Attached files
file | filename |
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EX-10.2 - ZONZIA MEDIA, INC. | v180981_ex10-2.htm |
EX-31.1 - ZONZIA MEDIA, INC. | v180981_ex31-1.htm |
EX-10.7 - ZONZIA MEDIA, INC. | v180981_ex10-7.htm |
EX-10.6 - ZONZIA MEDIA, INC. | v180981_ex10-6.htm |
EX-32.2 - ZONZIA MEDIA, INC. | v180981_ex32-2.htm |
EX-32.1 - ZONZIA MEDIA, INC. | v180981_ex32-1.htm |
EX-10.5 - ZONZIA MEDIA, INC. | v180981_ex10-5.htm |
EX-10.8 - ZONZIA MEDIA, INC. | v180981_ex10-8.htm |
EX-31.2 - ZONZIA MEDIA, INC. | v180981_ex31-2.htm |
EX-10.3 - ZONZIA MEDIA, INC. | v180981_ex10-3.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2009.
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ______________
TO________________.
|
INDIGO-ENERGY,
INC.
(Name of
small business issuer 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)
Securities
registered under Section 12(b) of the Exchange Act: NONE
Securities
registered under Section 12(g) of the Exchange Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes þ No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes
þ No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. 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 preceeding 12 months (or such shorter period that the
registrant was required to submit and post such files) o Yes þ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
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
definition 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
¨
|
Smaller
reporting Company
þ
|
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule
12b-2 of the Act).
oYes þ
No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of December 31, 2009, based on the closing price of the
Over-The-Counter Bulletin Board of $0.02 per share was
$7,031,776.22.
Number of
shares outstanding of the registrant’s common stock, $0.001 par value,
outstanding on April 13, 2010: 828,861,382.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING
THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes
o No o
;
Documents
Incorporated by Reference: NONE
INDIGO-ENERGY,
INC
INDEX
Page
|
||
PART
I
|
||
ITEM 1.
|
DESCRIPTION
OF BUSINESS
|
1
|
ITEM 2.
|
DESCRIPTION
OF PROPERTY
|
8
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
10
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
10
|
PART
II
|
||
ITEM 5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
10
|
ITEM 6. |
SELECTED
FINANCIAL DATA
|
12
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|
12
|
ITEM 8.
|
FINANCIAL
STATEMENTS
|
17
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
|
18
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ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
18
|
ITEM 9B.
|
OTHER
INFORMATION
|
22
|
ITEM
10.
|
DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS AND GOVERNANCE CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16 (a) OF THE
EXCHANGE
|
22
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
25
|
ITEM
12.
|
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
27
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPEND
|
28
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
32
|
ITEM 15.
|
EXHIBITS
|
33
|
SIGNATURE
|
i
PART
I
ITEM 1. DESCRIPTION OF
BUSINESS
Background
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, 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.
Business
Indigo-Energy
Inc. is an independent energy company engaged in the exploration of natural gas
and oil. Our strategy is to profitably grow reserves and production, primarily
through acquiring oil and gas leasehold interests and participating in or
actively conducting drilling operations in order to exploit those
interests.
Appalachian
Basin Gas Operations
We sold
mineral rights (excluding coal) in Greene County, Pennsylvania and Monogalia
County, West Virginia, respectively, in July 2009 (See Program #1 below) as
follows: 100% interest in 420 acres, one-third interests in 13 acres, one-sixth
interest in 68 acres, and various percentages in an additional 56 acres
(collectively the “Indigo Property”). We do not own the surface land in
these areas. These natural resources are available via subsurface drilling and
recovery techniques. We drilled twenty-four (24) gas wells located in this area,
twenty-one (21) of which were drilled through four turnkey drilling programs
with four (4) respective operators (see status below). To quantify the potential
for recoverable reserves of natural gas, oil and coal bed methane, we
commissioned four independent geological and engineering studies of the Indigo
Property.
Wells
Operated Through Drilling and Operating Agreements
The
Company operates 16 of its wells through the following Drilling and Operating
Agreements:
1.
|
Drilling
and Operating Agreement between Indigo and TAPO Energy, LLC (“TAPO”)
(“Program #1”) – 5 well program, all of which have been completed and are
producing.
|
1
2.
|
Drilling
and Operating Agreement between Indigo and Dannic Energy Corp. (“Dannic”)
(“Program #2”)– 5 well program, all of which have been completed and are
producing.
|
|
3
|
Drilling
and Operating Agreement between Indigo and Mid-East Oil Company
(“Mid-East”) (“Program #3”) – 6 well program, all of which have been
completed and are
producing.
|
Pursuant
to the Drilling and Operating Agreements Indigo entered into, the operators were
responsible for drilling, completing, and operating the wells.
Program #1 - Drilling and Operating Agreement
between Indigo and
TAPO – 5 well
program
Under the
Drilling and Operating Agreement between Indigo and TAPO the Company has an
87.5% working interest in five wells. The operating agreement also provides for an overriding
royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced
from the wells drilled by TAPO. This overriding royalty interest is in addition
to the customary 12.5% royalty interest due to the landowner. All five wells are
currently producing and determined to be proved properties as of December 31,
2009.
On April
2, 2008, the Company entered into a Modification and Settlement Agreement with
TAPO to settle its obligation due to TAPO in the amount of $671,598. Under the
terms of the settlement agreement, the Company assigned all of its rights to
receive revenue from the five wells for a period equal to the later of 48 months
(commencing January 2008) or until the obligation to TAPO has been satisfied
(“the Assignment Period”). Upon expiration of the Assignment Period, all rights
assigned to TAPO will automatically revert back to the Company and a new carried
interest in the five wells will be assigned to the Company.
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 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. 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.
Program #2 - Drilling and Operating Agreement
between Indigo and Dannic – 5 well program
Under the
Drilling and Operating Agreement between Indigo and Dannic the Company has a 60%
working interest in the five wells. The operating agreement also provides for an overriding
royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced
from the wells drilled by Dannic. This overriding royalty interest is in
addition to the customary 12.5% royalty interest due to the landowner. All
five wells are currently producing and determined to be proved properties as of
December 31, 2009.
2
On
December 30, 2008, The Company entered into a Continuation Agreement with Dannic
to settle its obligation in the amount of $381,824 to Dannic. Under the terms of
the settlement agreement, Dannic 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, Dannic 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, Dannic formally
recorded the assignment of the 27% interest in the wells. Dannic also
agreed to distribute to Indigo its proportionate share of monthly revenue within
30 days of its receipt of the production checks.
Program #3 - Drilling and Operating Agreement
between Indigo and Mid-East – 6 well program
Under the
Drilling and Operating Agreement between Indigo and Mid-East the Company has a
75% working interest in the six wells. The operating agreement also provides for an overriding
royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced
from the wells drilled by Mid-East. This overriding royalty interest is in
addition to the customary 12.5% royalty interest due to the landowner. All
six wells are currently producing and determined to be proved properties as of
December 31, 2009.
Revenue
earned by the Company in the year 2009 under the Programs 1- 3 above have been
minimal. The industry is subject to weather, pricing volatility
(including for overseas production) and industrial demand. The
Company’s wells are a small number of “feeder” wells to a vast pipeline network,
and when the wholesale gas buyer reduces demand, they may “shut-in” excess
production and only accept gas that meets their demands. Small
companies, such as the Company, have no leverage when competing with larger
companies to become a part of the producing wells and often are “shut in” for a
period of time on any number of wells.
Drilling
Agreement with P& J Resources, Inc. (“P&J”)
Under a
Drilling and Operating Agreement between Indigo and P&J the Company planned
on having a 75% working interest in the five wells operated by P&J. The
operating agreement also provides for an overriding
royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced
from the wells drilled by P&J. This overriding royalty interest is in
addition to the customary 12.5% royalty interest due to the
landowner.
All five
wells have been drilled but have not been completed as of December 31,
2009. Management has been unable to obtain a reasonable explanation
from P&J as to why these wells have not been completed since they were
spudded in early 2007. Management intends to seek legal actions against P&J
to recoup the money Indigo has invested in these wells, or, alternatively, to
endeavor to bring such wells into production. The Company has
retained counsel to initiate such legal action against P&J.
The
Company’s Wells
The
Company operates three of its own wells. All three wells are currently
producing and determined to be proved properties as of December 31,
2009. Well #1 generates 5% of production, well #2 generates 13% and
well #3 generates approximately 82% of total production of the wells that the
Company operates.
3
Illinois
Basin Gas Operations
In
November 2008, the Company commenced its drilling program with Epicenter Oil and
Gas, LLC (“Epicenter”) in the DuBois Field located in the Illinois Basin in
southern Indiana. The drilling of the initial two wells was funded through the
Global Financing Agreement (“GFA”) by Carr Miller Capital, LLC (“Carr Miller”)
which provided for an amount of $1,000,000 to be used exclusively for the
Company’s drilling activities. On December 30, 2008 the Company received funding
separate from the GFA from Carr Miller to begin drilling a third well in the
DuBois field, which well is, adjacent to, but separate and distinct from the two
wells drilled by the Company that were provided for in the
GFA.
On March
26, 2009, the Company entered into an 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 four wells, specifically,
two horizontal gas wells, joined through one vertical Hub gas well, and one
vertical oil well, 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.
On April
3, 2009, the Company announced that the above four wells have been
completed. These four wells consist of two horizontal spokes joining
a third vertical hub for natural gas production and a vertical oil
well.
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, and has
been 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. As of May 7, 2009, Epicenter’s assignment of the 75%
working interest to the Company has been recorded in the appropriate public
records of Dubois County, Indiana.
On
May 11, 2009, the Company received a Sworn Statement of Intention to Hold Lien
filed on behalf of Akerman Construction Co., Inc. against the Company and other
third parties indicating that Akerman Construction Co., Inc. intends to hold a
lien on the land, well and well improvements, casing, and mineral interests in,
on and under certain real estate located in the Dubois County, State of Indiana,
as well as on all buildings, structures and improvements located
thereon. A pre-trial conference relating to the Hold Lien filed by
Akerman Construction Co., Inc. is set for April 23, 2010.
In
February 2010, the Company completed the installation of a well pump system for
its three natural gas wells and one oil well located in the Illinois Basin. The
main system, which is driven by a progressive cavity pump was installed in the
HUB or “collector” vertical natural gas well which will be the production point
for all three gas wells that were drilled in 2009. A pump was also
installed in the horizontal oil well which the Company also drilled in 2009 with
the help of its operating partners in the Illinois Basin.
In March
2010, the Company completed a series of required tests on a 5,800 foot
transmission line regulated by the state utilities commission. This pipeline is
part of the processing and transportation system which will be utilized to
deliver natural gas from the wells recently completed by the Company and its
operating partners in the Illinois Basin drilling project. The high pressure
test along with detailed inspections, were conducted on the transmission line
that connects the field’s natural gas processing plant and the interstate
pipeline. The testing process was concluded on March 2, 2010 and recommended
mechanical adjustments highlighted during the inspection process were completed
in the field on March 3, 2010.
4
On March
15, 2010, the Company entered into a Memorandum of Understanding with Epicenter
and Reef, LLC whereby the Company undertook to provide funding in the maximum
amount of $350,000 for completion efforts required to bring the four wells into
production. It was further agreed that working interest revenue from
the wells, net of operational requirements, will be used, first, to pay certain
outstanding obligations the amount of $1,600,000 due to contractors and
subcontractors engaged to complete the four wells. Such outstanding
amounts shall be paid prior to any working interest revenue being distributed to
the parties to the Memorandum of Understanding.
The
parties further agreed that Epicenter would be the operator of the four wells
and that any costs incurred in the normal day-to-day operations shall be
incurred at Epicenter’s sole discretion, while any unusual operational costs
shall be subject to mutual consent. Reef, LLC is the leaseholder of
the drilling rights on the property. Robert Turnage is a managing
member of Reef, LLC and is a minority interest owner of Reef,
LLC. Mr. Turnage is also an officer and director of
Epicenter.
Operation
of Producing Wells
Once a
well drilled by an Operator is completed, the Operator supervises field
operations of producing wells on the premises pursuant to the Drilling and
Operating Agreement. The Drilling and Operating Agreement provides that the
Operator is required to operate the wells as a reasonable operator in a good and
workmanlike manner, in accordance with gas industry standards.
The
Operators generally receive a monthly operating fee of $300 for each producing
well, $100 for any “shut in” well. No fee shall be paid to the
operator for any “dry” well. The operating fee covers all normal and regularly
recurring operating expenses for the production, delivery and sale of gas, such
as well tender, routine maintenance and adjustment, reading meters, recording
production, pumping, maintaining appropriate books and records, preparing
reports to the Company and to government agencies and collecting and disbursing
revenues. The operating fee does not include costs and expenses related to the
production and sale of oil (for natural gas wells only), purchase of equipment,
materials or third party services, brine collection and disposal, compression
and dehydration of natural gas, meter repair and calibration, extraordinary
repairs and rebuilding of access roads, all of which will be billed at the
invoice cost of materials purchased or third party services performed together
with a reasonable charge by the Operator for services performed directly by
it.
Liquidity
The
Company has incurred losses since its inception and is delinquent on many of its
obligations to its creditors. The Company’s current liabilities exceed its
current assets. The Company has been borrowing money and has assigned certain
net revenue interest 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 is no assurance the
Company will receive funding necessary to implement its business plan. This
raises 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 order to fund its operations through December 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.
5
The
Company has been able to continue operations to date through the funding
provided by Carr Miller Capital, LLC (“Carr Miller”). Under a Global
Financing Agreement (the “GFA”), Carr Miller loaned $1,000,000 to the Company to
be used exclusively for the Company’s drilling activities. In addition, under
terms and conditions set forth in the GFA, additional funding in the amount of
$500,000 was to be provided to the Company each month for a period of six
months. This funding is to be utilized to meet the Company’s drilling objectives
of a minimum of one new well to be drilled each month.
On
December 30, 2008 the Company received additional funding separate from the GFA
from Carr Miller to begin drilling a third and fourth well in the DuBois field,
which well is, adjacent to, but separate and distinct from the two wells drilled
by the Company that were provided for in the GFA.
To date,
an amount of $1,500,000 is still due to the Company from Carr Miller pursuant to
the terms of the GFA. On February 23, 2010, the Company and Carr
Miller entered into a Global Financing Extension Agreement pursuant to which the
parties agreed that the GFA shall be extended until June 30,
2010. The agreement further provided on or before June 30, 2010, Carr
Miller shall have the option to (i) provide the Company with the $1,500,000 loan
remaining under the terms of the GFA; (ii) return to the Company for
cancellation an aggregate of 15,000,000 shares of the Company’s common stock
currently registered in the name of Carr Miller; or (iii) cancel and forgive
certain debts owed by the Company to Carr Miller in the aggregate amount of
$1,500,000.
The
Company’s ability to continue as a going concern is dependent upon the Company
earning sufficient revenue and raising additional financing on terms desirable
to the Company. If the Company is unable to earn revenues sufficient to sustain
its operations or 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.
Our
Principal Drilling Locations
Our
principal drilling locations are in the States of Pennsylvania and West
Virginia. In addition, we have drilling locations in Kentucky, where
the P&J wells are located. We also conduct drilling operations in
the Dubois Field in Jasper, Indiana.
Geographic
Markets
Our
primary geographic market is the United States.
Competition
The
industry in which the Company is engaged in is intensely competitive and it
competes with other companies that are significantly larger and have greater
resources. Many of these companies explore for and produce oil and natural gas
and also carry on refining operations and market petroleum and other products on
a regional, national or worldwide basis. These companies may have a greater
ability to continue exploration activities during periods wherein prices for oil
and natural gas are low. Moreover, our larger competitors may be able to better
absorb the burden of present and future federal, state, local and other laws and
regulations which would adversely affect our competitive position.
