UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q/A
Amendment
No. 1
|
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|
|
|
|
For
the quarterly period ended
September 30,
2008
|
|
|
|
o
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
|
|
|
|
For
the transition period _______ to _______
|
|
|
|
Commission
File Number:
333-140806
|
Capital City Energy Group,
Inc
.
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
|
20-5131044
|
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(IRS
Employer Identification
No.)
|
|
8351
N. High Street, Suite 101
Columbus,
Ohio 43235
|
|
(Address
of principal executive
offices)
|
|
(614)
310-1614
|
|
(Issuer’s
telephone number)
|
|
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Check
whether the issuer (1) 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 issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check One):
Large
Accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
There are 27,509,240 shares of Common Stock and 3,112,120 shares of Preferred A
Stock issued and outstanding as of November 6, 2008.
EXPLANATORY
NOTE
This
Amendment No. 1 on Form 10-Q/A (the “Amendment”) amends the quarterly report of
Capital City Energy Group, Inc. (the “Company”) on Form 10-Q for the quarter
ended September 30, 2008 as filed with the Securities and Exchange Commission on
November 14, 2008. The Purpose of the Amendment is to amend for omission
related to
preferred stock dividends in the statement of operations, financial statement
disclosures
stating that conditions exist which raise doubt about the Company's ability to
continue as a going concern and other
typographical
changes. Additionally, disclosures concerning management's discussion and
analysis of operations with respect to the
three
months ended September 30, 2008 and the corresponding three months in the
preceding fiscal year were unintentionally omitted
from the
Form 10-Q filed November 14, 2008.
In
addition, the three month analysis contained in the Management Discussion and
Analysis was inadvertently omitted from the original filed version of Form 10-Q
for the period ended September 30, 2008. For the convenience of the
reader, this Amendment No. 1 sets forth the Original Filing in its entirety.
|
|
TABLE OF CONTENTS
|
Page
|
|
PART
I - FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements
|
3
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis
|
17
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
24
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
24
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
24
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
|
|
|
|
|
Item
5.
|
Other
Information
|
24
|
|
|
|
|
|
Item
6.
|
Exhibits
|
25
|
|
|
|
|
|
|
Signatures
|
25
|
PART
I - FINANCIAL INFORMATION
Item 1.
Financial
Statements
|
Consolidated
Balance Sheets as of September 30, 2008 and December 31, 2007
(Unaudited)
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the Three Months Ended September 30, 2008 and
2007 (Unaudited)
|
5
|
|
|
|
|
Consolidated
Statements of Operations for the Nine Months Ended September 30, 2008 and
2007 (Unaudited)
|
6
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity from December 31, 2007 through
September 30, 2008 (Unaudited)
|
7
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
2007 (Unaudited)
|
8
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
9 -
16
|
CAPITAL CITY ENERGY GROUP,
INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
394,412
|
|
|
$
|
200,451
|
|
|
Accounts receivable and accrued revenues
|
|
|
650,384
|
|
|
|
414,826
|
|
|
Receivables related party
|
|
|
59,041
|
|
|
|
-
|
|
|
Other receivables
|
|
|
10,223
|
|
|
|
-
|
|
|
Prepaid expenses
|
|
|
14,518
|
|
|
|
40,991
|
|
|
Prepaid related parties
|
|
|
50,675
|
|
|
|
-
|
|
|
Total
Current Assets
|
|
|
1,179,253
|
|
|
|
656,268
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $38,185 and $1,497
|
|
|
436,214
|
|
|
|
147,261
|
|
|
|
|
|
|
|
|
|
|
|
|
OIL
AND GAS PROPERTIES, SUCCESSFUL EFFORTS ACCOUNTING
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
9,934,842
|
|
|
|
9,529,004,
|
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(2,903,774
|
)
|
|
|
(2,314,141
|
)
|
|
NET
OIL AND GAS PROPERTIES
|
|
|
7,031,068
|
|
|
|
7,214,863
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
Prepaid deposits – related parties
|
|
|
67,000
|
|
|
|
-
|
|
|
Deposits
|
|
|
7,445
|
|
|
|
4,485
|
|
|
Total
Other Assets
|
|
|
74,445
|
|
|
|
4,485
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
8,720,980
|
|
|
$
|
8,022,877
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
388,579
|
|
|
$
|
360,708
|
|
|
Notes payable-current portion
|
|
|
70,164
|
|
|
|
100,000
|
|
|
Participating interest financing arrangement
|
|
|
1,621,251
|
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
2,079,994
|
|
|
|
460,708
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
Asset Retirement Obligation
|
|
|
62,620
|
|
|
|
-
|
|
|
Deferred income tax liability
|
|
|
-
|
|
|
|
163,960
|
|
|
Total
Long Term Liabilities
|
|
|
62,620
|
|
|
|
163,960
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred shares: $0.001 par value, 10,000,000 shares
authorized;
3,112,120 and 3,142,650 shares issues and outstanding
respectively
|
|
|
3,112
|
|
|
|
3,143
|
|
|
Common shares: $0.001 par value, 90,000,000 shares
authorized;
27,448,301 and 20,750,740 shares issued and outstanding,
respectively
|
|
|
27,448
|
|
|
|
20,751
|
|
|
Additional paid-in capital
|
|
|
7,501,474
|
|
|
|
6,271,727
|
|
|
Retained earnings (Accumulated deficit)
|
|
|
(953,668
|
)
|
|
|
1,102,588
|
|
|
Total
Stockholders' Equity
|
|
|
6,578,366
|
|
|
|
7,398,209
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
8,720,980
|
|
|
$
|
8,022,877
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL
CITY ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For
the Three Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Oil and gas revenue
|
|
$
|
760,850
|
|
|
$
|
28,818
|
|
|
Management revenue
|
|
|
22,702
|
|
|
|
65,882
|
|
|
Total
Revenues
|
|
|
783,552
|
|
|
|
94,700
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
Lease operating costs
|
|
|
181,685
|
|
|
|
6,729
|
|
|
Dry hole expense
|
|
|
-
|
|
|
|
48,000
|
|
|
Depreciation, depletion and accretion
|
|
|
215,425
|
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
889,361
|
|
|
|
283,612
|
|
|
Total
Operating Expenses
|
|
|
1,289,353
|
|
|
|
338,341
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(505,801
|
)
|
|
|
(243,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
1,505
|
|
|
|
-
|
|
|
Interest expense
|
|
|
(140,447
|
)
|
|
|
(3,299
|
)
|
|
Total
Other Income (Expense)
|
|
|
(138,942
|
)
|
|
|
(3,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(644,743
|
)
|
|
|
(246,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
|
|
194,129
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(450,614
|
)
|
|
$
|
(246,940
|
)
|
|
LESS: PREFERRED
DIVIDENDS
|
|
|
196,407
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
(647,018
|
)
|
|
|
(246,940
|
)
|
|
BASIC
AND FULLY DILUTED LOSS PER SHARE
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
|
|
|
21,018,228
|
|
|
|
18,095,740
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL
CITY ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Oil and gas revenue
|
|
$
|
2,005,957
|
|
|
$
