1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2009 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-5525 PYRAMID OIL COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 94-0787340 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2008 - 21ST. STREET, BAKERSFIELD, CALIFORNIA 93301 (Address of principal executive offices) (Zip Code) (661) 325-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes [ ] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] 2 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. (Class) (Outstanding at September 30,2009) COMMON STOCK WITHOUT PAR VALUE 4,677,728 3 PYRAMID OIL COMPANY FORM 10-Q SEPTEMBER 30, 2009 Table of Contents Page ---- PART I Item 1. Financial Statements Balance Sheets - September 30, 2009 and December 31, 2008 4 Condensed Statements of Operations - Three months ended September 30, 2009 and 2008 6 Nine months ended September 30, 2009 and 2008 8 Condensed - Statements of Cash Flows - Nine months ended september30, 2009 and 2008 10 Notes to Financial Statements 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 25 PART II Item 1. Legal Proceedings 26 Item 1A. Risk Factors 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26 Item 6. Exhibits 26 4 PART I - FINANCIAL STATEMENTS Item 1. Financial Statements PYRAMID OIL COMPANY BALANCE SHEETS ASSETS September 30, 2009 December 31, (Unaudited) 2008 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $1,261,651 $1,793,563 Short-term investments 3,340,743 2,789,099 Trade accounts receivable 315,865 213,588 Income taxes receivable 132,655 -- Crude oil inventory 56,165 82,025 Prepaid expenses and other assets 58,297 186,353 Deferred income taxes 195,800 108,000 ------------ ------------ TOTAL CURRENT ASSETS 5,361,176 5,172,628 ------------ ------------ PROPERTY AND EQUIPMENT, at cost Oil and gas properties and equipment (successful efforts method) 15,999,336 15,755,472 Capitalized asset retirement costs 382,550 382,550 Drilling and operating equipment 2,109,993 2,109,993 Land, buildings and improvements 1,065,371 1,065,371 Automotive, office and other property and equipment 1,160,617 1,162,324 ------------ ------------ 20,717,867 20,475,710 Less: accumulated depletion, depreciation, amortization and valuation allowance (16,596,004) (16,147,157) ------------ ------------ 4,121,863 4,328,553 ------------ ------------ OTHER ASSETS Deposits 250,000 250,000 Deferred income taxes 390,945 509,245 Other assets 17,013 17,013 ------------ ------------ $10,140,997 $10,277,439 ============ ============The Accompanying Notes Are an Integral Part of These Financial Statements. 5 PYRAMID OIL COMPANY BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 2009 December 31, (Unaudited) 2008 ------------ ------------ CURRENT LIABILITIES: Accounts payable $ 28,997 $ 40,820 Accrued professional fees 120,426 130,261 Accrued taxes, other than income taxes 30,960 76,222 Accrued payroll and related costs 55,335 50,451 Accrued royalties payable 150,692 132,472 Accrued insurance 3,250 59,096 Accrued income taxes -- 239,815 Current maturities of long-term debt 24,610 23,901 ------------ ------------ TOTAL CURRENT LIABILITIES 414,270 753,038 ------------ ------------ LONG-TERM DEBT, net of current maturities 2,094 20,640 ------------ ------------ LIABILITY FOR ASSET RETIREMENT OBLIGATION 1,169,402 1,151,706 ------------ ------------ COMMITMENTS (Note 3) STOCKHOLDERS' EQUITY: Preferred stock - no par value; 10,000,000 authorized shares; no shares issued or outstanding -- -- Common stock - no par value; 50,000,000 authorized shares; 4,677,728 shares issued and outstanding 1,515,945 1,306,010 Retained earnings 7,039,286 7,046,045 ------------ ------------ 8,555,231 8,352,055 ------------ ------------ $10,140,997 $10,277,439 ============ ============ The Accompanying Notes Are an Integral Part of These Financial Statements. 6 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended September 30, --------------------------- 2009 2008 ------------ ------------ REVENUES Oil and gas sales $ 945,413 $1,999,119 Gain on sale of fixed assets -- 500 ------------ ------------ 945,413 1,999,619 ------------ ------------ COSTS AND EXPENSES: Operating expenses 346,800 548,991 General and administrative 198,703 298,759 Taxes, other than income and payroll taxes 33,809 42,481 Provision for depletion, depreciation and amortization 150,209 169,185 Accretion expense 5,898 54,847 Other costs and expenses 18,628 25,643 ------------ ------------ 754,047 1,139,906 ------------ ------------ OPERATING INCOME 191,366 859,713 ------------ ------------ OTHER INCOME (EXPENSE): Interest income 20,508 22,661 Other income 3,600 5,217 Interest expense (299) (529) ------------ ------------ 23,809 27,349 ------------ ------------ INCOME BEFORE INCOME TAX PROVISION (BENEFIT) 215,175 887,062 Income tax provision (benefit) Current ( 43,499) ( 35,223) Deferred 37,300 218,000 ----------- ------------ ( 6,199) 182,777 ------------ ------------ NET INCOME $ 221,374 $ 704,285 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements. 