Attached files
file | filename |
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EX-31.1 - ZONZIA MEDIA, INC. | v167284_ex31-1.htm |
EX-10.3 - ZONZIA MEDIA, INC. | v167284_ex10-3.htm |
EX-32.2 - ZONZIA MEDIA, INC. | v167284_ex32-2.htm |
EX-10.7 - ZONZIA MEDIA, INC. | v167284_ex10-7.htm |
EX-32.1 - ZONZIA MEDIA, INC. | v167284_ex32-1.htm |
EX-10.2 - ZONZIA MEDIA, INC. | v167284_ex10-2.htm |
EX-10.5 - ZONZIA MEDIA, INC. | v167284_ex10-5.htm |
EX-31.2 - ZONZIA MEDIA, INC. | v167284_ex31-2.htm |
EX-10.4 - ZONZIA MEDIA, INC. | v167284_ex10-4.htm |
EX-10.6 - ZONZIA MEDIA, INC. | v167284_ex10-6.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
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
|
For
the transition period from: to:
Commission
File Number 2-75313
INDIGO-ENERGY,
INC.
(Exact
name of registrant as specified in its charter)
NEVADA
|
84-0871427
|
|
(State
of or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
I.D.
No.)
|
701 N.
Green Valley Pkwy., Suite 200
Henderson,
Nevada 89074
(Address
of Principal Executive Office)
(702)
990-3387
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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. þ Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 if Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files) o Yes o 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. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding
as of November 12, 2009
|
|
Common
stock, $.001 par value
|
697,401,299
|
TABLE OF CONTENTS
Page
|
|||||
PART
I
|
FINANCIAL
INFORMATION
|
1
|
|||
ITEM
1.
|
FINANCIAL
STATEMENTS
|
1
|
|||
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
2
|
|||
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
|
7
|
|||
PART
II
|
OTHER
INFORMATION
|
9
|
|||
ITEM
1.
|
LEGAL
PROCEEDINGS
|
9
|
|||
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
9
|
|||
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
9
|
|||
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
10
|
|||
ITEM
5.
|
OTHER
INFORMATION
|
10
|
|||
ITEM
6.
|
EXHIBITS
|
10
|
|||
SIGNATURE
|
11
|
i
PART
I FINANCIAL
INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS
|
Index
to Financial Statements
F–1
|
||
Condensed
Consolidated Statements of Operations (Unaudited)
|
F–2
|
|
F–3
|
||
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F–4
|
1
INDIGO-ENERGY,
INC.
Condensed
Consolidated Balance Sheets
(Unaudited)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
|
(Unaudited)
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | - | $ | 625,222 | ||||
Accounts
receivable
|
24,765 | 208,147 | ||||||
Accounts
receivable - related party
|
9,863 | 13,570 | ||||||
Prepaid
expenses
|
118,322 | 186,301 | ||||||
Due
from related parties
|
4,425 | 4,000 | ||||||
Total
current assets
|
157,375 | 1,037,240 | ||||||
Proved
oil and gas properties, net
|
685,688 | 725,987 | ||||||
Unproved
oil and gas properties
|
3,741,003 | 442,403 | ||||||
Other
assets
|
||||||||
Deferred
loan costs, net of accumulated amortization of $338,681 and $263,043
at September 30, 2009 and December 31, 2008, respectively
|
533,529 | 609,167 | ||||||
$ | 5,117,595 | $ | 2,814,797 | |||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 3,622,781 | $ | 1,820,310 | ||||
Accounts
payable and accrued expenses - related party
|
44,738 | 233,774 | ||||||
Current
portion of liability due to operator
|
76,714 | 81,917 | ||||||
Notes
payable, net of discount
|
765,098 | 835,863 | ||||||
Notes
payable, net of discount - related party
|
363,512 | 525,000 | ||||||
Convertible
notes, net of discount
|
666,667 | 430,723 | ||||||
Due
to related parties
|
- | 244,500 | ||||||
Obligation
to former noncontrolling interest
|
265,920 | 175,787 | ||||||
Obligation
to former noncontrolling interest - related party
|
334,080 | 220,844 | ||||||
Total
current liabilities
|
6,139,510 | 4,568,718 | ||||||
Long
term liabilities
|
||||||||
Liability
due to operator, non-current
|
382,621 | 433,004 | ||||||
Accrued
interest - related party
|
653,438 | 30,711 | ||||||
Notes
payable, net of discount - related party
|
4,605,784 | 2,139,320 | ||||||
Obligation
to former noncontrolling interest
|
212,739 | 430,434 | ||||||
Obligation
to former noncontrolling interest - related party
|
267,268 | 540,762 | ||||||
Total
long term liabilities
|
6,121,850 | 3,574,231 | ||||||
Total
liabilities
|
12,261,360 | 8,142,949 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
deficit
|
||||||||
Series
C preferred stock; $0.001 par value; 100 shares authorized; 0
shares issued and 75 shares issuable at September 30, 2009 and
December 31, 2008, respectively
|
- | - | ||||||
Liquidation
preference; see Note 8
|
||||||||
Common
stock; $0.001 par value; 1,000,000,000 shares authorized; 697,401,299
and 562,346,488 issued and outstanding at September 30,
2009 and December 31, 2008, respectively; 620,000 and 2,994,811
shares issuable at September 30, 2009 and December 31, 2008,
respectively
|
698,021 | 565,341 | ||||||
Additional
paid-in capital
|
74,607,046 | 71,993,326 | ||||||
Deficit
accumulated since inception of the exploration stage in
|
||||||||
December
2005
|
(82,448,832 | ) | (77,886,819 | ) | ||||
Total
stockholders' deficit
|
(7,143,765 | ) | (5,328,152 | ) | ||||
$ | 5,117,595 | $ | 2,814,797 |
See notes
to these condensed consolidated financial statements.
F -
1
INDIGO-ENERGY,
INC.
Condensed
Consolidated Statements of Operations
(Unaudited)
Three
Months
|
Nine
Months
|
|||||||||||||||
Ended
September 30,
|
Ended
September 30,
|
|||||||||||||||
2008
|
2008
|
|||||||||||||||
As
Adjusted
|
As
Adjusted
|
|||||||||||||||
2009
|
(See
Note 4)
|
2009
|
(See
Note 4)
|
|||||||||||||
Revenues
|
$ | 35,212 | $ | 86,584 | $ | 125,517 | $ | 332,415 | ||||||||
Revenues
- related party
|
21,222 | 34,662 | 40,493 | 80,418 | ||||||||||||
Net
revenues
|
56,434 | 121,246 | 166,010 | 412,833 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Operating
expenses
|
16,842 | 49,979 | 53,407 | 156,237 | ||||||||||||
Operating
expenses - related party
|
3,662 | 2,924 | 9,266 | 16,170 | ||||||||||||
Depletion
|
12,831 | 27,986 | 40,300 | 79,774 | ||||||||||||
General
and administrative - related party
|
70,000 | 65,000 | 2,215,000 | 1,149,005 | ||||||||||||
General
and administrative
|
430,273 | 337,057 | 1,326,194 | 2,682,350 | ||||||||||||
Total
operating expenses
|
533,608 | 482,946 | 3,644,167 | 4,083,536 | ||||||||||||
Loss
from operations
|
(477,174 | ) | (361,700 | ) | (3,478,157 | ) | (3,670,703 | ) | ||||||||
Other
income (expenses)
|
||||||||||||||||
Interest
and forbearance expense, net
|
(172,767 | ) | (1,445,893 | ) | (496,834 | ) | (4,587,934 | ) | ||||||||
Interest
expense, net - related party
|
(438,075 | ) | (1,961,873 | ) | (1,336,284 | ) | (3,187,808 | ) | ||||||||
(Loss)
on extinguishment of debt
|
- | (885,424 | ) | - | (884,233 | ) | ||||||||||
Gain
(Loss) on extinguishment of debt - related party, net
|
- | (378,853 | ) | 119,500 | (378,853 | ) | ||||||||||
Gain
on sale of oil and gas interest
|
629,760 | - | 629,760 | - | ||||||||||||
Failed
transaction cost
|
- | (400,000 | ) | - | (400,000 | ) | ||||||||||
Settlement
expense
|
- | (33,633 | ) | - | (445,022 | ) | ||||||||||
Settlement
expense - related party
|
- | (29,339 | ) | - | (388,197 | ) | ||||||||||
Total
other expense, net
|
18,918 | (5,135,015 | ) | (1,083,858 | ) | (10,272,047 | ) | |||||||||
Net
loss before pre-acquisition income
|
(458,256 | ) | (5,496,715 | ) | (4,562,015 | ) | (13,942,750 | ) | ||||||||
Pre-acquisition
income
|
- | - | - | (44,135 | ) | |||||||||||
Net
loss
|
$ | (458,256 | ) | $ | (5,496,715 | ) | $ | (4,562,015 | ) | $ | (13,986,885 | ) | ||||
Basic
and diluted loss per common share
|
$ | - | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||||
Basic
and diluted weighted average common shares outstanding
|
697,641,625 | 237,740,465 | 645,488,845 | 209,007,473 |
See notes
to these condensed consolidated financial statements.
F -
2
INDIGO-ENERGY,
INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
Nine
Months
|
||||||||
Ended
September 30,
|
||||||||
2008
|
||||||||
As
Adjusted
|
||||||||
2009
|
(See
Note 4)
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (4,562,015 | ) | $ | (13,986,885 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Share-based
compensation for consulting services
|
- | 1,368,907 | ||||||
Stock
options granted
|
- | 119,290 | ||||||
Stock
options granted - related party
|
- | 954,410 | ||||||
Stock
issued - related party
|
2,020,000 | - | ||||||
Expense
on forbearance agreements
|
- | 300,000 | ||||||
Expense
on forbearance agreements - related party
|
- | 350,000 | ||||||
Amortization
of deferred loan costs
|
75,638 | 15,999 | ||||||
Amortization
of discount on notes
|
57,485 | 1,275,172 | ||||||
Amortization
of discount on notes - related party
|
525,125 | 342,616 | ||||||
Amortization
of discount on convertible notes
|
235,947 | 1,532,500 | ||||||
Amortization
of discount on convertible notes - related party
|
- | 2,223,307 | ||||||
Depletion
expense
|
40,300 | 79,774 | ||||||
Share-based
interest expense - related party
|
198,000 | - | ||||||
Settlement
expense
|
- | 445,022 | ||||||
Settlement
expense - related party
|
- | 388,197 | ||||||
Loss
on extinguishment of debt
|
- | 884,233 | ||||||
Gain
(loss) on extinguishment of debt - related party
|
(119,500 | ) | 378,853 | |||||
Gain
on sale of oil and gas interests
|
(629,760 | ) | - | |||||
Pre-acquisition
income
|
- | 44,135 | ||||||
Changes
in assets and liabilities
|
||||||||
Advances
to related party
|
(425 | ) | - | |||||
Accounts
receivable
|
183,382 | (44,329 | ) | |||||
Accounts
receivable - related party
|
3,707 | (56,137 | ) | |||||
Prepaid
expenses
|
67,979 | 89,406 | ||||||
Accounts
payable and accrued expenses
|
77,276 | 43,147 | ||||||
Accounts
payable and accrued expenses - related party
|
488,691 | 388,525 | ||||||
Obligation
to former noncontrolling interest
|
(127,562 | ) | - | |||||
Obligation
to former noncontrolling interest - related party
|
(160,258 | ) | - | |||||
|
||||||||
Net
cash used in operating activities
|
(1,625,990 | ) | (2,863,858 | ) | ||||
Cash
flows from investing activities
|
||||||||
Tangible
and intangible drilling costs for oil and gas properties
|
(992,283 | ) | - | |||||
Proceeds
from sale of oil & gas interests
|
629,760 | - | ||||||
Net
cash used in investing activities
|
(362,523 | ) | - | |||||
Cash
flows from financing activities
|
||||||||
Proceeds
from issuance of debt
|
25,000 | 610,000 | ||||||
Proceeds
from issuance of debt - related party
|
1,338,291 | 2,470,000 | ||||||
Repayment
of debt
|
- | (40,000 | ) | |||||
Repayment
of debt - related party
|
- | (20,500 | ) | |||||
Loan
costs
|
- | (6,000 | ) | |||||
|
||||||||
Net
cash provided by financing activities
|
1,363,291 | 3,013,500 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
(625,222 | ) | 149,642 | |||||
Cash
and cash equivalents, beginning of period
|
625,222 | 7,995 | ||||||
Cash
and cash equivalents, end of period
|
$ | - | $ | 157,637 |
Non-Cash Investing and
Financing Transactions
During
the nine months ended September 30, 2009, Carr Miller Capital, LLC (“Carr
Miller”) paid an aggregate of $600,000 directly to Epicenter Oil and Gas, LLC on
behalf of the Company to fund the Company’s oil and gas operations, for which
the Company issued promissory notes to Carr Miller in the total amount of
$600,000.
See notes
to these condensed consolidated financial statements.
F -
3
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
1 - BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements included herein have been
prepared by Indigo-Energy, Inc. (the “Company”, “Indigo”, or “we”), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments that are, in the
opinion of management, necessary to fairly present such information. All such
adjustments are of a normal recurring nature except the modification of certain
notes payable that were accounted for as a Troubled Debt Restructuring (see Note
6) and in 2008, the recording of our settlement with the former limited partners
of Indigo-Energy Partners, LP (see Indigo-Energy Partners, LP section in Note
5), the consolidation of Rivers West Energy, LLC as a Variable Interest Entity
(VIE), the settlement of certain short-term notes payable with shares of common
stock, the modification of certain short-term notes payable that were accounted
for as an extinguishment of the original note, the recording of a new note under
FASB ASC 470-50, (formerly EITF 96-19, “Debtor’s Accounting for a Modification
or Exchange of Debt Instruments”) resulting in a gain or loss on debt
extinguishment and the settlement of certain short-term notes payable that
resulted in a loss on debt settlement. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”), have been condensed or omitted pursuant to
such rules and regulations.
These
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company’s 2008 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on May 14, 2009. The
results of operations for interim periods are not necessarily indicative of the
results for any subsequent quarter or the entire fiscal year ending December 31,
2009.
For
comparability purposes, certain figures for the prior periods have been
reclassified where appropriate to conform to the financial statements
presentation used in the current reporting period. These
reclassifications have no effect on the reported net loss, except as indicated
in Note 4 – Change in Method of Accounting For Convertible Notes With Variable
Conversion Features.
Selected Accounting
Policies
The
accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”) and have been presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.
Consolidated
Financial Statements
The
consolidated financial statements for 2008 included the accounts of Indigo and
Indigo Energy Partners, LP (“Indigo LP”). Indigo LP was dissolved at
December 31, 2008. Our consolidated financial statements also include the
accounts of variable interest entities (VIEs) where we are the primary
beneficiary, regardless of our ownership percentage. Rivers West
Energy, LLC (“Rivers West”) a Nevada Limited Liability Company formed in 2007,
was consolidated in these financial statements as the Company determined it is a
variable interest entity and that the Company is the primary
beneficiary. All intercompany transactions and balances have been
eliminated in consolidation.