|
1,322,248
|
|
|
Management revenue
|
|
|
325,443
|
|
|
|
177,963
|
|
|
Total
Revenues
|
|
|
2,331,400
|
|
|
|
1,500,211
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
Lease operating costs
|
|
|
587,945
|
|
|
|
406,384
|
|
|
Depreciation, depletion and accretion
|
|
|
603,196
|
|
|
|
384,415
|
|
|
Selling, general and administrative
|
|
|
2,654,484
|
|
|
|
713,981
|
|
|
Dry hole expense
|
|
|
-
|
|
|
|
48,000
|
|
|
Total
Operating Expenses
|
|
|
3,845,625
|
|
|
|
1,552,780
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,514,225
|
)
|
|
|
(52,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
5,595
|
|
|
|
-
|
|
|
Interest expense
|
|
|
(178,505
|
)
|
|
|
(204,643
|
)
|
|
Total
Other Income (Expense)
|
|
|
(172,910
|
)
|
|
|
(204,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS BEFORE INCOME TAXES
|
|
|
(1,687,135
|
)
|
|
|
(257,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT
|
|
|
163,960
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,523,175
|
)
|
|
$
|
(257,212
|
)
|
|
LESS:
PREFERRED DIVIDENDS
|
|
|
(533,084)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
(2,056,259
|
)
|
|
|
(257,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND FULLY DILUTED (LOSS) PER SHARE
|
|
$
|
(0.10
|
)
|
|
$
|
(0.01
|
)
|
|
BASIC
AND FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
|
|
|
20,868,294
|
|
|
|
18,095,740
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL
CITY ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
Additional
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
Paid-In
Capital
|
|
|
(Accumulated
Deficit)
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of
December
31, 2007
|
3,142,650
|
|
|
|
3,143
|
|
|
20,750,740
|
|
|
20,751
|
|
|
6,271,727
|
|
|
|
1,102,588
|
|
|
|
7,398,209
|
|
|
Recapitalization
|
-
|
|
|
|
-
|
|
|
6,060,000
|
|
|
6,060
|
|
|
(6,060
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for debt at $3.36 per share
|
-
|
|
|
|
-
|
|
|
29,796
|
|
|
30
|
|
|
99,970
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services at $3.00 per share
|
-
|
|
|
|
-
|
|
|
40,000
|
|
|
40
|
|
|
119,960
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services at $2.11 per share
|
|
|
|
|
|
|
|
10,000
|
|
|
10
|
|
|
21,490
|
|
|
|
|
|
|
|
21,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
stock options
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
100,546
|
|
|
|
-
|
|
|
|
100,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for directors' fees
|
|
|
|
|
|
|
|
38,735
|
|
|
39
|
|
|
102,727
|
|
|
|
|
|
|
|
102,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for acquisition of subsidiaries at $3.50 per
share
|
-
|
|
|
|
-
|
|
|
1,000
|
|
|
1
|
|
|
3,499
|
|
|
|
-
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued
|
-
|
|
|
|
-
|
|
|
10,000
|
|
|
10
|
|
|
29,990
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid on preferred stock
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(533,081
|
)
|
|
|
(533,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued on warrant exercises
|
|
|
|
|
|
|
|
432,500
|
|
|
432
|
|
|
648,319
|
|
|
|
|
|
|
|
648,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation expense
|
|
|
|
|
|
|
|
45,000
|
|
|
45
|
|
|
109,305
|
|
|
|
|
|
|
|
109,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock
|
(30,530
|
)
|
|
|
(31
|
)
|
|
30,530
|
|
|
30
|
|
|
1
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the Nine Months ended September 30, 2008
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(1,523,175
|
)
|
|
|
(1,523,175
|
)
|
|
Balance
as of September 30, 2008
|
3,112,120
|
|
|
$
|
3,112
|
|
|
27,448,301
|
|
$
|
27,448
|
|
$
|
7,501,474
|
|
|
$
|
(953,668
|
)
|
|
$
|
6,578,366
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL
CITY ENERGY GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,523,175
|
)
|
|
$
|
(257,212
|
)
|
|
Adjustments to reconcile net loss to net cash provided by/used for
operating activities:
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation, and amortization
expense
|
|
|
602,196
|
|
|
|
384,415
|
|
|
Accretion of asset retirement obligation
|
|
|
1,000
|
|
|
|
-
|
|
|
Amortization of stock options expense
|
|
|
100,546
|
|
|
|
-
|
|
|
Common stock issued for services
|
|
|
141,500
|
|
|
|
-
|
|
|
Common stock issued for directors fees
|
|
|
102,766
|
|
|
|
-
|
|
|
Stock issued for acquisition of subsidiary
|
|
|
3,500
|
|
|
|
-
|
|
|
Stock issued for employee bonuses
|
|
|
109,350
|
|
|
|
-
|
|
|
Deferred tax liabilities
|
|
|
(163,960
|
)
|
|
|
-
|
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
(127,317
|
)
|
|
Amortization of discount on debt
|
|
|
-
|
|
|
|
458,333
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease
in prepaid expenses and deposits
|
|
|
23,513
|
|
|
|
-
|
|
|
Increase
in prepaid expenses – related party
|
|
|
(117,675
|
)
|
|
|
-
|
|
|
Increase
in accounts receivable and accrued revenue
|
|
|
(235,558
|
)
|
|
|
(13,861
|
)
|
|
Increase
in accounts receivable – related party
|
|
|
(59,042
|
)
|
|
|
-
|
|
|
Increase
in other receivables
|
|
|
(10,223
|
)
|
|
|
-
|
|
|
(Increase)
decrease in accounts payable and accrued expenses
|
|
|
27,870
|
|
|
|
(17,431
|
)
|
|
Increase
in interest payable on participating interest financing
|
|
|
121,251
|
|
|
|
-
|
|
|
CASH
PROVIDED BY/(USED) FOR OPERATING ACTIVITIES
|
|
|
(876,141
|
)
|
|
|
681,561
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(325,641
|
)
|
|
|
-
|
|
|
Purchase
of oil and gas properties
|
|
|
(320,089
|
)
|
|
|
-
|
|
|
Sale
of oil and gas properties
|
|
|
-
|
|
|
|
318,860
|
|
|
CASH
USED FOR INVESTING ACTIVITIES
|
|
|
(645,730
|
)
|
|
|
318,860
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
80,915
|
|
|
|
-
|
|
|
Repayment of notes payable
|
|
|
(10,751
|
)
|
|
|
(850,000
|
)
|
|
Proceeds from participating interest financing arrangement
|
|
|
1,500,000
|
|
|
|
-
|
|
|
Costs incurred by the Managed Funds not included in
re-capitalization
|
|
|
-
|
|
|
|
(2,179,647
|
)
|
|
Contributed capital
|
|
|
-
|
|
|
|
2,155,000
|
|
|
Proceeds from exercise of warrants
|
|
|
678,749
|
|
|
|
-
|
|
|
Dividends paid on preferred stock
|
|
|
(533,084
|
)
|
|
|
-
|
|
|
CASH
PROVIDED BY/(USED) FOR FINANCING ACTIVITIES
|
|
|
1,715,832
|
|
|
|
(874,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
193,961
|
|
|
|
125,774
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
200,451
|
|
|
|
380,099
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
394,412
|
|
|
$
|
505,873
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
57,254
|
|
|
$
|
18,017
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
$
|
61,620
|
|
|
$
|
-
|
|
|
Stock issued for settlement of debt
|
|
$
|
100,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis of
Presentation
The
accompanying unaudited interim consolidated financial statements of Capital City
Energy Group, Inc. (“Capital City” or the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission, and should be
read in conjunction with the audited financial statements and notes thereto
contained in Capital City’s annual report filed with the SEC on Form 8-K/A for
the year ended December 31, 2007. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the consolidated financial statements which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ending December 31, 2007 as reported
in Form 8-K/A have been omitted.
