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| CETG.OB > SEC Filings for CETG.OB > Form 10-Q on 19-Aug-2008 | All Recent SEC Filings |
19-Aug-2008
Quarterly Report
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE TERMS "CAPITAL CITY," "WE," "US" AND "OUR" REFER TO CAPITAL CITY ENERGY GROUP, INC.
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. We caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other matters expressed in forward-looking statements. These risks and uncertainties, many of which are beyond our control, include:
The sufficiency of existing capital resources and our ability to raise additional capital to fund cash requirements for future operations, uncertainties involved in the rate of growth of our business and acceptance of any products or services, volatility of the stock market - particularly within the energy sector and general economic conditions.
Although we believe the expectations reflected in these forward-looking statements are reasonable, such expectations cannot guarantee future results, levels of activity, performance or achievements.
All forward-looking statements included in this report and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made, other than as required by law, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
MANAGEMENT'S ANALYSIS OF OPERATIONS
Capital City Energy Group, Inc., through its consolidated operations, is an independent oil and natural gas company currently focused on the execution of its Triad business model. The Triad business model includes our Fund Management Division, Principal Investment Division and Strategic Acquisition Division.
The Fund Management Division is overseen by our wholly owned subsidiary, Avanti Energy Partners, LLC. This Division markets income oriented direct participation programs directly to regional Broker-Dealers and are called the Capital City Energy Funds. We have focused on expanding our distribution channels for these funds through the first 6 months of 2008 and have grown the distribution from one Broker-Dealer with 30 Brokers at the beginning of 2008 to more than 6 Broker-Dealers with over 600 Brokers.
We have committed to sponsor vendor conferences over the next couple of months for 4 separate regional Broker-Dealers, where we will highlight our Energy Funds to the individual Brokers. The growth in distribution has been costly to the Company over the last 2 quarters, which we believe will be recovered by in significant revenue growth for Capital City over the next several quarters.
The Principal Investment Division is also overseen by our wholly owned subsidiary, Avanti Energy Partners, LLC ("Avanti"). We continued to bring well positions online in some of the major basins of the continental United States. We participated in one of the last remaining well and acreage positions operated by Grand Energy in the Barnett Shale natural gas formation in central Texas. Avanti continues its strategy of diversifying its portfolio of oil and natural gas investments and is benefiting from strong well performance in the prolific Barnett Shale in central Texas, dual zone completions in the Buda and Georgetown in Southeast Texas, deeper oil production from the Louisiana Gulf Coast and the Smackover trend in Alabama. We have continued our participation the Woodford Shale in southern Oklahoma and the Fayetteville Shale in central Arkansas. However, as we continue to diversify our portfolio of energy properties our focus is shifting to our own backyard in the Appalachian Basin and Oklahoma area where we will have the ability to perform our own well completion through our wholly owned subsidiary Eastern Well Services, LLC thus increasing our overall net margins. We have acquired several acreage positions in the Appalachian Basin that will be developed in the 3rd quarter with the expectation to bring these new well positions online and generating revenue for the company within the 4th quarter of 2008. Our goal is to partner with a local oil and gas operator in the area to oversee the drilling and operation of these planned wells, which has been customary with the other positions in our portfolio.
The Strategic Acquisition Division made significant strides through Eastern Well Services, LLC ("Eastern"), a wholly owned subsidiary. Eastern opened its Corporate Headquarters in Burbank, Ohio. Situated on 30 acres, this facility anticipates being fully operational with wireline services late in the 3rd quarter of 2008. Eastern tripled its management and staff to 8 full time employees in Ohio and Oklahoma and expects to triple their staff again in the 3rd quarter of 2008 as both locations become fully operational in oil field services. Eastern's contract to provide consulting engineers for well completion with Saber Exploration, Pty Limited in Botswana, South Africa has grown from 2 full time consulting engineers to 5 full time consulting engineers. Saber Exploration was contracted by the Botswana Government to drill coalbed methane wells to fuel power generation facilities within Botswana. This Division continues active negotiations with oil field service companies for acquisition to strengthen the Division and Eastern.
Our Mission
To maximize both ethically and responsibly the total returns to the owners of the company --- our shareholders.
RESULTS OF OPERATIONS:
REVENUES
Revenues increased to $1,547,848 during the first six months of 2008, compared to revenue of $1,405,511 during the first six months of 2007.
Management revenues increased to $302,741 over first six months due the Capital City Energy Funds, the acquisition of Eastern Well Services, and Avanti Energy Partners compared to $112,081 for same period in 2007.