6
Price
Fluctuation
The price
of gas has been subject to high fluctuation. Gas prices have
decreased substantially in the past twelve months and no assurance can be given
that such prices will increase, whether incrementally or significantly, in the
near future. As such, the Company cannot give assurance that its
existing projects will prove to be economically feasible or
profitable.
Government
Regulation
The
Company’s operations are affected by various governmental laws and regulations
relating to the Company’s drilling activity which may require the Company to
make significant capital expenditures to comply with governmental laws and
regulations. Failure to comply with these laws and regulations may result in the
suspension or termination of our operations and subject us to administrative,
civil and criminal penalties.
Marketing
Wells
located in our oil and gas-drilling prospects that are successfully completed
are anticipated to produce oil and natural gas. The purchase price for the
produced hydrocarbon is expected to be what is then being paid in the area of
the prospects for similar hydrocarbons, which is dependent upon conditions over
which the Company has no control. The Company cannot assure that a purchaser
will pay such price, or that there will be an available purchaser.
After the
Company pays its drillers amounts it owes them for drilling the wells, the
Company may be able to sell a portion of its gas production on the so-called
“spot market” by effecting sales of its natural gas directly to public utilities
or other purchasers or through intermediaries. Although the terms of such sales
contracts vary considerably, they typically are made on a shorter-term basis
depending upon prevailing market conditions and may offer the possibility of
obtaining a somewhat higher sales price. However, there is no assurance that the
Company will be able to negotiate any such short-term sales
contracts.
In order
to market production from the wells, the Company must have access to pipeline
transmission lines in proximity to the wells and may be required to pay
transportation charges to the Operators for transmitting gas through
transportation pipelines in certain geographic areas. Each Operator may charge
its normal and customary fee for such transportation.
The
U.S. Market
Cost
of Compliance with Environmental Laws
Dismantlement,
Restoration and Environmental Costs
The
Company recognizes transition amounts for asset retirement obligations, asset
retirement costs and accumulated depreciation. A liability is recognized for
retirement obligations associated with tangible long-lived assets, such as
producing well sites. The obligations are those for which a company faces a
legal obligation. The initial measurement of the asset retirement obligation is
to record a separate liability at its fair value with an offsetting asset
retirement cost recorded as an increase to the related property and equipment on
the consolidated balance sheet. The asset retirement cost will be amortized
using a systematic and rational method similar to that used for the associated
property and equipment upon the establishment of proven reserves for the
respective wells. As of December 31, 2009, the Company’s liability
for retirement obligations was $290,580, representing the obligation for wells
completed as of the balance sheet date.
7
Retirement
obligations consist of the following as of December 31:
2009
|
2008
|
|||||||
Balance
as of January 1
|
$
|
227,800
|
$
|
208,000
|
||||
Cumulative
effect of change in accounting principle
|
–
|
|||||||
Additional
liabilities incurred
|
40,000
|
–
|
||||||
Liabilities
settled
|
–
|
|||||||
Accretion
expense
|
22,780
|
19,800
|
||||||
Revision
of estimates
|
–
|
|||||||
Balance
as of December 31
|
$
|
290,580
|
$
|
227,800
|
The gas
and oil business involves a variety of operating risks, including the risk of
fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and
environmental hazards such as oil spills, gas leaks, ruptures or discharges of
toxic gases, the occurrence of any of which could result in substantial losses
to the Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and
suspension of operations. In projects in which the Company is not the operator,
but in which it owns a non-operating interest directly or owns an equity
interest in a limited partnership or limited liability company that owns a
non-operating interest, the operator for the prospect maintains insurance to
cover its operations.
There can
be no assurance that insurance, if any, will be adequate to cover any losses or
exposure to liability. Although the Company believes that the policies obtained
by operators provide coverage in scope and in amounts customary in the industry,
they do not provide complete coverage against all operating risks. An uninsured
or partially insured claim, if successful and of significant magnitude, could
have a material adverse effect on the Company and its financial condition via
its contractual liability to the prospect.
Employees
As of
December 31, 2009, we had one (1) employee.
Reports
to Security Holders
We are
subject to the informational requirements of the Securities Exchange Act of
1934. Accordingly, we file annual, quarterly and other reports and information
with the Securities and Exchange Commission. You may read and copy these reports
in Washington, D.C. Our filings are also available to the public from commercial
document retrieval services and the Internet worldwide website maintained by the
U.S. Securities and Exchange Commission at www.sec.gov
ITEM 2. DESCRIPTION OF
PROPERTY
We sold
mineral rights (excluding coal) in Greene County, Pennsylvania and Monogalia
County, West Virginia, respectively, in July 2009 (See Program #1 above) as
follows: 100% interest in 420 acres, one-third interests in 13 acres, one-sixth
interest in 68 acres, and various percentages in an additional 56 acres
(collectively the “Indigo Property”). We do not own the surface land in
these areas. These natural resources are available via subsurface drilling and
recovery techniques. We drilled the 3 Indigo wells on this
property.
We
drilled twenty-one (21) wells in the Pennsylvania, West Virginia and Kentucky
acreages through four turnkey drilling programs with four (4) respective
operators, as previously described (see status below). To quantify the potential
for recoverable reserves of natural gas, oil and coal bed methane, we
commissioned four independent geological and engineering studies of the Indigo
Property and the turnkey drilling program properties.
8
For a
more detailed discussion on the Company’s operations in the Appalachian Basin,
please see “Appalachian Basin
Gas Operations” and “Wells Operated Through Drilling and
Operating Agreements” under
Item 1.
In
November 2008, the Company commenced its drilling program with Epicenter Oil and
Gas, LLC (“Epicenter”) in the DuBois Field located in the Illinois Basin in
southern Indiana. The drilling of the initial two wells was funded through the
Global Financing Agreement (“GFA”) by Carr Miller Capital, LLC (“Carr Miller”)
which provided for an amount of $1,000,000 to be used exclusively for the
Company’s drilling activities. On December 30, 2008 the Company received funding
separate from the GFA from Carr Miller to begin drilling a third well in the
DuBois field, which well is, adjacent to, but separate and distinct from the two
wells drilled by the Company that were provided for in the
GFA.
For a
more detailed discussion on the Company’s operations in the Dubois Field, please
see “Illinois Basin Gas
Operations” under Item 1 above.
Productive
Wells and Drilling Activity
Productive
wells are producing wells and wells capable of production. The following table
presents the Company's number of productive wells and plugged and abandoned dry
wells:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Productive
wells, beginning of year
|
24 | (1) | 18 | |||||
Wells
completed
|
- | 1 | ||||||
Wells
recovered through driller settlement agreements (2)
|
- | 5 | ||||||
Drilled
but not completed (3)
|
5 | - | ||||||
Wells
plugged and abandoned as dry wells
|
- | - | ||||||
Productive
wells, end of year
|
19 | 24 |
(1)
|
Includes
the three company wells.
|
(2)
|
On
December 30, 2008, the Company entered into a Continuation Agreement with
Dannic Energy Corporation which resulted in the recovery of these five (5)
wells.
|
|
(3)
|
Consists
of the P&J wells.
|
For a
more detailed description of the Company’s wells, please see Item 1. Description of
Business.
Production
The
following table presents the Company's average sales price and average
production cost per unit of gas produced (mmcf). Production costs are those
costs incurred to operate and maintain the Company’s wells and related equipment
and facilities, including depreciation and applicable operating costs of support
equipment and facilities and other costs of operating and maintaining those
wells and related equipment and facilities. Production costs also include
depreciation, depletion, and amortization of capitalized acquisition,
exploration, and development costs. Production includes only production that is
owned by the Company and produced to its working interest.
9
December
31,
|
||||||||
2009
|
2008
|
|||||||
Average
sales price per unit of gas production (mmcf)
|
$
|
3,900
|
$
|
10,900
|
||||
Average
production cost per unit of gas production (mmcf)
|
$
|
2,700
|
$
|
6,600
|
ITEM 3. LEGAL PROCEEDINGS
The
Company is not a party to any litigation. However, 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, 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 and a pre-trial
conference has been scheduled for April 23, 2010.
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. To date, no further action has been
taken by M&M Pump & Supply Co.
Our
address for service of process in Nevada is 2857 Sumter Valley Dr., Henderson,
NV 89052.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None.
PART
II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market
Information
As of
April 13, 2010, our common stock is quoted and traded under the symbol “IDGG” on
the OTC Bulletin Board (“Bulletin Board”).
10
As of
April 13, 2010, the closing price of our common stock was $0.05.
There is
a limited trading market for our common stock. There is no assurance that a
regular trading market for our common stock will develop or if developed that it
will be sustained. A shareholder in all likelihood, therefore, may not be able
to resell his securities should he or she desire to do so when eligible for
public resale. Furthermore, it is unlikely that a lending institution will
accept our securities as pledged collateral for loans unless a regular trading
market develops.
Below is
the market information pertaining to the range of the high and low bid
information of our common stock for each quarter since the year 2008. The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
2008
|
||||||||
High
|
Low
|
|||||||
First
quarter
|
$
|
0.35
|
$
|
0.03
|
||||
Second
quarter
|
0.45
|
0.05
|
||||||
Third
quarter
|
0.18
|
0.05
|
||||||
Fourth
quarter
|
0.10
|
0.02
|
||||||
2009
|
||||||||
High
|
Low
|
|||||||
First
quarter
|
$
|
0.09
|
$
|
0.03
|
||||
Second
quarter
|
0.07
|
0.03
|
||||||
Third
quarter
|
0.05
|
0.02
|
||||||
Fourth
quarter
|
0.05
|
0.01
|
||||||
2010
|
||||||||
High
|
Low
|
|||||||
First
quarter
|
$
|
0.08
|
0.02
|
Source:
http://www.pinksheets.com
Holders
On April
13, 2010, there were 1,134 holders of record of our common stock.
Dividends
No cash
dividend was declared in 2009.
Recent
Sales of Unregistered Securities
In
December 2009, the Company issued 1,000,000 shares of common stock as part of
the consideration for a promissory note issued by the Company in the amount of
$500,000.
In
December 2009, the Company issued 300,000 shares of common stock for promissory
note extensions.
In
December 2009, the Company issued 1,650,000 shares of common stock for
promissory note penalties.
11
These
securities were issued in transactions not registered under the Securities Act
in reliance upon the exemption provided under Section 4(2) of the Securities Act
and/or Regulation D promulgated by the Securities and Exchange
Commission. We believed that the exemption was available because the
offer and sale of the securities did not involve a public offering and because
of the limited number of recipients, each purchaser’s representation of
sophistication in financial matters, and their access to information concerning
our business.
ITEM 6. SELECTED FINANCIAL
DATA
Not
applicable.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Forward-Looking
Statements
The
information set forth in Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) contains certain
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995, including,
among others (i) expected changes in the Company’s revenues and profitability,
(ii) prospective business opportunities and (iii) the Company’s strategy for
financing its business. Forward-looking statements are statements other than
historical information or statements of current condition. Some forward-looking
statements may be identified by use of terms such as “believes,” “anticipates,”
“intends” or “expects.” These forward-looking statements relate to the plans,
objectives and expectations of the Company for future operations. Although the
Company believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, in light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this Annual Report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
You
should read the following discussion and analysis in conjunction with the
Financial Statements and Notes attached hereto, and the other financial data
appearing elsewhere in this Annual Report.
The
Company’s results of operations could differ materially from those projected in
the forward-looking statements as a result of numerous factors, including, but
not limited to, the following: the risk of significant natural disaster, the
inability of the Company to insure against certain risks, inflationary and
deflationary conditions and cycles, currency exchange rates, changing government
regulations domestically and internationally affecting our products and
businesses.
Overview
We are an
independent energy company, currently engaged in the exploration of natural gas
and oil. Our strategy is to profitably grow reserves and production, primarily
through acquiring oil and gas leasehold interests and participating in or
actively conducting drilling operations in order to exploit those interests. The
Company was formed in 1981 as Fuller-Banks Energy, Inc. and changed its name to
Royal Equity Exchange Inc. in 1987, and subsequently to Procare America, Inc. in
1999. In 2001, the Company ceased all operations and became a public shell
company. On December 15, 2005, the Company issued 49,100,000 shares of common
stock in exchange for 100% of the outstanding shares of Indigo Land &
Development, Inc. (“ILD”), which was treated as a recapitalization of ILD. On
January 12, 2006, the Company changed its name to Indigo Energy,
Inc.
12
We have
incurred losses since our inception. We are delinquent on many of our
obligations to our creditors. Our current liabilities exceed our current assets
and we will need additional capital to fund operations. There are no assurances
that we will receive funding to implement our business plan and our independent
registered accountant indicated in their opinion on our 2009 annual financial
statements that there was substantial doubt about our ability to continue as a
going concern.
The
Company has enjoyed substantial progress in development of its strategic
operating plan as developed at the last shareholders meeting. We had
set target goals in three specific areas: (1) new drilling and operating wells:
(2) improving our balance sheet and improving our cash flow: and (3) securing
sufficient capital to move the Company forward through a combination of debt and
equity instruments.
|
·
|
In
new well development, we have drilled and completed 2 horizontal wells
joining a 3rd vertical Hub for gas production. That well is
within weeks of production and early indications are very
promising. Also in the Dubois field within the Illinois basin,
we have successfully drilled a vertical oil well which is just coming into
production and should be generating revenue by the 2nd
quarter of 2010.
|
|
·
|
As
to balance sheet improvements, we have restructured a number of toxic
promissory notes, worked out settlements with 2 of our 3 operating
drillers to improve cash flow, and converted a number of notes to equity
at a favorable exchange rate. In the first quarter of 2010 the
Company also did a roll up of 18 promissory notes of varying terms into a
single longer term note with a 2 year window until first
payments. Additionally the almost half-million dollar
obligation to Indigo-Energy LP’s 14 partners were converted to
equity.
|
|
·
|
Regarding
the search for partnership in development of additional drilling
opportunities, the Company is in various stages of securing commitments to
follow the successful Dubois drilling program with similar programs as
well as acquisition of current operating
field.
|
The
Company needs to raise significant funds for future drilling and operating
costs. Any fundraising conducted by the Company will most likely result in the
issuance of additional shares of common stock which will dilute the ownership
interests of the Company’s current shareholders. The Company’s expectation of
its cash needs is approximately $11,100,000 to fund its current obligations
under the various agreements to which the Company is a party.
During
the next 12 months, we do not anticipate any significant changes in the number
of our employees other than to add adequate field operating personnel to enable
us to monitor and further develop our drilling and operating
opportunities.
Results
of Operations for the Year Ended December 31, 2009 Compared to Year Ended
December 31, 2008
We
incurred a net loss for the year ended December 31, 2009 in the amount of
$5,053,690 compared to a net loss of $17,128,014 for the year ended December 31,
2008. The decrease in net loss of $12,074,324 was primarily attributable to a
$439,932 decrease in general and administrative expenses, a decrease of
$6,904,148 in interest and forbearance expense, a reduction of $2,406,368 in
loss on extinguishment of debt, a decrease in transaction costs related to a
failed transaction of $400,000, and a reduction in settlement expenses of
$899,392. These were offset by a decrease in revenues of $537,204, an
increase of $252,545 from impairment of oil and gas properties, $629,760 from a
gain on the sale of oil and gas interests and a $985,498 unrealized gain on
derivatives.