Note 2.
Organization and Business
Operations
On May 2,
2003, Capital City Marketing Services, LLC (“Marketing”) was formed as an Ohio
limited liability company. On September 30, 2003, Marketing changed its name to
Capital City Petroleum, LLC (the “Company”). On September 28, 2006,
the Company was merged with Capital City Petroleum, LLC, a Delaware limited
liability company. The main purpose of the Company was to form and manage the
oil and gas interests of various Capital City Energy Funds (the “Funds”). On
October 18, 2007, the Company was converted into Capital City Petroleum, Inc., a
Delaware corporation.
At September
30, 2008, Capital City managed oil and gas investments for three energy
funds (Capital City Energy Fund XIV, LLC, Capital City Energy Fund XVI, LP and
Capital City Energy fund XVIII, LP) for which a management fee is earned. These
investments consisted of non-operating oil and gas working interests in wells in
Louisiana, Ohio, Texas, Pennsylvania, Alabama, Nebraska, Colorado, Oklahoma and
Arkansas with net revenue interests ranging from 50.00% to 0.0013%.
The
Company’s results of operations are dependent on four sources of revenue within
our Triad Business Model.
The Fund
Management Division has two sources of income. The first being the 2% annual
management fees earned for managing the Capital City Energy Funds and the second
being the difference between the prices received by the Company for its
natural gas and crude oil products and the cost to find, develop, produce and
market such resources.
The
Strategic Acquisition Division contains the third source of revenue the Company
receives through consulting fees earned by Eastern Well Services, LLC a wholly
subsidiary. Eastern Well Services is an oilfield service company
which is transitioning from receiving consulting fees from oil & gas
operating companies to becoming a full service oilfield service company and
charging for services such as wireline, logging, testing and other well
completion services.
The
Principal Investment Division contains our primary and fourth source of revenue
which accounts for 90% of revenue earned in the first nine months which is the
oil and natural gas revenue received from the ownership interests in more than
110 energy properties located in 12 different states.
The first
nine months was a transition period for the Company as we 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. We acquired Avanti Energy Partners
during the first six months of the year which is managing the Capital City
Energy Funds and will transition to a full service oil and natural gas operating
company before the end of 2008. We completed a second acquisition in the first
six months 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.
We moved
our accounting offices to North Canton, Ohio which affords the Company greater
opportunity to employ quality oil and gas professionals from the large pool of
oil and gas professionals without the added cost of relocating them to Columbus,
Ohio, our corporate offices. We also leased a facility situated on 30 acres in
Burbank, Ohio for the headquarters of Eastern Well Services. This facility
will allow Eastern to service oil and gas operating companies for their well
completion in the Northeastern Ohio area, Northwestern Pennsylvania area and
Northwestern New York as they move to become a full service oilfield service
company.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3. 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.
Capital
City'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 Capital City to concentration of credit
risk consist of cash. At September 30, 2008, Capital City had approximately
$144,412 in cash in excess of federally insured limits (the FDIC insured
deposits have been temporarily increased to $250,000). Capital City
maintains cash accounts only at large high quality financial institutions and
Capital City believes the credit risk associated with cash held in banks is
remote.
Capital
City'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 September 30, 2008, no allowance for doubtful accounts has been
recorded and none of the accounts receivable have been
collateralized.
Fair
Value of Financial Instruments
As of
September 30, 2008, 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.
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.
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.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3. Summary of Significant Accounting Policies
(cont.)
Consolidation
of Variable Interest Entities
The
Company evaluates and consolidates where appropriate its less than
majority-owned investments pursuant to Financial Accounting Standards Board
(FASB) Interpretation No. 46,
Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51
(FIN 46). 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. FIN 46 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
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.
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.
Income
(Loss) per Share of Common Stock
Basic and
diluted net income per share calculations are presented in accordance with SFAS
No. 128 and are calculated on the basis of the weighted average number of common
shares outstanding during the year. Common stock equivalents are excluded from
the calculation when a loss is incurred as their effect would be anti-dilutive.
The basic income per share of common stock is based on the weighted average
number of shares issued and outstanding at the date of the financial statements.
Capital City had 3,030,300 warrants at September 30, 2008 that were out of
the money and are therefore anti-dilutive.
Share-Based
Compensation
The
Company adopted SFAS No. 123-R "Accounting for Stock-Based Compensation -
Revised" effective January 1, 2006, using the modified prospective method. Under
FASB Statement 123(R), the Company estimates the fair value of each stock option
award at the grant date by using the Black-Scholes option pricing
model.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3. Summary of Significant Accounting Policies
(cont.)
Recently
Issued Accounting Pronouncements
No
recently issued accounting pronouncements are expected to have a significant
effect on Capital City’s consolidated financial position, results of operations
or cash flows.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period
presentation.
Note
4. Going Concern
The
Company’s financial statements are prepared using generally accepted accounting
principles 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. 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. Capital
City has incurred cumulative operating losses through September 30, 2008 of
$953,668 and had a working capital deficit of $900,741 at September 30,
2008. Revenues during the nine months ended September 30, 2008 were
not sufficient to cover our operating costs and we continue to generate negative
cash flows from operations. There can be no assurance that Capital
City 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.
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 management and significant shareholders
sufficient to meet its minimal operating expenses and seeking equity and/or debt
financing. However management cannot provide any assurances that the Company
will be successful in accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually secure other sources of financing and attain profitable
operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going
concern. Capital City is in the process of raising additional capital
through a related party private fund management company.
Note
5. Oil and Gas Properties
Oil and
gas properties are stated at cost. Depletion expense for the nine months ended
September 30, 2008 and 2007 amounted to $565,508, and $0, respectively. Gains
and losses on sales and disposals are included in the statements of operations.