7 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended September 30, --------------------------- 2009 2008 ------------ ------------ EARNINGS PER COMMON SHARE Basic Income Per Common Share $ 0.05 $ 0.15 ============ ============ Diluted Income Per Common Share $ 0.05 $ 0.15 ============ ============ Weighted average number of common shares outstanding 4,677,728 4,677,728 ============ ============ Diluted average number of common shares outstanding 4,719,004 4,677,728 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements. 8 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Nine months ended September 30, --------------------------- 2009 2008 ------------ ------------ REVENUES Oil and gas sales $2,341,359 $5,712,201 Gain on sale of fixed assets -- 500 ------------ ------------ 2,341,359 5,712,701 ------------ ------------ COSTS AND EXPENSES: Operating expenses 1,023,339 1,433,274 Exploration costs -- ( 28,812) General and administrative 653,805 740,359 Severance award agreement 209,935 -- Taxes, other than income and payroll taxes 114,593 99,091 Provision for depletion, depreciation and amortization 468,665 523,244 Accretion expense 17,696 66,468 Other costs and expenses 88,773 101,215 ------------ ------------ 2,576,806 2,934,839 ------------ ------------ OPERATING INCOME (LOSS) (235,447) 2,777,862 ------------ ------------ OTHER INCOME (EXPENSE): Interest income 68,378 64,672 Other income 10,800 24,031 Interest expense (1,072) (1,763) ------------ ------------ 78,106 86,940 ------------ ------------ INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) (157,341) 2,864,802 Income tax provision (benefit) Current (181,082) 239,252 Deferred 30,500 179,000 ----------- ------------ (150,582) 418,252 ------------ ------------ NET INCOME (LOSS) $ ( 6,759) $2,446,550 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements. 9 PYRAMID OIL COMPANY STATEMENTS OF OPERATIONS (UNAUDITED) Nine months ended September 30, --------------------------- 2009 2008 ------------ ------------ EARNINGS PER COMMON SHARE Basic Income (Loss) Per Common Share $ -- $ 0.52 ============ ============ Diluted Income (Loss) Per Common Share $ -- $ 0.52 ============ ============ Weighted average number of common shares outstanding 4,677,728 4,677,728 ============ ============ Diluted average number of common shares outstanding 4,677,728 4,677,728 ============ ============ The Accompanying Notes are an Integral Part of These Financial Statements. 10 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30, --------------------------- 2009 2008 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 6,759) $2,446,550 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Provision for depletion, depreciation and amortization 468,665 523,244 Gain on sale of fixed assets -- (500) Accretion expense 17,696 66,468 Exploration costs -- ( 28,812) Severance award agreement 209,935 ( 1,600) Deferred taxes 30,500 179,000 Changes in assets and liabilities: Increase in trade accounts, interest and income taxes receivable (234,932) ( 12,012) Decrease (increase) in crude oil inventories 25,860 ( 11,886) Decrease in prepaid expenses 126,855 116,738 (Decrease) in accounts payable and accrued liabilities (339,477) (72,629) --------- --------- Net cash provided by operating activities 298,343 3,204,561 --------- --------- The Accompanying Notes Are an Integral Part of These Financial Statements. 11 PYRAMID OIL COMPANY STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30, --------------------------- 2009 2008 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $(261,974) $(1,054,286) Proceeds from sale of fixed assets -- 500 Purchases of short-term investments (500,000) (750,000) Increase in short-term investments ( 51,644) ( 42,101) -------- --------- Net cash (used in) investing activities (813,618) (1,845,887) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Loans to employees (1,200) (2,100) Principal payments from loans to employees 2,400 2,100 Principal payments on long-term debt (17,837) (21,037) -------- -------- Net cash (used in) financing activities (16,637) (21,037) -------- -------- Net (decrease) increase in cash (531,912) 1,337,637 Cash at beginning of period 1,793,563 618,448 --------- --------- Cash at end of period $1,261,651 $1,956,085 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the six months for interest $ 1,072 $ 1,763 ======== ======== Cash paid during the six months for income taxes $191,388 $232,585 ======== ======== The Accompanying Notes Are an Integral Part of These Financial Statements. 12 PYRAMID OIL COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (UNAUDITED) 1. Summary of Significant Accounting Policies The financial statements include the accounts of Pyramid Oil Company (the Company). Such financial statements included herein have been prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. A summary of the Company's significant accounting policies is contained in its December 31, 2008 Form 10-K which is incorporated herein by reference. The financial data presented herein should be read in conjunction with the Company's December 31, 2008 financial statements and notes thereto, contained in the Company's Form 10-K. In the opinion of the Company, the unaudited financial statements, contained herein, include all adjustments necessary to present fairly the Company's financial position as of September 30, 2009 and December 31, 2008 and the results of its operations and its cash flows for the three and nine month periods ended September 30, 2009 and 2008. The results of operations for an interim period are not necessarily indicative of the results to be expected for a full year. Income taxes: When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. 