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
June 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)
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Nevada
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20-5131044
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(State
or other jurisdiction of incorporation or
organization)
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(IRS
Employer Identification No.)
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8351
N. High Street, Suite 101
Columbus,
Ohio 43235
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(Address
of principal executive offices)
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(614)
310-1614
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(Issuer’s
telephone number)
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(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.
x
Yes
o
No
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).
o
Yes
x
No
State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
There are 27,047,952 shares of Common Stock and 3,111,843 shares of Preferred A
Stock issued and outstanding as of August 18, 2008.
Capital
City Energy Group, Inc.
TABLE OF
CONTENTS
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Page
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PART
I – FINANCIAL INFORMATION
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Item
1. Financial Statements
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3
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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13
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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17
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Item
4(T). Controls and Procedures
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17
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PART
II – OTHER INFORMATION
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Item
1 Legal Proceedings
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18
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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18
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Item
3. Defaults Upon Senior Securities
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18
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Item
4. Submission of Matters to a Vote of Security Holders
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18
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Item
5. Other Information
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18
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Item
6. Exhibits
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19
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Signatures
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19
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EXPLANATORY
NOTE
This
Amendment No. 1 to 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 June 30, 2008 as filed with the Securities and Exchange Commission on
August 19, 2008. This Amendment (i) corrects typographical errors in the
original filing, and (ii) augments the Management’s Discussion and Analysis with
a detailed discussion of the proved reserves.
PART
I - FINANCIAL INFORMATION
Item 1.
Financial
Statements
Our
unaudited financial statements included in this Form 10-Q are as
follows:
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4
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Consolidated
Balance Sheets as of June 30, 2008 and December 31, 2007
(Unaudited)
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5
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Consolidated
Statements of Operations for the three months ended June 30, 2008 and 2007
(Unaudited)
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6
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Consolidated
Statements of Operations for the six months ended June 30, 2008 and 2007
(Unaudited)
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7
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Consolidated
Statements of Cash Flows for the six months ended June 30, 2008 and 2007
(Unaudited)
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8 -
12
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Notes
to Consolidated Financial Statements
(Unaudited)
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CAPITAL
CITY ENERGY GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
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June
30,
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December
31,
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2008
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2007
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|
ASSETS
|
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|
|
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CURRENT
ASSETS
|
|
|
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Cash
|
|
$
|
475,217
|
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|
$
|
200,451
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|
Accounts receivable and accrued revenues
|
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568,588
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|
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|
414,826
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Receivables-related
parties
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51,042
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-
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Other receivables
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10,223
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|
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-
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Prepaid expenses
|
|
|
63,765
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|
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40,991
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Prepaid expenses-related parties
|
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48,000
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-
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Total
Current Assets
|
|
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1,216,835
|
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|
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656,268
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PROPERTY