As of September 30, 2008 and December 31, 2007 oil and gas properties
consisted of the following:
|
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Well Equipment
|
|
$
|
1,812,372
|
|
|
$
|
1,429,311
|
|
|
Intangible Drilling Costs
|
|
|
5,081,518
|
|
|
|
5,630,066
|
|
|
Leasehold Improvements
|
|
|
3,040,952
|
|
|
|
2,469,627
|
|
|
Total
|
|
$
|
9,934,842
|
|
|
$
|
9,529,004
|
|
|
Accumulated Depletion
|
|
|
(2,903,774
|
)
|
|
|
(2,314,141
|
)
|
|
Net
Oil and Gas Properties
|
|
$
|
7,031,068
|
|
|
$
|
7,214,863
|
|
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6. Participating Interest Financing Arrangement
The
Company entered into a series of financing agreements for aggregate proceeds of
$1,500,000 whereby participating revenue interests were conveyed to individual
lenders in certain oil and gas properties owned by the Company. The principal
terms of the agreements provided for a production payment from the net revenue
interests in certain wells in which the Company owns a working interest;
provides a minimum return on investment of 12% in the first year only; and
provides a put option to the holders in Month 13. The put option provides the
holder the sole right to put the participating revenue interest to the Company
for the original principal amount. The put options expire during the period
March to May of 2009. The Company determined that these transactions were
financings as the put option creates a debt obligation until such option
expires, at which time, the transactions will be recorded as a sale. Any gain or
loss on the sale of the properties would then be recognized in the statements of
operations.
Note
7. Stockholders’ Equity
On July
29, 2008, pursuant to an exempt offering under Reg. D, Rule 506 of the
Securities Act of 1933, as amended, an affiliate of the Company, The Opportunity
Fund, LLC purchased 10,000 shares of common stock at $3.00 per share and
warrants to purchase an additional 10,000 shares of common stock, exercisable
over the next 36 months, with a strike price of $4.00 per share. This offering
has been terminated. Total proceeds from the offering were $30,000.
Note
8. Warrants and Options
Options
As of
September 30, 2008, three directors of the Company held options to purchase
375,000 shares of common stock at an exercise price of $3.29 per share. Those
options, which were granted in April 2008, do not vest until April 2009 and are
exercisable for 3 years from issuance.
Stock
Options
Capital
City estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2008.
|
|
|
September
30, 2008
|
|
|
Expected
volatility
|
|
40.25
|
%
|
|
Risk
free interest
|
|
3.29
|
%
|
|
Expected
lives
|
|
1
year
|
|
|
Dividend
yield
|
|
0.00
|
%
|
A summary
of the status of Capital City’s stock options to directors as of September 30,
2008 is presented below:
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price September 30, 2008
|
|
|
Outstanding
at beginning of period
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
750,000
|
|
|
$
|
3.29
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
(375,000
|
)
|
|
$
|
3.29
|
|
|
Outstanding
but unexercisable at end of period
|
|
|
375,000
|
|
|
$
|
3.29
|
|
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Warrants and
Options (cont.)
Warrants
Pursuant
to a Private Placement completed by the Company on October 31, 2007 the company
issued 2,155,000 warrants exercisable at $1.50 per share for a period of 3 years
but subject to being called by the company for $0.10 per warrant one year after
their issue date. The company has exercised its right to call the warrants on
their one year anniversary date, which ranges from January 1, 2008 through
October 23, 2008. There are 1,722,500 of the original 2,155,000
existing warrants yet to be exercised.
The
1,722,500 warrants have all been called by the Company and must be exercised by
the holder or purchased by the company before the end of the 2008 calendar
year.
Capital
City warrants outstanding and exercisable common stock of September 30, 2008
are:
|
Exercise
Price
|
|
Number
of Warrants Outstanding
|
|
Date
Warrants Expire
|
|
Exercisable
Number of Warrants Remaining
|
|
$
|
0.10
|
|
25,000
|
|
12/31/2009
|
|
25,000
|
|
$
|
1.00
|
|
928,800
|
|
12/31/2011
|
|
928,800
|
|
$
|
1.25
|
|
344,000
|
|
10/30/2012
|
|
344,000
|
|
$
|
1.50
|
|
1,722,500
|
|
12/31/2009
Through
10/23/2010
|
|
1,722,500
|
|
$
|
4.00
|
|
10,000
|
|
7/29/2011
|
|
10,000
|
|
|
|
|
3,030,300
|
|
|
|
3,030,300
|
Note 9.
Related Party
Transactions
Mr.
Crawford and Joseph Smith, both members of our Board of Directors, are greater
than 10% Members in CCSSM Capital Partners, LLC, which manages The Opportunity
Fund, LLC. On July 29, 2008, The Opportunity Fund, LLC invested $30,000 to
purchase 1 Unit being offered under a private placement memorandum. One Unit
consists of 10,000 shares of common stock at a price of $3.00 per share and one
warrant to purchase an additional 10,000 shares of common stock, exercisable
over the next 36 months, with an exercise price of $4.00 per share.
Daniel
Coffee, 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 in Burbank,
Ohio. The term of the lease is ten years beginning on June 1, 2008, and ending
on June 30, 2018. The Company prepaid $115,000 of rent on the
lease.
On April
16, 2008, Ms. Barbara Coffee, wife of our director, Mr. Daniel Coffee, sold her
interest in Eastern Well Services, LLC and Avanti Energy Partners, LLC to the
Company for 1,000 shares of the Company’s common stock valued at
$3,500.
Note
10. Commitments and Contingencies
Upon the
termination date of Capital City Energy Fund XVII, LP, the Company is obligated
to purchase all of the Capital City Energy Fund XVII, LP’s assets for a purchase
price equal to ten times the revenue of the Capital City Energy Fund XVII, LP
for the immediately prior fiscal quarter to the termination date of the Capital
City Energy Fund XVII, LP. The Company, at its discretion, may pay the purchase
price in cash, its own common stock or a combination of the two. The Capital
City Energy Fund XVII, LP termination date is the earlier of (a) the written
consent of a majority of the investors, (b) the investors receiving
distributions from the Capital City Energy Fund XVII, LP in the amount of their
original capital contributions or (c) the four year anniversary date after the
final closing date of the fund. As of September 30, 2008, the Capital City
Energy Fund XVII, LP has not recognized revenue to date.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
11. Managed Funds
The
Managed Funds are called the Capital City Energy Funds. The Funds
consist of Capital City Energy Fund XIV, LLC, Capital City Energy Fund XVI, LP
and Capital City Energy Fund XVII, LP.