13 2. Impact of Recent Accounting Pronouncements In April 2009, the FASB issued three related FASB Staff Positions: (i) FASB ASC 320-10-65-1 (formerly FSP FAS No. 115-2 and FAS No. 124-2, Recognition and Presentation of Other-Than- Temporary Impairments (FSP FAS 115-2 and FAS 124-2)); (ii) FASB ASC 825-10-65-1 (formerly FSP FAS No. 107-1 and Accounting Principles Board Opinion (APB) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1)), and; (iii) FASB ASC 820-10-65-4 (formerly FSP FAS No. 157-4, Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4)), which are effective for interim and annual reporting periods ending after June 15, 2009. FASB ASC 320-10-65-1 (formerly FSP FAS 115-2 and FAS 124-2) amend the other-than-temporary impairment guidance in GAAP for debt securities to modify the requirement for recognizing other- than-temporary impairments, change the existing impairment model and modify the presentation and frequency of related disclosures. FASB ASC 825-10-65-1 (formerly FSP FAS 107-1 and APB 28-1) require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FASB ASC 820-10-65-4 (formerly FSP FAS 157-4) provides additional guidance for estimating fair value in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate in accordance with FASB ASC 820-10 (formerly SFAS No. 157). These pronouncements are not expected to have a material impact on our operations and financial condition. In April 2009, the FASB issued FASB ASC 805-20 (formerly FSP SFAS No. 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. FASB ASC 805-20 amends the guidance in FASB ASC 805 (formerly SFAS 141R) relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities arising from contingencies in a business combination. FASB ASC 805 (formerly FSP SFAS 141R) is effective for fiscal years beginning after December 15, 2008. We adopted FASB ASC 805 (formerly FSP SFAS 141R) as of the beginning of fiscal 2009. We will apply the requirements of FASB ASC 805-20 (formerly FSP FAS 141R-1) prospectively to any future acquisitions. In May 2009, the FASB issued FASB ASC 855-10 (formerly SFAS No. 165, Subsequent Events (SFAS 165)), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of FASB ASC 855-10 (formerly SFAS 165) are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FASB ASC 855-10 (formerly SFAS 165) did not have any impact on our financial statements. The subsequent events have been evaluated through November 13, 2009, which was the date the Financial Statements were issued. 14 In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162 (SFAS 162). Effective for our financial statements issued for interim and annual periods commencing with the quarterly period ended September 30, 2009, the FASB Accounting Standards Codification (Codification or ASC) is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all then-existing, non-SEC accounting and reporting standards. In the FASB's view, the Codification does not change GAAP, and therefore the adoption of SFAS 168, now referred to as FASB ASC 105, Generally Accepted Accounting Principles, did not have an effect on our consolidated financial position, results of operations or cash flows. However, where we have referred to specific authoritative accounting literature, both the Codification and pre-Codification GAAP literature are disclosed. FASB ASC 820, Fair Value Measurements and Disclosures (formerly SFAS 157, Fair Value Instruments and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157) (Topic 820) defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurement. Topic 820 applies to other accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. The adoption of Topic 820 for financial assets and liabilities, as of January 1, 2008, did not have a material impact on our financial position or operations. Topic 820 delayed the effective date of Topic 820's fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Fair value measurements identified in Topic 820 is effective for our fiscal year beginning January 1, 2009 and did not have any impact on our consolidated financial position, results of operations or cash flows. 3. Dividends No cash dividends were paid during the nine months ended September 30, 2009 and 2008. 4. Income Taxes The Company adopted FASB ASC 740, Income Taxes (formerly FASB Interpretation 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109) (Topic 740) on January 1, 2007. As a result of the implementation of FASB ASC 740, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FASB ASC 740. As a result of the implementation of FASB ASC 740, the Company recognized no material adjustments to liabilities or stockholders equity. 15 The Company files income tax returns in the U.S. federal jurisdiction, California and New York states. With few exceptions, the Company is no longer subject to U.S. federal tax examination for the years before 2006. State jurisdictions that remain subject to examination range from 2005 to 2008. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FASB ASC 740, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter. 5. Commitments and Contingencies In February 2002, the Company entered into an employment agreement with John H. Alexander pursuant to which Mr. Alexander agreed to serve as the Company's Vice President. On June 3, 2004, Mr. Alexander was appointed as the Company's President and Chief Executive Officer. The employment agreement is for an initial term of six years, which term automatically renews annually if written notice is not tendered. Pursuant to the employment agreement, the Company may terminate Mr. Alexander's employment with or without cause at any time before its term expires upon providing written notice. In the event the Company terminates Mr. Alexander's employment without cause, Mr. Alexander would be entitled to receive a severance amount equal to his annual base salary and benefits for the balance of the term of his employment agreement. In the event of termination by reason of Mr. Alexander's death or permanent disability, his legal representative will be entitled to receive his annual salary and benefits for the remaining term of his employment agreement. In the event of, or termination following, a change in control of the Company, as defined in the agreement, Mr. Alexander would be entitled to receive his annual salary and benefits for the remainder of the term of his agreement. In the event that Mr. Alexander is terminated the Company would incur approximately $600,000 in costs. The Company has been notified by the United States Environmental Protection Agency (EPA) of a final settlement offer to settle its potential liability as a generator of waste containing hazardous substances that was disposed of at a waste disposal site in Santa Barbara County. The Company has responded to the EPA by indicating that the waste contained petroleum products that fall within the exception to the definition of hazardous substances for petroleum-related substances of the pertinent EPA regulations. Management has concluded that under both Federal and State regulations no reasonable basis exists for any valid claim against the Company. As such, the likelihood of any settlement is deemed remote. 16 6. Income Tax Provision Income tax benefits of $150,582 were realized by the Company for the first nine months of 2009, due primarily to a net loss before income tax provision (benefit) for the nine months ended September 30, 2009 and certain adjustments related to a true-up of estimates made to the recently filed 2008 tax returns. The income tax provision of $418,252 for the nine months ended September 30, 2008 is due primarily to a net income of $2,864,802 before income tax provision for the nine months ended September 30, 2008. Net income tax benefit for the first nine months ended September 30, 2009 was calculated as follows: Federal State Total -------- --------- -------- Current tax provision $( 76,000) $(11,228) $( 87,228) Tax return true-up (105,311) 11,457 ( 93,854) Deferred tax benefit 26,000 4,500 30,500 ------- ------- ------- $(155,311) $ 4,729 $(150,582) ======= ====== ======= Deferred income taxes are recognized using the asset and liability method by applying income tax rates to cumulative temporary differences based on when and how they are expected to affect the tax returns. Deferred tax assets and liabilities are adjusted for income tax rate changes. Deferred income tax assets have been offset by a valuation allowance of $1,766,000 as of September 30, 2009. Management reviews deferred income taxes regularly throughout the year, and accordingly makes any necessary adjustments to properly reflect the valuation allowance based upon current financial trends and projected results. The first quarter tax provision was based on one quarter of the full year estimate due to the inability to accurately calculate certain tax temporary differences at that time. As of the second quarter such calculations have been made. 7. Stock Split On June 5, 2008, the Company's Board of Directors approved a 5 for 4 stock split payable on July 3, 2008, to shareholders of record as of June 24, 2008. The effective date of the split is July 7, 2008. Common Stock --------- Shares outstanding at June 30, 2008 3,741,721 Shares issued 5 for 4 stock split July 3, 2008 936,007 --------- Shares outstanding at July 7, 2008 4,677,728 ========= All share and per share data for the periods presented have been retroactively restated to reflect this stock split. 17 8. Severance Award Agreements On June 4, 2009, the Company and John Alexander entered into a Severance Award Agreement pursuant to which the Company awarded Mr. Alexander a supplemental payment in connection with his future severance of employment with the Company and recorded an increase to stockholders' equity of $209,935. Pursuant to the Severance Award Agreement and following the termination of Mr. Alexander's employment, he will be entitled to receive (at the Company's option) 25,000 shares of the Company's common stock or the then-fair market value of the shares. As of June 30, 2009, the Company intends to deliver the Company's common shares for the Severance Award; therefore, in accordance with SFAS 123(R), management has classified the share-based compensation as stockholders' equity at June 30, 2009. 