13
Revenues
We had
revenue in the amount of $139,765 for the year ended December 31, 2009 compared
to $676,969 in revenues for the year ended December 31, 2008. The decrease in
revenue of $537,204 was primarily attributable to $221,098 of additional revenue
included in the year ended December 31, 2008 that resulted from a Continuation
Agreement with Dannic Energy Corporation, $95,025 of additional revenue included
in the year ended December 31, 2008 that resulted from a Modification and
Settlement Agreement with TAPO Energy, LLC, a general decline in both demand and
prices paid for oil and gas products, as well as adjustments to previous
production estimates.
Impairment
of Oil and Gas Properties
Impairment
cost of $252,545 related to oil and gas properties was incurred for the year
ended December 31, 2009 as a result of our ceiling test on proved
properties.
Depletion
Expense
We
recorded a depletion expense on our proved properties of $46,807 for the year
ended December 31, 2009 compared to $125,912 for the year ended December 31,
2008. The decrease of $79,105 in depletion expense was primarily due to our
decreased oil and gas carrying costs at December 31, 2009.
General
and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2009 were
$4,171,194, compared to $4,611,126 for the year ended December 31, 2008. The
decrease of $439,932 in general and administrative expenses was primarily due to
a decrease in professional fees of $467,765. General and administrative expenses
of $4,171,194 for the year ended December 31, 2009 were primarily comprised of
$2,497,293 of consulting fees, $782,989 of accounting and auditing fees and
$303,543 of legal fees.
Interest
and Forbearance Expense
Interest
expense for the year ended December 31, 2009 was $2,383,822 compared to
$9,287,970 for the year ended December 31, 2008. Interest expense of
$2,383,822 for the year ended December 31, 2009 was primarily comprised of
$2,116,555 of interest on various notes payable, including amortization of
discounts on the notes in the amount of $1,122,384, and $235,947 of interest
related to the amortization of the beneficial conversion feature on our Series 1
convertible notes. Interest expense of $9,287,970 for the year ended
December 31, 2008 was primarily comprised of $1,170,000 of interest related to
drilling lease option extensions, $7,831,351 of interest on various notes
payable, including amortization of discounts on the notes in the amount of
$6,440,228, $217,426 of interest related to the amortization of the beneficial
conversion feature on our Series 1 convertible notes.
Gain
on Extinguishment of Debt
We
incurred a gain on extinguishment of debt from various modifications and
settlement agreements related to our notes payable for the year ended December
31, 2009 in the amount of $119,500 compared to a loss of $2,286,868 for the year
ended December 31, 2008.
Gain
on Sale of Oil and Gas Interest
During
2009, the Company recorded a gain on the sale of oil and gas interests in the
amount of $629,760.
Unrealized
Gain on Derivative
We
incurred a gain on derivatives in the amount of $1,007,455 for the year ended
December 31, 2009 compared to a gain on derivatives of $21,957 for the year
ended December 31, 2008.
14
Liquidity
and Capital Resources
Since our
inception, we have funded our operations primarily through private sales of our
common stock and the use of convertible debt. As of December 31, 2009, we had a
cash balance of $411,042.
We
require a minimum of approximately $11,100,000 for the next 12 months, which
includes approximately $1,000,000 to pay for our outstanding professional fees,
$1,700,000 to pay for the outstanding drilling costs to various drillers,
$1,700,000 to pay our note payable obligations, including convertible notes as
well as $200,000 to pay accrued interest and $1,500,000 fund other
operating costs. In addition to the minimum amount required, the Company expects
to spend an additional $5,000,000 for drilling activities. 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 month. We currently do not have sufficient
funds to fund our current operations or such capital calls, pay our debts and
other liabilities, and operate at our current levels for the next twelve months.
Accordingly, we need to raise additional funds through sales of our securities
or otherwise, immediately.
If we are
unable to obtain additional funds on terms favorable to us, if at all, we may be
required to delay, scale back or eliminate some or all of our exploration and
well development programs and may be required to relinquish our interest in one
or more of our projects or in the extreme case, cease operations.
For
the Year Ended December 31, 2009 Compared to the Year Ended December 31,
2008
Net cash
used in operating activities was $1,712,216 for the year ended December 31, 2009
as compared to net cash used in operating activities of $4,634,215 for the year
ended December 31, 2008. The $2,921,999 decrease in cash used in operating
activities was primarily due to the decreased net loss incurred during the
year.
The sales
of natural gas is volatile and subject to upwards and downward changes in both
volume and price. Operators of gas field, pipelines, and processing
centers buy gas from smaller operators like Indigo based on the market price of
the gas at the street market price at the time of purchase. A slow
demand winter season will drive down both the need and price for natural
gas. Also outside the control of the Company is that lower demand is
at the dictate of the pipeline operator as to which wells to
“shut-in”. While the Company is committed to gas production, and the
USA is still very gas dependent, the demand, weather, operating conditions, and
pricing are outside the control of the Company.
Net cash
used in investing activities was $965,255 for the year ended December 31, 2009
as compared to net cash used in investing activities of $332,621 for the year
ended December 31, 2008.
Net cash
provided by financing activities was $2,463,290 for the year ended December 31,
2009 as compared to net cash provided by financing activities of $5,584,363 for
the year ended December 31, 2008. The amounts in both periods represent net
proceeds from sales of debt and equity securities.
At
December 31, 2009, we had a working capital deficit of $7,916,760 compared to a
working capital deficit of $4,422,717 at December 31, 2008. The increase in
working capital deficit in the amount of $3,494,043 was due primarily to an
increase in accounts payable and an increase in the current portion of notes
payable.
15
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, well completion percentage under the turnkey drilling programs,
estimates of future dismantlement costs, estimates of future cash flows in
valuing oil and gas proprieties, debt modifications or extinguishment, income
taxes and litigation. Actual results could differ from those
estimates.
Our most
critical accounting policies are 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.
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. 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 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.
16
The
Company then evaluated 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 some of the modifications and exchanges of debt were
deemed to be TDRs, some were deemed as an extinguishment of old debt, while
others were merely a modification of the original note.
Asset Retirement
Obligations
We
recognize an estimated liability for the plugging and abandonment of our oil and
gas wells and associated pipelines and equipment. The liability and the
associated increase in the related long-lived asset are recorded in the period
in which our asset retirement obligation (“ARO”) is incurred. The liability is
accreted to its present value each period and the capitalized cost is
depreciated over the useful life of the related asset.
The
estimated liability is based on historical experience in plugging and abandoning
wells, estimated remaining lives of those wells based on reserves estimates and
federal and state regulatory requirements. The liability is discounted using an
assumed credit-adjusted risk-free rate.
Revisions
to the liability could occur due to changes in estimates of plugging and
abandonment costs, changes in the risk-free rate or remaining lives of the
wells, or if federal or state regulators enact new plugging and abandonment
requirements. At the time of abandonment, we recognize a gain or loss on
abandonment to the extent that actual costs do not equal the estimated
costs.
Off
Balance Sheet Reports
The
Company had no off balance sheet transactions during the year ended December 31,
2009.
ITEM
8. FINANCIAL STATEMENTS.
17
FINANCIAL
STATEMENT TABLE OF CONTENT
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-4
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Consolidated
Statements of Stockholders’ Deficit
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F -
1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Indigo-Energy, Inc.
We have
audited the accompanying consolidated balance sheet of Indigo-Energy, Inc. as of
December 31, 2009, and the related consolidated statements of income,
stockholders’ equity, and cash flows for the year then ended. Indigo-Energy,
Inc.’s management is responsible for these consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We also
have audited the adjustments described in Note 3 that were applied to restate
the 2008 consolidated financial statements to correct errors. In our opinion,
such adjustments are appropriate and have been properly applied. We were not
engaged to audit, review, or apply any procedures to the 2008 consolidated
financial statements of the Company other than with respect to the adjustments
and, accordingly, we do not express an opinion or any other form of assurance on
the 2008 consolidated financial statements taken as whole.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Indigo-Energy, Inc. as of
December 31, 2009, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Mark
Bailey & Company, Ltd.
Reno,
Nevada
April 15,
2010
F -
2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Indigo-Energy,
Inc.
Henderson,
Nevada
We have
audited, before the effects of the immaterial adjustments (for the correction of
an error described in Note 3, the accompanying consolidated balance sheet of
Indigo-Energy, Inc. as of December 31, 2008, and the related consolidated
statement of operations, stockholders’ deficit and cash flows for the year then
ended. These financial statements are the responsibility of the company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Indigo-Energy, Inc. as of December
31, 2008, and the results of its operations, changes in stockholders’ deficit
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company: has incurred net losses since
inception; had a working capital deficiency of $4,422,717 as of December 31,
2008; had a net loss in 2008 of $17,128,014; is delinquent on many of its
obligations to its creditors; still owes certain parties payments for drilling
wells for the Company; and does not currently have sufficient funds to execute
its business plan or fund current operations or current capital commitments; and
has been borrowing money and assigned its interests in certain property as
collateral or consideration for these loans. These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans regarding those matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
L J
SOLDINGER ASSOCIATES, LLC
Deer
Park, Illinois
May 13,
2009
F -
3
INDIGO-ENERGY,
INC.
Consolidated
Balance Sheets
Year Ending December 31,
|
||||||||
2008
|
||||||||
2009
|
Restated
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 411,042 | $ | 625,222 | ||||
Accounts
receivable
|
7,960 | 208,147 | ||||||
Accounts
receivable - related party
|
- | 13,570 | ||||||
Prepaid
expenses
|
9,825 | 186,301 | ||||||
Due
from related parties
|
- | 4,000 | ||||||
Total
current assets
|
428,827 | 1,037,240 | ||||||
Proved
oil and gas properties, net
|
426,635 | 725,987 | ||||||
Unproved
oil and gas properties
|
3,743,736 | 442,403 | ||||||
Total
oil and gas properties, net
|
4,170,371 | 1,168,390 | ||||||
Other
assets
|
||||||||
Deferred
loan costs, net of accumulated amortization of $373,892
|
||||||||
and
$263,043 at December 31, 2009 and 2008, respectively
|
498,319 | 609,167 | ||||||
$ | 5,097,517 | $ | 2,814,797 | |||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses (restated)
|
$ | 3,617,056 | $ | 1,416,509 | ||||
Accounts
payable and accrued expenses - related party
|
493,569 | 233,774 | ||||||
Current
portion of liability due to operator
|
83,767 | 81,917 | ||||||
Notes
payable, net of discount
|
1,218,334 | 835,863 | ||||||
Notes
payable, net of discount - related party
|
375,000 | 525,000 | ||||||
Convertible
notes, net of discount
|
666,667 | 430,723 | ||||||
Current
portion of long term notes payable - related party
|
987,761 | - | ||||||
Derivative
liability (restated)
|
310,789 | 1,295,040 | ||||||
Due
to related parties
|
- | 244,500 | ||||||
Obligation
to former non-controlling interest
|
262,660 | 175,787 | ||||||
Obligation
to former non-controlling interest - related party
|
329,984 | 220,844 | ||||||
Total
current liabilities
|
8,345,587 | 5,459,957 | ||||||
Long
term liabilities
|
||||||||
Liability
due to operator, non-current
|
382,621 | 433,004 | ||||||
Accrued
interest - related party
|
426,129 | 30,711 | ||||||
Notes
payable, net of discount - related party (restated)
|
2,656,543 | 1,126,025 | ||||||
Asset
retirement obligation (restated)
|
290,580 | 227,800 | ||||||
Obligation
to former non-controlling interest
|
239,220 | 430,434 | ||||||
Obligation
to former non-controlling interest - related party
|
300,536 | 540,762 | ||||||
Total
long term liabilities
|
4,295,629 | 2,788,736 | ||||||
Total
liabilities
|
12,641,216 | 8,248,693 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Stockholders'
deficit
|
||||||||
Series
C preferred stock; $0.001 par value; 100 shares authorized; 0 shares
issued, and 0 and 75 shares issuable at December 31, 2009 and 2008,
respectively
|
- | - | ||||||
Liquidation
preference; see Note 8
|
||||||||
Common
stock; $0.001 par value; 1,000,000,000 shares authorized; 700,251,299 and
562,346,488 issued and outstanding at December 31, 2009 and 2008,
respectively; 0 and 2,994,811 shares issuable at December 31, 2009 and
2008, respectively
|
700,251 | 565,341 | ||||||
Additional
paid-in capital (restated)
|
73,800,774 | 70,991,798 | ||||||
Accumulated
deficit (restated)
|
(82,044,724 | ) | (76,991,035 | ) | ||||
Total
stockholders' deficit
|
(7,543,699 | ) | (5,433,896 | ) | ||||
$ | 5,097,517 | $ | 2,814,797 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
4
INDIGO-ENERGY,
INC.
Consolidated
Statements of Operations
For the Years Ended
|
||||||||
December 31,
|
||||||||
2008
|
||||||||
2009
|
Restated
|
|||||||
Revenues
|
$ | 139,765 | $ | 578,063 | ||||
Revenues
- related party
|
- | 98,906 | ||||||
Net
revenues
|
139,765 | 676,969 | ||||||
Operating
expenses
|
||||||||
Impairment
of oil and gas properties
|
252,545 | - | ||||||
Operating
expenses
|
95,802 | 266,530 | ||||||
Operating
expenses - related party
|
- | 19,235 | ||||||
Depletion
|
46,807 | 125,912 | ||||||
General
and administrative - related party
|
2,260,000 | 1,214,005 | ||||||
General
and administrative
|
1,911,194 | 3,397,121 | ||||||
Total
operating expenses
|
4,566,348 | 5,022,803 | ||||||
Loss
from operations
|
(4,426,583 | ) | (4,345,834 | ) | ||||
Other
income (expenses)
|
||||||||
Interest
and forbearance expense, net
|
(653,752 | ) | (5,303,078 | ) | ||||
Interest
expense, net - related party (restated)
|
(1,730,070 | ) | (3,984,892 | ) | ||||
Gain
on troubled debt restructuring
|
- | 55,700 | ||||||
Gain
on troubled debt restructuring - related party
|
- | 58,528 | ||||||
Loss
on extinguishment of debt
|
- | (1,546,792 | ) | |||||
Gain
(Loss) on extinguishment of debt - related party, net
(restated)
|
119,500 | (740,076 | ) | |||||
Gain
on sale of oil and gas interest
|
629,760 | - | ||||||
Gain
on derivative (restated)
|
1,007,455 | 21,957 | ||||||
Failed
transaction cost
|
- | (400,000 | ) | |||||
Settlement
expense
|
- | (398,611 | ) | |||||
Settlement
expense - related party
|
- | (500,781 | ) | |||||
Total
other expense, net
|
(627,107 | ) | (12,738,045 | ) | ||||
Net
loss before pre-acquisition income
|
(5,053,690 | ) | (17,083,879 | ) | ||||
Pre-acquisition
income
|
- | (44,135 | ) | |||||
Net
loss (restated)
|
$ | (5,053,690 | ) | $ | (17,128,014 | ) | ||
Basic
and diluted loss per common share
|
$ | (0.01 | ) | $ | (0.07 | ) | ||
Basic
and diluted weighted average common shares outstanding
|
658,957,957 | 256,497,728 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
5
INDIGO-ENERGY,
INC.