Avanti
serves as the advisor to the Managed Funds through the selection and purchase of
energy properties on behalf of the Funds and earns a 2% annual management fee
for these services provided. The Funds incur all the costs associated with the
distribution to the members, tax reporting, geological studies and all other
ancillary accounting costs. The Funds are 99.9% owned by the members with the
Managing General Partner owning .01% of the Fund. The members receive 99.9% of
all the income received from the energy properties owned by the Fund until they
receive 100% of their contributed capital. Upon the members receiving
100% of their contributed capital, the income received by the Fund is split 80%
to the members and 20% to Avanti.
Note
12. Segment Information
We have
three reporting segments which share in the corporate overhead:
The Fund Management Division -
This Division is operated by Avanti Energy Partners, LLC and has
historically marketed direct participation programs to regional broker-dealers
and financial professionals. These Funds are marketed under the name of “Capital
City Energy Funds.
The Principal Investment Division –
This Division is currently managed by Avanti Energy Partners,
LLC.
Capital City currently owns more than 110 fractional
interests in various energy properties located in 12 different states and
operated by some of the largest oil and natural gas companies in the
country. These energy properties include deep oil wells in Northwest
Texas, Oklahoma and Louisiana, natural gas wells in the Barnett and Fayetteville
Shale, coal-bed methane wells in the Dakotas, oil wells in the Powder River
Basin of Wyoming, and natural gas pipelines in the Gulf Coast.
The Strategic Acquisition Division –
This Division consists of Eastern Well Services, LLC an oilfield services
company.
Eastern opened its Corporate Headquarters in Burbank,
Ohio during the past quarter. Situated on 30 acres, this facility is completing
construction of three additional bays for a total of six bays to house wireline
trucks and equipment. This facility anticipates being fully operational with
wireline services late in 2008. Eastern recently opened an office in
Hominy, Oklahoma with three fulltime employees and has targeted numerous
oilfield service companies to acquire over the next several months.
Corporate
overhead
Capital
City evaluates performances based on profit or loss from operations before
income taxes, not including nonrecurring gains and losses. Capital
City's reportable segments are strategic business units that offer
different operations and marketing strategies. Capital City's areas of
operations are principally in the United States. No single geographic area is
significant to the consolidated financial statements.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Segment Information
(cont.)
Corporate
overhead (cont.)
Consolidated
revenues from external customers, operating income (loss), and identifiable
assets were as follows:
|
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund Management Division
|
|
$
|
22,702
|
|
|
$
|
-
|
|
|
$
|
325,443
|
|
|
$
|
-
|
|
|
Principal Investment Division
|
|
|
739,505
|
|
|
|
94,700
|
|
|
|
1,899,342
|
|
|
|
1,500,211
|
|
|
Strategic Acquisition Division
|
|
|
20,999
|
|
|
|
-
|
|
|
|
106,270
|
|
|
|
-
|
|
|
Corporate
|
|
|
345
|
|
|
|
-
|
|
|
|
345
|
|
|
|
-
|
|
|
Total
revenue
|
|
$
|
783,552
|
|
|
$
|
94,700
|
|
|
$
|
2,331,400
|
|
|
$
|
1,500,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund Management Division
|
|
$
|
7,081
|
|
|
$
|
-
|
|
|
$
|
17,162
|
|
|
$
|
-
|
|
|
Principal Investment Division
|
|
|
232,298
|
|
|
|
(243,641
|
)
|
|
|
(159,513
|
)
|
|
|
(52,569
|
)
|
|
Strategic Acquisition Division
|
|
|
(68,594
|
)
|
|
|
-
|
|
|
|
23,546
|
|
|
|
-
|
|
|
Corporate
|
|
|
(607,987
|
)
|
|
|
-
|
|
|
|
(1,393,201
|
)
|
|
|
-
|
|
|
Total
income (loss) from operations
|
|
|
(505,796
|
)
|
|
|
(243,641
|
)
|
|
|
(1,512,006
|
)
|
|
|
(52,569
|
)
|
|
Other income (expense)
|
|
|
(138,943
|
)
|
|
|
(3,299
|
)
|
|
|
(175,125
|
)
|
|
|
(204,643
|
)
|
|
Net
loss before income tax
|
|
$
|
(644,744
|
)
|
|
$
|
(246,940
|
)
|
|
$
|
(1,687,131
|
)
|
|
$
|
(257,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
December 31,
2007
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund Management
|
|
|
|
|
|
|
|
|
|
$
|
17,362
|
|
|
$
|
-
|
|
|
Principal Investment
|
|
|
|
|
|
|
|
|
|
|
7,497,567
|
|
|
|
8,022,877
|
|
|
Strategic Acquisition Division
|
|
|
|
|
|
|
|
|
|
|
473,694
|
|
|
|
-
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
732,357
|
|
|
|
-
|
|
|
Total
identifiable assets
|
|
|
|
|
|
|
|
|
|
$
|
8,720,980
|
|
|
$
|
8,022,877
|
|
Note
13. Subsequent Events
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.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
OVERVIEW
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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
Our
Business Plan
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.
We have
continued to build the foundations of the company for the benefit of our
shareholders in order to grow the Company into a vertically integrated oil and
gas company by investing in our three separate Divisions. We have
accomplished this by investing in people that are well seasoned in the oil and
gas industry. We can only become the best by hiring the
best.
Doug
Crawford joined the organization during the past quarter as our Chief Accounting
Officer to oversee our Accounting Group located in our North Canton, Ohio
office. He was formerly CFO and a Director of Ports Petroleum
Corporation in Wooster, Ohio; a $750,000,000 wholesaler of gasoline which
operates 80 Fuel Marts in 15 States. He will remain on the Board of
Directors of Ports Petroleum Corporation and has no relationship to the CEO of
Capital City.
Chuck
Kendall joined the organization in the past quarter as Director of Business
Development and Land Management. He has more than 30 years of oil and
gas experience to the Company. His expertise lies in supervising land leasing,
right-of-way acquisitions, drill site surveying and permitting of new wells and
large lease-acquisitions programs which included an 80,000-acre program for
Belden & Blake Corp. in Eastern Ohio. He owned Petroleum Land
Services, which later became PetroSearch, Inc. which provided land-related
services to oil and gas companies throughout the Appalachian basin. Prior
clients included Great Lakes Energy Partners, Mason-Dixon Energy, Schreiner Oil
& Gas Inc., GonzOil Inc. and Cardinal Oil Company
The Fund
Management Division
is overseen by our wholly owned subsidiary, Avanti
Energy Partners, LLC (“Avanti”). This Division has historically
marketed direct participation programs to regional broker-dealers, called the
“Capital City Energy Funds.” We have focused on expanding our distribution
channels for these funds through the first 9 months of 2008 and have grown the
distribution from one broker-dealer with 30 brokers at the beginning of 2008 to
more than 8 broker-dealers with over 1,200 brokers. The focus for distribution
of the Capital City Energy Funds through-out the remainder of 2008 will target
financial planning firms, Certified Public Accounting firms and small family
offices.
The
reason for this shift in distribution channels signals our growth strategy into
becoming a fully integrated oil and natural gas company. Avanti has now become
an oil and gas operating company, operating our own wells and not just
partnering with other oil and gas operators.
