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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
 
 
Steven P. Durdin
 
 
President and Chief Executive Officer
 

Date: November 20, 2009

 
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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