Consolidated
Statements of Stockholders’ Deficit
Common
Stock
|
Preferred
Series
C
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Additional
paid-in Capital |
Accumulated
Deficit |
Total
Stockholders' Deficit |
||||||||||||||||||||||
Balance,
December 31, 2007
|
176,076,919 | $ | 176,077 | - | $ | - | $ | 53,089,578 | $ | (59,857,466 | ) | $ | (6,591,811 | ) | ||||||||||||||
Correction
of common stock issued in prior periods
|
(1,000 | ) | (1 | ) | - | - | (404 | ) | - | (405 | ) | |||||||||||||||||
Common
stock issued in connection with promissory notes
(restated)
|
328,839,319 | 328,839 | - | - | 14,359,045 | - | 14,687,884 | |||||||||||||||||||||
Common
stock issued as non-employee compensation
|
10,426,061 | 10,426 | - | - | 1,685,710 | - | 1,696,136 | |||||||||||||||||||||
Issuance
of stock options & warrants
|
- | - | - | - | 981,665 | - | 981,665 | |||||||||||||||||||||
Cancellation
of shares related to a settlement agreement
|
(2,000,000 | ) | (2,000 | ) | - | - | 2,000 | - | - | |||||||||||||||||||
Preferred
stock issued in connection with promissory notes
|
52,000,000 | 52,000 | 75 | - | 2,191,204 | - | 2,243,204 | |||||||||||||||||||||
Derivative
liability (restated)
|
- | - | - | - | (1,317,000 | ) | - | (1,317,000 | ) | |||||||||||||||||||
Prior
period adjustment
|
- | - | - | - | - | (5,555 | ) | (5,555 | ) | |||||||||||||||||||
Net
(Loss) for the year (restated)
|
- | - | - | - | - | (17,128,014 | ) | (17,128,014 | ) | |||||||||||||||||||
Balance,
December 31, 2008 (restated)
|
565,341,299 | $ | 565,341 | 75 | $ | - | $ | 70,991,798 | $ | (76,991,035 | ) | $ | (5,433,896 | ) | ||||||||||||||
Common
stock issued in connection with promissory notes
|
19,910,000 | 19,910 | - | - | 923,976 | - | 943,887 | |||||||||||||||||||||
Common
stock issued as non-employee compensation
|
40,000,000 | 40,000 | - | - | 1,960,000 | - | 2,000,000 | |||||||||||||||||||||
Preferred
stock converted to common stock
|
75,000,000 | 75,000 | (75 | ) | - | (75,000 | ) | - | - | |||||||||||||||||||
Net
(Loss) for the year
|
- | - | - | - | - | (5,053,690 | ) | (5,053,690 | ) | |||||||||||||||||||
Balance,
December 31, 2009
|
700,251,299 | $ | 700,251 | - | $ | - | $ | 73,800,774 | $ | (82,044,724 | ) | $ | (7,543,699 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F -
6
INDIGO-ENERGY,
INC.
Consolidated
Statements of Cash Flows
For the Years Ended
|
||||||||
December 31,
|
||||||||
2008
|
||||||||
2009
|
Restated
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss (restated)
|
$ | (5,053,690 | ) | $ | (17,128,014 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Share-based
compensation for consulting services
|
- | 1,337,642 | ||||||
Share-based
compensation for consulting services-related party
|
2,000,000 | 35,000 | ||||||
Stock
options granted
|
- | 119,290 | ||||||
Stock
options granted - related party
|
- | 954,410 | ||||||
Stock
warrants issued - related party (restated)
|
20,000 | - | ||||||
Expense
on forbearance agreements
|
- | 300,000 | ||||||
Expense
on forbearance agreements - related party
|
- | 350,000 | ||||||
Amortization
of deferred loan costs
|
110,849 | 19,332 | ||||||
Amortization
of discount on notes
|
66,621 | 1,316,653 | ||||||
Amortization
of discount on notes - related party (restated)
|
1,055,763 | 885,013 | ||||||
Amortization
of discount on convertible notes
|
235,947 | 2,339,431 | ||||||
Amortization
of discount on convertible notes - related party
|
- | 2,116,557 | ||||||
Depletion
expense
|
46,807 | 125,912 | ||||||
Settlement
expense
|
- | 398,611 | ||||||
Settlement
expense - related party
|
- | 500,781 | ||||||
Loss
on extinguishment of debt
|
- | 1,546,792 | ||||||
(Gain)
loss on extinguishment of debt - related party (restated)
|
(119,500 | ) | 740,075 | |||||
Gain
on troubled debt restructuring
|
- | (55,700 | ) | |||||
Gain
on troubled debt restructuring-related party
|
- | (58,528 | ) | |||||
Gain
on sale of oil and gas interests
|
(629,760 | ) | - | |||||
Unrealized
gain on derivative (restated)
|
(1,007,455 | ) | (21,957 | ) | ||||
Impairment
of oil and gas properties
|
252,545 | |||||||
Pre-acquisition
income
|
- | 44,135 | ||||||
Changes
in assets and liabilities
|
||||||||
Due
from related party
|
4,000 | - | ||||||
Accounts
receivable
|
200,187 | (203,787 | ) | |||||
Accounts
receivable - related party
|
13,570 | 66,994 | ||||||
Prepaid
expenses
|
176,476 | (22,074 | ) | |||||
Deposits
|
- | 100,000 | ||||||
Accounts
payable and accrued expenses
|
839,431 | (878,153 | ) | |||||
Accounts
payable and accrued expenses - related party
|
248,643 | 242,570 | ||||||
Asset
retirement obligation
|
62,780 | 194,800 | ||||||
Obligation
to former non-controlling interest
|
(104,342 | ) | - | |||||
Obligation
to former non-controlling interest - related party
|
(131,087 | ) | - | |||||
Net
cash used in operating activities
|
(1,712,215 | ) | (4,634,215 | ) | ||||
Cash
flows from investing activities
|
||||||||
Tangible
and intangible drilling costs for oil and gas properties
|
(1,595,015 | ) | (332,921 | ) | ||||
Proceeds
from sale of oil & gas interests
|
629,760 | - | ||||||
Net
cash used in investing activities
|
(965,255 | ) | (332,921 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from issuance of debt
|
525,000 | 610,000 | ||||||
Proceeds
from issuance of debt - related party
|
1,938,290 | 5,050,000 | ||||||
Repayment
of debt
|
- | (49,137 | ) | |||||
Repayment
of debt - related party
|
- | (20,500 | ) | |||||
Loan
costs
|
- | (6,000 | ) | |||||
Net
cash provided by financing activities
|
2,463,290 | 5,584,363 | ||||||
Net
increase (decrease) in cash
|
(214,180 | ) | 617,227 | |||||
Cash,
beginning of period
|
625,222 | 7,995 | ||||||
Cash,
end of period
|
$ | 411,042 | $ | 625,222 |
The accompanying notes are an
integral part of these consolidated financial statements.
F -
7
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - NATURE OF OPERATIONS AND ABILITY TO CONTINUE AS A GOING CONCERN
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.
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 order to fund its operations through December 31, 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
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
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. From inception to December 31,
2008, the Company was deemed to be in the exploration stage. The Company ceased
reporting as an exploration stage entity in 2009 since planned principal
operations have commenced.
Consolidated
Financial Statements
The
consolidated financial statements include the accounts of Indigo and Indigo
Energy Partners, LP (“Indigo LP”). 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 the Company is
the primary beneficiary. All intercompany transactions and balances
have been eliminated in consolidation.
In
general, a VIE is a corporation, partnership, limited liability corporation,
trust or any other legal structure used to conduct activities or hold assets
that either (i) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support; (ii) has a group
of equity owners that are unable to make significant decisions about is
activities; or (iii) has a group of equity owners that do not have the
obligation to absorb losses or the right to receive returns generated by its
operations. Determining whether we are the primary beneficiary of a
VIE is complex and subjective, and requires our judgment. There are a
variety of facts and circumstances and a number of variables taken into
consideration to determine whether we are considered the primary beneficiary of
a VIE. A change in facts and circumstances or a change in accounting
guidance could require us to reconsider whether or not we are the primary
beneficiary of the VIE.
F -
8
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
a 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.
In April,
July and September 2008, Indigo provided an aggregate of $715,000 to Rivers West
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”), which was to commence upon the Company’s obtaining of sufficient
funding from an outside party. The $715,000 payment was considered
essentially a forbearance for the landholders and leaseholders to continue their
patience giving Rivers West additional time to complete the payment and obtain
the leases and therefore, was recorded as interest expense on the consolidated
financial statements. Subsequently these expenditures were converted into a loan
due to the Company (See Note 4).
In
November and December 2008, the Company provided an aggregate of $550,000 to
Rivers West to commence drilling operations in the Illinois Basin in southern
Indiana, of which $332,921 was recorded as unproved properties at December 31,
2008, $80,917 as prepaid expenses, and $136,162 was expensed during 2008 (See
Note 4).
In
January and February 2009, the Company provided an aggregate of $650,000 to
Rivers West in connection with its drilling operations in the Illinois Basin in
Southern Indiana.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Management periodically reviews its
estimates, including those related to the determination of proved reserves, well
completion percentage under the turnkey drilling programs, estimates of future
dismantlement costs, 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 or as an extinguishment or modification of
debt, estimates for the liability for variable conversion features on its
convertible debt, estimates of future cash flows in valuing oil and gas
properties, income taxes and litigation and estimates of the fair value of the
derivatives associated with some of our warrants and certain non-employee stock
options. Actual results could differ from those estimates.
Management
believes that it is reasonably possible the following material estimates
affecting the financial statements could significantly change in the coming
year: (1) estimates of proved gas reserves and (2) estimates as to the expected
future cash flows from proved gas properties (3) estimates of the fair value of
the derivatives associated with certain warrants and non-employee stock
options.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for oil and gas operations
whereby all costs of exploring for and developing oil and gas reserves are
initially capitalized on a country-by-country (cost center) basis. Such costs
include land acquisition costs, geological and geophysical expenses, carrying
charges on non-producing properties, costs of drilling and overhead charges
directly related to acquisition and exploration activities. We are concentrating
our exploration activities only in the United States and therefore utilize a
single cost center.
Capitalized
costs 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.
Costs of
acquiring and evaluating unproved properties are initially excluded from
depletion calculations. These unevaluated properties are assessed periodically
to ascertain whether impairment has occurred. When proved reserves are assigned
or the property is considered to be impaired, the cost of the property or the
amount of the impairment is added to costs subject to depletion
calculations.
F -
9
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
If
capitalized costs, less related accumulated amortization and deferred income
taxes, exceed the “full cost ceiling” the excess is expensed in the period such
excess occurs. The “full cost ceiling” is determined based on the present value
of estimated future net revenues attributed to proved reserves.
Proceeds
from a sale of petroleum and natural gas properties are applied against
capitalized costs, with no gain or loss recognized, unless such a sale would
alter the relationship between capitalized costs and proved reserves of oil and
gas attributable to a cost center.
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. 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 that a 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.
The
Company then evaluated 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 a TDR, 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 some of the modifications and exchanges of debt were
deemed to be TDRs some were deemed to be a modification of the original
note.
Impairment
of Long-lived Assets
The
carrying value of intangible assets and other long-lived assets are reviewed on
a regular basis for the existence of facts or circumstances that may suggest
impairment. The Company recognizes impairment when the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset.
Impairment losses, if any, are measured as the excess of the carrying amount of
the asset over its estimated fair value. Impairment on the properties with
unproved reserves is evaluated by considering criteria such as future drilling
plans for the properties, the results of geographic and geologic data related to
the unproved properties and the remaining term of the property leases. For the
year ended December 31, 2009, the Company recorded an impairment to
proved oil and gas properties in the amount of $252,545.
Revenue
Recognition
Oil and
gas revenues are recognized when production is sold to a purchaser at a fixed or
determinable price, when delivery has occurred and title has transferred, and if
the collection of the revenue is probable. When the Company has an interest in a
property with operators, it uses the sales method of accounting for its oil and
gas to its customers, which can be different from its net working interest in
field production.
Segment
Information
The
Company has determined that during the period of these financial statements it
has one reportable operating segment; which is the acquisition and exploration
of natural gas and oil properties in the United States.
F -
10
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization
of Interest
We
capitalize 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. For the year ended December 31, 2009 the Company recorded capitalized
interest in the amount of $88,381.
Asset
Retirement Obligations and Environmental Obligations
The
Company recognizes transition amounts for asset retirement obligations, asset
retirement costs and accumulated depreciation. A liability is recognized for
retirement obligations associated with tangible long-lived assets, such as
producing well sites. The obligations are those for which a company faces a
legal obligation. The initial measurement of the asset retirement obligation is
to record a separate liability at its fair value with an offsetting asset
retirement cost recorded as an increase to the related property and equipment on
the consolidated balance sheet. The asset retirement cost will be depreciated
using a systematic and rational method similar to that used for the associated
property and equipment upon the establishment of proven reserves for the
respective wells.
Cash
Cash
includes cash on hand. The Company did not have any cash equivalents during the
years ended December 31, 2009 and 2008.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash deposits at financial institutions. At various
times during the year, the Company may exceed the federally insured limits. To
mitigate this risk, the Company places its cash deposits only with high credit
quality institutions. Management believes the risk of loss is
minimal.
Accounts
Receivable
The
Company establishes allowances for doubtful accounts based on a review of the
credit profiles of customers, contractual terms and conditions, current economic
trends and historical collection experience. The allowance for doubtful accounts
is reassessed for each period. If different judgments and estimates were
utilized is establishing the allowance, the amount or timing of bad debt expense
or revenue recognized could differ materially from the amounts reported. In the
Company’s limited historical experience, actual losses and credits related to
accounts receivable have been consistent with the recorded provisions. If,
however, actual future receipts differ materially from the current assessments
due, among other things, to unexpected events or significant changes in trends,
additional provisions may be necessary and future cash flows and statements of
operations could be materially negatively impacted. Allowances for doubtful
accounts as a percentage of revenues have been immaterial.
Financial
Instruments
The
carrying value of the notes payable is recorded at face value less unamortized
discounts for beneficial conversion features, variable conversion features and
alloction for the fair value of other consideration received by the
lenders. The face value of the notes payable is disclosed in Note
5.
Income
Taxes
Deferred
tax assets and liabilities are recorded to reflect temporary differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements that will result in taxable or deductible amounts in future
years. The tax rate used to determine the deferred tax assets and liabilities is
the enacted tax rate for the year in which the differences are expected to
reverse. Valuation allowances are recorded to reduce deferred tax assets to the
amount that will more likely than not be realized.
F -
11
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based
Compensation Expense
Compensation
cost relating to share-based payment transactions are recognized under fair
value accounting and recorded in the financial statements. The cost is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity award).
The fair
value of the stock option award is estimated on the date of grant using the
Black-Scholes option pricing model. Expected volatility is based on an average
of historical volatility of common stock prices of the Company or its peer
companies where there is a lack of relevant volatility information of the
Company for the length of the expected term. The expected term is derived from
estimates and represents the period of time that the stock option granted is
expected to be outstanding. The Company uses historical data to estimate option
exercises and employee terminations within the valuation model. The risk-free
rate for the expected term is the yield on the zero-coupon U.S. Treasury
security with a term comparable to the expected term of the option. The Company
does not include an estimated dividend yield since it has not paid dividends on
its common stock historically.
For the
year ending December 31, 2009, there was $2,020,000 of compensation cost related
to warrants issued to consultants and shares of common stock issued to Steven
Durdin and James Walter Sr., related parties, as compensation for consulting
services. For the year ending December 31, 2008, there was $1,073,710 of
compensation cost related to stock options we issued to our non-employee board
members, consultants, and legal counsel. Since the Company has generated losses
from its inception, no associated future income tax benefit was recognized for
the year ended December 31, 2009 (see Preferred Stock and Shares Issued Pursuant
to Various Consulting Agreements sections in Note 7 for more
details).
Valuation
of Derivative Instruments
US
GAAP requires that embedded derivative instruments be bifurcated and
assessed, along with free-standing derivative instruments such as warrants and
non-employee stock-options to determine whether they should be considered a
derivative liability and subject to re-measurement at their fair value. In
estimating the appropriate fair value, the Company uses a
Black-Scholes option pricing model. At December 31, 2009, the Company adjusted
its derivative liability to its fair value, and reflected the net decrease in
the obligation of $1,007,455.