F-4
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
Rivers
West is an entity designed to merge oil and gas lease interests and operations
with a financing source. Steve Durdin, our CEO and President, is also
the managing member of Rivers West. The Company has determined that
Rivers West is a VIE and, consequently, has consolidated the entity into its
financial statements.
Troubled
Debt Restructuring, Debt Extinguishments and Modifications
In
evaluating the accounting for the debt modifications and exchanges, management
was required to make a determination as to whether the debt modifications and
exchanges should be accounted for as a troubled debt restructuring (“TDR”) or as
an extinguishment or modification of debt. In concluding on the accounting,
management evaluated FASB ASC 470-60 (formerly SFAS 15, Accounting by Creditors
and Debtors in Troubled Debt Restructurings), FASB ASC 470-60 (formerly EITF
02-4, Determining Whether a Debtor’s Modification or Exchange of Debt
Instruments is within the Scope of FASB Statement No. 15), FASB ASC 470-50
(formerly EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt
Instruments), and FASB ASC 470-50 (formerly EITF 06-6, Debtor’s Accounting for a
Modification or Exchange of Convertible Debt Instruments). The relevant
accounting guidance required us to determine first whether the exchanges of debt
instruments should be accounted for as a TDR. A TDR results when it is
determined, evaluating six factors described in FASB ASC 470-60-55-8 (formerly
EITF 02-4) considered to be indictors of whether a debtor is experiencing
financial difficulties, that the debtor is experiencing financial difficulties,
and the creditors grant a concession; otherwise, such exchanges should be
accounted for as an extinguishment or modification of debt. The assessment of
this critical accounting estimate required management to apply a significant
amount of judgment in evaluating the inputs, estimates, and internally generated
forecast information to conclude on the accounting for the modifications and
exchanges of debt.
If a
modification was not considered a TDR then the Company evaluated FASB ASC 470-50
(formerly EITF 96-19 or EITF 06-6) to determine if the debt modification
constituted a material modification, in which case the debt modification would
be accounted for as the extinguishment of the original debt and the creation of
new debt, resulting in the recognition of a gain or loss on the extinguishment
of debt. If it was determined that the debt modification was not a material
modification, then there is no recognition of gain or loss on the extinguishment
of debt, and the carrying amount of the debt is adjusted for any premium or
discount that is amortized over the modification period.
Based on
this analysis and after the consideration of the applicable accounting guidance,
management concluded the modifications and exchanges of debt were deemed to be
TDRs.
Capitalization
of Interest
The
Company capitalizes interest, including amortization of debt discounts, on
expenditures for significant exploration projects while activities are in
progress to bring the assets to their intended use. As costs are transferred to
the full cost pool, the associated capitalized interest is also transferred to
the full cost pool. The Company capitalized a portion of interest expense,
including amortization of discounts on its long-term notes payable based on the
portion of notes payable identified as the funding source for the Company’s
drilling activities (see Long-Term Notes Payable – Related Party under Note 6).
Consequently, the Company recorded capitalized interest of $88,381 for the nine
months ended September 30, 2009.
F-5
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
Loss
Per Share
Loss per
common share is calculated in accordance with FASB ASC 260-10 (formerly SFAS No.
128, “Earnings Per Share”). Basic loss per common share is computed by dividing
net loss attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted loss per share is computed similarly to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Shares associated with convertible debt, stock options and stock
warrants are not included because their inclusion would be antidilutive (i.e.,
reduce the net loss per share).
At
September 30, 2009 and 2008, the Company had outstanding potentially dilutive
shares of 98,522,222 and 58,695,816, respectively.
Recent Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Codification (ASC) 105, Generally Accepted Accounting Principles
(formerly SFAS No. 168, The FASB Accounting Standards Codification”™ and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
CodificationTM
(Codification) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the form
of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. The Company adopted ASC 105 on
September 30, 2009. Because the Codification is not intended to
change GAAP, the adoption of this standard did not have an impact on the
Company’s financial results; however, the Company’s disclosures and references
to accounting standards changed to reflect the new Codification
structure.
In May
2009, the FASB issued ASC 855, Subsequent Events (formerly SFAS No. 165,
Subsequent Events). ASC 855 establishes general accounting standards
to account for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued,
otherwise known as “subsequent events”. More specifically, these changes require
the disclosure of the date through which subsequent events have been evaluated,
as well as whether the date is the date the financial statements were issued or
the date the financial statements were available to be issued. For
public entities, financial statements are considered “issued” when they are
widely distributed to shareholders and other financial users for general use and
reliance in a form and format that complies with GAAP. The Company
adopted the provisions of this standard on June 30, 2009. The Company
has evaluated subsequent events through November 16, 2009, which is the date
they issued their financial statements, and concluded that no subsequent events
have occurred that would require recognition in the Financial Statements or
disclosure in the Notes to the Financial Statements.
F-6
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
NOTE
2 - DESCRIPTION OF BUSINESS
Indigo-Energy,
Inc. (the “Company”, “Indigo”, “our”, or “we”) is an independent energy company
engaged primarily in the exploration, development and production of natural gas
in the Appalachian Basin in Pennsylvania, West Virginia, and Kentucky, and in
the Illinois Basin in Indiana.
NOTE
3 - GOING CONCERN
The
Company has incurred significant losses since its inception and is delinquent on
many of its obligations to its creditors. Also, its current liabilities exceed
its current assets. The Company has been borrowing money and has assigned
certain net revenue interests in oil and gas properties as collateral or
consideration for these loans. The Company needs to raise a significant amount
of cash to fund current operations and current capital commitments. There are no
assurances the Company will receive funding necessary to implement its business
plan. These conditions raise substantial doubt about the ability of the Company
to continue as a going concern.
The
Company plans to raise funds from private offerings of equity and debt
securities in addition to expected revenue from its gas wells in order to fund
its operations through September 30, 2010. The Company will need to raise
additional funds in the event it locates additional prospects for acquisition,
experiences cost overruns at its current prospects, or fails to generate
projected revenues.
The
Company’s ability to continue as a going concern is dependent upon the Company
raising additional financing on terms desirable to the Company. If the Company
is unable to obtain additional funds when they are required or if the funds
cannot be obtained on terms favorable to the Company, management may be required
to delay, scale back or eliminate its well development program or even be
required to relinquish its interest in one or more properties or in the extreme
situation, cease operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE
4 - CHANGE IN METHOD OF ACCOUNTING FOR CONVERTIBLE NOTES WITH VARIABLE
CONVERSION FEATURES
On
October 1, 2008, the Company adopted FASB ASC 470-20-65 (formerly EITF 08-4,
“Transition Guidance for Conforming Changes to Issue No. 98-5”) and changed its
accounting, as required, for valuation of convertible notes with certain
variable conversion features by recognizing an additional liability equal to the
fixed monetary amount known at inception for the conversion option under FASB
ASC 480-10 (formerly SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”) whereas in prior years
those convertible notes were accounted for using FASB ASC 470-20 (formerly
Emerging Issues Task Force No. 98-5 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios). The conversion price of these notes is determined by a
discount to the average trading price of the Company’s stock price generally
ranging between 60% to 80% for a period between 30 to 60 days prior to
conversion. The new method of accounting for convertible notes with
the variable conversion features was required by FASB ASC 470-20-65 and
comparative financial statements of prior years have been adjusted to apply the
new method retrospectively.
F-7
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
We
previously accounted for our convertible notes under FASB ASC 470-20 (formerly
EITF 98-5 and APB No. 14 “Accounting for Convertible Debt and Debt Issued With
Stock Purchase Warrants”) where we allocated the proceeds from issuance of the
convertible notes and common stock issued with the notes based on the
proportional fair value basis for each item. A beneficial conversion discount
was also recorded on the convertible notes if the convertible notes were
convertible into shares of common stock at an effective conversion price lower
than the prevailing common stock share price on the note issuance dates. The
beneficial conversion amount was limited to the portion of the cash proceeds
allocated to the convertible notes. The combined value of the note discounts and
discounts related to the beneficial conversion features on the convertible notes
were amortized over the term of the respective convertible notes using the
effective interest yield method. The amortization of the discounts was recorded
as interest expense under FASB ASC 470-20 (formerly EITF 00-27).
Upon
implementing FASB ASC 470-20-65 for all periods presented the Company
recalculated and replaced the original accounting by recognizing an additional
liability equal to the fixed monetary amount known at inception for the
conversion option under FASB ASC 480-10. Upon the issuance of shares to settle
the liability, equity will be increased by the amount of the liability and no
gain or loss will be recognized for any difference between the fixed monetary
amount known at inception and the ending market price. The fair value of the
convertible notes was determined based on future cash flows of the note,
discounted at the effective interest rate of a comparable non-convertible note
of the Company, close in date to the note being valued. The discounts on the
notes attributable to both the stock issued with the notes and the additional
liability recognized under FASB ASC 480-10 were amortized to interest expense
over the term of the respective convertible notes using the effective interest
yield method.
The
following financial statement line items for the three and nine months ended
September 30, 2008 were affected by the change in accounting
principle.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008
Three
Months Ended September 30, 2008
|
Nine
Months Ended September 30, 2008
|
|||||||||||||||||||||||
As
Computed
|
As
Computed
|
|||||||||||||||||||||||
under
|
under
|
|||||||||||||||||||||||
As
Originally
|
FASB
ASC
470-20-65
|
Effect
of
|
As
Originally
|
FASB
ASC
470-20-65
|
Effect
of
|
|
||||||||||||||||||
Reported
|
&
480-10
|
Change
|
Reported
|
&
480-10
|
Change
|
|
||||||||||||||||||
Net
Revenues
|
$ | 121,246 | $ | 121,246 | $ | - | $ | 412,833 | $ | 412,833 | $ | - | ||||||||||||
Operating
Expenses
|
482,946 | 482,946 | - | 4,083,536 | 4,083,536 | - | ||||||||||||||||||
Loss
From Operations
|
(361,700 | ) | (361,700 | ) | - | (3,670,703 | ) | (3,670,703 | ) | - | ||||||||||||||
Other
Income (Expenses)
|
||||||||||||||||||||||||
Interest
and forbearance
|
||||||||||||||||||||||||
expense,
net
|
(3,728,117 | ) | (3,407,766 | ) | 320,351 | (8,447,017 | ) | (7,775,742 | ) | 671,275 | ||||||||||||||
Gain
(loss) on extinguishment of
|
||||||||||||||||||||||||
debt
|
(1,946,836 | ) | (1,264,277 | ) | 682,559 | (1,946,836 | ) | (1,263,086 | ) | 683,750 | ||||||||||||||
Failed
transaction cost
|
(400,000 | ) | (400,000 | ) | - | (400,000 | ) | (400,000 | ) | - | ||||||||||||||
Settlement
expense
|
(62,972 | ) | (62,972 | ) | - | (833,219 | ) | (833,219 | ) | - | ||||||||||||||
Total
Other Expenses
|
(6,137,925 | ) | (5,135,015 | ) | 1,002,910 | (11,627,072 | ) | (10,272,047 | ) | 1,355,025 | ||||||||||||||
Net
loss before pre-acquisition
|
||||||||||||||||||||||||
income
|
(6,499,625 | ) | (5,496,715 | ) | 1,002,910 | (15,297,775 | ) | (13,942,750 | ) | 1,355,025 | ||||||||||||||
Pre-acquisition
income
|
- | - | - | (44,135 | ) | (44,135 | ) | - | ||||||||||||||||
Net
loss attributable to common
|
||||||||||||||||||||||||
shareholders
|
$ | (6,499,625 | ) | $ | (5,496,715 | ) | $ | 1,002,910 | $ | (15,341,910 | ) | $ | (13,986,885 | ) | $ | 1,355,025 | ||||||||
Basic
and diluted loss per
|
||||||||||||||||||||||||
common
share
|
$ | (0.03 | ) | $ | (0.02 | ) | $ | 0.01 | $ | (0.07 | ) | $ | (0.07 | ) | $ | - | ||||||||
Basic
and diluted weighted average
|
||||||||||||||||||||||||
common
shares outstanding
|
237,740,465 | 237,740,465 | 209,007,473 | 209,007,473 |
F-8
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF
SEPTEMBER 30, 2008
As Computed
|
||||||||||||
under
|
||||||||||||
As Originally
|
FASB ASC
470-20-65
|
Effect
of
|
||||||||||
Reported
|
&
480-10
|
Change
|
||||||||||
Total
Assets
|
$ | 1,306,474 | $ | 1,306,474 | $ | - | ||||||
Current
Liabilities
|
||||||||||||
Accounts
payable and accrued expenses
|
$ | 3,826,629 | $ | 3,826,629 | $ | - | ||||||
Notes
payable, net of discount
|
3,008,480 | 3,008,480 | - | |||||||||
Convertible
notes, net of discount
|
657,156 | 431,032 | (226,124 | ) | ||||||||
Convertible
notes, net of discount – related party
|
- | 308,624 | 308,624 | |||||||||
Due
to related parties
|
244,500 | 244,500 | - | |||||||||
Obligation
to former noncontrolling interest
|
297,395 | 297,395 | - | |||||||||
Total
Current Liabilities
|
8,034,160 | 8,116,660 | 82,500 | |||||||||
Long
Term Liabilities
|
||||||||||||
Convertible
notes, net of discount
|
65,753 | 165,598 | 99,845 | |||||||||
Obligation
to former noncontrolling interest
|
1,004,258 | 1,004,258 | - | |||||||||
Total
Long Term Liabilities
|
1,070,011 | 1,169,856 | 99,845 | |||||||||
Total
Liabilities
|
9,104,171 | 9,286,516 | 182,345 | |||||||||
Commitments
and contingencies
|
||||||||||||
Stockholders'
deficit
|
||||||||||||
Common
stock; $.001 par value; 600,000,000 shares authorized;
|
||||||||||||
249,317,544
issued and outstanding at September 30, 2008;
|
||||||||||||
63,603,612
shares issuable at September 30, 2008
|
312,921 | 312,921 | - | |||||||||
Additional
paid-in capital
|
67,335,162 | 65,727,387 | (1,607,775 | ) | ||||||||
Deficit
accumulated since inception of the exploration stage in
|
||||||||||||
December
2005
|
(75,445,780 | ) | (74,020,350 | ) | 1,425,430 | |||||||
Total
Stockholders’ Deficit
|
(7,797,697 | ) | (7,980,042 | ) | (182,345 | ) | ||||||
Total
Liabilities and Stockholders' Deficit
|
$ | 1,306,474 | $ | 1,306,474 | $ | - |
F-9
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
As a
result of the accounting change, accumulated deficit as of January 1, 2008,
decreased from $60,103,871, as originally reported, to $60,033,466 computed
under FASB ASC 480-10and FASB ASC
470-20-65.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2008
As Computed
|
||||||||||||
under
|
||||||||||||
As Originally
|
FASB ASC
470-20-65
|
Effect
of
|
||||||||||
Reported
|
&
480-10
|
Change
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
loss
|
$ | (15,341,910 | ) | $ | (13,986,885 | ) | $ | 1,355,025 | ||||
Adjustments
to reconcile net loss to net cash used in operating
|
||||||||||||
activities
|
||||||||||||
Share-based
compensation for consulting services
|
1,368,907 | 1,368,907 | - | |||||||||
Stock
options granted
|
1,073,700 | 1,073,700 | - | |||||||||
Expense
on forbearance agreements
|
650,000 | 650,000 | - | |||||||||
Amortization
of deferred loan costs
|
15,999 | 15,999 | - | |||||||||
Amortization
of discount on notes
|
1,617,788 | 1,617,788 | - | |||||||||
Amortization
of discount on convertible notes
|
4,427,082 | 3,755,807 | (671,275 | ) | ||||||||
Depletion
expense
|
79,774 | 79,774 | - | |||||||||
Settlement
expense
|
833,219 | 833,219 | - | |||||||||
Gain
on extinguishment of debt
|
1,946,836 | 1,263,086 | (683,750 | ) | ||||||||
Pre-acquisition
income
|
44,135 | 44,135 | - | |||||||||
Changes
in assets and liabilities
|
||||||||||||
Accounts
receivable
|
(100,466 | ) | (100,466 | ) | - | |||||||
Prepaid
expenses
|
89,406 | 89,406 | - | |||||||||
Accounts
payable and accrued expenses
|
431,672 | 431,672 | - | |||||||||
Net
cash used in operating activities
|
(2,863,858 | ) | (2,863,858 | ) | - | |||||||
Net
cash provided by financing activities
|
3,013,500 | 3,013,500 | - | |||||||||
Net
decrease in cash and cash equivalents
|
149,642 | 149,642 | - | |||||||||
Cash
and cash equivalents, beginning of period
|
7,995 | 7,995 | - | |||||||||
Cash
and cash equivalents, end of period
|
$ | 57,637 | $ | 157,637 | $ | - |
F-10
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
NOTE
5 - OIL AND GAS PROPERTIES
Oil and Gas Operations in
Appalachian Basin
As of
September 30, 2009, the Company had $272,157 of oil and gas property costs
related to its three initial wells drilled on its West Virginia property, net of
impairment and accumulated depletion on the wells.