We closed
our most recent fund, Capital City Energy Fund XVII LP, on November 7, 2008,
which will be our last fund structured as a limited partnership. We began a new
chapter for our highly successful Capital City Energy Funds on November 10, 2008
due to the overwhelming demand from high net worth individuals and institutions
to invest alongside Avanti in oil and gas ventures. This structure has a higher
minimum investment, allowing us to reduce the distribution costs significantly,
while providing the qualified investors higher first year tax write-offs,
quicker return of their contributed capital and direct ownership in the oil or
natural gas wells.
The first
“fund” of this type began accepting partners on November 10, 2008 and we believe
it will be warmly received by investors. This project is called
“Capital City Energy Fund – Homer
Prospect 1.”
The Homer Prospect is a 10 well drilling program
located in Medina and Ashland County, Ohio targeting the Clinton Sandstone
formation with total well depths ranging from 2,700’ to 3,000’. This project is
surrounded by other wells currently in operation that have produced an average
of approximately 35 million cubic feet of natural gas per well during their
first year of production. Overall, the cumulative life of each well is expected
to produce approximately 175 million cubic feet of natural gas.
These
wells will be operated and primarily owned by Avanti. We have
targeted five wells to be drilled before the end of the year and the balance to
be drilled before March 31, 2009. We anticipate our wholly owned
subsidiary Eastern Well Services, LLC ("Eastern") will perform some of the well
completion services. Securities offered will not be or have not been
registered under the Act and may not be offered or sold in the United States
absent registration or an applicable exemption from registration
requirements
The Principal
Investment Division
is also overseen by our wholly owned subsidiary,
Avanti. We now currently own more than 110 fractional interests in
various energy properties located in 12 different states and operated by some of
the largest oil and natural gas companies in the country. These
energy properties include deep oil wells in Northwest Texas, Oklahoma and
Louisiana, natural gas wells in the Barnett and Fayetteville Shale of Texas,
coal-bed methane wells in the Dakotas and pipelines in the Gulf
Coast. The Powder River Basin continues to be a strong producing
region for the Principal Investment Division. Our key well in Niobrara County,
Wyoming, produced net revenue of $289,803 on an investment of $179,682 in the
third quarter. Avanti will continue to seek prospects yielding this type of
return.
However,
holding true to our statements announced in the second quarter of this year our
focus has shifted to our own backyard in the Appalachian Basin and Oklahoma area
where we will have the ability to operate our own wells through our wholly owned
subsidiary Avanti and also perform our own well completion through another
wholly owned subsidiary Eastern thus increasing our overall net
margins. We have acquired numerous acreage positions in the
Appalachian Basin that will be drilled and completed in the current quarter with
the expectation to bring these new wells online and generating revenue for the
company before the end of the year.
The Strategic
Acquisition Division
continues to make significant strides through
Eastern, a wholly owned subsidiary. Eastern opened its Corporate
Headquarters in Burbank, Ohio in the past quarter. Situated on 30 acres, this
facility is completing construction of three additional bays for a total of six
bays to house wireline trucks and equipment and anticipates being fully
operational with wireline services late in 2008. Eastern recently
opened an office in Hominy, Oklahoma with three fulltime employees and has
targeted numerous oilfield service companies to acquire over the next several
months.
Our
Mission
To
maximize both ethically and responsibly the total returns to the owners of the
Company --- our shareholders.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008:
REVENUES
On a
consolidated basis oil and gas revenues increased to $760,850 and our net loss
was $450,614 during the three month ended September 30, 2008, compared to oil
and gas revenue of $28,818 and a net loss of $243,641 recorded during the same
period for 2007.
Management
revenues decreased to $22,702 over the three months ended September 30, 2008,
compared to $65,882 for same period in 2007.
Total net
oil and gas production realized from principal investments was 4,805 barrels of
oil and 34,803 thousand cubic feet (MCF) of natural gas for this quarter ended
September 30, 2008. The comparative data for the same period of 2007
was 60 barrels of oil and 2856 thousand cubic feet (MCF) of natural
gas.
Average
commodity price realized on the principal investment portfolio production for
the quarter ended September 30, 2008 was $99.68 per barrel of oil and $7.98 per
thousand cubic feet (MCF) of natural gas. The comparative data for the same
period of 2007 was $43 per barrel of oil and $4.80 per thousand cubic feet (MCF)
of natural gas.
LEASE
OPERATING EXPENSES AND DRY HOLE EXPENSE
For the
quarter ended September 30, 2008, lease operating expenses (LOE) increased to
$184,567 compared to $6,729 during the same quarter ended September 30, 2007 due
to our direct ownership of the energy properties acquired in fourth quarter of
2007 from the Capital City Energy Funds, instead of just managing the
Funds.
Typical
LOE expenses include operating labor, field supervision, water hauling and
disposal fees, communications, fuel, leased vehicles, environmental and safety
compliance.
DEPRECIATION
AND DEPLETION
Depreciation
and depletion expenses totaled $215,425 for the quarter ended September 30,
2008, compared to $0 for the quarter ended September 30, 2007. This increase was
expected due to the $11,700,000 acquisition of the oil and gas properties owned
by Capital City Energy Funds V through XII completed in the fourth quarter of
2007.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
For the
three month period ending September 30, 2008, the general and administrative
expenses totaled $889,361 which was an increase over expenses of $283,612 posted
during the same time period in 2007. The increase in operating
expenses was driven by significant one-time costs as we continued to accelerate
the execution of our Triad model business plan, the costs associated with the
$11,700,000 acquisition of the oil and gas properties owned by Capital City
Energy Funds V through XII, the cost associated with the reverse merger in the
first quarter of 2008, the one-time start-up expenses associated with the
establishment of our North Canton accounting office and headquarters of Eastern
Well Services in Burbank, Ohio, stock options granted to Directors and various
stock incentive bonuses given to key employees.
INTEREST
EXPENSE
For this
quarter ended September 30, 2008, interest expense of $140,447, up substantially
from its level of $3,299 recorded for the same quarter,
2007. Interest in 2008 is attributed to the $1,500,000 participation
financing arrangement added in early 2008.
INCOME
TAX EXPENSE
We had an
income tax benefit of $194,129 for the three months ended September 30,
2008. For the three months ended September 30, 2007, the Company was
operated as a LLC and did not accrue for income tax expenses.
NET
LOSS
Net loss
for the three months ended September 30, 2008 was $450,614 compared to a net
loss of $246,940 for the same period in 2007.
LIQUIDITY
AND CAPITAL RESOURCES
As of
September 30, 2008, we had total current assets of $1,179,253. The current
assets consisted mainly of cash in the amount of $394,412, prepaid expenses in
the amount of $14,518 and accounts receivable and accrued revenues in the amount
of $650,384.