Fair
Value Measurements
The
Company applies the fair value hierarchy as established by US
GAAP. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure the fair value as
follows.
·
|
Level
1 – quoted prices in active markets for identical assets or
liabilities.
|
·
|
Level
2 – other significant observable inputs for the assets or liabilities
through corroboration with market data at the measurement
date.
|
·
|
Level
3 – significant unobservable inputs that reflect management’s best
estimate of what market participants would use to price the assets or
liabilities at the measurement
date.
|
The
following table summarizes fair value measurements by level at December 31, 2009
for assets and liabilities measured at fair value on a recurring
basis:
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
Cash
|
$ | 411,042 | $ | - | $ | - | $ | 411,042 | ||||||||
Notes
payable, net of discount - related party
|
- | - | (2,796,528 | ) | (2,796,528 | ) | ||||||||||
Derivative
liability
|
- | - | (310,789 | ) | (310,789 | ) |
F -
12
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative
liability was valued under the Black-Scholes model, with the following
assumptions:
Risk
free interest rate
|
4.4%
|
Expected
life
|
5.25
to 7.84 years
|
Dividend
Yield
|
0%
|
Volatility
|
181%
|
The
following table summarizes fair value measurements by level at December 31, 2008
for assets and liabilities measured at fair value on a recurring
basis:
Level
I
|
Level
II
|
Level
III
|
Total
|
|||||||||||||
Cash
|
$ | 625,222 | $ | - | $ | - | $ | 625,222 | ||||||||
Notes
payable, net of discount - related party
|
- | - | (1,126,025 | ) | (1,126,025 | ) | ||||||||||
Derivative
liability
|
- | - | (1,295,040 | ) | (1,295,040 | ) |
Derivative
liability was valued under the Black-Scholes model, with the following
assumptions:
Risk
free interest rate
|
4.4%
|
Expected
life
|
6.25
to 8.84 years
|
Dividend
Yield
|
0%
|
Volatility
|
181%
|
The
following tables provides a reconciliation between beginning and ending balances
of items measured at fair value on a recurring basis that used significant
unobservable inputs (Level 3):
Derivative
|
Notes Payable,
|
|||||||
Liability
|
Net of Discount
|
|||||||
Balance
at December 31, 2008
|
$ | (1,295,040 | ) | $ | (1,126,025 | ) | ||
Additions
to liability
|
(23,204 | ) | (1,670,503 | ) | ||||
Gain
included in earnings
|
1,007,455 | - | ||||||
Balance
at December 31, 2009
|
$ | (310,789 | ) | $ | (2,796,528 | ) |
Loss
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
December 31, 2009 and 2008, the Company had outstanding potentially dilutive
shares of 142,966,667 and 104,471,429, respectively.
Reclassifications
Certain
amounts reported in the prior periods have been reclassified to conform to the
current period’s presentation.
F -
13
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In the
course of preparing our books and records for our 2009 audit, we became aware of
several transactions that were not properly recorded for the year ended December
31, 2008. Subsequently we evaluated the impact of the potential
misstatements individually and in the aggregate, as well as both quantitatively
and qualitatively. We determined that the adjustments indicated were
not material to the financial statements at December 31, 2008. We
found it necessary to correct the accounting treatments because of the potential
material effect on the financial statements at December 31, 2009, which
necessitated restating the balances at December 31, 2008 of certain accounts
which are summarized in the following tables.
In
certain cases, when considered separately in relation to individual line items
or sub-totals, misstated amounts were numerically significant, however, because
of their nature and the accounts affected when considered qualitatively they
were not significant from an entity specific perspective. Because of
the homogenous nature of the errors, it is more appropriate to consider the
impact to the financial statements in the aggregate.
The
effect of the combined adjustments was to increase total liabilities 1.3%;
reduce additional paid-in-capital 1.4%; reduce the net loss 4%; and, reduce the
accumulated deficit 1.15% for the year ended December 31, 2008.
The net
effects of the restatement on the balance sheets as of December 31, 2008 are as
follows:
Reported
|
Restated
|
||||||||||||
December 31,
|
Effect of
|
December 31,
|
|||||||||||
2008
|
Restatement
|
2008
|
|||||||||||
Current
liabilities
|
|||||||||||||
Accounts
payable and accrued expenses
|
$ | 1,820,309 | $ | (176,000 | ) |
(a)
|
|||||||
(227,800 | ) |
(b)
|
$ | 1,416,509 | |||||||||
Derivative
liability
|
- | 1,295,040 |
(c)
|
1,295,040 | |||||||||
Long
term liabilities
|
|||||||||||||
Notes
payable, net of discount - related party
|
2,139,320 | (605,791 | ) |
(d)
|
|||||||||
(407,504 | ) |
(e)
|
1,126,025 | ||||||||||
Asset
retirement obligation (reclassification for presentation)
|
- | 227,800 |
(b)
|
227,800 | |||||||||
Total
liabilities
|
8,142,948 | 105,745 | 8,248,693 | ||||||||||
Stockholders'
deficit
|
|||||||||||||
Additional
paid-in capital
|
71,993,326 | (1,316,997 | ) |
(c)
|
|||||||||
407,504 |
(e)
|
||||||||||||
(92,035 | ) |
(f)
|
70,991,798 | ||||||||||
Accumulated
deficit
|
(77,886,818 | ) | 176,000 |
(a)
|
|||||||||
21,957 |
(c)
|
||||||||||||
605,791 |
(d)
|
||||||||||||
92,035 |
(f)
|
(76,991,035 | ) | ||||||||||
Total
stockholders' deficit
|
$ | (5,328,151 | ) | $ | (105,745 | ) | $ | (5,433,896 | ) |
F -
14
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The net
effects of the restatement on the consolidated statements of operations for the
year ended December 31, 2008 are as follows:
Reported
|
Restated
|
||||||||||||
For the
|
For the
|
||||||||||||
Year Ended
|
Year Ended
|
||||||||||||
December 31,
|
Effect of
|
December 31,
|
|||||||||||
2008
|
Restatement
|
2008
|
|||||||||||
Other
income (expenses)
|
|||||||||||||
Interest
expense, net - related party
|
$ | (4,076,927 | ) | $ | 92,035 |
(f)
|
$ | (3,984,892 | ) | ||||
(Loss)
on extinguishment of debt - related party, net
|
(1,345,867 | ) | 605,791 |
(d)
|
(740,076 | ) | |||||||
Unrealized
gain on derivative
|
- | 21,957 |
(c)
|
21,957 | |||||||||
Total
other expense, net
|
(13,457,828 | ) | 719,783 | (12,738,045 | ) | ||||||||
Net
loss
|
(17,847,797 | ) | 92,035 |
(f)
|
|||||||||
605,791 |
(d)
|
||||||||||||
21,957 |
(c)
|
(17,128,014 | ) | ||||||||||
Basic
and diluted loss per common share
|
$ | (0.07 | ) | $ | 0.00 | $ | (0.07 | ) |
The net
effects of the adjustments on the consolidated statements of cash flows for the
year ended December 31, 2008 are as follows:
Reported
|
Restated
|
||||||||||||
For the
|
For the
|
||||||||||||
Year Ended
|
Year Ended
|
||||||||||||
December 31,
|
Effect of
|
December 31,
|
|||||||||||
2008
|
Restatement
|
2008
|
|||||||||||
Cash
flows from operating activities
|
|||||||||||||
Net
loss
|
$ | (17,847,797 | ) | $ | 719,783 |
(f)
|
$ | (17,128,014 | ) | ||||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|||||||||||||
Stock
warrants issued - related party
|
92,035 | (92,035 | ) |
(f)
|
- | ||||||||
(Gain)
loss on extinguishment of debt - related party
|
1,345,866 | (605,791 | ) |
(d)
|
740,075 | ||||||||
Unrealized
gain on derivative
|
- | (21,957 | ) |
(d)
|
(21,957 | ) | |||||||
Net
cash used in operating activities
|
(4,634,215 | ) | - | (4,634,215 | ) |
The
restatements were as follows:
|
a)
|
This
restatement is to correct an error in the recording of a payroll tax
liability that originated from Procare America, Inc., the public shell
company that the Company recapitalized on December 15, 2005. As a result,
the Company reduced its accounts payable and accrued expenses and
increased its retained earnings by
$176,000.
|
|
b)
|
This
restatement is to correct an error in the classification of the Company’s
asset retirement obligation. As a result, the Company reclassified
$227,800 of its asset retirement obligation from current liabilities to
long term liabilities.
|
|
c)
|
This
restatement is to correct an error in the application of certain
accounting principles related to the issuance of some of the Company’s
previously issued and vested non-employee stock options and warrant
transactions resulting from the Global Settlement Agreement with the
former partners of Indigo-Energy Partners, LP in prior periods. These
vested non-employee options and warrants were previously recorded in
equity. Due to the Company having other instruments outstanding
that were convertible into an indeterminate number of shares of common
stock at the grant date of the vested non-employee options and warrants,
these options and warrants should have been classified as
liabilities.
|
F -
15
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company reclassified the fair value of these previously issued vested
non-employee options and warrants from additional paid-in capital to derivative
liability accounts on the balance sheet. At December 31, 2008, the
effect of the restatement related to the Company’s options and warrants was to
record a derivative liability in the amount of $1,295,040, an unrealized gain on
derivative in the amount of $21,957, and a reduction in additional paid-in
capital in the amount of $1,316,997.
|
d)
|
This
restatement is to correct an error in the application of a discount rate
to calculate the discount on the Company’s promissory note issued in
December 2008 aggregating $2,861,218. At December 31, 2008, the effect of
the restatement related to the Company’s discounts resulted in both an
increase in the discount and a decrease in the loss on extinguishment of
debt in the amount of $605,791.
|
|
e)
|
This
restatement is to correct an error in the application of the valuation of
the fair market value used to calculate the relative fair market value and
the corresponding discount on some of the Company’s promissory notes
issued in December 2008 aggregating $2,180,000. At December 31, 2008, the
effect of the restatement related to the Company’s discounts resulted in
both an increase in the discount and a decrease in additional paid-in
capital in the amount of $407,504.
|
|
f)
|
Additionally,
the Company previously recognized $92,035 of financing expenses during the
year ended December 31, 2008 related to the issuance of contingent
warrants. Accounting principles require that when accounting
for a security that becomes convertible only upon the occurrence of a
future event outside the control of the holder, known as contingent
beneficial conversion feature, the security should not be recognized in
earnings until the contingency is resolved. As a result, the Company
reversed its previous recording of this transaction by both decreasing
interest expense and increasing additional paid-in capital by
$92,035.
|
NOTE
4 - OIL AND GAS PROPERTIES
Oil
and Gas Operations in Appalachian Basin
As of
December 31, 2009, the Company had $426,636 of oil and gas property costs
related to its proved wells, net of impairment and accumulated depletion. During
the year ended December 31, 2009, the Company recorded revenue of $139,765 and
depletion expense of $46,807 on its proved 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 will expire seven years from the grant
date.
F -
16
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company commenced the required monthly payments of $50,000 in January 2009 and
has paid an aggregate amount of $450,000 at December 31,
2009. As of December 31, 2009 the Company was late on $150,000
of payments. On February 26, 2010, the Company settled the remaining
monthly payments aggregating $1,350,000 by issuing 54,000,000 shares of the
Company’s common stock at $0.025 per share, a 50% discount to the closing share
price on the date of the agreement. The shares were issued in March
2010.
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 former 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.
For the
year ended December 31, 2009, the Company recorded interest expense of $214,573,
$95,099 of which was ascribed to related parties, which represented interest on
the cash installment payment due to the former noncontrolling
interest.
Oil and Gas Interests and
Operations
On April
2, 2008, the Company entered into a Modification and Settlement Agreement with
TAPO Energy, LLC (“TAPO”) to settle its obligation due to TAPO in the amount of
$671,598. Under the terms of the settlement agreement, the Company assigned all
of its rights to receive revenue from the five TAPO wells for a period equal to
the later of 48 months (commencing January 2008) or until the obligation to TAPO
has been satisfied (“the Assignment Period”). Upon expiration of the Assignment
Period, all rights assigned to TAPO will automatically revert back to the
Company and a new carried interest in the five TAPO wells will be assigned to
the Company. Under the settlement agreement, the Company also agreed to enter
into a transportation agreement with TAPO, whereby TAPO will transport all gas
produced and recovered from the five wells. As a result of the
settlement agreement, the Company’s obligation due to TAPO was reduced by
$156,677 in 2008 and by $48,533 in 2009 to $466,388 as of December 31, 2009 due
to the application of the Company’s revenue from the five TAPO wells for the
twelve months ended December 31, 2009 against the Company’s settlement
obligation due to TAPO.
On
December 29, 2008, the Company entered into a Continuation Agreement with
Mid-East Oil Company (“Mid-East”) and Mid-East’s advisor HUB to settle its
obligation in the amount of $283,039 to Mid-East and $65,000 to HUB in
accordance with the November 2007 Modification and Settlement Agreement with
HUB, Mid-East, and Mark Thompson (Mid-East and HUB are under the common control
of Mark Thompson). In addition, the Company paid Mid-East $18,000 for the
completion of a well in September 2008. As consideration for the Continuation
Agreement, Mid-East 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, Mid-East agreed to distribute to Indigo its proportionate share of
monthly revenue within 10 days of its receipt of the production
checks.
On
December 30, 2008, The Company entered into a Continuation Agreement with Dannic
Energy Corporation (“Dannic”) to settle its obligation in the amount of $381,824
to Dannic. Under the terms of the settlement agreement, Dannic 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, Dannic
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, Dannic formally recorded the assignment of the 27% interest in
the wells. Dannic also agreed to distribute to Indigo its
proportionate share of monthly revenue within 30 days of its receipt of the
production checks.
F -
17
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 year ending December 31, 2009,
the Company recorded a gain on sale of oil and gas interests in the amount of
$629,760.
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. 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 value of $300,000. All these amounts were expensed as
forbearance costs in 2008 since the Company was not a named party on any lease
agreements.
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 December 31, 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 5). As of
December 31, 2009, the Company has incurred $3,743,736 of costs related to the
drilling program which are recorded as unproved property costs, of which
$1,633,380 was accrued at December 31, 2009. On April 3, 2009, the
Company announced that four wells had 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 had 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.
F -
18
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In April
2009 the Company 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. On February 16, 2010,
the Company completed the installation of a new well pumps system. On March 4,
2010 the Company completed required high pressure tests on the transmission
lines from the wells. The Company still needs approval by the
utilities regulatory commission before production can commence.
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.