Indigo-Energy
Partners, LP (“Indigo LP”)
Prior to
March 31, 2008, the Company owned a 50% ownership interest in Indigo LP, which
was consolidated with the Company in accordance with the guidance of FASB ASC
810-20 (formerly EITF 04-5, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights).
On March
31, 2008, the Company entered into a Global Settlement Agreement with all the
other partners of Indigo LP pursuant to which the Company acquired the remaining
50% partnership interests from the other partners in exchange for 1) an
aggregate monthly cash payment of $50,000 for a period of 36 months for a total
amount of $1,800,000, which will be allocated proportionately to each of the
other partners based on their respective ownership interest in Indigo LP,
commencing upon the Company’s receiving of funding of $10,000,000 or more
(Indigo LP Settlement Obligation), and 2) the Company’s issuance of three
warrants to each of the other partners for each dollar they originally invested,
which resulted in the issuance of warrants to purchase a total of 13,200,000
shares of the Company’s common stock to all of the other partners at an exercise
price of $0.25 per share (“Indigo LP Settlement Warrants”). These warrants
vested on October 1, 2008 and expire in 7 years from date of grant.
Also as
part of the Global Settlement Agreement, the Company was released of all its
obligations under the partnership agreement. However, under the Global
Settlement Agreement, if the Company has not commenced the monthly payment of
$50,000 by January 1, 2009, then the other partners may seek judicial
enforcement of the Company’s obligation to pay the settlement amounts and the
Company will no longer be released of any obligations under the partnership
agreement. The Company commenced the required monthly payments of $50,000 in
January 2009 and has paid an aggregate amount of $450,000 at September 30, 2009.
As of November 1, 2009, the Company has made the first nine monthly payments
under the Global Settlement Agreement totaling $450,000.
The
Company calculated the present value of the $1,800,000 aggregate cash settlement
amount to be $1,178,756 on the date of the Global Settlement Agreement, of which
$549,182 was ascribed to related parties due to Steve Durdin, the Company’s
President, James Walter Sr., a member of the Company’s Board of Directors, Jerry
L. Braatz, Sr. and Kirsten K. Braatz (the “Braatz Family”) who became a related
party in October 2008 when their combined holdings of the common stock of the
Company exceeded 5% of the then outstanding stock of the Company, and their
affiliates collectively owning 55.68% of the interest not owned by the Company
in Indigo LP before the Global Settlement Agreement. The present value of the
cash settlement amount was based on a 20% discount rate which is commensurate
with the interest rate incurred on the Company’s borrowings in close proximity
to the Global Settlement Agreement. The Company has ascribed a value of $907,000
to the Indigo LP Settlement Warrants, using the Black-Scholes model, assuming a
volatility of 185.36%, a risk-free rate of 2.595% and an expected dividend yield
of zero. The value of the other partners’ noncontrolling interest as of the date
of the Global Settlement Agreement was less than the consideration provided to
them under the agreement, and accordingly, the Company recorded a settlement
expense of $710,321, of which $330,939 was ascribed to related
parties.
F-11
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
Subsequent
to the Global Settlement Agreement, the Company recorded additional settlement
expenses of $189,072 during 2008, which represented interest on the cash
installment payment due to the former noncontrolling interest. For
the three and nine months ended September 30, 2009, the Company recorded
interest expense of $57,114 and $162,182, respectively.
Oil
and Gas Interests and Operations
On April
2, 2008, the Company entered into a Modification and Settlement Agreement with
TAPO Energy, LLC (“Operator1” or “TAPO”) to settle its obligation due to
Operator1 in the amount of $671,598 under the Drilling and Operating Agreement
among Indigo, Indigo LP and Operator1, with HUB as its Advisor (“DOA1”). Under
the terms of the settlement agreement, the Company assigned all of its rights to
receive revenue from the five DOA1 wells for a period equal to the later of 48
months (commencing January 2008) or until the obligation to Operator1 has been
satisfied (“the Assignment Period”). Upon expiration of the Assignment Period,
all rights assigned to Operator1 will automatically revert back to the Company
and a new carried interest in the five DOA1 wells will be assigned to the
Company. In addition to the aforementioned assignment, the Company assigned a
84.375% working interest to Operator1 in three drill sites to be determined
located on the Company’s land. As of November 1, 2009 these drill sites are yet
to be determined. The Company retains the remaining 15.625% royalty and
overriding royalty interests in the three drill sites. Operator1 will be
operating the wells situated in the three drill sites. Under the settlement
agreement, the Company also agreed to enter into a transportation agreement with
Operator1, whereby Operator1 will transport all gas produced and recovered from
the five wells under DOA1 as well as the wells to be drilled using the Company’s
existing pipelines. The Company is to be compensated at a rate equal to the
greater of 5% of the gas price paid or $.50 per MCF.
As a
result of the settlement agreement, the Company’s obligation due to Operator1 as
of September 30, 2009 was reduced by $212,263 to $459,335, due to the
application of the Company’s revenue from the five DOA1 wells against the
Company’s settlement obligation due to Operator1.
On May
28, 2009, the Company entered into a Purchase and Sale Agreement (“PSA”) with
TAPO. The PSA outlined an understanding with respect to TAPO’s purchase of all
of Indigo’s oil and gas interests in certain properties located in Greene
County, Pennsylvania and Monogalia County, West Virginia excluding interests in
certain drilling sites previously assigned to TAPO in connection with the April
2, 2008 Modification and Settlement as described above (“Indigo Property”) for
an aggregate purchase price of $630,000. Under the PSA, the Company keeps all
its rights and interests in its three initial wells drilled on Indigo
Property. However, TAPO has the right of first refusal to purchase
interests in those three wells within the next 60 days. In addition, the Company
will be entitled to an overriding royalty interest of 3.125% of all net revenues
generated by TAPO on the Indigo Property.
On July
16, 2009, the Company entered into an Amended Purchase Sale Agreement (“Amended
PSA”) with Bluestone Energy Partners, a West Virginia corporation (“Bluestone”)
amending the terms of the PSA dated May 28, 2009. The Amended PSA provided
for all of TAPO’s rights under the PSA to be assigned to Bluestone pursuant to
an Assignment and Assumption Agreement dated June 1, 2009 between TAPO and
Bluestone. The Company closed the sale of Indigo Property with
Bluestone for $630,000 on July 16, 2009. For the nine months ending September
30, 2009, the Company recorded a gain on sale of oil and gas interests in the
amount of $629,760.
F-12
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
On
December 30, 2008, The Company entered into a Continuation Agreement with Dannic
Energy Corporation (“Operator2”) to settle its obligation in the amount of
$381,824 to Operator2 under the Drilling and Operating Agreement between Indigo
LP and Operator2, with HUB as its Advisor (“DOA2”). Under the terms of the
settlement agreement, Operator2 agreed to release $180,186 of suspended revenue
checks owed to the Company for well production through October 2008 in exchange
for the payment of the outstanding obligation of $381,824 by the Company. The
parties exchanged checks for their respective amounts owed on the date of the
Continuation Agreement. In addition, Operator2 agreed to assign the Company an
additional 27% working interest in the wells, increasing the Company’s working
interest in the wells to 60%. On January 29, 2009, Operator2 formally
recorded the assignment of the 27% interest in the wells. Operator2
also agreed to distribute to Indigo its proportionate share of monthly revenue
within 30 days of its receipt of the production checks.
On
December 29, 2008, the Company entered into a Continuation Agreement with
Mid-East Oil Company (“Operator4”) and HUB Energy, LLC (“HUB”), Operator4’s
advisor, to settle its obligation in the amount of $283,039 to Mid-East Oil
Company and $65,000 to HUB in accordance with the November 2007 Modification and
Settlement Agreement with HUB, Mid-East Oil Company, and Mark Thompson. In
addition, the Company paid Operator4 $18,000 for the completion of a well in
September 2008 originally contemplated under the Drilling and Operating
Agreement between Indigo LP and Mid-East Oil Company, with HUB as its Advisor.
As consideration for the Continuation Agreement, Operator4 agreed to reduce the
Company’s obligation by the amounts owed under previously suspended revenue
checks in the amount of $138,553. As of December 31, 2008, the Company paid the
remaining balance owed under the 2007 Modification and Settlement Agreement in
the amount of $227,486. The Continuation Agreement reaffirmed the
Company’s 75% working interest in its five completed wells that it acknowledged
are free of any additional encumbrance, lien or hindrance, or Department of
Environmental Protection default or claim. In addition, Operator4 agreed to
distribute to Indigo its proportionate share of monthly revenue within 10 days
of its receipt of the production checks.
Oil and Gas Operations in
Illinois Basin
During
2008, Indigo was under the belief it needed to preserve the lease rights to
certain properties included in its planned drilling program with Epicenter Oil
and Gas, LLC (“Epicenter”) for 2008. Given that a number of these leases were
held by various interests, and that these development interests were commingled
with the interests of Epicenter, the Company provided to Epicenter $840,000 in
cash payments and 2,500,000 shares of its common stock as essentially a
forbearance for the landholders and leaseholders to provide the Company
additional time to complete the payment and obtain the leases. All these amounts
were expensed in 2008 since the Company was not a named party on any lease
agreements. The 2,500,000 shares were valued at $0.12 per share based on the
stock trading price of the Company on March 7, 2008, the date of the Company’s
letter agreement with Epicenter for a total of $300,000. The $840,000 cash
payment as well as the $300,000 of value of the 2,500,000 shares were recorded
as forbearance expense in 2008.
F-13
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On
February 16, 2009, Epicenter indicated it viewed the monies forwarded by the
Company in 2008 as a loan and the Company entered into a promissory note with
Epicenter in the amount of $940,000, which represented amounts including
$840,000 the Company initially paid to Epicenter for the purpose to preserve the
lease rights to certain properties (including a $715,000 payment the Company
paid to Rivers West) and a $100,000 deposit paid to Epicenter against future
development costs of oil and gas leases and purchases of oil field equipment.
The promissory note matures on the earlier of (i) one year from its issuance; or
(ii) five days after Epicenter receives any funding, whether through the
issuance of debt or of equity, in the amount of at least $5,000,000. The
promissory note provided for interest at 5% per annum. The $940,000 was
primarily used as forbearance on options to purchase leases and equipment that
expired before the Company could enter into the leases or acquire the
equipment.
The
Company has recorded a loan loss provision equal to 100% of the value of the
note receivable from Epicenter as of September 30, 2009 due to the Company’s
belief that Epicenter has no ability to repay the loan.
In
November 2008, the Company commenced its drilling program with Epicenter in the
Dubois Field located in the Illinois Basin in southern Indiana. The drilling
program was funded through the Global Financing Agreement (“GFA”) by Carr Miller
Capital, LLC (“Carr Miller”) (See Global Financing Agreement – Note 6). As of
September 30, 2009, the Company has incurred $3,741,003 of costs related to the
drilling program which are recorded as unproved property costs, of which
$1,655,672 was accrued for at September 30, 2009. On April 3, 2009,
the Company announced that four wells have been completed.
On March
26, 2009, the Company entered into an agreement (the “Agreement”) with Epicenter
wherein Epicenter acknowledged that, between February 20, 2009 and March 23,
2009, it has received an aggregate of $900,000 from the Company, which amount
was utilized for drilling and other activities related to the four wells located
in the Dubois Field, in the Illinois Basin. The Agreement contained a
representation from Epicenter that it has the right to drill on the property and
also contained an undertaking on the part of Epicenter to execute an assignment
of working interest in the Wells in favor of the Company and to record such
assignment in the appropriate Public Records in Dubois County,
Indiana.
In April
2009 we commenced testing operations on the completed wells within the Dubois
field of the Illinois basin. The wells were expected to have a high
water cut, which is natural for the horizons drilled in the Illinois basin, and
pumps were sourced and installed upon well completion meeting those
specifications. Unfortunately, the water cut was significantly less
and the amount of gas flowing significantly higher on a percentage
basis. This change resulted in the pump failing, as without the high
water cut it was unable to operate properly. The Company is currently
trying to source locally a pumping unit capable of handling the lower water
cut.
On April
29, 2009, The Company entered into another agreement with Epicenter wherein
Epicenter acknowledged that it has received an aggregate of $2,100,000 from the
Company, which amount was utilized for drilling and other activities related to
the four wells located in the Dubois field, in the Illinois Basin. The agreement
provides that any remaining charges for the drilling of these four wells over
and above the $2,100,000 will be paid from the 100% of the net revenue interest
from these four wells until all drilling and completion costs have been
paid-in-full. In consideration of the $2,100,000 provided by the Company,
Epicenter assigned the Company a 75% working interest in the four wells, to be
recorded in the appropriate public records of Dubois County, Indiana. In
consideration of Epicenter being the operator of the wells, Epicenter will
receive a 25% working interest in the wells. The working interests are subject
to the customary 12.5% royalty interest due to the landowner and an overriding
royalty interest of 8.25% of all gross revenues from oil and gas produced from
the four wells. On May 7, 2009, Epicenter’s assignment of the 75%
working interest to the Company was recorded in the public records of Dubois
County, Indiana.