Our total
current liabilities as of September 30, 2008 were $2,079,994. The current
liabilities consist of accounts payable and accrued expenses in the amount of
$388,579, notes payable-current portion in the amount of $1,621,251 and $70,164
of debt related to a participating interest financing arrangement. In addition,
we had $6,578,366 in stockholder’s equity as of September 30, 2008.
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. Capital City has incurred cumulative operating losses
through September 30, 2008 of $953,668 and had a working capital deficit of
$900,741 at September 30, 2008. Revenues during the nine months ended
September 30, 2008 were not sufficient to cover our operating costs and we
continue to generate negative cash flows from operations. There can
be no assurance that Capital City 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.
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 management and significant shareholders
sufficient to meet its minimal operating expenses and seeking equity and/or debt
financing. 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. An initial equity financing
could result in significant dilution to our shareholders.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2008:
REVENUES
On a
consolidated basis oil and gas revenues increased to $2,005,957 and our net loss
was $1,523,174 during the first nine months of 2008, compared to oil and gas
revenue of $28,818 and a net loss of $257,212 recorded during the first nine
months of 2007.
Management
revenues increased to $325,443 over the first nine months due the Capital City
Energy Funds, the acquisition of Eastern and Avanti compared to $177,963 for
same period in 2007.
Total net
oil and gas production realized from principal investments was 10,439 barrels of
oil and 63,136 thousand cubic feet (MCF) of natural gas for the first nine
months of 2008. The comparative data for the same period of 2007 was
83 barrels of oil and 2,449 thousand cubic feet (MCF) of natural
gas.
Average
commodity price realized on the principal investment portfolio production for
the first nine months of 2008 was $117.13 per barrel of oil and $12.25 per
thousand cubic feet (MCF) of natural gas. The comparative data for the same
period of 2007 was $43.34 per barrel of oil and $4.88 per thousand cubic feet
(MCF) of natural gas.
LEASE
OPERATING EXPENSES AND DRY HOLE EXPENSE
For the
first nine months of 2008, lease operating expenses (LOE) increased to $587,945
compared to $48,000 during the first nine months of 2007 due to our direct
ownership of the energy properties acquired in fourth quarter of 2007 from the
Capital City Energy Funds, instead of just managing the Funds.
Typical
LOE expenses include operating labor, field supervision, water hauling and
disposal fees, communications, fuel, leased vehicles, environmental and safety
compliance.
DEPRECIATION
AND DEPLETION
Depreciation
and depletion expenses totaled $603,196 for the first nine months of 2008, above
the results for the first nine months of 2007 of $384,415. This increase was
expected due to the $11,700,000 acquisition of the oil and gas properties owned
by Capital City Energy Funds V through XII completed in the fourth quarter of
2007.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the
nine month period ending September 30, 2008, the general and administrative
expenses totaled $2,654,484 which was an increase over expenses of $713,981
posted during the same time period in 2007. The increase in operating
expenses was driven by significant one-time costs as we continued to accelerate
the execution of our Triad model business plan, the costs associated with the
$11,700,000 acquisition of the oil and gas properties owned by Capital City
Energy Funds V through XII, the cost associated with the reverse merger in the
first quarter of 2008, the one-time start-up expenses associated with the
establishment of our North Canton accounting office and headquarters of Eastern
Well Services in Burbank, Ohio, stock options granted to Directors and various
stock incentive bonuses given to key employees.
INTEREST
EXPENSE
Interest
expense of $178,505 for the first nine months of 2008 was down from its level of
$204,643 recorded for the first nine months of 2007. Interest in 2008
is attributed to the $1,500,000 participation financing arrangement added in
early 2008.
INCOME
TAX EXPENSE
We had an
income tax benefit of $163,960 for the nine months ended September 30,
2008. For the first nine months of 2007, the Company was operated as
a LLC and did not accrue for income tax expenses.
NET
LOSS
Net loss
for the nine months ended September 30, 2008 was $1,523,175 compared to a net
loss of $257,212 for the same period in 2007.
LIQUIDITY
AND CAPITAL RESOURCES
As of
September 30, 2008, we had total current assets of $1,179,253. The current
assets consisted mainly of cash in the amount of $394,412, prepaid expenses in
the amount of $14,518 and accounts receivable and accrued revenues in the amount
of $650,384.
Our total
current liabilities as of September 30, 2008 were $2,079,990. The current
liabilities consist of accounts payable and accrued expenses in the amount of
$388,579, notes payable-current portion in the amount of $1,621,251 and $70,164
of debt related to a participating interest financing arrangement. In addition,
we had $6,578,366 in stockholder’s equity as of September 30, 2008.
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.
GOING
CONCERN
Capital
City requires additional financing to grow its business and fund its
operations. The Company’s unaudited interim 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. Capital City has incurred cumulative operating losses through
September 30, 2008 of $953,668 and had a working capital deficit of $884,411 at
September 30, 2008. Revenues during the nine months ended September
30, 2008 were not sufficient to cover our operating costs and we continue to
generate negative cash flows from operations. 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 Capital City 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. Capital City is in the process of raising additional
capital through a related party private fund management company.
CASH
FLOW FROM OPERATING ACTIVITIES
For the
nine-month period ended September 30, 2008, net cash used in operating
activities was $876,141 versus net cash provided by operating activities of
$681,561 for the nine-month period ended September 30, 2007.
CASH
FLOW FROM INVESTING ACTIVITIES
For the
nine-month period ended September 30, 2008, net cash provided by investing
activities was $645,730 primarily attributed to our lease acquisition and
continued rework program. For the nine month period ended September 30, 2007 net
cash provided by investing was $318,860. Our investing activities were funded
from the use of cash from operations and financing.
CASH
FLOW FROM FINANCING ACTIVITIES
For the
nine-month period ended September 30, 2008, net cash provided in financing
activities was $1,715,832 versus net cash used in financing activities of
$874,647 for the nine month period ended September 30,
2007. Financing activities principally consisted of $678,500 proceeds
from exercise of warrants and $1,500,000 of proceeds related to our
participation interest financing.
HEDGING
We did
not hedge any of our oil or natural gas production during 2008 and have not
entered into any such hedges from September 30, 2008 through the date of this
filing.
RESERVES
The
present value of the proved developed producing reserves, discounted at 10%
(PV-10) per year, stood at $7,030,938 as of July 1, 2008, and represented a 12%
increase in PV-10 present value of the portfolio from June 1, 2007. This is due
to a much stronger commodity price environment for both crude oil and natural
gas during this same period.
As of
July 1, 2008, net proved developed producing oil reserves stood at 168,950
barrels, which was a 51% increase over the period ending June 1, 2007. In
addition, net proved developed producing gas reserves stood at 385,675 MCF
(thousand cubic feet), which represented a 2% decrease over the period ending
June 1, 2007.