On March
15, 2010, the Company entered into a Memorandum of Understanding (“MOU”) with
Epicenter (Epicenter together with the Company, the “Parties”) which supersedes
all agreements between the Parties with respect to the four wells located in the
Dubois field, in the Illinois Basin (“Wells”). Within 60 days after the
execution of the MOU the Parties will execute a formal operating agreement
patterned after the standard industry operating agreement as published by the
American Petroleum Institute. The parties agreed that:
|
·
|
The
Company provided to Epicenter an aggregate of $2,100,000 which was
utilized for drilling and other activities related to the
Wells.
|
|
·
|
The
working interest revenue generated by the Wells shall be owned 75% by
Indigo and 25% by Epicenter.
|
|
·
|
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
Wells.
|
|
·
|
The
Company will provide funding to a maximum of $350,000 for completion
efforts that are required to bring the Wells online and into
production.
|
|
·
|
Working
interest revenue, net of operational requirements, will be utilized to pay
outstanding accounts payable incurred during the drilling and completion
of the Wells beginning with mechanics lien
holders.
|
Summary
Oil and gas properties
consisted of the following:
|
December 31,
|
|||||||
|
2009
|
2008
|
||||||
Acquisition,
exploration and development costs
|
$ | 13,510,144 | $ | 10,208,811 | ||||
Impairment
charge
|
(8,992,130 | ) | (8,739,585 | ) | ||||
Depletion
|
(347,643 | ) | (300,836 | ) | ||||
Total
|
$ | 4,170,371 | $ | 1,168,390 |
F -
19
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
5 - NOTES PAYABLE
Convertible
Notes - Series 1
In return
for $400,000 received in 2006, we issued convertible notes. The notes had
maturity dates three years from the date of issuance and bore interest at 8% per
annum. The notes provided 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 notes and a corresponding discount in
the amount of $266,667. As of December 31, 2009, the Company has recorded
$78,100 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
December 31, 2009, the Company has failed to pay obligations amounting to
$400,000 on this series of notes, and as such, was in default on the
obligations
Notes
- Series 2
In April
and May 2007, we borrowed a total of $510,000 from various lenders and issued
promissory notes to the lenders. In July 2007, $100,000 of these promissory
notes was settled. On September 30, 2008, the Company settled five of the
promissory notes aggregating $296,986, including $86,986 of accrued interest and
penalties in exchange for 9,899,524 shares of common stock (See Promissory Note
Settlement Agreements below). On November 30, 2008, the Company settled one of
the promissory notes aggregating $110,910, including $35,910 of interest and
late fees in exchange for 3,697,000 shares of common stock.
As of
December 31, 2009, the Company failed to pay obligations amounting to $203,372,
which includes $78,372 of accrued interest, on this series of notes, of which
$121,870, which includes $46,870 of accrued interest, is due to the Braatz
family, a related party, and as such, was in default on the obligations. On
February 26, 2010, the lenders agreed to settle all outstanding obligations in
exchange for 5,000,000 shares of the Company’s common stock. The shares were
issued in March 2010.
Convertible
Notes - Series 3
On
September 30, 2008, the Company settled four of the promissory notes aggregating
$148,587, including $33,587 of accrued interest and penalties, of which
promissory notes aggregating $116,113, including $26,113 of accrued interest and
penalties is attributable to related parties, in exchange for 4,952,886 shares
of common stock, of which 3,870,449 shares of common stock is attributable to
related parties (See Promissory Note Settlement Agreements below).
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.
F -
20
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
This
transaction has been accounted for in accordance with ASC 470-60 as a troubled
debt restructuring because the 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 a note discount.
Convertible
Notes - Series 4
In April
and June 2008, we borrowed a total of $875,000 from various lenders and issued
promissory notes of which $700,000 were due to related parties ($600,000 was due
to Carr Miller and $100,000 was due to James Walter Sr.). In October 2008, Jerry
L. Braatz, Sr. and Kirsten K. Braatz (collectively the “Braatz Family”) became a
related party when their combined holdings of the common stock of the Company
exceeded 5% of the then outstanding stock of the Company. As a result, their
notes totaling $175,000 were classified as related party as of December 31,
2008. On September 30, 2008, the Company settled the $100,000 note due to James
Walter, Sr., a related party, in addition to $19,524 of accrued interest and
penalties in exchange for 3,984,141 shares of common stock (See Promissory Note
Settlement Agreements below). On November 30, 2008, pursuant to the Global
Financing Agreement (“GFA”), a promissory note in the amount of $500,000 due to
Carr Miller was converted into 25,000,000 shares of common. Accrued interest on
this note in the amount of $92,192 as of November 30, 2008 was included in the
revised promissory note (see Global Financing Agreement section
below).
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 and at the
option of the Carr Miller, can be accelerated and due on demand.
This
transaction has been accounted for in accordance with ASC 470-60 as a troubled
debt restructuring because the 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 a note discount.
Convertible
Notes - Series 5 – Related Party
In July
and September 2008, we borrowed a total of $1,000,000 from Carr Miller, a
related party. On November 30, 2008, pursuant to the GFA, this promissory note
was replaced by a revised promissory note (see Global Financing Agreement
section below).
Other
Convertible Notes
On July
9, 2007, we borrowed $100,000 from an individual lender and issued a promissory
note. On September 30, 2008, the Company settled this note, including $37,066 of
accrued interest and penalties in exchange for 4,568,857 shares of common stock
(See Promissory Note Settlement Agreements below).
F -
21
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2008, the Company borrowed $55,000 from two individual lenders and
issued promissory notes. On September 30, 2008, the Company settled these notes
aggregating $67,899, including $12,899 of accrued interest and penalties in
exchange for 2,263,312 shares of common stock (See Promissory Note Settlement
Agreements below).
Promissory
Notes
Note
Payable 1
On
October 15, 2008, the Company entered into a settlement agreement on a
promissory note in the amount of $450,000 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. The note
automatically renewed on October 15, 2009. As of December 31, 2009, the Company
has not made three of the required monthly payments of $5,625 aggregating
$16,875 which are included in accounts payable and accrued expenses. The note
includes a clause, in the event of default, giving the Maker an option to
accelerate the note and cause it to be immediately due on demand.
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. In July 2009, the Company paid the lender the 10%
penalty fee of $20,000 required by the Modification and Settlement Agreement.
For the year ended December 31, 2009, the Company has issued 2,540,000 penalty
shares to the noteholder. The shares were valued at $106,800 and recorded as
interest expense. On February 26, 2010, the lender agreed to settle all
outstanding obligations in exchange for 8,000,000 shares of the Company’s common
stock. The shares were issued in March 2010.
Note
Payable 3
On
January 25, 2007, we borrowed $80,000 from an individual lender and issued a
promissory note. On September 30, 2008, the Company settled this note, including
$37,185 of accrued interest and penalties in exchange for 4,572,843 shares of
common stock (See Promissory Note Settlement Agreements below).
Note
Payable 4
On
February 7, 2007, we borrowed $200,000 from an individual lender and issued a
promissory note. On September 30, 2008, the Company settled the promissory note
aggregating $220,000, including $20,000 of penalties in exchange for 7,333,333
shares of common stock (See Promissory Note Settlement Agreements
below).
F -
22
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 Modification and 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 year ended December 31, 2009, the Company
has issued 1,320,000 penalty shares to the noteholder. The penalty shares were
valued at $55,000 and recorded as interest expense. On February 26, 2010, the
lender agreed to settle all outstanding obligations in exchange for 4,400,000
shares of the Company’s common stock. The shares were issued in March
2010.
Other
Promissory Notes
In 2007,
we borrowed $300,000 from various individual lenders and issued promissory
notes. On September 30, 2008, the Company settled the promissory notes
aggregating $373,570, including $73,570 of accrued interest and penalties in
exchange for 12,452,320 shares of common stock (See Promissory Note Settlement
Agreements below).
In 2007,
we borrowed $165,000 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. In December 2009, this
note was extended for a tenth time to March 2010 in exchange for which we agreed
to issue 300,000 shares to the lender. We valued the 150,000 shares at $9,000
based on the stock trading price on the note extension date. For the year ended
December 31, 2009, the Company recorded interest expense for the amortization of
discounts on the extensions in the amount of $25,500. As of December 31, 2009,
the Company was in default on $140,000 of these notes. In February and March
2010, the lenders holding notes aggregating $75,000 agreed to settle all
outstanding obligations in exchange for 3,000,000 shares of the Company’s common
stock. The shares were issued in March 2010. As of April 10, 2010 the Company
was in default on $90,000 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 and at the option of the Maker, can be accelerated and due on demand. The
funds are designated for two monthly settlement payments to the former partners
of Indigo-Energy, LP and general working capital.
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 year ended
December 31, 2009, amortization of the discounts amounted to $40,450, which was
recorded as interest expense. The Company also recorded an additional interest
expense of $11,745 during 2009 which was accrued at December 31, 2009. As of
December 31, 2009 the Company was in default on these notes. On
February 26, 2010, a lender holding note in the amount of $100,000 agreed to
settle all outstanding obligations in exchange for 4,000,000 shares of the
Company’s common stock. The shares were issued in March 2010. On March 25, 2010,
a lender holding note in the amount of $25,000 agreed to settle all outstanding
obligations in exchange for 1,000,000 shares of the Company’s common stock. The
shares were issued in March 2010.
F -
23
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 10, 2009, the Company borrowed $500,000 from an individual lender and
issued promissory notes that provided for interest at 9% per annum with a
maturity date of December 10, 2010. Within thirty days of funding of the loan,
the lenders are also to receive shares of the Company’s common stock equal to
two times the numerical dollars of the principal of the loan. These shares were
issued in December 2009. The borrowed funds are to be utilized for the
completion of the Company’s 4-well DuBois drilling program. In the event these
notes are unpaid within ten days of their maturity date, the Company will incur
a late charge equal to 10% of the note amount, and issue 5,000,000 shares within
30 days of default. In the event of default, up to 50% of the net revenue in the
Company’s 4-well DuBois drilling program which is actually received by the
Company, net of expenses, liens, and related obligations, shall be used to repay
any remaining balance due under this note and at the option of the Maker, can be
accelerated and due on demand.
We valued
the 1,000,000 shares at $40,000 based on our stock trading price on the date of
the promissory note. We allocated the proceeds from issuance of the note and
common stock based on the proportional fair value for each item. Consequently,
we recorded a discount of $37,000 on the promissory notes, which is being
amortized over the term of the note. For the year ended December 31, 2009,
amortization of the discount amounted to $2,051, which was recorded as interest
expense. The Company also recorded an additional interest expense of $2,712
during 2009 which was accrued at December 31, 2009.
Promissory Note Settlement
Agreements
On
September 30, 2008, the Company entered into a total of 20 settlement agreements
(“September Settlement Agreements”) with individual lenders holding various
convertible and non-convertible promissory notes previously issued by the
Company in the aggregate amount of $1,500,817, consisting of $1,180,000 of
principal and $320,817 of accrued interest. The settlements also included
promissory notes in the total amount of $372,823 issued to one of the Company’s
directors, Mr. Walter, Sr. and his affiliates. Under the terms of the September
Settlement Agreements, the individual lenders agreed to the retirement of their
promissory notes in exchange for an aggregate of 50,027,216 shares of the
Company’s common stock, 12,427,433 of which was issued to Mr. Walter, Sr. and
his affiliates. As part of the settlement agreements, the individual lenders
agreed to release the Company from any liability arising out of the issuance of
and defaults on the promissory notes as well as any other claims that the
individual lenders may have against the Company.
The total
of the promissory notes, accrued interest, and late fees were settled at $0.03
per share of the Company’s common stock, which was below the Company’s stock
trading price of $0.06 per share on the September 30, 2008 settlement date. The
settlement of the convertible notes requires the debtor enterprise to
recognize an expense equal to the fair value of all securities and other
consideration transferred in the transaction in excess of the fair value of
securities issuable pursuant to the original conversion terms. Consequently, the
Company recorded a net loss on extinguishment on convertible notes in the amount
of $1,045,377 for the year ending December 31, 2008, of which $143,254 of loss
on extinguishment is ascribed to related parties. The settlement of the
non-convertible notes require the difference between the net carrying
amount of the extinguished debt and the reacquisition price of the extinguished
debt be recognized currently in income in the period of extinguishment. The
Company recorded a loss on extinguishment on non-convertible notes in the amount
of $730,755 for the period ending December 31, 2008, of which $137,185 is
ascribed to a related party.
F -
24
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 note required that commencing December 31,
2009, the Company is required to make equal monthly installment payments of
principal and interest on the note. 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 $2,026,623, 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 year ended December 31, 2009 amounted to
$401,154, which was recorded as interest expense. Additional interest expense on
this note was recorded for the year ended December 31, 2009 in the amount of
$286,122. As of December 31, 2009 the Company was delinquent on one payment of
principal and interest in the amount of $79,642. On March 25, 2010, the Company
entered into a Modification and Consolidation Agreement with Carr Miller whereby
this note was consolidated with other Carr Miller notes into a new note (See
Modification and Consolidation Agreement below).
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 December 31, 2009, the August through December installment
payments were unpaid, and as a result the Company was in default on the note and
incurred a late charges in the amount of $6,438, which was recorded as interest
expense. On March 25, 2010, the Company entered into a Modification and
Consolidation Agreement with Carr Miller whereby this note was consolidated with
other Carr Miller notes into a new note (See Modification and Consolidation
Agreement below).
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 $916,329, 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 year ended December 31, 2009 amounted to
$318,612, which was recorded as interest expense. Additional interest expense on
this note and late payment penalties on scheduled interest payments were
recorded for the year ended December 31, 2009 in the amount of $115,622. On
March 25, 2010, the Company entered into a Modification and Consolidation
Agreement with Carr Miller whereby this note was consolidated with other Carr
Miller notes into a new note (See Modification and Consolidation Agreement
below).
On
December 30, 2008, the Company borrowed $900,000 from Carr Miller and issued two
promissory notes that provided for interest at 20% per annum with maturity dates
of December 30, 2013. One of the notes 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.
Another 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 $851,324, based on the ascribed value of
the 45,000,000 shares of common stock issued to the lender. 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 year ended December 31, 2009 amounted to $61,780, which was recorded as
interest expense. Additional interest expense on this note was recorded for the
year ended December 31, 2009 in the amount of $179,877. On March 25, 2010, the
Company entered into a Modification and Consolidation Agreement with Carr Miller
whereby this note was consolidated with other Carr Miller notes into a new note
(See Modification and Consolidation Agreement below).
F -
25
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
$151,730, 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 year ended December 31, 2009 amounted to $4,830, which was recorded as
interest expense. Additional interest expense on this note was recorded for the
year ended December 31, 2009 in the amount of $40,000. On March 25, 2010, the
Company entered into a Modification and Consolidation Agreement with Carr Miller
whereby this note was consolidated with other Carr Miller notes into a new note
(See Modification and Consolidation Agreement below).
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 and at the option of the Maker, can be accelerated and due on demand. 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 $255,938, 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 year ended December 31,
2009 amounted to $7,105, which was recorded as interest expense. Additional
interest expense on these notes was recorded for the year ended December 31,
2009 in the amount of $26,596. On March 25, 2010, the Company entered into a
Modification and Consolidation Agreement with Carr Miller whereby this note was
consolidated with other Carr Miller notes into a new note (See Modification and
Consolidation Agreement below).
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 traunch and part of the third traunch of the
Additional Funding per the GFA (See Global Financing Agreement – Related Party
section under Note 5). 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 and at the option of the Maker, can be accelerated and due on demand.
Interest expense on these notes was recorded for the year ended December 31,
2009 in the amount of $89,520. 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 5) 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 year ended December
31, 2009 amounted to $1,739, which was recorded as interest expense. On March
25, 2010, the Company entered into a Modification and Consolidation Agreement
with Carr Miller whereby this note was consolidated with other Carr Miller notes
into a new note (See Modification and Consolidation Agreement
below).
F -
26
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 and at the option of the Maker, can be
accelerated and due on demand. 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 $36,752, 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 year ended December 31, 2009 amounted to $702, which was recorded
as interest expense. Additional interest expense on this note was recorded for
the year ended December 31, 2009 in the amount of $3,253. On March 25, 2010, the
Company entered into a Modification and Consolidation Agreement with Carr Miller
whereby this note was consolidated with other Carr Miller notes into a new note
(See Modification and Consolidation Agreement below).
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 traunch of the Additional
Funding per the GFA (See Global Financing Agreement – Related Party section
under Note 5). 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 and at the option of the Maker, can be accelerated and due on
demand.. Interest expense on this note was recorded for the year ended
December 31, 2009 in the amount of $687. On March 25, 2010, the Company entered
into a Modification and Consolidation Agreement with Carr Miller whereby this
note was consolidated with other Carr Miller notes into a new note (See
Modification and Consolidation Agreement below).