F-14
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
Summary
Oil and
gas properties consisted of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Acquisition,
exploration and development costs
|
$ | 13,507,412 | $ | 10,208,811 | ||||
Impairment
charge
|
(8,739,585 | ) | (8,739,585 | ) | ||||
Depletion
|
(341,136 | ) | (300,836 | ) | ||||
Total
|
$ | 4,426,691 | $ | 1,168,390 |
A
significant portion of the Company’s oil and gas assets in the Illinois Basin
are subject to mechanics liens filed by certain oil and gas subcontractors (see
Note 9 – Commitments and Contingencies – Not Disclosed Elsewhere).
NOTE
6 - NOTES PAYABLE
Convertible
Notes - Series 1
In return
for $2,662,100 received in April 2006 and continuing through October 2006, we
issued convertible notes. During 2007, the noteholders converted $2,262,100 of
principal into 2,714,250 shares of our common stock. The notes had maturity
dates three years from the date of issuance and bore interest at 8% per annum.
The notes provide that the 8% interest is due and payable only if the trading
price of our stock fell below $0.15625 in a given month, whereby we would then
be responsible for paying interest on the outstanding balance of the notes for
that month. On October 1, 2008, upon the adoption of FASB ASC
470-20-65 and FASB ASC 480-10, the Company recorded an additional liability for
variable conversion features on the $400,000 outstanding balance of these notes
and a corresponding discount in the amount of $266,667. As of September 30,
2009, the Company has recorded $61,623 of accrued interest on the remaining
$400,000 of notes that are outstanding as a result of the stock price falling
below $0.15625. As of September 30, 2009, the Company has failed to pay
obligations amounting to $300,000 on this series of notes, and as such, was in
default on the obligations. As of November 1, 2009, $400,000 of the obligations
were in default. Management is in discussions with the noteholders to enter into
a formal forbearance agreement and anticipates using the proceeds from future
equity contributions to repay the note obligations.
Convertible
Notes - Series 2
As of
September 30, 2009, the Company has failed to pay obligations amounting to
$125,000 on this series of notes, of which $75,000 is due to the Braatz family,
a related party, and as such, was in default on the obligations. As of November
1, 2009, the obligations remained in default. Management is in discussions with
the note holder to enter into a formal forbearance agreement and anticipates
using the proceeds from future equity contributions to repay the note
obligations.
F-15
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
Convertible
Notes - Series 3
On
January 10, 2009, Carr Miller acquired the remaining unpaid Series 3 notes from
the original noteholders in the amount of $155,000, of which $75,000 was due to
the Braatz Family, a related party. As part of the transaction, the noteholders
agreed to waive all obligations including but not limited to interest,
principal, and penalties owed by the Company, which totaled $51,886 as of the
refinance. Also on January 10, 2009, the Company issued replacement Series 3
notes to Carr Miller that provided for interest at 20% per annum with a maturity
date of January 29, 2014. Consequently, the Company’s original notes acquired by
Carr Miller were canceled. Commencing February 6, 2010, the Company is required
to make 48 equal monthly interest installment payments equal to the total
interest due on the note. Within thirty days of refinancing the notes, Carr
Miller was to receive shares of the Company’s common stock equal to ten times
the numerical dollars of the principal of the loan which was 1,550,000 shares of
Company stock. These shares were issued in April 2009. In the event this note is
unpaid within ten days of its maturity date, the Company will incur a late
charge equal to 10% of the note amount.
This
transaction has been accounted for in accordance with FASB ASC 470-60 (formerly
SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt
Restructurings”). The transaction was determined to be a TDR based on FASB ASC
470-60 which states that a creditor is deemed to have granted a concession if
the debtor’s effective borrowing rate on the restructured debt is less than the
effective borrowing rate of the old debt immediately prior to the restructuring.
In addition, on the modification date it was determined that the
total future cash payments under the terms of the modified note were greater
than the carrying amount of the original note. Accordingly, the effects of the
restructuring were accounted for prospectively from the time of the
restructuring, and the difference between the total future cash payments under
the terms of the modified note and the carrying amount of the original note are
being amortized to interest expense. The 1,550,000 shares of common stock issued
to Carr Miller were valued at $93,000 based on the stock trading price on
January 10, 2009, which was recorded as interest expense for the nine months
ended September 30, 2009.
Convertible
Notes - Series 4
On
January 10, 2009, Carr Miller acquired the remaining unpaid Series 4 notes from
the original noteholders, the Braatz Family, a related party, in the amount of
$175,000. As part of the transaction, the noteholders agreed to waive all
obligations including but not limited to interest, principal, and penalties owed
by the Company, which totaled $41,569 as of the date of the refinance. Also on
January 10, 2009, the Company issued replacement Series 4 notes to Carr Miller
that provided for interest at 20% per annum with a maturity date of January 29,
2014. Consequently, the Company’s original Series 4 notes acquired by Carr
Miller were canceled. Commencing February 6, 2010, the Company is required to
make 48 equal monthly interest installment payments equal to the total interest
due on the note. Within thirty days of refinancing of the Series 4 notes, Carr
Miller is also to receive shares of the Company’s common stock equal to ten
times the numerical dollars of the principal of the loan which was 1,750,000
shares of Company common stock. These shares were issued in April
2009. In the event this note is unpaid within ten days of its maturity date, the
Company will incur a late charge equal to 10% of the note amount.
F-16
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
This
transaction has been accounted for in accordance with FASB ASC 470-60 (formerly
SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt
Restructurings”). The transaction was determined to be a TDR based on FASB ASC
470-60 which states that a creditor is deemed to have granted a concession if
the debtor’s effective borrowing rate on the restructured debt is less than the
effective borrowing rate of the old debt immediately prior to the restructuring.
In addition, on the modification date it was determined that the total future
cash payments under the terms of the modified note were greater than the
carrying amount of the original note of $175,000. Accordingly, the effects of
the restructuring were accounted for prospectively from the time of the
restructuring, and the difference between the total future cash payments under
the terms of the modified note and the carrying amount of the original note are
being amortized to interest expense. The 1,750,000 shares of common stock issued
to Carr Miller were valued at $105,000 based on the stock trading price on
January 10, 2009, which was recorded as interest expense for the nine months
ended September 30, 2009.
Promissory
Notes
Note
Payable 1
On
November 27, 2006, the Company borrowed $450,000 and issued a promissory note to
the lender. The note, as amended, had a maturity date of March 30, 2008. Within
ten days of the maturity date, the Company was to pay the lender $550,000 less
any earlier payments of principal, as satisfaction in full of this obligation.
The Company did not pay the note at the maturity date of March 30, 2008.
However, the lender agreed to extend the note so long as the Company makes the
monthly payment of $12,500 as required under the amended note.
On
October 15, 2008, the Company entered into a settlement agreement whereby the
parties agreed that 1) the total due to the lender is $450,000 of principal plus
$46,250 of accrued interest, late charges, and net royalty interests; 2) the
principal will accrue simple interest at 15% per annum via monthly payments of
$5,625 commencing October 15th until
paid; 3) if any monthly interest payment is not paid by the 25th of the
month, a one-time late payment penalty of $250 will be applied and accrued; 4)
the lender waives forever any and all claim against the revenues, ownership, net
royalty interest and any claim against Indigo No. 3 well; 5) in the event that
Indigo does not pay the balance by October 15, 2009 and the agreement is not
automatically renewed per item 7 below, or Indigo declares bankruptcy, the
lender’s rights to the net revenue interest in Indigo No. 3 well will revert to
100% for the life of the well; 6) the lender releases Indigo, its officers,
directors and agents from any liability arising out of the replacement of this
settlement agreement and terminating all prior agreements and notes including
any and all defaults, fees, penalties and interest on any notes as well as any
other claims that the lender may have against Indigo; and 7) this initial term
is for one-year commencing October 15, 2008 and will automatically renew from
year to year under the same terms and conditions unless terminated by either
party after the initial term or payment in full of the balance. On October 15,
2009, the settlement agreement automatically renewed. As of November 1, 2009,
the Company has made the required monthly payments of $5,625 and made late
payment penalties totaling $500.
Note
Payable 2 – Related Party
On
January 19, 2007, we borrowed $200,000 from the Braatz Family, who became a
related party in October 2008. On March 15, 2008, the Company entered into a
Modification and Settlement Agreement with the noteholders whereby the Company
was released from all its obligations under the original promissory note. Under
the settlement agreement, since the Company did not pay the principal amount of
the original note plus a 10% penalty fee on or before May 1, 2008 (“Due Date”),
the Company was required to issue to the noteholder one share of its common
stock for every dollar of the principal and penalty then outstanding for every
month past the Due Date on which the note principal and penalty charge remain
unpaid. On September 30, 2008, the note was extended to
December 31, 2008. For the nine months ended September 30, 2009, the
Company has issued 1,540,000 of penalty shares and had 400,000 penalty shares
issuable to the noteholder. The shares were valued at $88,800 and recorded as
interest expense. In July 2009, the Company paid the lender the 10% penalty fee
of $20,000 required by the March 15, 2008 Modification and Settlement Agreement.
As of November 1, the note remained unpaid, the Company was in default on the
obligation, and the Modification and Settlement Agreement that was in effect was
deemed void.
F-17
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
Note
Payable 5
On
February 15, 2007, we borrowed $100,000 from an individual lender and issued a
promissory note. On March 15, 2008, the Company entered into a
Modification and Settlement Agreement with the note holder whereby the Company
was released from all its obligations under the original promissory note. Under
the settlement agreement, since the Company did not pay the principal amount of
the original note plus a 10% penalty fee on or before May 1, 2008 (“Due Date”),
the Company was required to issue to the note holder one share of its common
stock for every dollar of the principal and penalty then outstanding for every
month past the Due Date on which the note principal and penalty charge remain
unpaid. For the nine months ended September 30, 2009, the Company has issued
770,000 of penalty shares and had 220,000 penalty shares issuable to the
noteholder. The penalty shares were valued at $45,100 and recorded as interest
expense. As of November 1, 2009, the note remained unpaid, the Company was in
default on the obligation, and the Modification and Settlement Agreement that
was in effect was deemed void.
Other
Promissory Notes
In 2007,
we borrowed $430,000 from various individual lenders and issued promissory
notes. In January 2009, a note in the amount of $25,000 was extended for the
seventh time to March 2009 in exchange for which we agreed to issue 150,000
shares to the lender. We valued the 150,000 shares at $9,000 based on the stock
trading price on the note extension date. In April 2009, this note was extended
for the eighth time to June 2009 in exchange for which we agreed to issue
150,000 shares to the lender. We valued the 150,000 shares at $7,500 based on
the stock trading price on the note extension date. In July 2009, this note was
extended for a ninth time to September 2009 in exchange for which we agreed to
issue 150,000 shares to the lender. We valued the 150,000 shares at $4,500 based
on the stock trading price on the note extension date. For the nine months ended
September 30, 2009, the Company recorded interest expense for the amortization
of discounts on the extensions in the amount of $21,000. As of September 30,
2009, unpaid balance on these notes amounted to $165,000. As of November 1,
2009, the Company was in default on $140,000 of these notes.
On March
18, 2009, the Company borrowed $125,000 from two lenders, of which $100,000 was
due to James C. Walter, Sr., a related party, and issued promissory notes that
provided for interest at 12% per annum with a maturity date of December 23,
2009. Within thirty days of funding of the loan, the lenders are also to receive
shares of the Company’s common stock equal to ten times the numerical dollars of
the principal of the loan. These shares were issued in April 2009. In the event
these notes are unpaid within ten days of their maturity date, the Company will
incur a late charge equal to $625 for each 30 day period beyond the maturity
date. The funds are designated for two monthly settlement payments to the former
partners of Indigo-Energy, LP and general working capital.
F-18
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
We valued
the 1,250,000 shares at $60,000 based on our stock trading price on the date of
the promissory notes. We allocated the proceeds from issuance of the two notes
and common stock based on the proportional fair value for each item.
Consequently, we recorded total discounts of $40,450 on the promissory notes,
which are being amortized over the term of the notes. For the nine months ended
September 30, 2009, amortization of the discounts amounted to $26,454, which was
recorded as interest expense. The Company also recorded an additional interest
expense of $7,964 during 2009 which was accrued at September 30,
2009.
Long-Term
Notes Payable – Related Party
On
December 5, 2008, pursuant to the GFA (See Global Financing Agreement below),
promissory notes previously issued to Carr Miller in the aggregate principal
amount of $2,450,000 and their accrued interest in the amount of $248,412, and
accrued interest of $162,806 on three other Carr Miller notes with aggregate
principle amount of $1,000,000, which were converted into Indigo’s common stock
pursuant to the GFA, were amended and replaced by a new promissory note
(“New Note”) totaling $2,861,218. The New Note is secured by all the
assets of the Company, has a maturity date of November 30, 2013 and bears
interest at the rate of 10% per annum. In the event of default principal and
interest due shall become immediately due and payable. The new debt instruments
were recorded with discounts amounting to $1,420,832, which are being amortized
over the term of the New Note, and recorded as interest expense. Amortization of
the discounts on this note for the nine months ended September 30, 2009 amounted
to $157,360, which was recorded as interest expense. Additional interest expense
on this note was recorded for the nine months ended September 30, 2009 in the
amount of $238,435.
On
December 16, 2008, pursuant to the GFA, the Company borrowed $1,080,000 from
Carr Miller and issued a promissory note that provided for interest at 10% per
annum with a maturity date of December 16, 2010. This note represents the
$1,000,000 of funding for the drilling of the initial two wells per the GFA. The
additional $80,000 of funding represents a deposit on legal fees as outlined in
the GFA that was paid to Pappas & Richardson, LLC, of which Hercules Pappas,
a partner at the Law Firm, became a related party of the Company at the end of
January 2008 upon his appointment as a Board Director. The note required that
commencing January 16, 2009, the Company is required to make 12 equal monthly
interest installment payments on the note, and commencing January 16, 2010, the
Company is required to make 12 equal monthly payments equal to the interest plus
an equal proportion of the principal amount. As of September 30, 2009, the
Company has made the first three interest installment payments aggregating
$27,592. The second three interest installment payments aggregating $27,592 plus
the seventh interest installment payment in the amount of $9,197 were included
in a promissory note from Carr Miller dated July 28, 2009 (See below). Payments
not made within 10 days of their due date are subject to a late charge of 10% of
said payment. As of September 30, 2009, the August and September installment
payment were unpaid, and as a result the Company incurred a late charge in the
amount of $1,839, which was recorded as interest expense. As of November 1, the
August, September, and October interest installment payments were unpaid and the
Company was in default on the obligation. Within thirty days of funding of the
loan, the lender is also to receive 50,000,000 shares of the Company’s common
stock. The shares were issued in December 2008. In the event this note is unpaid
within ten days of its maturity date, the Company will incur a late charge equal
to 10% of the note amount. The Company valued the 50,000,000 shares at
$2,666,667 based on its stock trading price on the date of promissory note. The
Company allocated the proceeds from issuance of the note and common stock based
on the proportionate fair value for each item. Consequently, we recorded a
discount of $703,080, based on the ascribed value of the 50,000,000 shares of
common stock issued to the lender. Amortization of the discounts on this note
for the nine months ended September 30, 2009 amounted to $183,276, which was
recorded as interest expense. Additional interest expense on this note and late
payment penalties on scheduled interest payments were recorded for the nine
months ended September 30, 2009 in the amount of $82,839.