AND EQUIPMENT, net of accumulated depreciation of $15,289 and
$1,497
|
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211,528
|
|
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147,261
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OIL
AND GAS PROPERTIES, SUCCESSFUL EFFORTS ACCOUNTING
|
|
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Proved
|
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9,932,791
|
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9,529,004
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Unproved properties
|
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-
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-
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Accumulated depreciation, depletion and amortization
|
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(2,712,245
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)
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(2,314,141
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)
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NET
OIL AND GAS PROPERTIES
|
|
|
7,220,546
|
|
|
|
7,214,863
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|
|
|
|
|
|
|
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OTHER
ASSETS
|
|
|
|
|
|
|
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Prepaids and deposits-related parties
|
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|
67,000
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|
|
|
-
|
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Deposits
|
|
|
7,070
|
|
|
|
4,485
|
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|
Total
Other Assets
|
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|
74,070
|
|
|
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4,485
|
|
|
|
|
|
|
|
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|
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TOTAL
ASSETS
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|
$
|
8,722,979
|
|
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$
|
8,022,877
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|
|
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LIABILITIES
AND STOCKHOLDERS'EQUITY
|
|
|
|
|
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|
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CURRENT
LIABILITIES
|
|
|
|
|
|
|
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Accounts payable and accrued expenses
|
|
$
|
239,507
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$
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360,708
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Payable-related parties
|
|
|
35,538
|
|
|
|
-
|
|
|
Notes payable-current portion
|
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70,620
|
|
|
|
100,000
|
|
|
Participating interest financing arrangement
|
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1,534,279
|
|
|
|
-
|
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Total
Current Liabilities
|
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|
1,879,944
|
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460,708
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|
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LONG
TERM LIABILITIES
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Asset retirement obligation
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61,624
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|
|
|
-
|
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Deferred income tax liability
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|
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194,129
|
|
|
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163,960
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Total
Long Term Liabilities
|
|
|
255,753
|
|
|
|
163,960
|
|
|
|
|
|
|
|
|
|
|
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TOTAL
LIABILITIES
|
|
|
2,135,697
|
|
|
|
624,668
|
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|
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|
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STOCKHOLDERS'
EQUITY
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Preferred
shares: $0.001 par value, 10,000,000 shares authorized:
3,142,650 shares issued and outstanding
|
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3,143
|
|
|
|
3,143
|
|
|
Common shares: $0.001 par value, 90,000,000 shares
authorized:
27,047,514 and 20,750,740 shares issued and outstanding,
respectively
|
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27,048
|
|
|
|
20,751
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|
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Additional paid-in capital
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|
|
6,863,741
|
|
|
|
6,271,727
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Retained earnings (Accumulated Deficit)
|
|
|
(306,650
|
)
|
|
|
1,102,588
|
|
|
Total
Stockholders' Equity
|
|
|
6,587,282
|
|
|
|
7,398,209
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
8,722,979
|
|
|
$
|
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)
|
|
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For
the Three Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
724,175
|
|
|
$
|
646,715
|
|
|
Management
revenue
|
|
|
282,608
|
|
|
|
58,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
1,006,783
|
|
|
|
705,363
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating costs
|
|
|
198,499
|
|
|
|
199,185
|
|
|
Depreciation
and depletion
|
|
|
200,780
|
|
|
|
194,095
|
|
|
Selling,
general and administrative
|
|
|
1,255,029
|
|
|
|
213,951
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,654,308
|
|
|
|
607,231
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
(647,525
|
)
|
|
|
98,132
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
4,090
|
|
|
|
-
|
|
|
Interest
expense
|
|
|
(35,961
|
)
|
|
|
(98,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(31,871
|
)
|
|
|
(98,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(679,396
|
)
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
|
|
40,813
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(638,583
|
)
|
|
$
|
(436
|
)
|
|
LESS:
PREFERRED DIVIDENDS
|
|
|
(197,933
|
)
|
|
|
-
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(836,516
|
)
|
|
$
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
20,821,349
|
|
|
|
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 Six Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas revenue