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 traunch of the Additional
Funding per the GFA (See Global Financing Agreement – Related Party section
under Note 5) 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 and at the option of
the Maker, can be accelerated and due on demand. Interest expense on this
note was recorded for the year ended December 31, 2009 in the amount of $15,721.
On March 25, 2010, the Company entered into a Modification and Consolidation
Agreement with Carr Miller whereby this note was consolidated with other Carr
Miller notes into a new note (See Modification and Consolidation Agreement
below).
On March
3, 2010, the Company borrowed $75,000 from Carr Miller and issued a promissory
note that provided for interest at 10% per annum with a maturity date of March
3, 2012. This note represents part of the fourth traunch of the Additional
Funding per the GFA (See Global Financing Agreement – Related Party section
under Note 5). 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 and at the option of the Maker, can be accelerated and due on
demand. Interest expense on this note was recorded for the year ended
December 31, 2009 in the amount of $4,264. On March 25, 2010, the Company
entered into a Modification and Consolidation Agreement with Carr Miller whereby
this note was consolidated with other Carr Miller notes into a new note (See
Modification and Consolidation Agreement below).
F -
27
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Modification and
Consolidation Agreement – Related
Party
On March
25, 2010, the Company entered into a Modification and Consolidation Agreement
with Carr Miller whereby all outstanding Carr Miller promissory notes in the
aggregate principal amount of $7,321,218 plus any accrued interest and penalties
thereon were consolidated into one new promissory note (“New Note”). The New
Note has a principal amount of $8,376,169 and requires that commencing March 25,
2012, the Company is required to make equal monthly installment payments of
principal and interest on the note. The New Note has a maturity date of March
25, 2014 and bears interest at the rate of 10% per annum. 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. As an inducement to enter into the
Modification and Consolidation Agreement, within thirty days of the agreement,
the lender is also to receive shares of the Company’s common stock equal one
share for each dollar of the principal of the loan. These shares were issued in
March 2010.
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 traunch of this funding was received in February 2009,
the second traunch of this funding was received in March and April 2009, third
traunch of this funding was received in June and July 2009, and part of the
fourth tranche of this funding was received in March 2010.
On March
12, 2010, the Parties agreed to enter into a Global Financing Agreement
Extension, whereby CMC’s commitment to provide the Company with the remaining
funding shall be extended to June 30, 2010. In satisfaction of its commitment
under the GFA, CMC shall, prior to June 30, 2010, have the option to (a) return
an aggregate of 15,000,000 shares of the Company’s common stock currently
registered under CMC’s name to the Company for cancellation; (b) cancel and
forgive certain debts owed by the Company to CMC in the amount of $1,500,000; or
(c) provide the Company with the remaining funding as set forth under the
GFA.
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.
|
F -
28
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
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. 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 $101,682 for
the year ending December 31, 2009 based on receiving the first, second and
third traunch 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.
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.
On March
25, 2010, the Company entered into a Modification and Consolidation Agreement
with Carr Miller whereby this note was consolidated with other Carr Miller notes
into a new note (See Modification and Consolidation Agreement
above).
Summary
The
following summarizes the Company’s notes and loan payable as of December 31,
2009:
F -
29
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Instrument
|
Maturity Dates
|
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
|
||||||||||||||
Note
Series 2
|
Settled
February 2010
|
50,000 | - | 50,000 | ||||||||||
Note
Series 2 - related party
|
Settled
February 2010
|
75,000 | - | 75,000 | ||||||||||
Note
Payable 1
|
October
2009
|
417,783 | - | 417,783 | ||||||||||
Note
Payable 2 - related party
|
Settled
February 2010
|
200,000 | - | 200,000 | ||||||||||
Note
Payable 5
|
Settled
February 2010
|
100,000 | - | 100,000 | ||||||||||
Other
Promissory Notes
|
January
2008 - Dec. 2010
|
615,000 | (39,449 | ) | 575,551 | |||||||||
Settled
February 2010
|
75,000 | - | 75,000 | |||||||||||
Other
Promissory Notes -
|
||||||||||||||
related
party
|
Settled
February 2010
|
100,000 | - | 100,000 | ||||||||||
Long-Term
Notes Payable -
|
||||||||||||||
related
party
|
March
2014
|
7,246,218 | (3,601,914 | ) | 3,644,304 | |||||||||
Total
|
$ | 9,545,668 | $ | (3,641,363 | ) | $ | 5,904,305 | |||||||
Less
long-term portion
|
2,656,543 | |||||||||||||
Current
portion
|
$ | 3,247,762 |
These
notes carried effective interest rates ranging between 9% and 162% based on
various factors including the Company’s effective borrowing rates at the date of
issue and discounts based on amounts allocated to equity shares issued and other
beneficial conversion features arising in conjunction with certain of these
notes at their issue date.
The
following summarizes the Company’s notes and loan payable as of December 31,
2008:
Instrument
|
Maturity Dates
as of April 2009
|
Principal
Amount Owed
|
Debt Discount
|
Amount
Reflected on
Balance Sheet
|
||||||||||
Convertible
Notes
|
||||||||||||||
Convertible
Notes Series 1
|
September-October
2009
|
$ | 666,667 | $ | (235,944 | ) | $ | 430,723 | ||||||
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
31, 2008
|
75,000 | - | 75,000 | ||||||||||
Convertible
Notes Series 3
|
||||||||||||||
(conversion
option later
|
||||||||||||||
eliminated)
|
February-March
2008
|
80,000 | - | 80,000 | ||||||||||
Convertible
Notes Series 3 -
|
||||||||||||||
related
party (conversion
|
||||||||||||||
option
later eliminated)
|
February
2008
|
75,000 | - | 75,000 | ||||||||||
Convertible
Notes Series 4 -
|
||||||||||||||
related
party (conversion
|
||||||||||||||
option
later eliminated)
|
August
2008
|
175,000 | - | 175,000 | ||||||||||
Note
Payable 1
|
October
2009
|
440,863 | - | 440,863 | ||||||||||
Note
Payable 2 – Related Party
|
December
2008
|
200,000 | - | 200,000 | ||||||||||
Notes
Payable 5
|
May
2008
|
100,000 | - | 100,000 | ||||||||||
Other
Promissory Notes
|
January2008-June
2009
|
165,000 | - | 165,000 | ||||||||||
Notes
Payable – Related Party
|
November
2013
|
2,861,218 | (2,007,332 | ) | 853,886 | |||||||||
Notes
Payable – Related Party
|
December
2010 and
|
|||||||||||||
December
2013
|
2,180,000 | (1,907,861 | ) | 272,139 | ||||||||||
Total
|
$ | 7,068,748 | $ | (4,151,137 | ) | $ | 2,917,611 | |||||||
Less
long-term portion
|
1,126,025 | |||||||||||||
Current
portion
|
$ | 1,791,586 |
F -
30
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
current portion is reflected in the balance sheet as follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Notes
payable, net
|
$ | 1,218,334 | $ | 835,863 | ||||
Notes
payable, net – related party
|
375,000 | 525,000 | ||||||
Convertible
notes, net
|
666,667 | 430,723 | ||||||
Current
portion of long term notes payable – related party
|
987,761 | - | ||||||
$ | 3,247,762 | $ | 1,791,586 |
The
following is a schedule by year of the future minimum payments required under
the Company’s notes payable.**
Year
Ending December 31:
|
||||
2010
|
$ | 5,539,714 | ||
2011
|
2,260,319 | |||
2012
|
1,480,292 | |||
2013
|
2,740,649 | |||
2014
|
355,208 | |||
Total
principal and interest due
|
12,376,183 | |||
Less
amounts due within one year
|
(5,539,714 | ) | ||
Noncurrent
Portion
|
$ | 6,836,468 |
**This
schedule includes both principal and interest due, and excludes discount
amortization and the additional liability for variable conversion features on
our Series 1 Convertible notes (see Convertible Notes - Series 1 section
above.)
F -
31
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 year
ended December 31, 2009 was $1,046,629, of which $720,984 was from related
parties. Additional interest on notes payable pursuant to the rates charged on
the notes for the year ended December 31, 2009 was $1,817,194 of which
$1,694,157 was from related parties. Accrued interest at December 31, 2009 was
$1,205,878, of which $928,152 was due to related parties.
NOTE
6 - DUE TO RELATED PARTY
On
September 3, 2005, we entered into a agreement with one of our then principal
stockholders, Leo Moore, to redeem his entire interest in the Company. At the
time of the agreement, he held a 33⅓ interest in our common stock. 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 May
18, 2009, the Company entered into a Global Settlement Agreement with the Moore
Family. The 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 Moore Family had originally
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 terms of an earlier settlement agreement, the 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.
The
Company valued the aggregate 6,000,000 shares issued to Leo Moore and Moore
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 year ending December
31, 2009.
NOTE
7 - 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 5), 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 5). 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.
Common
Stock
In April
2008, the Company issued 56,250 shares of common stock for legal services
performed in 2006 valued at $0.21 per share.
F -
32
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On July
7, 2008, the Company reached a settlement agreement with an individual who
agreed to perform services in exchange for 4,000,000 shares of the Company’s
common stock in 2005. As a result of the settlement, the
individual returned 2,000,000 of the shares to the
Company. The 4,000,000 shares were originally issued to the
individual in November 2005 prior to the Company’s recapitalization on December
15, 2005, which had no effect on the Company’s statement of
operations. Therefore, the Company accounted for the return of the
2,000,000 shares simply as a reduction in common stock at par value for a total
of $2,000 with a corresponding increase in additional paid-in capital at the
same amount.
On
December 15, 2008, our Board of Directors authorized the issuance of 250,000
shares of common stock each to two of our board members, Brad Hoffman and
Hercules Pappas. These shares were issued on December 29, 2008 and were valued
at $.07 per share, based on the closing price of the Company’s common stock,
resulting in a compensation expense of $35,000 in the twelve months ended
December 31, 2008.
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 5) gave Carr Miller control of the
majority of the common stock of the Company.
On
December 24, 2008, our Board of Directors approved an 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.
On March
10, 2009, the Company’s Board of Directors approved the issuance of 20,000,000
shares of the Company’s common stock to each of Mr. Steven Durdin and Mr. James
Walter Jr., which were valued at an aggregate of $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. The shares were issued on April 22, 2009.The issuance of
the shares 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.
Shares
Issued Pursuant to Various Consulting Agreements
On
January 30, 2008, the Company entered into a consulting agreement with David
Rosania to provide consulting services and support for business development of
energy related properties, assist in development of the Company’s strategic
marketing and business plan and to handle other duties as assigned by Company
management. As compensation, 155,000 shares of the Company’s common stock were
to be issued to Mr. Rosania. The term of this agreement was for a one month
period commencing January 1, 2008. These shares were issued on February 1, 2008
and were valued at $.17 per share, based on the closing price of the Company’s
common stock, resulting in consulting expense of $26,350 in the twelve months
ended December 31, 2008.
F -
33
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On April
1, 2008, the Company entered into a consulting agreement with William E.
Schumacher (“Schumacher”) to provide consulting services and support for the
Company’s interim fundraising efforts, assist in development of the Company’s
strategic marketing and business plan and to handle other duties as assigned by
Company’s management. As compensation, 25,000 shares of the Company’s common
stock were issued to Mr. Schumacher. The term of this agreement was for a three
month period commencing April 1, 2008. These shares were issued on May 20, 2008
and were valued at $0.13 per share, based on the closing price of the Company’s
common stock, resulting in consulting expense of $3,250 in the twelve months
ended December 31, 2008.
On April
17, 2008, the Company entered into a consulting agreement with Robert McIlhinney
(“McIlhinney”) to provide consulting services and support for the Company’s
interim fundraising efforts, assist in development of the Company’s strategic
marketing and business plan and to handle other duties as assigned by Company
management. As compensation, 75,000 shares of the Company’s common stock were to
be issued to Mr. McIlhinney. The term of this agreement was for a three month
period commencing April 15, 2008. These shares were issued on May 1, 2008 and
were valued at $0.11 per share, based on the closing price of the Company’s
common stock, resulting in consulting expense of $5,275 in the twelve months
ended December 31, 2008.
On May 1,
2008, the Company entered into a consulting agreement with Randall P. Cohen
(“Cohen”) to provide consulting services and support for the Company’s interim
fundraising efforts, assist in development of the Company’s strategic marketing
and business plan and to handle other duties as assigned by Company’s
management. As compensation, 50,000 shares of the Company’s common stock are to
be issued to Mr. Cohen. The term of this agreement was for a three month period
commencing April 1, 2008. These shares were issued on May 20, 2008 and were
valued at $0.13 per share, based on the closing price of the Company’s common
stock, resulting in consulting expense of $6,500 in the twelve months ended
December 31, 2008.
On May 6,
2008, the Company and World Stock Exchange (“WSE”) entered into an Investment
Relation Agreement, whereby the Company agreed to engage the Investment Relation
services of WSE for one month and for compensation in the amount of $1,980 and
150,000 restricted shares of the Company’s common stock which were issued on May
20, 2008. The shares were valued at $0.13 per share, the trading price, and were
recorded as consulting expense in the amount of $19,500 for the twelve months
ending December 31, 2008.
On June
1, 2008, the Company entered into a Consulting Agreement with Karl Schmidt
(“Schmidt”), whereby, for compensation in the amount of 12,000,000 restricted
shares of the Company’s common stock and reimbursement for all approved related
business expenses, Schmidt will provide consulting services to the Company for a
term of one-quarter commencing on June 1, 2008. The shares were issued on June
24, 2008. On June 30, 2008, the parties agreed that the shares issued were
partial consideration for a loan agreement with International Financial
Corporation, LLC. They further agreed that if the Company did not receive gross
loan proceeds of at least $30,000,000 prior to the end of business on July 3,
2008, Schmidt would return the shares to the Company for cancellation. The
Company did not receive the loan proceeds prior to the end of business on July
3, 2008, and as a result the shares were returned and assigned no value as of
December 31, 2008.
On June
1, 2008, the Company entered into a Consulting Agreement with D&P
Development LLC (“D&P”), a Florida corporation, whereby, for compensation in
the amount of 5,000,000 restricted shares of the Company’s common stock and
reimbursement for all approved related business expenses, D&P will provide
consulting services to the Company for a term of one-quarter commencing on June
1, 2008. The shares were issued on June 24, 2008. On June 30, 2008, the parties
agreed that the shares issued were partial consideration for a loan agreement
with International Financial Corporation, LLC. They further agreed that if the
Company did not receive gross loan proceeds of at least $30,000,000 prior to the
end of business on July 3, 2008, D&P would return the shares to the Company
for cancellation. The Company did not receive the loan proceeds prior to the end
of business on July 3, 2008, and as a result the shares were returned and
assigned no value as of December 31, 2008.