F-19
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On
December 30, 2008, the Company borrowed $900,000 from Carr Miller and issued
promissory notes that provided for interest at 20% per annum with maturity dates
of December 30, 2013. The note in the amount of $500,000 required that
commencing January 5, 2010, the Company is required to make 48 equal monthly
interest installment payments equal to the total interest due on the note. The
note in the amount of $400,000 required that commencing January 5, 2011, the
Company is required to make 36 equal monthly interest installment payments equal
to the total interest due on the note. Within thirty days of funding of the
loans, the lender is also to receive shares of the Company’s common stock equal
to fifty times the numerical dollars of the principal of the loans. In the event
this note is unpaid within ten days of its maturity date, the Company will incur
a late charge equal to 10% of the note amount. The Company valued the 45,000,000
shares at $3,600,000 based on its stock trading price of $0.08 on the date of
promissory notes. The Company allocated the proceeds from issuance of the notes
and common stock based on the proportionate fair value for each item.
Consequently, we recorded a discount of $720,000, based on the ascribed value of
the 45,000,000 shares of common stock issued to the lender. Since the Company
did not have enough authorized shares of common stock, the Company agreed to
issue Carr Miller 45 shares of the Company’s Series C Preferred Stock, which
were issued in January 2009. Each share of Series C Preferred Stock
shall automatically convert into 1,000,000 shares of the Company’s common stock
upon the occurrence of the Company’s contemplated increase in authorized stock
from 600,000,000 to 1,000,0000,000 shares of common stock. On April 21, 2009,
upon the increase in the Company’s authorized common stock from 600,000,000 to
1,000,000,000 shares (see Note 8), the 45 shares of Series C Preferred Stock
automatically converted into 45,000,000 shares of common stock, which were
issued on April 22, 2009. The preferred shares will vote on an as converted
basis. All shares of the Company’s stock issued to Carr Miller are subject to
restrictions under Rule 144 and are subject to volume limitations imposed on
affiliates of the Company upon the sale thereof. The purpose of the loans is:
(i) to procure an accounts payable settlement on ten operating wells previously
drilled by the Company (ii) to provide the Company with the necessary funds to
settle the Company’s obligations with certain professionals; and (iii) to
provide the Company with the funding it requires to begin drilling a third well
in the Dubois field, which well is, adjacent to, but separate and distinct from
the two wells currently being drilled by the Company that were provided for in
the Global Financing Agreement. Amortization of the discounts on these notes for
the nine months ended September 30, 2009 amounted to $49,032, which was recorded
as interest expense. Additional interest expense on this note was recorded for
the nine months ended September 30, 2009 in the amount of $134,877.
On
December 31, 2008, the Company borrowed $200,000 from Carr Miller and issued
promissory notes that provided for interest at 20% per annum with a maturity
date of December 31, 2013. The note required that commencing January 6, 2010,
the Company is required to make 48 equal monthly interest installment payments
equal to the total interest due on the note. Within thirty days of funding of
the loan, the lender is also to receive shares of the Company’s common stock
equal to ten times the numerical dollars of the principal of the loan. The
shares were issued in January 2009. In the event this note is unpaid within ten
days of its maturity date, the Company will incur a late charge equal to 10% of
the note amount. The Company valued the 2,000,000 shares at $160,000 based on
its stock trading price of $0.08 on the date of promissory note. The Company
allocated the proceeds from issuance of the note and common stock based on the
proportionate fair value for each item. Consequently, we recorded a discount of
$88,800, based on the ascribed value of the 2,000,000 shares of common stock
issued to the lender was recorded. Amortization of the discounts on this note
for the nine months ended September 30, 2009 amounted to $10,235, which was
recorded as interest expense. Additional interest expense on this note was
recorded for the nine months ended September 30, 2009 in the amount of
$30,000.
F-20
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
In
February 2009, the Company borrowed an aggregate of $300,000 from Carr Miller
and issued promissory notes that provided for interest at 10% per annum with a
maturity date in February 2014. Commencing February 2010, the Company is
required to make 48 equal monthly interest installment payments equal to the
total interest due on the note. Within thirty days of funding of the loan, the
lender is also to receive shares of the Company’s common stock equal to ten
times the numerical dollars of the principal of the loan. These shares were
issued in April 2009. In the event this note is unpaid within ten days of its
maturity date, the Company will incur a late charge equal to 10% of the note
amount. The Company valued the 3,000,000 shares at $235,000 based on the stock
trading price on the dates of promissory notes. The Company allocated the
proceeds from issuance of the note and common stock based on the proportionate
fair value for each item. Consequently, we recorded a discount of $131,600,
based on the ascribed value of the 3,000,000 shares of common stock issued to
the lender. Amortization of the discounts on these notes for the nine months
ended September 30, 2009 amounted to $12,835, which was recorded as interest
expense. Additional interest expense on these notes was recorded for the nine
months ended September 30, 2009 in the amount of $19,096.
In
February through June 2009, the Company borrowed an aggregate of $1,140,000 from
Carr Miller and issued promissory notes that provided for interest at 10% per
annum with a maturity dates in February through June of 2011. These notes
represent the first and second tranche and part of the third tranche of the
Additional Funding per the GFA (See Global Financing Agreement – Related Party
section under Note 6). In the event these notes are unpaid within ten days of
its maturity date, the Company will incur a late charge equal to 10% of the note
amount. Interest expense on these notes was recorded for the nine months ended
September 30, 2009 in the amount of $59,353 In July 2009, one of the notes was
amended to change $25,000 of the note from being designated as Additional
Funding per the GFA (See Global Financing Agreement – Related Party section
under Note 6) to being designated for general and operating expenses. In
exchange, the lender is to receive shares of the Company’s common stock equal to
ten times the numerical dollars of the amended amount. The 250,000 shares were
issued in July 2009. The Company valued the 250,000 shares at $10,000 based on
the stock trading price on the dates of promissory notes. The Company allocated
the proceeds from issuance of the $25,000 portion of the note and common stock
based on the proportionate fair value for each item. Consequently, we recorded a
discount of $7,150, based on the ascribed value of the 250,000 shares of common
stock issued to the lender. Amortization of the discounts on these notes for the
nine months ended September 30, 2009 amounted to $764, which was recorded as
interest expense.
On May 6,
2009, the Company borrowed $50,000 from Carr Miller and issued promissory notes
that provided for interest at 10% per annum with a maturity date of May 6, 2014.
The note required that commencing May 6, 2010, the Company is required to make
48 equal monthly interest installment payments equal to the total interest due
on the note. Within thirty days of funding of the loan, the lender is also to
receive shares of the Company’s common stock equal to ten times the numerical
dollars of the principal of the loan. The shares were issued in July 2009. In
the event this note is unpaid within ten days of its maturity date, the Company
will incur a late charge equal to 10% of the note amount. The Company valued the
500,000 shares at $20,000 based on its stock trading price of $0.04 on the date
of promissory note. The Company allocated the proceeds from issuance of the note
and common stock based on the proportionate fair value for each item.
Consequently, we recorded a discount of $14,300, based on the ascribed value of
the 500,000 shares of common stock issued to the lender was recorded.
Amortization of the discounts on this note for the nine months ended September
30, 2009 amounted to $1,013, which was recorded as interest expense. Additional
interest expense on this note was recorded for the nine months ended September
30, 2009 in the amount of $2,003.
F-21
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On July
16, 2009, the Company borrowed $15,000 from Carr Miller and issued a promissory
note that provided for interest at 10% per annum with a maturity date of July
16, 2011. This note represents part of the third tranche of the Additional
Funding per the GFA (See Global Financing Agreement – Related Party section
under Note 6). In the event this note is unpaid within ten days of its maturity
date, the Company will incur a late charge equal to 10% of the note
amount. Interest expense on this note was recorded for the nine months
ended September 30, 2009 in the amount of $312.
On July
28, 2009, the Company borrowed $370,000 from Carr Miller and issued a promissory
note that provided for interest at 10% per annum with a maturity date of July
28, 2011. This note represents final part of the third tranche of the
Additional Funding per the GFA (See Global Financing Agreement – Related Party
section under Note 6) and includes $36,789 for unpaid interest as required under
a promissory note with Carr Miller dated December 16, 2008 (See above). In the
event this note is unpaid within ten days of its maturity date, the Company will
incur a late charge equal to 10% of the note amount. Interest expense on
this note was recorded for the nine months ended September 30, 2009 in the
amount of $6,471.
Global
Financing Agreement (“GFA”) – Related Party
On
December 5, 2008, the Company entered into a Global Financing Agreement (the
“GFA” or “Agreement”) with Carr Miller (“CMC” and together with the Company, the
“Parties”), wherein CMC agreed to restructure the Company’s existing debt
obligations to CMC and to provide the Company, subject to the terms and
conditions set forth in the Agreement, with funding to finance and institute a
new drilling program for the Company.
Under the
terms of the Agreement, CMC irrevocably agreed to provide the Company with
funding in the amount of up to $1,000,000 to be used exclusively for the
Company’s drilling activities (the “Funding”). The Company received
this funding in November and December of 2008 (See Long-Term Notes Payable –
Related Party section above). Upon the completion of the drilling activities,
CMC also committed to provide the Company with additional funding in the amount
of $500,000 each month for a period of 6 months, which amount shall be used to
meet the Company’s objective of one new well drilled each month and to fund
other reasonable expenses (the “Additional Funding”). The Additional Funding
will be in the form of promissory notes with two year maturities and an interest
rate of 10%. The first tranche of this funding was received in February 2009,
the second tranche of this funding was received in March and April 2009, and
third tranche of this funding was received in June and July 2009.
F-22
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
The
Agreement further provides that promissory notes previously issued by the
Company to CMC in the aggregate amount of $1,000,000 (the “First Notes”) shall
be converted into 50,000,000 shares of the Company’s common stock, based on the
per share price when the Agreement was negotiated. The shares were issued in
December 2008. Further, the Parties agreed that promissory notes previously
issued to CMC in the aggregate principal amount of $2,450,000 and their accrued
interest in the amount of $248,412 (the “Second Notes”) in addition to the
accrued interest on the First Notes, in the amount of $162,806, shall be amended
and replaced by a new promissory note (“New Note”) totaling $2,861,218 (See
Long-Term Notes Payable – Related Party section above). The New Note
shall be secured by all the assets of the Company, shall have a maturity date of
November 30, 2013 and shall bear interest at the rate of 10% per annum. In the
event of default principal and interest due shall become immediately due and
payable. The Second Notes that were restructured originally provided for
interest at a rate of 20% per annum.
In
consideration for the restructuring of the First and Second Notes and financing
commitment, and other undertakings under the Agreement, the Company agreed to
grant CMC, in addition to the restricted shares issued upon conversion of the
First Notes:
|
a.
|
125,000,000
restricted shares of the Company’s common stock as additional
consideration for the New Note. The shares were issued in December
2008.
|
|
b.
|
Warrants
(“CMC Warrants”) to purchase 37,950,000 shares of common stock, which
warrants shall be exercisable within 7 years at an exercise price of $0.02
per share, the per share price when the Agreement was negotiated, provided
that such warrants shall only be exercisable in the event that existing
options/warrants are exercised. The CMC Warrants were issued to
ensure anti-dilution protection to CMC. The CMC Warrants were issued and
vested on December 5, 2008 and expire in 7 years from date of
grant.
|
|
c.
|
Upon
the delivery of the Funding of $1,000,000 as described above, the Company
agreed to issue to CMC 50,000,000 shares of Common Stock. The
number of shares to be issued to CMC was arrived at using the same formula
the Company has used for similar funding activities throughout 2008. The
shares were issued in December
2008.
|
|
d.
|
In
consideration of the commitment for the Additional Funding, the Company
shall issue to CMC 10 shares of Common Stock for every dollar committed to
the Company from such Additional Funding, which equals an aggregate of
30,000,000 shares. The number of shares issuable to CMC upon
the occurrence of the Additional Funding was arrived at using the same
formula the Company has used for similar funding activities throughout
2008. These shares shall be effective immediately and issued
upon the Company’s increase in its authorized shares in a sufficient
quantity to allow the issuance. The shares were issuable in the form of
shares of the Company’s Series C Preferred Stock at December 31, 2008, and
were issued in January 2009. On April 21, 2009, upon the increase in
the Company’s authorized common stock from 600,000,000 to 1,000,000,000
shares (see Note 8), the 30 shares of Series C Preferred Stock
automatically converted into 30,000,000 shares of common stock, which were
issued on April 22, 2009. The Company valued the 30,000,000 shares at
$600,000 based on its stock trading price of $0.02 on the date of the
agreement, and recorded the amount to deferred loan fees. The Company
recorded amortization expense of deferred loan fees in the amount of
$66,471 for the nine months ending September 30, 2009 based on receiving
the first, second and third tranche of the Additional
Funding.
|
The above
share issuances combined with the shares previously issued to Carr Miller and
shares assigned to Carr Miller under a Voting Agreement (see Common Stock under
Note 8) resulted in Carr Miller having voting rights to more than 50% of the
Company’s common stock as of December 31, 2008.
F-23
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
Lastly,
the Company also agreed to appoint Mr. Everett Miller as the Company’s Chief
Operating Officer. On
December 24, 2008, our Board of Directors adopted a resolution approving the
amendment of the Company’s Articles of Incorporation to allow for a change in
the Company’s corporate name from “Indigo-Energy, Inc.” to “Carr Miller Energy,
Inc.” (the “Name Change”). Subsequently, stockholders representing 53.6% of the
Company’s outstanding common stock as of January 14, 2009 (the "Majority
Stockholders") executed a written consent to allow for the Name Change. Although
a decision has yet to be made as to the name change, at the appropriate time a
Certificate of Amendment to our Articles of Incorporation effectuating the Name
Change will be filed with the Secretary of State of Nevada (the “Certificate of
Amendment”) and the Name Change will become effective at the close of business
on the date it is accepted for filing by the Secretary of State of
Nevada.