|
|
$
|
1,245,107
|
|
|
$
|
1,293,430
|
|
|
Management
revenue
|
|
|
302,741
|
|
|
|
112,081
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
1,547,848
|
|
|
|
1,405,511
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating costs
|
|
|
403,378
|
|
|
|
399,655
|
|
|
Depreciation
and depletion
|
|
|
387,771
|
|
|
|
384,415
|
|
|
Selling,
general and administrative
|
|
|
1,765,123
|
|
|
|
430,369
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
2,556,272
|
|
|
|
1,214,439
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
(1,008,424
|
)
|
|
|
191,072
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
4,090
|
|
|
|
-
|
|
|
Interest
expense
|
|
|
(38,058
|
)
|
|
|
(201,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(33,968
|
)
|
|
|
(201,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(1,042,392
|
)
|
|
|
(10,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (EXPENSE)
|
|
|
(30,169
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(1,072,561
|
)
|
|
$
|
(10,272
|
)
|
|
LESS:
PREFERRED DIVIDENDS
|
|
|
(336,677
|
)
|
|
|
-
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(1,409,238
|
)
|
|
$
|
(10,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED EARNINGS (LOSS) PER SHARE
|
|
$
|
(0.07
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
21,163,023
|
|
|
|
18,095,740
|
|
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 Six Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,072,561
|
)
|
|
$
|
(10,272
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
387,771
|
|
|
|
384,415
|
|
|
Stock issued for services
|
|
|
141,500
|
|
|
|
-
|
|
|
Stock issued for directors fees
|
|
|
61,515
|
|
|
|
-
|
|
|
Stock issued for acquisition of subsidiary
|
|
|
3,500
|
|
|
|
-
|
|
|
Amortization of stock options
|
|
|
100,546
|
|
|
|
|
|
|
Amortization of discount on debt
|
|
|
-
|
|
|
|
183,334
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase in prepaid expenses and deposits
|
|
|
(25,359
|
)
|
|
|
-
|
|
|
Increase in prepaid expenses – related party
|
|
|
(115,000
|
)
|
|
|
-
|
|
|
Increase in accounts receivable and accrued revenue
|
|
|
(153,762
|
)
|
|
|
(72,657
|
)
|
|
Increase in accounts receivable – related party
|
|
|
(51,042
|
)
|
|
|
-
|
|
|
Increase in other assets
|
|
|
(10,223
|
)
|
|
|
-
|
|
|
Decrease in accounts payable and accrued expenses
|
|
|
(121,201
|
)
|
|
|
(33,932
|
)
|
|
Increase in accounts payable – related party
|
|
|
35,538
|
|
|
|
-
|
|
|
Increase in deferred tax liability
|
|
|
30,169
|
|
|
|
-
|
|
|
Increase in interest payable – participating interest financing
arrangement
|
|
|
34,279
|
|
|
|
-
|
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
|
(754,330
|
)
|
|
|
450,888
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(78,059
|
)
|
|
|
-
|
|
|
Purchase of oil and gas properties
|
|
|
(318,038
|
)
|
|
|
-
|
|
|
Net
Cash Used by Investing Activities
|
|
|
(396,097
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
75,144
|
|
|
|
-
|
|
|
Repayment of notes payable
|
|
|
(4,524
|
)
|
|
|
-
|
|
|
Proceeds from financing arrangement
|
|
|
1,500,000
|
|
|
|
-
|
|
|
Costs incurred by the Energy Funds not included in
re-capitalization
|
|
|
-
|
|
|
|
(1,521,638
|
)
|
|
Proceeds from exercise of warrants
|
|
|
191,250
|
|
|
|
-
|
|
|
Dividends paid on preferred stock
|
|
|
(336,677
|
)
|
|
|
-
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
1,425,193
|
|
|
|
(1,521,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
274,766
|
|
|
|
(1,070,750
|
)
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
200,451
|
|
|
|
1,169,749
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
475,217
|
|
|
$
|
98,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,682
|
|
|
$
|
11,109
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Common
stock issued for debt
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
Recapitalization
of common stock on reverse merger
|
|
$
|
6,060
|
|
|
$
|
-
|
|
|
Asset
retirement obligation incurred
|
|
$
|
61,624
|
|
|
$
|
-
|
|
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”) 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’ 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. All references to shares authorized and outstanding have
been restated to reflect the conversion on a retroactive basis.
At June
30, 2008, Capital City managed oil and gas investments for two energy funds
(Capital City Energy Fund XIV, LLC and Capital City Energy Fund XVI, LP). 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 gross
number of wells in which these two Funds owned an interest is 69 and the number
of net wells is 3.82.
The
Company’s results of operations are dependent on four sources of revenue. 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 third source of
revenue the Company receives is 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 a becoming a full service oilfield
service company and charging for services such as wireline, logging, testing and
other well completion services. The fourth source of revenue which accounts for
the majority of revenue earned in the first six months is the oil & natural
gas revenue received from the fractional ownership interests in more than 178
wells located in 12 different states.
The first
six 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 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 staff accountants from the large pool
of oil and gas accounting people 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.
Note
3.
S
ummary 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.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. S
ummary of Significant Accounting
Policies (continued)
Concentration
of Credit Risk
Financial
instruments that potentially subject Capital City to concentration of credit
risk consist of cash. At June 30, 2008, Capital City had approximately $475,000
in cash in excess of federally insured limits. 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 June 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
June 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.
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.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. S
ummary of Significant Accounting
Policies (continued)
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. 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
Financial Accounting Standards Statement 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 2,763,049 warrants at
June 30, 2008 that were out of the money and are therefore
anti-dilutive.