9. Incentive and Retention Plan On January 9, 2007, the Company's Board of Directors adopted an Incentive and Retention Plan pursuant to which the Company's officers and other employees selected by the Company's Compensation Committee are entitled to receive payments if they are employed by the Company as of the date of a 'Corporate Transaction,' as defined in the Incentive and Retention Plan. A 'Corporate Transaction' includes certain mergers involving the Company, sales of Company assets, and other changes in the control of the Company, as specified in the Incentive and Retention Plan. In general, the amount that is payable to each plan participant will equal the number of plan units that have been granted to him or her, multiplied by the increase in the value of the Company between January 9, 2007 and the date of a Corporate Transaction. There has been no Corporate Transaction since the adoption of the Incentive and Retention Plan. 10. Related-party Transaction Effective January 1, 1990, John H. Alexander, an officer and director of the Company participated with a group of investors that acquired the mineral and fee interest on one of the Company's oil and gas leases (Santa Fe Energy lease) in the Carneros Creek field after the Company declined to participate. The thirty-three percent interest owned by Mr. Alexander represents a minority interest in the investor group. Royalties on oil and gas production from this property paid to the investor group approximated $142,000 during the first nine months of 2009. 11. Investor Relations Consultants On March 12, 2008, the Company entered into an agreement with Pfeiffer High Investor Relations, Inc. (PHIR) pursuant to which PHIR will serve as an investor relations consultant to the Company. PHIR will receive a monthly fee of $5,000 and will be reimbursed for approved out-of-pocket expenses. The agreement also provides for the payment of a 1.5% finder's fee to PHIR upon the closing of a specified transaction, such as a merger, a sale of assets or a sale of equity securities, if PHIR is responsible for initiating the transaction. 18 The Company and PHIR mutually decided to extend the agreement after its initial six-month term, and the Company granted to PHIR's two principals fully vested warrants to purchase a total of 25,000 shares of the Company's common stock at an exercise price of $3.20 per share. The warrants will have a two-year term, will be assignable and will have piggyback registration rights and cashless exercise provisions. See Note 12. The Company and PHIR verbally agreed to extend the arrangement on a month-to-month basis. Effective April 1, 2009, the Company and PHIR verbally agreed to reduce the monthly fee from $5,000 to $2,500. 12. Warrants Issued The Company issued warrants to purchase common shares of the Company as compensation for consulting services. The value of warrants issued for compensation is accounted for as a non-cash expense to the Company at the fair value of the warrants issued. The Company values the warrants at fair value as calculated by using the Black-Scholes option-pricing model. The warrants were not included in the computation of diluted net loss per share for the nine months ended September 30, 2009 because exercise or conversion would have an anti-dilutive effect on the net loss per share. The following table summarizes the warrant activity for the nine months ended September 30, 2009: Number Weighted-Average (Unaudited) of Warrants Exercise Price ----------- ---------------- Outstanding, December 31, 2008 25,000 $3.20 Granted -- -- Exercised -- -- Cancelled -- -- ------ ---- Outstanding, September 30, 2009 25,000 $3.20 ====== ==== The following summarizes the warrants issued, outstanding and exercisable as of September 30, 2009: Grant Date November, 2008 Strike Price $3.20 Expiration Date November, 2010 Warrants Remaining 25,000 Proceeds if Exercised $80,000 Call Feature None PAGE <19> 13. Fair Value Effective January 1, 2009, we adopted FASB ASC 820 (formerly SFAS No. 157) for our nonfinancial assets and nonfinancial liabilities measured on a non-recurring basis. We adopted the provisions of FASB ASC 820 for measuring the fair value of our financial assets and liabilities during 2008. As defined in FASB ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. FASB ASC 820 establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: Level 1 - Observable inputs such as quoted prices in active markets; Level 2 - Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Included in this category is the Company's determination of the value of its asset retirement obligation liability. The obligation has increased $17,696 during the nine months ended September 30, 2009 as a result of normal accretion expense. The carrying amount of our cash and equivalents, short term investments, and accounts payable reported in the condensed consolidated balance sheets approximates fair value because of the short maturity of those instruments. Note 14. Subsequent Events Subsequent events reflect all applicable transactions through November 13, 2009. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION Looking forward into the balance of fiscal 2009, crude oil prices have increased by $5.90 per barrel since September 30, 2009. The Company is participating in a Texas natural gas joint venture, and in late October the joint venture's Pan Am #1 well was re-perforated and acid fraced to stimulate gas production from the Slago formation at a depth of approximately 13,600 feet. As of November 12, the well was being tested prior to hookup to a gas sales line. 20 In September, the Company and its joint venture group commenced execution of a Farmout Agreement (the Agreement) that calls for the drilling and development of the Eagle Ford formation on lands within McMullen County Texas. The Agreement will go into effect when all parties have signed on and a formal change in operator becomes effective. The Company expects completion of the Agreement during November 2009. The general terms of the Agreement call for the Farmee company to re-enter the Murray Franklin well, abandon the lower section and drill a +/-4,500 foot lateral hole through the Eagle Ford formation at a depth of approximately 9,300 feet. Within 120 days after the completion of the Murray Franklin well, the Farmee is to commence the drilling of a new horizontal well into the Eagle Ford Formation and thereafter will have the right to drill additional wells in the Formation subject to a 90-day continuous drilling obligation. The Farmee will earn 100% of the working interest prior to payout and 70% after payout, with the joint venture group receiving 30% after payout. Pyramid will own approximately 2.5% of the working interest after payout, with no out of pocket costs for the drilling and completion of any Eagle Ford wells. The joint venture group has retained all of the original rights below the Eagle Ford Formation. In the middle of the third quarter, management cancelled plans to participate in a joint venture exploratory drilling project in Louisiana and in turn, intends to drill a new well in its Carneros Creek field in California. The well is planned to be drilled on the Company's Anderson property to a depth of approximately 3,400 feet. The Company expects that it will be late December before it obtains a contract-drilling rig for this well. In mid October 2008 the Company postponed a developmental well in the Company's Carneros Creek field, located in Kern County California. Management intends to re-evaluate the possibility of drilling this well sometime in the second half of 2009. The Company was well prepared for, and is effectively managing, the present economic downturn, as management positioned the Company with no debt and significant cash reserves. Management continues to believe that during the next 12 months there will be an expanding range of opportunities to invest in oil and gas assets at more attractive valuations than have been available during the past several years. The Company's growth in 2009 will be highly dependant on the amount of success the Company has in its operations and capital investments, including the outcome of wells that have not yet been drilled. The Company's capital investment program may be modified during the year due to explorations and development successes or failures, market conditions and other variables. The production and sales of oil and gas involves many complex processes that are subject to numerous uncertainties, including reservoir risk, mechanical failures, human error and market conditions. The Company has positioned itself, over the past several years, to withstand various types of economic uncertainties, with a program of consolidating operations on certain producing properties and concentrating on properties 21 that provide the major revenue sources. The drilling of a new well and several limited work-overs of certain wells have allowed the Company to maintain its crude oil reserves for the last three years. The Company expects to maintain its reserve base in 2009, by drilling new wells and routine maintenance of its existing wells. The Company may be subject to future costs necessary for compliance with the new implementation of air and water environmental quality requirements of the various state and federal governmental agencies. The requirements and costs are unknown at this time, but management believes that costs could be significant in some cases. As the scope of the requirements become more clearly defined, management may be better equipped to determine the true costs to the Company. The Company continues to absorb the costs for various state and local fees and permits under new environmental programs, the sum of which were not material during 2008 and for the nine months ended September 30, 2009. The Company retains outside consultants to assist the Company in maintaining compliance with these regulations. The Company is actively pursuing an ongoing policy of upgrading and restoring older properties to comply with current and proposed environmental regulations. The costs of upgrading and restoring older properties to comply with environmental regulations have not been determined. Management believes that these costs will not have a material adverse effect upon its financial position or results of operations. CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS Portions of this Quarterly Report, including Management's Discussion and Analysis, contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this release. Such forward-looking statements speak only as of the date of this report and the Company expressly disclaims any obligation to update or revise any forward-looking statements found herein to reflect any changes in Company expectations or results or any change in events. Factors that could cause results to differ materially include, but are not limited to: the timing and extent of changes in commodity prices of oil, gas and electricity, environmental risk, drilling and operational costs, uncertainties about estimates of reserves and government regulations. 