Summary
The
following summarizes the Company’s notes and loan payable as of September 30,
2009:
Instrument
|
Maturity Dates as of
November 1, 2009
|
Principal
Amount Owed
|
Debt Discount
|
Amount
Reflected on
Balance Sheet
|
||||||||||
Convertible
Notes
|
||||||||||||||
Convertible
Notes Series 1
|
September-October
2009
|
$ | 666,667 | $ | - | $ | 666,667 | |||||||
Non-Convertible
Notes
|
||||||||||||||
Convertible
Notes Series 2
|
||||||||||||||
(conversion
option later
|
||||||||||||||
eliminated)
|
October
2007
|
50,000 | - | 50,000 | ||||||||||
Convertible
Notes Series 2 -
|
||||||||||||||
related
party (conversion
|
||||||||||||||
option
later eliminated)
|
December
2008
|
75,000 | - | 75,000 | ||||||||||
Note
Payable 1
|
October
2009
|
427,606 | - | 427,606 | ||||||||||
Note
Payable 2 - related party
|
December
2008
|
200,000 | - | 200,000 | ||||||||||
Note
Payable 5
|
May
2008
|
100,000 | - | 100,000 | ||||||||||
Other
Promissory Notes
|
January
2008 - Dec. 2009
|
190,000 | (2,508 | ) | 187,492 | |||||||||
Other
Promissory Notes -
|
||||||||||||||
related
party
|
December
2009
|
100,000 | (11,488 | ) | 88,512 | |||||||||
Long-Term
Notes Payable -
|
||||||||||||||
related
party
|
December
2010 - May 2014
|
7,246,218 | (2,640,434 | ) | 4,605,784 | |||||||||
Total
|
$ | 9,055,491 | $ | (2,654,430 | ) | $ | 6,401,061 | |||||||
Less
long-term portion
|
4,605,784 | |||||||||||||
Current
portion
|
$ | 1,795,277 |
F-24
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
The
current portion is reflected in the balance sheet as follows:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Notes
payable, net
|
$ | 765,098 | $ | 835,863 | ||||
Note
payable, net – related party
|
363,512 | 525,000 | ||||||
Convertible
notes, net
|
666,667 | 430,723 | ||||||
$ | 1,795,277 | $ | 1,791,586 |
Interest
expense related to the amortization of discounts on notes payable, value of
penalty shares and shares issued in connection with amended notes for the nine
months ended September 30, 2009 was $831,812, of which $525,126 was from related
parties. Additional interest on notes payable pursuant to the rates charged on
the notes for the nine months ended September 30, 2009 was $799,462 of which
$720,855 was from related parties. Accrued interest at September 30, 2009 was
$926,943, of which $653,437 was due to related parties.
NOTE
7 - DUE TO RELATED PARTY
On
September 3, 2005, we entered into separate agreements with two of our then
principal stockholders (Leo Moore and James Love) to redeem their entire
interest in the Company. At the time of the agreement, each shareholder held a
33⅓ interest in our common stock. The original agreements provided
for a redemption price of $500,000 each to be paid under different payment
schedules. The obligation due to James Love was paid off in September
2006. On March 20, 2008, we entered into a Modification and
Settlement Agreement with Leo Moore whereby we agreed to settle our obligation
due to Leo Moore by paying a total amount of $209,500 on or before June 30,
2008; $5,000 to be paid each month from April through June 2008 with the balance
due by June 30, 2008. The Company made the April, May, and June 2008 payment of
$5,000 per month to Mr. Moore as scheduled.
On May
18, 2009, the Company entered into a Global Settlement Agreement with Leo Moore
whereby Leo Moore agreed to release his rights to outstanding debt of
approximately $199,500, including accrued interest of $35,000, in exchange for
3,000,000 shares of the Company’s stock.
On July
11, 2006, we entered into a Mutual Release and Settlement Agreement (“Moore
Settlement Agreement”) with Jerry Moore, certain of his family members and
affiliates (“Moore Family”). Moore Family had received 49,100,000 of our shares
of common stock and became the majority shareholder of us on December 15, 2005
during the recapitalization of the Company in 2005. Under the Moore Settlement
Agreement, Moore Family agreed to surrender to us 28,485,000 shares of our
common stock, in exchange for which we agreed to pay Moore Family a total of
$150,000 in installment payments. On March 20, 2008 we entered into a
Modification and Settlement Agreement with the Moore Family whereby we agreed to
settle our obligation due to Moore Family by paying cash amount of $100,000 on
or before June 30, 2008 and issuing 5,000,000 shares of our common stock to
Moore Family. The Company valued the common stock at $350,000 based on the
closing price of the stock as of the date of the agreement, and fully amortized
the cost to interest expense over the term of the March 20, 2008 settlement
agreement.
F-25
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements
(cont’d)
On May
18, 2009, the Company entered into a Global Settlement Agreement with Moore
Family whereby Moore Family agreed to release their rights to outstanding debt
of approximately $100,000, including accrued interest of $20,000, in exchange
for 3,000,000 shares of the Company’s stock.
The
Company valued the aggregate 6,000,000 shares issued to Leo Moore and More
Family pursuant to the Global Settlement Agreements as described above at
$180,000 based on its stock trading price of $0.03 on the date of the Global
Settlement Agreements. Accordingly, the Company recorded a gain on
extinguishment of debt in the amount of $119,500 for the nine months ending
September 30, 2009.
NOTE
8 - STOCKHOLDERS’ EQUITY - NOT DISCLOSED ELSEWHERE
Preferred
Stock
On
December 24, 2008, our Board of Directors authorized the designation of 100 of
shares of preferred stock as Series C Preferred Stock with par value of $0.001.
On January 9, 2009, the Company filed the Certificate of Designation with the
Nevada Secretary of State for the Series C Preferred Stock. Each share of the
Series C Preferred Stock will automatically convert into 1,000,000 shares of the
Company’s common stock upon the increase of the Company’s authorized common
stock from 600,000,000 to 1,000,000,000 shares. Each share of Series C Preferred
Stock shall be entitled to vote on an “as converted” basis. Holders of the
Series C Preferred Stock are not entitled to receive dividends paid on common
stock. In the event of liquidation, dissolution or winding up of the Company,
the holders of shares of Series C Preferred Stock shall be entitled to receive
an aggregate amount per share equal to the amount they would have otherwise held
if those shares had been converted into shares of common stock.
In
January 2009, we issued an aggregate of 75 shares of the Series C Preferred
Stock to Carr Miller, consisting of 30 shares related the additional funding in
the amount of $500,000 each month for a period of 6 months provided for in the
GFA (See Global Financial Agreement – Related Party section under Note 6), 25
shares related to a $500,000 promissory note dated December 30, 2008, and 20
shares related to a $400,000 promissory note dated December 30, 2008 (See Notes
Payable – Related Party section under Note 6). On April 21, 2009, upon the
increase in the Company’s authorized common stock from 600,000,000 to
1,000,000,000 shares (see Common Stock section below), the 75 shares of Series C
Preferred Stock automatically converted into 75,000,000 shares of common stock,
which were issued on April 22, 2009.
On March
10, 2009, our Board of Directors authorized the designation of 100 of shares of
preferred stock as Series D Preferred Stock (“Series D”) with par value of
$0.001. On March 27, 2009, the Company filed the Certificate of Designation with
the Nevada Secretary of State for the Series D. Each share of the Series D will
automatically convert into 1,000,000 shares of the Company’s common stock upon
the increase of the Company’s authorized common stock sufficient to facilitate
such conversion. Each share of Series D shall be entitled to vote on an “as
converted” basis. Holders of the Series D are not entitled to receive dividends
paid on common stock. In the event of liquidation, dissolution or winding up of
the Company, the holders of shares of Series D shall be entitled to receive an
aggregate amount per share equal to the amount they would have otherwise held if
those shares had been converted into shares of common stock.
F-26
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On March
10, 2009, the Company’s Board of Directors approved the issuance of 20 shares of
the Company’s Series D to each of Mr. Steven Durdin and Mr. James Walter. The 40
shares of the Series D, which will automatically convert into 40,000,000 shares
of the Company’s common stock upon increase of the Company’s authorized shares,
were issuable at March 31, 2009 and valued at $2,000,000 based on the Company’s
stock trading price of $0.05 per share on March 10, 2009. This
consulting expense is reflected under the caption general and administrative
expense – related party in the statement of operations. On April 2,
2009, the Company issued the 40 shares of the Series D. On April 21,
2009, upon the increase in the Company’s authorized common stock from
600,000,000 to 1,000,000,000 shares (see Common Stock section below), the 40
shares of Series D Preferred Stock automatically converted into 40,000,000
shares of common stock, which were issued on April 22, 2009.The issuance of
Series D to both Mr. Durdin and Mr. Walter are in consideration for the
extensive efforts extended by each of them in relation to the completion of the
drilling on the wells in the Dubois Field and for their continued efforts in
preparation for other drilling activities in the Illinois Basin.
Common
Stock
In
November 2008, the Company entered into a voting rights agreement with Carr
Miller and related party stockholders of the corporation (“Related
Stockholders”) (James Walter Sr., who became one of our Board Members in October
2007 and James Walter, Jr. and Tammy Walter, family members of James Walter Sr.
who then collectively owned 33,119,454 shares of common stock; and Steve Durdin,
the Company’s CEO and President who then owned 3,959,031 shares of common
stock), whereby the Related Stockholders agreed to assign Carr Miller all the
voting rights attributable to the 37,078,485 shares of common stock then held by
them for a period of 5 years. 1/5th of the
voting rights shall be released back to the Related Stockholders from Carr
Miller at the end of each year for a period of 5 years. The combination of the
shares assigned under this voting rights agreement and the shares issued or to
be issued under the GFA (See Global Financial Agreement section under Note 6)
gave Carr Miller control of the majority of the common stock of the
Company.
On
December 24, 2008, our Board of Directors authorized the increase in authorized
common stock of the Company from its existing 600,000,000 shares to
1,000,000,000 shares. Subsequently, stockholders representing 53.6% of the
Company’s outstanding common stock as of January 14, 2009 (the "Majority
Stockholders") executed a written consent to effect the increase in authorized
common stock. On January 20, 2009, the Company filed a Schedule 14C Definitive
Information Statement with the SEC (“Schedule 14C”). On March 30, 2009, the SEC
approved the Schedule 14C. On April 21, 2009, the Company filed its Certificate
of Amendment to its Article of Incorporation with the State of Nevada increasing
the total number of shares of common stock which the Company has the authority
to issue to 1,000,000,000 shares with a par value of $0.001 per
share.
On
January 12, 2009, the Company issued 384,811 shares of common stock to Gersten
Savage for legal services performed in 2008 valued at $0.06 per
share.
Shares
Issued Pursuant to Various Consulting Agreements
On
February 1, 2009, the Company entered into a consulting agreement with James T.
Dunn III (“Dunn”) to provide consulting services and support for the Company’s
business development, assist in development of the Company’s strategic marketing
and business plan and to handle other duties as assigned by Company’s
management. The term of this consulting agreement was for a one month
period commencing February 1, 2009. As compensation, a warrant to purchase
200,000 shares of the Company’s common stock was to be issued to Mr. Dunn. The
warrant will have an exercise price of $0.05 per share, vest immediately, and
expire in five years. The warrant was issued on March 13, 2009 and ascribed a
value of $10,000, using the Black-Scholes model, assuming a volatility of
248.55%, a risk-free rate of 1.875% and an expected dividend yield of zero,
resulting in consulting expense of $10,000 in the nine months ended September
30, 2009.
F-27
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On
February 1, 2009, the Company entered into a consulting agreement with Denny
Ramos (“Ramos”) to provide consulting services and support for the Company’s
business development, assist in development of the Company’s strategic marketing
and business plan and to handle other duties as assigned by Company’s
management. The term of this consulting agreement was for a one month
period commencing February 1, 2009. As compensation, a warrant to purchase
200,000 shares of the Company’s common stock was to be issued to Mr. Ramos. The
warrant will have an exercise price of $0.05 per share, vest immediately, and
expire in five years. The warrant was issued on March 13, 2009 and ascribed a
value of $10,000, using the Black-Scholes model, assuming a volatility of
248.55%, a risk-free rate of 1.875% and an expected dividend yield of zero,
resulting in consulting expense of $10,000 in the nine months ended September
30, 2009.
On May
15, 2009, the Company entered into a consulting agreement with Dr. Larry Stowe
(“Stowe”) to 1) assist in the Company’s interim fundraising efforts for the
Company’s drilling activities in the Dubois field in Indiana (“Wells”), 2)
develop a 45 day completion strategy to ensure the Company’s completion of the
Wells to full production capacity, 3) represent the Company’s interests in
discussions and negotiations with field personnel, and 4) provide direct
assistance in the execution of the completion strategy described above. As
compensation, Stowe will receive $5,000 by May 15, 2009 and $5,000 by May 22,
2009 for items 1 through 3 above; and $25,000 for the completion of item 4 above
subject to receipt of funding from any source for the completion of the Wells.
The term of this agreement is for 45 days commencing May 15, 2009. As of
November 5, 2009, Stowe has received an aggregate of $10,000 for items 1 through
3 above, and item 4 remains uncompleted.
NOTE
9 - COMMITMENTS AND CONTINGENCIES - NOT DISCLOSED ELSEWHERE
On May 6,
2009, Akerman Construction Co., Inc. (“Akerman”), a subcontractor of Epicenter,
filed a Mechanic’s Lien against Indigo and two other parties on the four wells
drilled by the subcontractor on the Dubois Field of Indiana (see Oil and Gas
Operations in Illinois Basin section under Note 5) for claims aggregating
$875,969, due to Epicenter’s failure to pay obligations for the drilling
costs. The Company has engaged counsel to resolve these lien claims,
which were still pending as of November 1, 2009.
In May
12, 2009, M&M Pump & Supply, Inc. (“M&M”), a subcontractor of
Epicenter, filed a Mechanic’s Lien against Indigo, Epicenter and four other
parties on the four wells drilled on the Dubois Field of Indiana (see Oil and
Gas Operations in Illinois Basin section under Note 5) for claims aggregating
$125,160, due to Epicenter’s failure to pay obligations for the drilling
costs. The Company has engaged counsel to resolve these lien claims,
which were still pending as of November 1, 2009.
F-28
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
On May 20, 2009, the Company entered into a Letter Agreement with Epicenter, Spectrum Facilitating Technologies, LLC (“Spectrum”), and Stowe (collectively the “Parties”). The Parties agreed that approximately $5,000,000 of additional funds are required to complete the four wells drilled on the Dubois Field of Indiana. The Parties further agreed that Spectrum shall arrange for funding in the amount of $5,000,000 which will be deposited into a bank account subject to the control and direction of Spectrum. The amount of funds drawn down from the said $5,000,000 will bear interest at the rate of 10% per annum. Interest will be paid annually with the first payment being due on or before one year from the date of first disbursement of any funds from said bank account, or upon repayment of the $5,000,000, whichever is first. The Parties further agreed that Indigo and Epicenter will form a new LLC which will have two managing members, Robert Turnage from Epicenter directing all well and field related operations and Stanley L. Teeple from Indigo directing all administrative and accounting functions. The new LLC will be owned 50% by Indigo and 50% by Epicenter. On May 27, 2009, Dubois Partners, LLC was formed according to this Letter Agreement. Once production from the four wells in the Dubois Field is confirmed by Spectrum, a second phase of funding will be secured by Spectrum, of which Indigo and Epicenter will each receive further funding to be used for each company’s respective projects. Epicenter will purchase all of Indigo’s interest in the Dubois Field for an amount to be mutually agreed upon. In addition, the Parties agreed that all future sales from production from the four Dubois wells will be deposited into Dubois Partners, LLC as working capital until the entire $5,000,000 funding is repaid or the dissolution of Dubois Partners, LLC.