Total net oil and gas production realized from principal investments was 8,892 barrels of oil and 59,230 thousand cubic feet (MCF) of natural gas for the first six months of 2008. Production for first six months of 2007 was 9,288 barrels of oil and 61,597 thousand cubic feet (MCF) of natural gas.
Average commodity price realized on the principal investment portfolio production for the first six months of 2008 was $97.82 per barrel of oil, and $7.99 per thousand cubic feet (MCF) of natural gas. Pricing for the first six months of 2007 was $81 per barrel of oil and $8 per thousand cubic feet (MCF) of natural gas.
LEASE OPERATING EXPENSES
For the first six months of 2008, lease operating expenses (LOE) increased to $403,378 compared to $399,655 during the first six months of 2007 due to increased levels of field production from the principle investment portfolio. Typical LOE expenses include operating labor and field supervision, water hauling and disposal fees, communications, fuel and lease vehicles, and environmental and safety compliance.
DEPRECIATION AND DEPLETION
Depreciation and depletion expenses totaled $387,771 for the first six months of 2008, slightly below the results for the first six months of 2007 of $384,415. This decrease is not unexpected due to the depletion of the reserves of the producing wells in the portfolio.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the six month period ending June 30, 2008, the general and administrative expenses totaled $1,581,562 which was a sharp increase for the same period in 2007 of $430,369. The increase in operating expenses was driven by significant one-time costs associated with our reverse merger into a public entity in March of 2008 and the execution of our Triad model business plan as further outlined.
The cost associated with our reverse merger into a public company such as Legal, Accounting and Investment Banking fees were substantial for the first six months of 2008. The accounting rules which apply to reverse merger accounting for SEC reporting purposes did not allow our firm to capitalized these significant costs which had to be expensed as they occurred. These expenses were paid from revenues generated by the Company during this period rather through the customary capital raising activities or debt incurred by most companies that elect to become public. The costs associated with our reverse merger totaled in excess of $500,000.
· The one-time build out expense and expansion of the North Canton, Ohio Accounting Office including additional staff accountants increased the operating expenses in excess of $140,000 for the first six months.
· The one-time build out expenses for our Burbank, Ohio wireline facility for Eastern Well Services increased the operating expenses in excess of $150,000 for the first six months.
· The addition of staff for Eastern Well Services and Avanti Energy Partners increased operating expenses by nearly $55,000 for the first six months.
· Engaged two new investor relation firms and engaged a national public relations firm to market the company, its stock and the Capital City Energy Funds. They received shares valued at more than $136,000 in addition to their monthly consulting fees.
· Options were granted to officers and directors of the company which were valued at $86,000 for the quarter.
· Investor relations,public relations and general marketing costs associated with being public were approximately $177,000 for the first six months
INTEREST EXPENSE
Interest expense of $38,058 for the first six months of 2008 was down substantially from its level of $201,344 recorded for the first six months of 2007. Last year it was necessary for us to impute interest expense on the convertible debt relating to the beneficial conversion feature attached to the convertible debt. Once the debt was converted and /or paid, the interest expense was eliminated.
INCOME TAX EXPENSE
Income tax expense was $30,169 for the six month period ending June 30, 2008. During the first six months of 2007, we were organized as a limited liability company and the company flowed all tax expense and benefit to its members.
NET INCOME
Net loss for the six months ended June 30, 2008 was $1,072,561, compared to a net loss of $10,272 for the same period ended 2007 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, we had total current assets of $1,256,835. The current assets consisted mainly of cash in the amount of $475,215, prepaid expenses in the amount of $111,765 and accounts receivable in the amount of $619,630.
Our total current liabilities as of June 30, 2008 were $1,879,944. The current liabilities consist of accounts payable and accrued expenses in the amount of $275,042, and notes payable-current portion in the amount of $25,491. In addition, we had $7,538,255 in stockholders' equity as of June 30, 2008. This compares to current assets of $1,216,835 and total liabilities of $2,135,697 for the period ended December 31, 2007.
Assets at December 31, 2007 consisted of cash in the amount of $200,451, prepaid expenses of $40,991 and accounts receivable in the amount of $414,826. Liabilities as of December 31, 2007 consisted of accounts payable and accrued expenses in the amount of $360,708 and notes payable-related party in the amount of $100,000 remaining payable for the period ended December 31, 2007. We have adequate capital to fund our ongoing operations for at least the next twelve months. 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. An initial equity financing could result in significant dilution to our shareholders.
CASH FLOW FROM OPERATING ACTIVITIES
For the six-month period ended June 30, 2008, net cash used in operating activities was $754,330, versus net cash used in operating activities of $450,888 for the six-month period ended June 30, 2007 principally due to higher general and administrative costs incurred in corporate development activities.