22 ANALYSIS OF SIGNIFICANT CHANGES IN RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2009 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2008 REVENUES The decrease in revenues of $1,053,706 is due to lower average prices for the third quarter of 2009 and lower crude oil production. Oil and gas revenues decreased by 53% for the three months ended September 30, 2009 when compared with the same period for 2008. Oil and gas revenues decreased by 34% due to lower average crude oil prices for the third quarter of 2009. The average price of the Company's oil and gas for the third quarter of 2009 decreased by approximately $46.16 per equivalent barrel when compared to the same period for 2008. Revenues decreased by 19% due to lower crude oil production/shipments. The Company's net revenue share of crude oil production/sales decreased by approximately 3,400 barrels for the third quarter of 2009. The decrease in crude oil production is primarily the result of the decline in production on the Company's Anderson and Santa Fe leases. OPERATING EXPENSES Operating expenses decreased by $202,191 for the third quarter of 2009. Operating expenses decreased by 37% for the third quarter of 2009. The cost to produce an equivalent barrel of crude oil during the third quarter of 2009 was approximately $23.46 per barrel, a decrease of approximately $6.78 per barrel when compared with production costs for the third quarter of 2008. The decrease in lease operating expenses is caused by many factors. These include lower costs for labor, parts and supplies, pump repairs and equipment fuel. The Company has reduced its maintenance activities as a result of lower crude oil sales prices. Company labor as a component of total operating expenses decreased by approximately 16% due to a reduction in overtime hours worked, a reduction in hourly labor rates, a reduction in personnel and a reduction in bonuses paid. Parts and supplies as a component of total operating expenses decreased by approximately 8% due to a reduction in maintenance activities. Pump repairs as a component of total operating expenses were lower by approximately 5% due to the decline in maintenance work in the third quarter of 2009 and the replacement of down-hole pumps in prior years with more expensive pumps that are more efficient and have better longevity. Equipment fuel as a component of total operating expenses was lower by approximately 3% due to lower overall maintenance activities and lower prices for gasoline and diesel during the third quarter of 2009. 23 GENERAL AND ADMINISTRATIVE General and administrative expenses decreased by $100,056 for the third quarter of 2009 when compared with the same period for 2008. During the third quarter of 2008, the Board of Directors approved the payment of a bonus to Mr. Alexander of $50,000. No bonus was paid during the third quarter of 2009. Legal services also decreased by approximately $34,000. In the third quarter of 2008, the Company incurred additional legal fees relating to the stock split that was effective July 7, 2008. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by $18,976 fo the three months ended September 30, 2009. The provision for depletion, depreciation and amortization decreased by approximately 11% for the third quarter of 2009, when compared with the same period for 2008. The decrease is due primarily to a decrease in depletion of the Company's oil and gas properties. The decrease in depletion is due primarily to a decrease in crude oil production for the third quarter of 2009. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2008 REVENUES The decrease in revenues of $3,370,662 is due to lower average prices for the first nine months of 2009 and lower crude oil production. Oil and gas revenues decreased by 59% for the nine months ended September 30, 2009 when compared with the same period for 2008. Oil and gas revenues decreased by 42% due to lower average crude oil prices for the first nine months of 2009. The average price of the Company's oil and gas for the first nine months of 2009 decreased by approximately $54.19 per equivalent barrel when compared to the same period for 2008. Revenues decreased by 17% due to lower crude oil production/shipments. The Company's net revenue share of crude oil production/sales decreased by approximately 8,900 barrels for the first nine months of 2009. The decrease in crude oil production is primarily the result of the decline in production on the Company's Anderson, Santa Fe and Pike leases. OPERATING EXPENSES Operating expenses decreased by $409,935 for the nine months ended September 30, 2009. Operating expenses decreased by 29% for the nine months ended September 30, 2009. The cost to produce an equivalent barrel of crude oil during the nine months ended September 30, 2009 was approximately $22.92 per barrel, a decrease of approximately $3.83 per barrel when compared with production costs for the same period for 2008. The decrease in lease operating expenses is caused by many factors. These include lower costs for labor, parts and supplies, equipment fuel and pump repairs. 