Share-Based
Compensation
As of
December 31, 2007, Capital City had not issued any share-based payments to its
employees.
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. During
the six months ended June 30, 2008, stock options were valued with the following
weighted average assumptions used for grants; dividend yield of 0.00 percent;
expected volatility of 40.25%; risk-free interest rate of 3.29% and expected
lives of 1 year. Compensation expense related to options granted in the first
six months of 2008 and 2007 was $86,182 and $-0-, respectively.
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.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
4. Oil and Gas Properties
Oil and
gas properties are stated at cost. Depletion expense for the six months ended
June 30, 2008 and 2007 amounted to $387,771, and $384,415, respectively. Gains
and losses on sales and disposals are included in the statements of operations.
As of June 30, 2008 and December 31, 2007 oil and gas properties consisted
of the following:
|
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Equipment
|
|
$
|
1,810,321
|
|
|
$
|
1,429,311
|
|
|
Intangible
Drilling Costs
|
|
|
4,585,651
|
|
|
|
5,630,066
|
|
|
Leasehold
Improvements
|
|
|
3,536,819
|
|
|
|
2,469,627
|
|
|
Total
|
|
|
9,932,791
|
|
|
|
9,529,004
|
|
|
Accumulated
Depletion
|
|
|
(2,712,245
|
)
|
|
|
(2,314,141
|
)
|
|
Net
Oil and Gas Properties
|
|
$
|
7,220,546
|
|
|
$
|
7,214,863
|
|
Note
5. 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
6. Notes Payable
During
the six months ended June 30, 2008, the Company purchased office equipment under
secured financing agreements. The financing agreements will become long-term
capital leases or purchase contracts if the Company does not pay them in full
during July 2008. The contracts bear interest at 21.5% per annum.
Note
7. Equity Transactions
On March
11, 2008, the Company split its common shares on a 10 to 1 basis. All amounts in
the consolidated financial statements and footnotes reflect the common stock
split on a retroactive basis.
On March
12, 2008, we entered into an Investor Relations contract with CEOcast, Inc for a
period of 12 months at which time we issued 40,000 shares of our Common Stock,
valued at $120,000, for the upfront engagement fee, a $15,000 retainer and have
agreed to pay a monthly consulting fee of $7,500. The contract expires on March
12, 2009.
On March
28, 2008, the Company issued 29,796 shares of its common stock to the Eagle
Foundation in lieu of a cash payment for a note payable that was previously
entered into by the Company. The original note was executed in the amount of
$400,000, which had been subsequently paid down in previous quarters to
$100,000. The issuance of 29,796 shares of common stock retired the note in its
entirety.
On April
16, 2008, the Company issued 1,000 shares of its common stock, valued at $3,500,
to Ms. Barbara Coffee as consideration for the acquisition of Eastern Well
Services, LLC which then became a wholly owned subsidiary.
On April
16, 2008, the Company issued 10,000 shares of its common stock, valued at
$21,500, to SmallCapVoice.com as an advance payment for Investor Relations
services to be performed for the second quarter for the promotion of our
Company’s business plan.
CAPITAL
CITY ENERGY GROUP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
8. Warrants
As of
June 30, 2008 and December 31, 2007, the Company has outstanding 2,020,000
warrants for the purchase of its common shares at $1.50 per share, 344,000
warrants for the purchase of its common shares at $1.25 per share, 928,800
warrants for the purchase of its common shares at $1.00 per share and 25,000
warrants for the purchase of its common shares at $.10 per share. As of
the time of this filing, we have had several shareholders elect to exercise
their warrants. To date we have received $202,500 to purchase 135,000
shares of our common stock.
Note 9.
Related Party
Transactions
The
Company entered into an Investment Banking agreement with Capital City
Consulting Services, LLC on January 1, 2008, the Managing Director of this
company is Joseph T. Smith who is also a Director of Capital City Energy Group.
Capital City Consulting Group was paid $157,500 in consulting fees pursuant to
this agreement for the first six months of 2008.
The
Company receives a management fee for various direct participation programs that
it manages for individual investors. These direct participation programs are
Capital City Energy Fund XIV, Capital City Energy Fund XVI and NGO Program #1
and Program #2. The total amount of management fees received for
these direct participation programs during the first six months of 2008 was
$$20,675.
