has evolved from its beginnings to where it recently resumed its core pursuits as an innovative leader in the design, management and sponsorship of retail and institutional, direct participation energy programs.  With fractional and wholly owned well holdings diversified across the United States, the Company opportunistically seeks out conventional and unconventional projects, occasionally self-operated and from among its historic and developing list of operator affiliates and partners. 

The Company was in transition throughout 2008 as it moved from receiving the majority of revenue from the Fund Management Division of the Company in 2007 and previous years to receiving the majority of revenue from the direct ownership of interests in energy properties.  

During 2008 the Company acquired Avanti Energy Partners, which had managed the Capital City Energy Funds.  Avanti transitioned to a small, full-service oil and natural gas operating company during 2008.  A second acquisition was transacted in the first half of 2008 in the oilfield service sector. The Company acquired was Eastern Well Services,  LLC and began operations through consulting oil and natural gas operating companies on their well completion in the continental United States and internationally.

On December 11, 2008, Capital City Energy Fund XIV, LLC (the “LLC”) merged with and into Capital City Petroleum, Inc., a wholly-owned subsidiary of the Company.  Pursuant to the merger, the members of the LLC received 698,551 shares of the Company’s unregistered common stock based on the distribution provisions of the limited liability company agreement of the LLC.

Additionally, on December 11, 2008, Capital City Energy Fund XVI, LP (the “LP”) merger with and into Capital City Petroleum, Inc.  Pursuant to the merger, the partners of the LP received 820,546 shares of the Company’s unregistered common stock based on the distribution provisions of the limited partnership agreement of the LP.

The Company acquired 100% of the capital stock of Hotwell Services Inc. (“Hotwell”), an emerging oilfield service company operating in the Appalachian Basin, on December 31, 2008.  The Company purchased Hotwell for $5,000,000, through the issuance of 2,777,778 shares of common stock valued at $1.80 per share.  On February 15, 2011 the Company entered into an Asset Sale Agreement whereby the Company sold 100% of Hotwell’s assets and approximately 88 percent of its liabilities.  As of December 31, 2014 the Hotwell subsidiary is largely inactive.

Revenue Sources

The Company’s results of operations are dependent on two sources of revenue.

The Principal Investment Division contains our primary source of revenue which accounts for approximately 99% of revenue earned during the years ended December 31, 2014 and 2013.  The Principal Investment Divisions earns oil and natural gas revenue received from the ownership interests in more than 80 energy properties located in 12 different states.

The Fund Management Division earns 2% annual management fees for managing the Capital City Energy Funds.  During the years ended December 31, 2014 and 2013 this Division earned less than one percent of the Company’s gross revenues.

F-7

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CAPITAL CITY ENERGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

Note 2.   Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company's consolidated financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing and costs associated with its retirement obligations.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash. At December 31, 2014, the Company had approximately $139,775 in excess of federally insured limits (the FDIC insured deposits have been temporarily increased to $250,000).  The Company maintains cash accounts only at large high quality financial institutions and the Company believes the credit risk associated with cash held in banks is remote.

The Company's receivables primarily consist of accounts receivable from oil and gas sales. Accounts receivable are recorded at invoiced amount and generally do not bear interest. Any allowance for doubtful accounts is based on management's estimate of the amount of probable losses due to the inability to collect from customers. As of December 31, 2014 and 2013, no allowance for doubtful accounts has been recorded and none of the accounts receivable have been collateralized.

Fair Value of Financial Instruments

As of December 31, 2014, the fair value of cash, accounts receivable, and accounts payable, including amounts due to and from related parties, if any, approximate carrying values because of the short-term maturity of these instruments.

Principles of Consolidation

The Company’s financial statements include the accounts of the Company and its wholly owned subsidiaries: Eastern Well Services, LLC, Capital City Petroleum, Inc. Avanti Energy Partners, Inc. and Hotwell, Inc. All significant intercompany transactions have been eliminated in the consolidation.

Oil and Gas Properties, Successful Efforts Method

The Company uses the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method, costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. 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 as incurred.  We evaluate our proved oil and gas properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable.  Capital City follows Accounting Standards Codification Topic 932, Extractive Activities – Oil and Gas, in performing an impairment test (ceiling test) for these evaluations. Unamortized capital costs are reduced to fair value if the undiscounted future net cash flows from our interest in the property’s estimated proved reserves are less than the asset’s net book value.

F-8

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CAPITAL CITY ENERGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

Note 2.   Summary of Significant Accounting Policies (Continued)

Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance. Other unproved properties are amortized based on the Company's experience of successful drilling and average holding period. Capitalized costs of producing oil and gas properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are depreciated and depleted by the unit-of-production method. Support equipment and other property and equipment are depreciated over their estimated useful lives.

Under Accounting Standards Codification Topic 932, Extractive Activities – Oil and Gas, drilling costs for exploratory wells are initially capitalized but generally must be charged to expense unless the wells are determined to be successful within one year after completion of drilling. The one-year limitation may be exceeded for an exploratory well only if sufficient reserves have been found to justify its completion and sufficient progress has been made in assessing the reserves and the economic and operating viability of the project. If the exploratory well does not meet both criteria, its capitalized costs are expensed, net of any salvage value. Annual disclosures are required under FSP No. 19-1 to provide information about management’s evaluation of capitalized exploratory well costs, including disclosure of (i) net changes from period to period in the costs for wells that are pending the determination of proved reserves, (ii) the amount of any exploratory well costs that have been capitalized for more than one-year after the completion of drilling and (iii) an aging of suspended exploratory well costs and the number of wells affected. See Note 2 – Oil and Gas Properties.    

On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually.

If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained.

Property and Equipment

The cost of leasehold improvement and office equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to five years.

Consolidation of Variable Interest Entities

The Company evaluates and consolidates where appropriate its less than majority-owned investments pursuant to Accounting Standards Codification Topic 810, Consolidation.  A variable interest entity (VIE) is a corporation, partnership, trust, or any other legal structure used for business purposes that does not have equity investors with proportionate voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities.  Topic 810 requires a VIE to be consolidated by a company if that company is the primary beneficiary of the VIE.  The primary beneficiary of a VIE is an entity that is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the entity’s residual returns, or both. The Company has determined that the Capital City Energy Funds qualify as VIEs, however, they have determined that the Company is not the primary beneficiary. Accordingly, the Company has not consolidated the Capital City Energy Funds.

Asset Retirement Obligations

The Company follows the provisions of Accounting Standards Codification 410, Asset Retirement and Environmental Obligations. The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For the Company, asset retirement obligations relate to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.

F-9

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CAPITAL CITY ENERGY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014 and 2013

Note 2.   Summary of Significant Accounting Policies (Continued)

Income Taxes

The Company accounts for income taxes pursuant to Accounting Standards Codification 740, Accounting for Income Taxes," which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred taxes are provided on temporary differences between the financial statements and tax basis of assets using the enacted tax rates that are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Topic 740 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements. Topic 740 also implements a process for measuring those tax positions which meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities

Revenue Recognition

Capital City recognizes oil and natural gas revenue under the sales method of accounting for its interests in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold by Capital City is not significantly different from Capital City’s share of production.  Revenues from management fees are recognized in the preceding month at end of each calendar quarter and paid in arrears.

Comprehensive Income and Loss

The accompanying consolidated financial statements do not include statements of comprehensive income (loss) since the Company had no items of comprehensive income or loss for the years reported. 

 

Recent Accounting Pronouncements

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position or statements.

Reclassification

Certain amounts in prior periods have been reclassified to conform to current period presentation.