The
reserve report for the Company was completed by James Engineering, Inc. located
in Marietta, Ohio for the period ending July 1, 2008. Previously, a
reserve report was completed by Netherland, Sewell & Associates of Houston,
Texas for the period ending June 1, 2007. The reserve estimates were
prepared in accordance with generally accepted petroleum engineering and
evaluation principles as set forth in the Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserves promulgated by the Society of Petroleum
Engineers.
The Society of Petroleum Engineers and the Securities and Exchange
Commission generally define proved reserves as those oil, natural gas, and
natural gas liquids which upon analysis of geological and engineering data
appear with reasonable certainty to be recoverable in the future from known oil
and gas reservoirs under existing economic and operating conditions.
Proved developed reserves are proved reserves that are expected to be recovered
from existing wells with existing equipment and operating methods. Proved
developed producing reserves are proved developed reserves to be produced from
completion intervals open to production in existing wells.
CONTRACTUAL
COMMITMENTS
None.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
September 30, 2008, we had no off-balance sheet arrangements.
RELATED
PARTY TRANSACTIONS
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 elected to
perform his duties as CEO without compensation for the 2008 calendar year. Mr.
Crawford stated that he wanted to align his interests with those of the
shareholders and thus wanted to assist the company in deferring the enormous
cost associated with the company being public in its first year by forgoing any
compensation. Mr. Crawford is a beneficial owner of almost 10% of the Company’s
common stock.
On
September 11, 2008, The Energy Acquisition Group, an affiliated company
repurchased Mr. Kauffman’s 250,000 shares of common stock in the company
subsequently redistributed the shares to its remaining members.
Mr. Keith
Kauffman, David Beule, Todd Crawford and John Harsh resigned from the Board of
Directors in order to create vacancies on the board for a majority of
independent directors, as required for listing on the American Stock Exchange or
any other major exchange. These former directors surrendered an aggregate of
500,000 Stock Options that had previously been granted to them. None of the
options had vested in any amount.
Mr.
Crawford and Joseph Smith, both members of our Board of Directors are greater
than 10% Members in CCSSM Capital Partners, LLC, which manages the Opportunity
Fund, LLC. On July 29, The Opportunity Fund, an Ohio LLC managed by Timothy W.
Crawford, our CEO and Chairman of the Board of Directors; Mr. Joseph Smith,
Director; Mr. Todd Crawford, Former Director/Beneficial Owner; Gary Sturtz,
Beneficial Owner and Mr. Michael McKenzie, Beneficial Owner purchased one Unit
pursuant to a Rule 506 private placement memorandum that we have in effect at
this time. One Unit consists of 10,000 shares of stock and a warrant to purchase
an additional 10,000 shares of common stock for $4.00 per share for thirty-six
(36) months following the date of purchase of the Unit.
The
following table lists shares of common stock that were paid to each member of
our Board of Directors as compensation for their participation on our Board of
Directors for the third quarter:
|
DIRECTOR
|
|
NUMBER OF
SHARES ISSUED
|
|
Timothy
Crawford
|
|
3,206
|
|
Daniel
Coffee
|
|
3,206
|
|
Joseph
Smith
|
|
3,206
|
|
Lee
Robinson
|
|
3,206
|
|
David
Beule (former director)
|
|
1,946
|
|
Keith
Kauffman (former director)
|
|
1,946
|
|
James
Bishop
|
|
3,206
|
|
David
Tenwick
|
|
714
|
|
TOTAL
|
|
20,636
|
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.
Asset
Retirement Obligations
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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risk is the risk of loss arising from adverse changes in market rates and
prices. We are exposed to risks related to increases in the prices of fuel and
raw materials consumed in exploration, development and production. We do not
engage in commodity price hedging activities.
ITEM
4T. CONTROLS AND PROCEDURES
MANAGEMENT'S
EVALUATION ON THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES
Our
principal executive officer and principal financial officer have reviewed and
continue to evaluate the effectiveness of our controls and procedures over
financial reporting and disclosure (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this quarterly report. The term "disclosure controls and procedures"
is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission's
rules and forms, and that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating our controls and procedures over
financial reporting and disclosure, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and our
management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
An
evaluation was performed under the supervision and with the participation of our
management, including our chief executive officer and chief accounting officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2008. Based on that evaluation, our management,
including our chief executive officer and chief financial officer, has concluded
that our disclosure controls and procedures were not effective as of September
30, 2008.
The
principal reasons that our disclosure and procedure controls were determined to
be ineffective was due principally to the number of adjustments identified by
our auditors in their review of the quarterly financial statements. Our
assessment considered the recent increase in disclosure and procedure controls
following our reverse merger into a public company. We concluded that we
need to implement additional disclosure controls and procedures related to the
evaluation of accounting policies and procedures used in our accounting records
particularly related to oil and gas accounting matters and increased training of
personnel in SEC reporting requirements. Management is developing a plan to
enhance controls in these areas to ensure the accurate and timely filing of its
SEC reports.
CHANGES
IN INTERNAL CONTROL
The
Company has engaged various consultants to evaluate, document and assist
management in the implementation of controls and procedures over financial
reporting and disclosure.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We are
not a party to any pending legal proceeding. We are not aware of any pending
legal proceeding to which any of our officers, directors, or any beneficial
holders of 5% or more of our voting securities are adverse to us or have a
material interest adverse to us.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the first nine months of 2008, we received $648,750 to purchase 432,500 shares
of our common stock. These warrants were called by the Company and
the warrant holders elected to exercise their right to purchase the Common
stock. There are 1,722,500 existing warrants yet to be exercised that
have also been called by the Company.
Item
3. Defaults upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
We held
the first annual meeting of our stockholders on October 23, 2008 in Columbus,
Ohio. As of the September 19, 2008 record date for the meeting, there were
27,347,283 shares of our common stock issued and outstanding. Our Bylaws state
that it is necessary to have a quorum of fifty percent (50%) of the issued and
outstanding shares in order for any items voted on to be passed. Proxies for
14,950,599 shares or fifty-five percent (55%) were received. The first item to
be voted on was the re-election of six (6) directors to our Board of Directors;
Mr. Timothy Crawford, Mr. Daniel Coffee, Mr. Joseph Smith, Mr. Lee Robinson, Mr.
James Bishop, and Mr. David Tenwick. The second item to come before the
stockholders for a vote was the ratification of our change of auditors to GBH
CPAs, PC. All proxies received were voted in favor of the two items placed
before the stockholders for a vote.
Item
5. Other Information
None.
Item 6. Exhibits
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation
(1)
|
|
|
|
|
|
3.2
|
|
By-Laws
(1)
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002
|
|
(1)
|
Previously
included as an exhibit to the 8-K/A filed on March 14,
2008.
|
SIGNATURES
In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
Capital
City Energy Group, Inc.
|
|
|
|
|
Date:
January 20, 2009
|
|
|
|
|
|
|
By:
/s/ Douglas
Crawford
Douglas Crawford
Title:
Chief Accounting
Officer
|
Capital City Energy (GM) (USOTC:CETG)
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