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 plan 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 stock have yet been
made. The deferred compensation plan is in the process of being
established.
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.
Timothy
W.
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. The Opportunity Fund, LLC has invested $100,000 in the NGO
Production Participation Program.
Daniel
Coffee (“Lessor”), 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 (the
“Premises”) 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.
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
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 3
rd quarter with the expectation to bring these new well positions
online and generating revenue for the company within the 4 th 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.
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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.
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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.
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The
addition of staff for Eastern Well Services and Avanti Energy Partners
increased operating expenses by nearly $55,000 for the first six
months.
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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.
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Options
were granted to officers and directors of the company which were valued at
$86,000 for the quarter.
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Investor
relations, public relations and general marketing costs associated
with being public were approximately $177,000 for the first six
months
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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 $1,216,835. The current assets
consisted mainly of cash in the amount of $475,217, 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 $275,045, and
notes payable-current portion in the amount of $70,620. In addition, we had
$6,587,282 in stockholders’ equity as of June 30, 2008. This compares to current
assets of $656,268 and current liabilities of $460,708 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 provided by 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 financing
arrangement, 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.
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
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.
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 financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of June 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 June 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
We made
no changes to our internal control over financial reporting during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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
On April
16, 2008, we issued 29,796 shares of our Common Stock to the Eagle Foundation in
lieu of a cash payment for a note payable that was previously entered into by
the Company. The original note was executed in the amount of $400,000, which had
been subsequently paid down in previous quarters to $100,000. The issuance of
29,796 shares of Common Stock retired the note in its entirety.
On April
16, 2008, we issued 1,000 shares of Common Stock to Ms. Barbara Coffee to
satisfy amounts owed to Ms. Coffee for the acquisition of Eastern and Avanti,
wholly owned subsidiaries of Capital City.
On July
7, 2008, we issued 10,000 shares of our common stock to SmallCapVoice.com as an
advance payment for Investor Relations services to be performed for the second
quarter for the promotion of our company’s business plan.
Item
3. Defaults upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
No
matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the period ended June 30,
2008.
Item
5. Other Information
On August
18, 2008, Mr. Keith Kaufman resigned his position on the Board of Directors and
as President of Capital City, effective immediately. Mr. Kaufman’s resignation
from the Board of Directors was solely for the purpose of creating a vacancy for
the appointment of Mr. David A. Tenwick. There were no known disagreements with
Mr. Kaufman any matters relating to our operation, policies or
practices. Mr. Kaufman will remain the Chief Executive Officer of
Avanti.
On August
18, 2008, the Board of Directors of the Company filled the vacancy created by
Mr. Kaufman's resignation by appointing Mr. David A. Tenwick. Mr. Tenwick will
fill this position until our next regularly scheduled shareholder meeting at
which time he may stand for reelection by the shareholders who are permitted to
vote in that election.
Mr.
Tenwick is the Chairman of the Board of Directors of Adcare Health Systems, Inc.
("Adcare"). Prior to founding Adcare, Mr. Tenwick was an independent
business consultant from 1982 to 1990. Through this capacity, he has served as a
director and an officer of several businesses, including Douglass Financial
Corporation, a surety company, and AmeriCare Health & Retirement, Inc., a
long-term care management company. From 1967 until 1982, Mr. Tenwick was a
director and an officer of Nucorp Energy, Inc., a company which he co-founded.
Nucorp Energy was a public company which invested in oil and gas properties and
commercial and residential real estate. Prior to founding Nucorp, he was an
enforcement attorney for the United States Securities and Exchange
Commission.
Item
6. Exhibits
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Exhibit
Number
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Description
of Exhibit
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3.1
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Articles
of Incorporation (1)
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3.2
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By-Laws
(1)
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31.1
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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
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31.2
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Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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32.1
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Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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(1)
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Previously
included as an exhibit to the 8-KA filed on March 14,
2008.
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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.
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Capital
City Energy Group, Inc.
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Date:
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September 24,
2008
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By:
/s/ Douglas
Crawford
Douglas
Crawford
Title:
Chief Accounting
Officer
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