On June
6, 2009, Dubois Partners, LLC entered into a service agreement to retain
Spectrum to perform facilitation and due diligence services to identify and
report on the validity of certain assets and business development plans of
Dubois Partners, LLC. The compensation of Spectrum by Dubois Partners, LLC has
not yet been determined.
On June
11, 2009, Dubois Partners, LLC entered into a Financing Agreement with Elite Dom
Establishment (“Elite”), a Registered Trader in Dubai, United Arab Emirates. The
agreement provides for a $5,000,000 short-term bridge loan (“Bridge Loan”) and
more significant long-term financing from Elite depending on the outcome of
ongoing due diligence efforts regarding Dubois Partners, LLC’s projects. The
Bridge Loan will bear interest at 10% per annum, and matures upon the closing of
the long-term financing. As collateral for the financing, all assets of Dubois
Partners, LLC will be pledged. In addition, Indigo and Epicenter will guarantee
the performance and repayment of all principal and interest of the Bridge Loan
to Elite. Elite’s obligations are dependent on Spectrum completing the due
diligence required for the Bridge Loan. On July 23, 2009,
Spectrum and Elite further requested that the Bridge Loan be personally
guaranteed by the principals of Dubois Partners, LLC. As of November
1, 2009, the Bridge Loan has not yet been funded by Elite.
On July
30, 2009, the Company entered into a Settlement Agreement (“Agreement”) with
Carr Miller, and Gersten Savage LLP (“GS”) as escrow agent, as required by the
Financing Agreement with Elite as described above. The parties acknowledged that
Carr Miller is the owner of an aggregate of 348,127,288 shares of the Company’s
common stock, options to purchase 5,250,000 shares of Indigo’s common stock
(“CMC Options”), and warrants to purchase 37,950,000 shares of Indigo’s common
stock (“CMC Warrants”). The parties further agreed that Indigo is indebted to
Carr Miller in the total amount of $7,209,508 plus accrued interest on 17
promissory notes of various amounts and dates (“CMC Notes”). The Agreement
provided that as part of the Financing Agreement, Indigo would be required to
settle all obligations with Carr Miller. The Agreement further provided that
270,127,288 of the shares owned by Carr Miller (“CMC Shares”), all of the CMC
Options, all of the CMC Warrants, all of the CMC Notes, and all stock powers
executed in blank (collectively “CMC Securities”) be held by GS as collateral
until CMC Notes are settled as described below. In exchange, Carr Miller will
receive $2,500,000 no later than August 15, 2009 which will be deducted from the
total amount owed pursuant to the CMC Notes, and no later than November 15,
2009, Carr Miller will receive an additional $7,500,000 which will be deemed to
satisfy the CMC Notes in full. It is intended that Elite will provide funding to
Indigo for these purposes. Upon Carr Miller’s receipt of the additional
$7,500,000, the CMC Securities will be cancelled. Until such payment is made,
Carr Miller will retain all of its ownership rights with respect to the CMC
Securities, except that it may not transfer any of such securities while they
are held in escrow. In the event that Carr Miller does not receive the balance
of $7,500,000 on or before November 1, 2009, 1) Indigo will cancel $2,500,000 of
the oldest of the CMC Notes and the remainder of the CMC Notes will remain in
full force and effect, and 2) GS will return the CMC Shares, the CMC Warrants,
and CMC Options that it will then be holding in escrow. In the event that Carr
Miller does not receive the $2,500,000 by August 16, 2009, this Agreement shall
be of no further force and effect. Also as part of the Agreement, Carr Miller
will be entitled to 10% of Indigo’s net revenue interest in the four wells
already drilled in the Dubois Field, Dubois County, Indiana. On
August 16, 2009, the Agreement was amended to extend the due date of repayment
for $2,500,000 to Carr Miller to August 21, 2009. As of November 1, 2009, the
Company has not received the funding from Elite and has not repaid the amounts
to Carr Miller.
F-29
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
NOTE
10 - SUBSEQUENT EVENTS NOT DISCLOSED ELSEWHERE
On
October 5, 2009, the Company terminated the services of L J Soldinger Associates
LLC as the Company’s Independent Certified Public Accountants. L J
Soldinger Associates LLC served as the Company’s Independent Certified Public
Accountants for each of the fiscal years ended December 31, 2006, 2007 and 2008,
and for the first and second quarters of 2009. The decision to terminate the
services of L J Soldinger Associates LLC was approved by the Audit Committee of
the Company’s Board of Directors.
During
the fiscal years ended December 31, 2008 and 2007, and the subsequent interim
periods through the date of L J Soldinger Associates LLC’s termination, (i)
there were no disagreements with L J Soldinger Associates LLC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement(s), if not resolved to the
satisfaction of L J Soldinger Associates LLC , would have caused it to make
reference to the subject matter of the disagreement(s) in connection with its
reports. The reports of L J Soldinger Associates LLC on the Company’s
consolidated financial statements as of and for the fiscal years ended December
31, 2008 and 2007 did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles, except for an explanatory paragraph indicating
substantial doubt about the Company’s ability to continue as a going concern in
the audit report for the fiscal years 2007 and 2008.
During
the Company’s two most recent fiscal years and through the effective date of
Mark Bailey & Company, Ltd.’s appointment, the Company did not have any
reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K
except that the accountants have advised the Company of numerous material
weaknesses in internal controls over financial reporting necessary for the
registrant to develop reliable financial statements.
The
Company provided L J Soldinger Associates LLC with a copy of the foregoing
disclosures and requested from L J Soldinger Associates LLC a letter addressed
to the U.S. Securities and Exchange Commission stating whether it agrees with
such statements, made by the Company in response to Item 304(a) of Regulation
S-K and, if not, stating the respects in which it does not agree. The letter
from L J Soldinger Associates LLC is filed herewith.
On
October 5, 2009, the Company engaged Mark Bailey & Company, Ltd. (“Mark
Bailey”) as the Company’s new independent accountants.
F-30
INDIGO-ENERGY,
INC.
Notes
to Unaudited Condensed Consolidated Financial Statements (cont’d)
During
the fiscal year ended December 31, 2008 and 2007, and the subsequent interim
periods through the date of Mark Bailey’s engagement, neither the Company, nor
anyone on its behalf, consulted Mark Bailey regarding (i) either the application
of accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the Company’s
financial statements, and neither a written report nor oral advice was provided
to the Company by Mark Bailey that it concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of
a “disagreement” (as defined in Item 304(a)(1)(iv) of Regulation S-K and the
related instructions) or a “reportable event” as defined in Item 304(a)(1)(v) of
Regulation S-K.
F–31
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
This
Form 10-Q includes “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. All statements other than statements of historical facts, included in this
Form 10-Q that address activities, events or developments that we expect or
anticipate will or may occur in the future, including such things as future
capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strength, goals,
expansion and growth of our business and operations, plans, references to future
success, reference to intentions as to future matters and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by us in light of our experience and our perception of
historical trends, current conditions and expected future developments as well
as other factors we believe are appropriate in the circumstances. However,
whether actual results and developments will conform to our expectations and
predictions is subject to a number of risks and uncertainties, and other
factors, many of which are beyond our control. Consequently, all of the
forward-looking statements made in this Form 10-Q are qualified by these
cautionary statements and we cannot assure you that the actual results or
developments anticipated by us will be realized or, even if realized, that they
will have the expected consequences to or effects on us, our business or
operations. We have no intention, and disclaim any obligation, to update or
revise any forward-looking statements, whether as a result of new information,
future results or otherwise. Unless otherwise indicated or the context otherwise
requires, all references to “Indigo,”” the” Company,” “we,” “us” or “our” and
similar terms refer to Indigo-Energy, Inc.
General
Indigo-Energy,
Inc. (the “Company” or “Indigo” or “We”) is an independent energy company
engaged primarily in the exploration of natural gas and oil in the Appalachian
Basin in Pennsylvania, West Virginia, and Kentucky. Additionally, the Company
began a drilling program with Epicenter Oil & Gas LLC in the DuBois field
near Jasper, Indiana, in the Illinois Basin for both oil and gas
prospects.
Indigo,
formerly known as Procare America, Inc. (“Procare”) was incorporated in
Minnesota on September 22, 1993 and in 1999 relocated its state domicile to
Nevada. At the date of recapitalization on December 15, 2005, Procare was a
public shell company, defined as an inactive, publicly quoted company with
nominal assets and liabilities.
On
December 15, 2005, pursuant to a stock exchange agreement between the Company
and the shareholders of Indigo Land and Development, Inc. (“ILD”), the Company
purchased all of the outstanding shares of ILD through the issuance of
49,100,000 shares of our common stock directly to the ILD shareholders. The
Company was the legal acquirer in the transaction. ILD was the accounting
acquirer since its stockholders acquired a majority interest in the Company. The
transaction was treated for accounting purposes as a recapitalization by the
accounting acquirer (ILD). Upon completion of the recapitalization, the Company
changed its name to Indigo-Energy, Inc.
Results
of Operations for the Nine Months Ended September 30, 2009 and September 30,
2008
We
incurred a net loss for the nine-month period ended September 30, 2009 in the
amount of $4,562,015 compared to a net loss of $13,986,885 for the nine-month
period ended September 30, 2008. The decrease in net loss of $9,424,870 was
primarily attributable to a $5,942,624 decrease in interest expense, a
$1,382,586 decrease in net loss on extinguishment of debt, a $833,219 decrease
in settlement expense, a $629,760 gain on sale of oil and gas interests, a
$400,000 decrease in failed transaction costs, and a $290,161 decrease in
general and administrative expenses, which were offset by a $246,823 decrease in
revenues.
2
Revenues
We
generated revenue in the amount of $166,010 for the nine-month period ended
September 30, 2009 compared to $412,833 for the nine-month period ended
September 30, 2008. The decrease of $246,823 in revenue was primarily due to
$95,025 of additional revenue included in the nine-month period ended September
30, 2008 that resulted from a Modification and Settlement Agreement with TAPO
Energy, LLC, a general decline in prices paid for oil and gas products, as well
as adjustments to previous production estimates.
General
and Administrative Expenses
General
and administrative expenses for the nine-month period ended September 30, 2009
were $3,541,194 compared to $3,831,355 for the nine-month period ended September
30, 2008. The decrease of $290,161 in general and administrative expenses was
primarily due to a decrease in share-based compensation expense in the amount of
$1,073,700 and a decrease in legal fees in the amount of $84,555, which was
offset by an increase in consulting expense in the amount of $789,188 and an
increase in salaries expense in the amount of $68,000. General and
administrative expenses of $3,541,194 for the nine-month period ended September
30, 2009 were primarily comprised of $2,444,293 of consulting fees, $510,782 of
accounting fees, $153,500 of salaries and $162,308 of legal fees.
Interest
Expense
Interest
expense for the nine-month period ended September 30, 2009 was $1,833,117
compared to $7,775,742 for the nine-month period ended September 30, 2008.
Interest expense for the nine-month period ended September 30, 2008 was
primarily comprised of $1,140,000 of interest related to drilling lease option
extensions, $6,419,386 of interest on various notes payable, including
amortization of discounts on the notes in the amount of $5,201,639, and $154,457
of interest related to the amortization of the beneficial conversion feature on
our Series 1 convertible notes.
Interest
expense incurred in the nine-month period ended September 30, 2009 primarily
consisted of $1,416,574 of interest on various notes payable, including
amortization of discounts on the notes in the amount of $595,868, and
$235,944 of interest related to the amortization of the additional liability for
conversion features on our short-term convertible notes.
Net Loss
on Extinguishment of Debt
We
incurred loss on extinguishment of debt from various modification and settlement
agreements related to our notes payable for the nine-month period ended
September 30, 2008 in the total amount of $1,263,086. The Company
recorded a gain on extinguishment of debt in the amount of $119,500 for the nine
months ending September 30, 2009.
Gain on
Sale of Oil and Gas Interest
For the
nine months ending September 30, 2009, the Company recorded a gain on sale of
oil and gas interests in the amount of $629,760.
3
Failed
Transaction Cost
We
incurred a failed transaction cost related to our loan agreement with BJ Petro,
Inc. for the nine-month period ended September 30, 2008 in the total amount of
$400,000.
Settlement
Expense
We
incurred settlement expense from our Global Settlement Agreement with all the
other partners of Indigo LP for the nine-month period ended September 30, 2008
in the amount of $833,219.
Pre-Acquisition
Income
For the
nine-month period ended September 30, 2008, we recorded a pre-acquisition income
of $44,135. This represented the 50% net income from Indigo LP for the
three-month period ended March 31, 2008, the date of the Global Settlement
Agreement we entered into with the other partners of Indigo LP, which was
allocated to those partners.
Results
of Operations for the Three Months Ended September 30, 2009 and September 30,
2008
We
incurred a net loss for the three-month period ended September 30, 2009 in the
amount of $458,256 compared to a net loss of $5,496,715 for the three-month
period ended September 30, 2008. The decrease in net loss of $5,038,460 was
primarily attributable to a $2,854,038 decrease in interest expense, a
$1,264,277 decrease in net loss on extinguishment of debt, a $629,760 gain on
sale of oil and gas interests, and a $400,000 decrease in failed transaction
costs, which were offset by a $98,216 increase in general and administrative
expenses and a $64,812 decrease in revenue.
Revenues
We
generated revenue in the amount of $56,434 for the three-month period ended
September 30, 2009 compared to $121,246 for the three-month period ended
September 30, 2008. The decrease of $64,812 in revenue was primarily due to a
general decline in prices paid for oil and gas products, as well as adjustments
to previous production estimates.
General
and Administrative Expenses
General
and administrative expenses for the three-month period ended September 30, 2009
were $500,273 compared to $402,057 for the three-month period ended September
30, 2008. The increase of $98,216 in general and administrative expenses was
primarily due to a increase in consulting expense in the amount of $28,641, an
increase in legal fees in the amount of $28,590, and an increase in accounting
fees of $28,156. General and administrative expenses of $500,273 for the
three-month period ended September 30, 2009 were primarily comprised
of $181,252 of accounting fees, $73,381 of legal fees, $73,000 of
consulting fees, and $62,500 of salaries expense.
Interest
Expense
Interest
expense for the three-month period ended September 30, 2009 was $610,841
compared to $3,407,766 for the three-month period ended September 30, 2008.
Interest expense for the three-month period ended September 30, 2008 was
primarily comprised of $310,000 of interest related to drilling lease option
extensions, $3,022,446 of interest on various notes payable, including
amortization of discounts on the notes in the amount of $2,601,881, and $55,749
of interest related to the amortization of the beneficial conversion feature on
our Series 1 convertible notes.