24 Company labor as a component of total operating expenses decreased by approximately 9% due to a reduction in overtime hours worked, a reduction in hourly labor rates, a reduction in personnel and a reduction in bonuses paid. Parts and supplies as a component of total operating expenses decreased by approximately 7% due to a reduction in maintenance activities during the first nine months of 2009. The Company has reduced its maintenance activities as a result of the lower crude oil sales prices. Equipment fuel as a component of total operating expenses was lower by approximately 4% due to lower overall maintenance activities and lower prices for gasoline and diesel for the first nine months of 2009. Pump repairs as a component of total operating expenses were lower by approximately 4% due to the decline in maintenance work in the first nine months of 2009 and the replacement of down-hole pumps in prior years with more expensive pumps that are more efficient and have better longevity. EXPLORATION COSTS In the first quarter of 2008, the Company received a payment, from its joint venture partner, in the amount of $28,812 for its share of certain tangible completion equipment on an exploratory well that had been abandoned in 2006. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased by $86,555 for the first nine months of 2009 when compared with the same period of 2008. Officers salaries decreased by approximately $21,000. This is due primarily to a decrease in the bonus paid to the Chief Executive Officer in 2009. Legal services decreased by approximately $28,000. During 2008, the Company incurred additional legal fees relating to a stock split that was effective July 7, 2008. Accounting services decreased by approximately $19,000 due primarily to lower costs incurred for SOX-404 internal control compliance and tax related matters. Travel and entertainment expenses decreased by approximately $10,000 for the nine months ended September 30, 2009. PROVISION FOR DEPLETION, DEPRECIATION AND AMORTIZATION The provision for depletion, depreciation and amortization decreased by $54,579 for the nine months ended September 30, 2009. The provision for depletion, depreciation and amortization decreased by approximately 10% for the first nine months of 2009, when compared with the same period for 2008. The decrease is due primarily to a decrease in depletion of the Company's oil and gas properties. The decrease in depletion is due primarily to a decrease in crude oil production for the first nine months of 2009. 25 LIQUIDITY AND CAPITAL RESOURCES Cash decreased by $531,912 for the nine months ended September 30, 2009. During the nine months ended September 30, 2009, operating activities provided cash of $298,343. Cash was used for the purchase of short-term investments of $500,000, capital spending of $261,974 and payments on long-term debt of $17,837. See the Statements of Cash Flows for additional detailed information. The Company had available a line of credit of $500,000 and short-term investments of $3,340,743 that provided additional liquidity during the first nine months of 2009. IMPACT OF CHANGING PRICES The Company's revenue is affected by crude oil prices paid by the major oil companies. Average crude oil prices for the first nine of 2009 decreased by approximately 42% ($54.19 per equivalent barrel) when compared with the same period of 2008. The Company cannot predict the future course of crude oil prices. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable Item 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in 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. There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 26 PYRAMID OIL COMPANY PART II - OTHER INFORMATION Item 1. - Legal Proceedings None Item 1A. - Risk Factors See the risk factors that are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. - Defaults Upon Senior Securities None Item 4. - Submission of Matters to a Vote of Security Holders None Item 5. - Other Information - None Item 6. - Exhibits a. Exhibits 31.1 Certification of the Registrant's Principal Executive Officer under Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Registrant's Principal Financial Officer under Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Registrant's Principal Executive Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Registrant's Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PYRAMID OIL COMPANY (registrant) Dated: November 13, 2009 JOHN H. ALEXANDER --------------------- John H. Alexander President Dated: November 13, 2009 LEE G. CHRISTIANSON --------------------- Lee G. Christianson Chief Financial Officer