CASH FLOW FROM INVESTING ACTIVITIES
For the six-month period ended June 30, 2008, net cash used in investing activities was $396,097, primarily attributed to our purchase of equipment and oil and gas properties , versus net cash used in investing activities of $0 for the six month period ended June 30, 2007. Our investing activities were funded from cash generated from operations and financing
CASH FLOW FROM FINANCING ACTIVITIES
For the six-month period ended June 30, 2008, net cash provided by financing activities was $1,425,193, primarily attributed to$ 1,500,000 of proceeds from notes payable, versus net cash used in financing activities of $1,521,638 for the six month period ended June 30, 2007.
HEDGING
We did not hedge any of our oil or natural gas production during 2008 and have not entered into any such hedges from June 30, 2008 through the date of this filing.
CONTRACTUAL COMMITMENTS
None.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2008, we had no off-balance sheet arrangements.
RELATED PARTY TRANSACTIONS
At a meeting of our Board of Directors held on June 23, 2008, the Board voted to pay Mr. Timothy W. Crawford, CEO, his annual salary in stock via a deferred compensation fund in the form of stock to be paid on the last trading day of each month at a price equal to the average of the last bid and ask for the trading day. No payments or issuances of shares have yet been made. The deferred compensation fund is in the process of being established.
Subsequent to the Board of Directors meeting held on June 23, 2008 wherein it was decided to pay Mr. Timothy Crawford's annual salary in stock via a deferred compensation fund, on August 11, 2008, Mr. Timothy W. Crawford, our CEO issued a letter to our Board of Directors stating that effective immediately and retroactively, he has elected to perform his duties as CEO without compensation for the 2008 calendar year. Mr. Crawford further indicated that since we had incurred additional costs as a public entity that we did not have as a private company, and as one of the Company's largest beneficial shareholders, he felt it was appropriate to help defray some of the expenses by eliminating his compensation this year, in order to enhance Capital City's earnings.
Mr. Crawford and Joseph Smith, both members of our Board of Directors are greater than 10% members of CCSSM Partners, LLC, which manages the Opportunity Fund, LLC. The Opportunity Fund, LLC has invested $100,000 in the NGO Production Participation Program.
Daniel Coffee ("Lessor"), our Chief Operating Officer and a member of our Board of Directors, has entered into a lease agreement with the Company whereby the Company leases from Lessor approximately 1,024 rentable square feet of office space and approximately 30 acres and identified as 920 West Easton, Burbank, Ohio 44214. The term of the lease shall be ten years beginning on or about the 1st day of June, 2008, and ending on June 30, 2018, unless sooner terminated in accordance with the terms in the lease.
Ms. Barbara Coffee, wife of Mr. Coffee, sold the rights to Eastern and Avanti to the Company for the sum of $3,500. Ms. Coffee elected to be compensated in stock rather than cash. Pursuant to that, on April 16, 2008, the Company issued Ms. Coffee 1,000 shares of our common stock, valued at $3.50 per share.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies
Oil and Gas Properties, Successful Efforts Method
Capital City 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.
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 Capital City'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.
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.
In April 2005, the FASB issued Staff Interpretation No. 19-1 ("FSP 19-1")
Accounting for Suspended Well Costs, which provides guidance on the accounting
for exploratory well costs and proposes an amendment to FASB -35- Statement No.
19 ("FASB 19"), Financial Accounting and Reporting by Oil and Gas Producing
Companies. The guidance in FSP 19-1 applies to enterprises that use the
successful efforts method of accounting as described in FASB 19. The guidance in
FSP 19-1 did not have a material impact our consolidated financial position,
results of operations, or cash flows. Capital City had no capitalized
exploratory well costs at June 30, 2008 and December 31, 2007.
Capital City follows the provisions of Financial Accounting Standards Board Statement No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). 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 Capital City, 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.
Income Taxes
Capital City accounts for income taxes pursuant to SFAS No 109, "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.
In July 2006, the FASB issued "Accounting for Uncertainty in Income Taxes," an interpretation of FAS 109 ("FIN 48"), effective for years beginning after December 15, 2006. FIN 48 establishes a more-likely-than-not threshold for recognizing the benefits of tax return positions in the financial statements. Also, FIN 48 implements a process for measuring those tax positions which meet the recognition threshold of being ultimately sustained upon examination by the taxing authorities. The adoption of FIN 48 had no material impact to the Company's consolidated financial statements. The Company files tax returns in the United States and states in which it has operations and is subject to taxation. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax jurisdictions.
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.
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