4
Interest
expense incurred in the three-month period ended September 30, 2009 primarily
consisted of $463,092 of interest on various notes payable, including
amortization of discounts on the notes in the amount of $205,459, and
$83,174 of interest related to the amortization of the additional liability for
conversion features on our Series 1 convertible notes.
Net Loss
on Extinguishment of Debt
We
incurred loss on extinguishment of debt from various modification and settlement
agreements related to our notes payable for the nine-month period ended
September 30, 2008 in the total amount of $1,264,277.
Gain on
Sale of Oil and Gas Interest
For the
nine months ending September 30, 2009, the Company recorded a gain on sale of
oil and gas interests in the amount of $629,760.
Failed
Transaction Cost
We
incurred a failed transaction cost related to our loan agreement with BJ Petro,
Inc. for the nine-month period ended September 30, 2008 in the total amount of
$400,000.
Liquidity
and Capital Resources
Since our
inception, we have funded our operations primarily through private sales of our
common stock and the issuance of promissory notes. As of September 30, 2009, we
had a cash balance of $0.
We
require a minimum of approximately $6,000,000 for the next 12 months, which
includes approximately $620,000 to pay for our outstanding professional fees,
$1,700,000 to pay for the outstanding drilling costs to various drillers,
$600,000 to the other former partners of Indigo LP as a result of the settlement
agreement, $1,800,000 to pay our note payable obligation as well as $1,280,000
of accrued interest and fund other operating costs. We need
cash immediately, as we have no cash at the current time. In addition
to the minimum amount required, the Company expects to spend an additional
$4,600,000 for lease acquisition and drilling activities. The amount we
anticipate for our exploration and drilling needs is subject to wide
fluctuations, as to date, we have been unable to accurately budget for our
drilling and exploration costs and have encountered significant budget overruns
in our current drilling program. Moreover, in the event we locate
additional prospects for acquisition, experience cost overruns at our current
prospects or fail to generate projected revenues, we will also need additional
funds during the next twelve months. We currently do not have sufficient funds
to sustain our current operations, pay our debts and other liabilities, and
operate at our current levels for the next twelve months. Accordingly, we need
to immediately raise additional funds through the sale of our securities or
other fundraising means. We plan to raise funds from private
offerings of our equity and debt securities in order to fund our operations
through September 30, 2010. In July 2009, we also sold certain oil
and gas interests for a $630,000. Further, as of the date of this
filing, we have a financing agreement with Elite Don Establishment, a Registered
Trader in Dubai, United Arab Emirates (“Elite”) relative to a $5,000,000 short
term bridge loan and potentially a more significant long-term
financing. Such long-term financing is dependent on on-going due
diligence efforts regarding the projects of Dubois Partners, LLC. As
of November 1, 2009, Elite has not provided any funding under this agreement and
the Company has not entered into any other agreements with any party relating to
the sale of its debt or equity securities which will provide it with the funding
necessary for the Company.
5
Our
ability to continue as a going concern is dependent upon us raising additional
financing on terms desirable to us. If we are unable to obtain additional funds
when required, or if the any financing is obtained on terms that are unfavorable
to us, management may be required to delay, scale back or eliminate its well
development program or even be required to relinquish its interest in one or
more properties or in the extreme situation, cease operations.
Critical
Accounting Policies and Estimates
The
accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”) and have been presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. These accounting principles
require management to use estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements, and revenues and expenses during the reporting period. Management
reviews its estimates, including those related to the determination of proved
reserves, estimates of future dismantlement costs, estimates of
future cash flows in valuing oil and gas proprieties, estimates of average
expected life and annual forfeitures of stock options and warrants, estimates of
fair market value of debt used in evaluating whether the accounting for debt
modifications should be accounted for as a troubled debt restructuring (“TDR”)
or as an extinguishment or modification of debt, estimates for the liability for
variable conversion features on its convertible debenture, income taxes and
litigation. Actual results could differ from those estimates.
Our most
critical accounting policy is as follows:
We
account for oil and gas properties and interests under the full cost method.
Under the full cost method, all acquisition, exploration and development costs
incurred for the purpose of finding oil and gas are capitalized and accumulated
in pools on a country—by—country basis. We only are concentrating our
exploration activities in the United States and therefore we will utilize a
single cost center.
Capitalized
costs will include the cost of drilling and equipping productive wells,
including the estimated costs of dismantling and abandoning these assets, dry
hole costs, lease acquisition costs, seismic and other geological and
geophysical costs, delay rentals and costs related to such activities. Employee
costs associated with production and other operating activities and general
corporate activities are expensed in the period incurred.
The costs
of investments in unproved properties and portions of costs associated with
major development projects are excluded from the depreciation, depletion and
amortization (“DD&A”) calculation until the project is
evaluated.
Unproved
property costs include the costs associated with unevaluated properties and are
not included in the full cost amortization base (where proved reserves exist)
until the project is evaluated. These costs include unproved leasehold acreage,
seismic data, wells in progress and wells pending determination, together with
interest costs capitalized for these projects. Significant unproved properties
are assessed periodically, but not less than annually, for possible impairment
or reduction in value. If a reduction in value has occurred, these property
costs are considered impaired and are transferred to the related full cost
pool.
In
situations where the existence of proved reserves has not yet been determined,
unevaluated property costs remain capitalized in unproved property cost centers
until proved reserves have been established, exploration activities cease or
impairment and reduction in value occurs.
6
Impairment
of unproved properties is based on factors such as the existence of events that
may serve to impair the properties such as failure of a well, expiration of
leases and comparison of carrying value of oil and gas properties with their
fair market value at the end of the reporting period.
In
evaluating the accounting for the debt modifications and exchanges, management
was required to make a determination as to whether the debt modifications and
exchanges should be accounted for as a troubled debt restructuring (“TDR”) or as
an extinguishment or modification of debt. In concluding on the accounting,
management evaluated SFAS 15, Accounting by Creditors and Debtors in Troubled
Debt Restructurings, EITF 02-4, Determining Whether a Debtor’s
Modification or Exchange of Debt Instruments is within the Scope of FASB
Statement No. 15 (“EITF 02-4”), EITF 96-19, Debtor’s Accounting for a
Modification or Exchange of Debt Instruments (“EITF 96-19”), and EITF
06-6, Debtor’s Accounting for a Modification or Exchange of Convertible Debt
Instruments (“EITF 06-6”). The relevant accounting guidance required us to
determine first whether the exchanges of debt instruments should be accounted
for as a TDR. A TDR results when it is determined, evaluating six factors
described in EITF 02-4 considered to be indictors of whether a debtor is
experiencing financial difficulties, that the debtor is experiencing financial
difficulties, and the creditors grant a concession; otherwise, such exchanges
should be accounted for as an extinguishment or modification of debt. The
assessment of this critical accounting estimate required management to apply a
significant amount of judgment in evaluating the inputs, estimates, and
internally generated forecast information to conclude on the accounting for the
modifications and exchanges of debt.
If
modification was not considered a TDR then Company evaluated EITF 96-19 or EITF
06-6 to determine if the debt modification constituted a material modification,
in which case the debt modification would be accounted for as the extinguishment
of the original debt and the creation of new debt, resulting in the recognition
of a gain or loss on the extinguishment of debt. If it was determined that the
debt modification was not a material modification, then there is no recognition
of gain or loss on the extinguishment of debt, and the carrying amount of the
debt is adjusted for any premium or discount that is amortized over the
modification period.
Off
Balance Sheet Reports
The
Company had no off balance sheet transactions during the quarter ended September
30, 2009.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS.
|
There
have been no significant changes in our market risks since the year ended
December 31, 2008. For more information, please read the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2008 filed on May 14, 2009.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer have carried out an evaluation of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act) as of September 30, 2009.
7
Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) are not effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms and to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Material
Weaknesses
In our
Form 10-K for the fiscal year ended December 31, 2008 under Item 9-A- Controls
and Procedures, we identified material weaknesses in our system of internal
control over financial reporting. A material weakness is defined as a
deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
Changes in Internal Control
over Financial Reporting
There
were no significant changes in our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting in the fiscal quarter ending
September 30, 2009.
We are
committed to improving our financial organization. As part of this commitment,
we intend to create a position to segregate duties consistent with control
objectives and will increase our personnel resources and technical accounting
expertise within the accounting function when funds are available to us by
preparing and implementing sufficient written policies and checklists which will
set forth procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure
requirements.
Other
We intend
to become compliant in implementing added internal controls, document present
procedures and hire a consultant to assure compliance with new self-assurance
requirements. We expect to hire additional accounting staff which will provide
for the segregation of duties necessary for a strong system of internal
control.
8
PART
II OTHER
INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
On May 6,
2009, Akerman Construction Co., Inc., (“Akerman”) a subcontractor of Epicenter,
filed a Mechanic’s Lien against Indigo and two other parties on the four wells
drilled by it on the Dubois Field of Indiana (the “Wells”) for claims
aggregating $875,969. Such claim was predicated on Epicenter’s
failure to pay obligations for the drilling costs.
On July
30, 2009, Akerman filed a Complaint against the Company for Breach of Contract
and to Foreclose Mechanic’s Lien. On September 14, 2009, Akerman
filed a Motion for Leave to Amend its complaint seeking judgment against the
defendants, jointly and severally, in the sum of $875,969.49, plus interest
thereon as well as reasonable attorney’s fees and costs of
action. The complaint further seeks an order foreclosing the
plaintiff’s mechanic’s lien on the Wells and an order for the sale of the
defendant’s interest in the wells, the improvements thereon and the defendant’s
leasehold mineral interest therein to satisfy the amounts allegedly owing and
due to Akerman. Such Motion for Leave to Amend the complaint was
granted on September 14, 2009.
The
Company has engaged counsel to resolve the above claims, which were still
pending as of November 12, 2009.
In May
12, 2009, M&M Pump & Supply, Inc., a subcontractor of Epicenter, filed a
Mechanic’s Lien against Indigo, Epicenter and four other parties on the four
wells drilled on the Dubois Field of Indiana for claims aggregating
$125,160. Such claim was predicated on Epicenter’s failure to pay
obligations for the drilling costs. The Company has engaged counsel
to resolve these lien claims, which were still pending as of November 12,
2009.
Our
address for service of process in Nevada is 2857 Sumter Valley Dr., Henderson,
NV 89052.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
|
In July
2009, the Company issued 750,000 shares of common stock as part of the
consideration for promissory notes issued by the Company in the amount of
$75,000.
In July
2009, the Company issued 150,000 shares of common stock for promissory note
extensions.
In July
2009, the Company issued 1,980,000 shares of common stock for promissory note
penalties.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
As of
November 1, 2009, the Company is in default of the following senior
securities:
Name of Debtor
|
Type of Obligation
|
Principal
Amount
|
Amount Outstanding
As of November 1,
2009
|
|||||||
Convertible
Note - Series 1
|
||||||||||
James
Walgreen
|
Promissory
Note
|
$ | 300,000 | $ | 346,042 | |||||
Convertible
Note - Series 2
|
||||||||||
Carrie
Jean Doine
|
Promissory
Note
|
$ | 50,000 | $ | 78,982 | |||||
Jerry
Braatz, Sr.
|
Promissory
Note
|
$ | 75,000 | $ | 118,089 | |||||
Series
of Notes Payable
|
||||||||||
Kirsten
Braatz
|
Settlement
Agr.
|
$ | 200,000 | $ | 200,000 | |||||
James
T. Dunn III
|
Settlement
Agr.
|
$ | 100,000 | $ | 110,000 | |||||
Other
Promissory Notes
|
||||||||||
Lonnie
Somora
|
Promissory
Note
|
$ | 50,000 | $ | 77,576 | |||||
Antoinette
Davis
|
Promissory
Note
|
$ | 25,000 | $ | 23,774 | |||||
Robert
Rosania
|
Promissory
Note
|
$ | 25,000 | $ | 33,589 | |||||
Raymond
& Gerri Garonski
|
Promissory
Note
|
$ | 40,000 | $ | 61,622 | |||||
Long-Term
Notes Payable
|
||||||||||
Carr
Miller Capital, LLC
|
Promissory
Note
|
$ | 1,080,000 | $ | 1,105,406 |
9
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM
5.
|
OTHER
INFORMATION
|
None
ITEM
6.
|
EXHIBITS
|
Exhibit
No.
|
Identification of Exhibit
|
|
3.1
|
Articles
of Incorporation*
|
|
3.2
|
By-Laws*
|
|
10.1
|
Amended
Purchase and Sale Agreement between Indigo-Energy, Inc. and BlueStone
Energy Partners dated July 16, 2009*
|
|
10.2
|
Promissory
Note in favor of Carr Miller Capital, LLC dated July 16,
2009
|
|
10.3
|
Promissory
Note in favor of Janelle M. Anderson dated July 10,
2009
|
|
10.4
|
Amended
Promissory Note, dated July 17, 2009
|
|
10.5
|
Promissory
Note in favor of Carr Miller Capital dated July 28,
2009
|
|
10.6
|
Settlement
Agreement between Indigo-Energy, Inc. and Carr Miller Capital, LLC dated
July 29, 2009
|
|
10.7
|
Extension
Agreement between Indigo-Energy, Inc. and Carr Miller Capital, LLC dated
August 16, 2009
|
|
31.1
|
Sarbanes
Oxley Section 302 Certification
|
|
31.2
|
Sarbanes
Oxley Section 302 Certification
|
|
32.1
|
Sarbanes
Oxley Section 906 Certification
|
|
32.2
|
|
Sarbanes
Oxley Section 906
Certification
|
*
Previously
filed
10
SIGNATURE
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
INDIGO-ENERGY,
INC.
|
||
By:
|
/s/ Steven P. Durdin
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|
Steven
P. Durdin
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||
President
and Chief Executive Officer
|
Date:
November 20, 2009
11
Exhibit
Index
Exhibit
No.
|
Identification of Exhibit
|
|
3.1
|
Articles
of Incorporation*
|
|
3.2
|
By-Laws*
|
|
10.1
|
Amended
Purchase and Sale Agreement between Indigo-Energy, Inc. and BlueStone
Energy Partners dated July 16, 2009*
|
|
10.2
|
Promissory
Note in favor of Carr Miller Capital, LLC dated July 16,
2009
|
|
10.3
|
Promissory
Note in favor of Janelle M. Anderson dated July 10,
2009
|
|
10.4
|
Amended
Promissory Note, dated July 17, 2009
|
|
10.5
|
Promissory
Note in favor of Carr Miller Capital dated July 28,
2009
|
|
10.6
|
Settlement
Agreement between Indigo-Energy, Inc. and Carr Miller Capital, LLC dated
July 28, 2009
|
|
10.7
|
Extension
Agreement between Indigo-Energy, Inc. and Carr Miller Capital, LLC dated
August 16, 2009
|
|
31.1
|
Sarbanes
Oxley Section 302 Certification
|
|
31.2
|
Sarbanes
Oxley Section 302 Certification
|
|
32.1
|
Sarbanes
Oxley Section 906 Certification
|
|
32.2
|
Sarbanes
Oxley Section 906
Certification
|
*
Previously filed