F -
34
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On March
7, 2007, the Company entered into a consulting agreement with Big Apple
Consulting USA, Inc. (“Big Apple”), whereby Big Apple was to market and promote
the Company to its network of brokerage firms and market makers. Big Apple was
responsible for locating and introducing potential investors to the Company
through telemarketing and other networking activities, as well as representing
the Company in responding to investor inquiries. The Company was to compensate
Big Apple in the form of either the Company’s shares of free trading common
stock or cash, at the Company’s option. The term of the consulting agreement was
for one year, and the Company had the right to extend the term for an additional
year after the initial expiration date. The Company was unable to compensate Big
Apple with free trading common stock however did issue 5,000,000 shares of its
restricted common stock to Big Apple in 2007, and the Company recorded
$5,250,000 of consulting expense in the first quarter of 2007 for the value of
the common stock issued to Big Apple. Because the Company was unable to provide
Big Apple with free trading shares, Big Apple failed to perform under the terms
of the contract. Big Apple subsequently asserted that the Company had a
remaining obligation under the contract in the amount of $260,000 for services
performed under the consulting agreement. In April 2008 the Company agreed to
pay $20,000 and issue 1,030,000 shares of restricted common stock to Big Apple
as payment for the $260,000 obligation. The Company has recorded this obligation
as consulting expense for the twelve-months ended December 31, 2008. The Company
issued the 1,030,000 shares of common stock to Big Apple in May 2008. Big Apple
subsequently asserted that the Company had a remaining obligation under the
contract in the amount of $40,000 for services performed, but not limited to,
invoices from April and May 2008, under the consulting agreement. In December
2008 the Company agreed to pay $20,000 and issue 500,000 shares of restricted
common stock to Big Apple as payment for the $40,000 obligation. The Company has
recorded this obligation as consulting expense for the twelve-months ended
December 31, 2008. The Company issued the 500,000 shares of common stock to Big
Apple in January 2009.
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 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 year ended December 31,
2009.
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 issued to Mr. Ramos. The
warrant has 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 year ended December 31,
2009.
Stock
Options Granted
On
October 29, 2007, the Board of Directors approved the issuance of stock options
to the individuals named below in accordance with the 2007 Stock Option Plan.
The options vested immediately.
Number of
|
||||||||||
Stock Options
|
||||||||||
Name of Optionee
|
Issued
|
Exercise Price
|
Expiration
|
|||||||
Steven
P. Durdin (CEO and President)
|
10,000,000 | $ | 0.25 |
October 16, 2017
|
||||||
Stanley
L. Teeple (Board Director)
|
5,000,000 | $ | 0.25 |
October
16, 2017
|
||||||
Stacey
Yonkus (Former Board Director)
|
250,000 | $ | 0.25 |
October
16, 2017
|
||||||
John
Hurley (Former Board Director)
|
250,000 | $ | 0.25 |
October
16, 2017
|
||||||
James
C. Walter, Sr. (Former Board Director)
|
250,000 | $ | 0.25 |
October
16, 2017
|
The
estimated fair value of the aforementioned options was calculated using the
Black-Scholes model. Consequently, the Company recorded a share-based
compensation expense of $1,873,700 for the year ended December 31, 2007. The
following table summarizes the weighted average of the assumptions used in the
method.
F -
35
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Year ending December 31,
|
||||
|
2007
|
|||
Expected
volatility
|
170 | % | ||
Dividend
yield
|
0 | % | ||
Expected
terms (in years)
|
10 | |||
Risk-free
rate
|
4.35 | % |
On
February 26, 2008, the Company’s Board of Directors approved the issuance of
non-qualified stock options to the following individuals in accordance with the
2007 Stock Option Plan. The options vested immediately.
Name of Optionee
|
Number of
Stock Options
Issued
|
Exercise Price
|
Expiration
|
|||||||
Everett
Miller (consulting service)
|
2,500,000 | $ | 0.25 |
October
16, 2017
|
||||||
Stanley
L. Teeple (Board Director)
|
5,000,000 | $ | 0.25 |
October
16, 2017
|
||||||
Hercules
Pappas (Board Director)
|
250,000 | $ | 0.25 |
October
16, 2017
|
||||||
Everett
Miller (Board Director)
|
250,000 | $ | 0.25 |
October
16, 2017
|
||||||
Gersten
Savage (legal service)
|
1,000,000 | $ | 0.25 |
October
16, 2017
|
The
estimated fair value of the aforementioned options was calculated using the
Black-Scholes model. Consequently, the Company recorded a share-based
compensation expense of $1,073,700 for the twelve months ended December 31,
2008. The following table summarizes the weighted average of the assumptions
used in the method.
Year Ending
|
||||||||
December 31,
|
||||||||
2008
|
2007
|
|||||||
Expected
volatility
|
181 | % | n/a | |||||
Dividend
yield
|
0 | % | n/a | |||||
Expected
terms (in years)
|
10 | n/a | ||||||
Risk-free
rate
|
4.35 | % | n/a |
The
following table summarizes the Company’s stock option activity and related
information:
Number of
|
||||
Shares
|
||||
Balance
as of December 31, 2007
|
15,750,000
|
|||
Granted
|
9,000,000
|
|||
Exercised
|
-
|
|||
Expired/forfeit
|
-
|
|||
Balance
as of December 31, 2008
|
24,750,000
|
|||
Granted
|
-
|
|||
Exercised
|
-
|
|||
Expired/forfeit
|
-
|
|||
Balance
as of December 31, 2009
|
24,750,000
|
F -
36
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS OUTSTANDING December 31, 2009
|
OPTIONS EXERCISABLE
|
|||||||||||||||||||||||||
Number of
|
Weighted
|
|||||||||||||||||||||||||
Outstanding
|
Average
|
Weighted
|
Number
|
Weighted
|
||||||||||||||||||||||
Range of
|
Shares at
|
Remaining
|
Average
|
Aggregate
|
Exercisable at
|
Average
|
Aggregate
|
|||||||||||||||||||
Exercise
|
December 31,
|
Contract
|
Exercise
|
Intrinsic
|
December 31,
|
Exercise
|
Intrinsic
|
|||||||||||||||||||
Prices
|
2009
|
Life
|
Price
|
Value
|
2009
|
Price
|
Value
|
|||||||||||||||||||
$ |
0.25
|
24,750,000
|
8.80
years
|
$
|
0.25
|
$
|
-
|
24,750,000
|
$
|
0.25
|
$
|
-
|
NOTE
8 - ASSET RETIREMENT OBLIGATIONS
Total
future asset retirement obligations were estimated by management based on the
Company’s net ownership interest, estimated costs to reclaim and abandon the
wells and the estimated timing of the costs to be incurred in future periods.
The Company has estimated the net present value of its total assets retirement
obligations at December 31, 2009 to be $290,580.
2009
|
2008
|
|||||||
Balance
as of January 1
|
$
|
227,800
|
$
|
208,000
|
||||
Additional
liabilities incurred
|
40,000
|
-
|
||||||
Liabilities
settled
|
-
|
-
|
||||||
Accretion
expense
|
22,780
|
19,800
|
||||||
Revision
of estimates
|
-
|
-
|
||||||
Balance
as of December 31
|
$
|
290,580
|
$
|
227,800
|
NOTE
9 - COMMITMENTS AND CONTINGENCIES - NOT DISCLOSED ELSEWHERE
General
There
have been significant changes in the US economy, oil and gas prices and the
finance industry which have adversely affected and may continue to adversely
affect the Ccompany in its attempt to obtain financing or in its process to
produce commercially feasible gas exploration or production.
Federal,
state and local authorities regulate the oil and gas industry. In particular,
gas and oil production operations and economics are affected by environmental
protection statutes, tax statutes and other laws and regulations relating to the
petroleum industry, as well as changes in such laws, changing administrative
regulations and the interpretations and application of such laws, rules and
regulations. The Company believes it is in compliance with all federal, state
and local laws, regulations, and orders applicable to the Company and its
properties and operations, the violation of which would have a material adverse
effect on the Company or its financial condition.
Operating
Hazards and Insurance
The gas
and oil business involves a variety of operating risks, including the risk of
fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and
environmental hazards such as oil spills, gas leaks, ruptures or discharges of
toxic gases, the occurrence of any of which could result in substantial losses
to the Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and
suspension of operations.
In those
projects for which the Company is an operator, the Company maintains certain
insurance of various types to cover its operations with policy limits and
retention liability customary in the industry. In those projects in which the
Company is not the operator, but in which it owns a non-operating interest, the
operator for the prospect maintains insurance to cover its operations and the
Company may purchase additional insurance coverage when necessary.
There can
be no assurance that insurance, if any, will be adequate to cover any losses or
exposure to liability. Although the Company believes that the policies obtained
by operators or the Company itself provide coverage in scope and in amounts
customary in the industry, they do not provide complete coverage against all
operating risks. An uninsured or partially insured claim, if successful and of
significant magnitude, could have a material adverse effect on the Company and
its financial condition via its contractual liability to the
prospect.
F -
37
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As of
August 2008 the Company was in default on all of its insurance policies
including, but not limited to, its policies covering general and excess
liability, directors and officers, errors and omissions, as well as sudden and
accidental coverage on the wells. The occurrence of an uninsured event which may
result in financial damage to the Company could have a material adverse effect
on our financial condition and results of operations. Management intends to have
all of these policies reinstated. On September 18, 2008, the Company obtained a
new policy for directors and officers insurance and was current on this policy
through September 17, 2009. As of April 10, 2010, most policies have not been
reinstated, and management is unaware of any uninsured event which may result in
financial damages to the Company.
Title
to Properties
The
Company’s practice has been to acquire ownership or leasehold rights to oil and
natural gas properties from third parties. Most of the Company’s current
drilling operations are conducted on properties acquired from third parties. Our
existing rights are dependent on those previous third parties having obtained
valid title to the properties. Prior to the commencement of gas drilling
operations on those properties, the third parties customarily conduct a title
examination. The Company generally does not conduct examinations of title prior
to obtaining its interests in its operations, but rely on representations from
the third parties that they have good, valid and enforceable title to the oil
and gas properties. Based upon the foregoing, we believe that we have
satisfactory title to our producing properties in accordance with customary
practices in the gas industry. The Company became aware of potential historical
discrepancies in the chain of title and other possible title
imperfections pertaining to certain of its properties. The Company is
not aware of the assertion or threatened assertion of any adverse claims
against title to such properties. The Company intends to work
with the third party predecessors in interest to resolve these
discrepancies and imperfections in accordance with accepted industry
practices.
Potential
Loss of Oil and Gas Interests/ Cash Calls
The
Company has entered into turnkey contracts with various operators for the
drilling of oil and gas properties, and still owes certain operator payments on
drilling wells. In addition, it might be subject to future cash calls due to (1)
the drilling of any new well or wells on drilling sites not covered by the
original turnkey contracts; (2) rework or recompletion of a well; (3) deepening
or plugging back of dry holes, etc. If the Company does not pay delinquent
amounts due or its share of future Authorization For Expenditures (“AFE”)
invoices, it may have to forfeit all of its rights in certain of its interests
in the applicable prospects and any related profits. If one or more of the other
members of the prospects fail to pay their share of the prospect costs, the
Company may need to pay additional funds to protect its
investments.
Other
On April
25, 2008, the Company entered into a Letter of Intent (“LOI”) with International
Financial Corporation, LLC, a Nevada Limited Liability Company (“International”)
whereby both parties agreed to become members of Rivers West Energy,
LLC. Under the LOI, International also agreed to provide the Company, upon the
execution of a definitive agreement governing the understanding between the
Company and International, with funds for capital expenditures specified in the
agreement and general working capital of the Company. The Company did not
receive the funds that International committed to deliver.
As
further consideration for the LOI, the Company agreed to pay to Spectrum
Facilitating Technologies, LLC, a Limited Liability Company (“Spectrum”) engaged
by International to seek and investigate loan transactions on its behalf, the
amount of $150,000, as well as to transfer to Spectrum 5,000,000 shares of the
Company’s restricted common stock for bridge financing due diligence services.
The Company paid the $150,000 in April and issued the 5,000,000 shares to
Spectrum in May 2008. The shares were valued at $0.19 per share based on the
Company’s stock trading price on the date of LOI for a total of $950,000, which
was expensed by the Company for the twelve months ended December 31,
2008.
F -
38
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 10, 2010.
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 April 10, 2010.
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 April
10, 2010, Stowe has received an aggregate of $10,000 for items 1 through 3
above, and item 4 remains uncompleted.
NOTE
10 - INCOME TAXES
Deferred
income taxes result from the net tax effects of temporary differences between
the carrying amounts of assets and liabilities reflected on the financial
statements and the amounts recognized for income tax purposes. The tax effects
of temporary differences and net operating loss carryforwards that give rise to
significant portions of deferred tax assets and liabilities are as follows at
December 31:
2009
|
2008
|
|||||||
Deferred
tax assets
|
||||||||
Tax
benefit arising from net operating loss carryforward
|
$ | 11,900,000 | $ | 5,314,000 | ||||
Settlement
expenses
|
396,000 | 396,000 | ||||||
Impairment
of oil and gas properties
|
111,000 | - | ||||||
Share
based compensation
|
1,297,000 | 1,337,000 | ||||||
13,704,000 | 7,047,000 | |||||||
Deferred
tax liabilities
|
||||||||
Intangible
drilling costs
|
1,588,000 | 191,000 | ||||||
Unrealized
gain on derivative
|
443,000 | - | ||||||
Depreciation
and depletion
|
110,000 | 33,000 | ||||||
Capitalized
interest
|
42,000 | 3,000 | ||||||
2,183,000 | 227,000 | |||||||
Net
deferred assets
|
11,521,000 | 6,820,000 | ||||||
Less
valuation allowance
|
(11,521,000 | ) | (6,820,000 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
As of
December 31, 2009 and 2008, the Company had losses which resulted in net
operating loss carryforwards for tax purposes amounting to approximately
$27,000,000 and $18,000,000, respectively, that may be offset against future
taxable income. These NOL carryforwards expire beginning 2027 through 2030.
However, these carryforwards may be significantly limited due to changes in the
ownership of the Company as a result of past and future equity
offerings.
F -
39
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Recognition
of the benefits of the deferred tax assets will require that the Company
generate future taxable income. There can be no assurance that the Company will
generate any earnings or any specific level of earnings in future years.
Therefore, the Company has established a valuation allowance for deferred tax
assets (net of liabilities) of approximately $11,521,000 and $6,820,000 as of
December 31, 2009 and 2008, respectively.
The
following table presents the principal reasons for the difference between the
Company’s effective tax rates and the United States federal statutory income tax
rate of 35%.
2009
|
2008
|
|||||||
Federal
income tax benefit at statutory rate
|
$ | 1,769,000 | $ | 6,247,000 | ||||
State
income tax benefit
|
455,000 | 1,606,000 | ||||||
Permanent
differences
|
(43,000 | ) | (5,021,000 | ) | ||||
Impairment
expenses
|
111,000 | - | ||||||
Intangible
drilling costs
|
(1,396,000 | ) | - | |||||
Unrealized
gains
|
(443,000 | ) | - | |||||
Other
temporary differences
|
97,000 | - | ||||||
Net
operating loss carryforward
|
4,151,000 | - | ||||||
Change
in valuation allowance
|
(4,701,000 | ) | (2,832,000 | ) | ||||
Income
tax benefit
|
$ | - | $ | - | ||||
Effective
income tax rate
|
0 | % | 0 | % |
Tax
Uncertainties
Uncertainty
in income taxes arise from tax positions taken or expected to be taken in the
Company’s tax return. For those benefits to be recognized, a tax position must
be more-likely-than-not to be sustained upon examination by taxing authorities.
The amount recognized is measured as the largest amount of benefit that has a
greater than 50 percent likelihood of being realized upon ultimate
settlement.
The
Company has analyzed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as open
tax years in these jurisdictions. The periods subject to examination for the
Company’s tax returns are for the years from 2006 to 2009. The Company believes
that its income tax filing positions and deductions would be sustained on audit
and does not anticipate any adjustments that would result in a material change
to its financial position. Therefore, no reserves for uncertain income tax
positions have been recorded.
The
Company is subject to U.S. federal income tax including state and local
jurisdictions. Currently, no federal or state income tax returns are under
examination by the respective taxing jurisdictions.
The
Company’s accounting policy is to recognize interest and penalties related to
uncertain tax positions in income tax expense. The Company has not accrued
interest for any periods.
NOTE
11 - RELATED PARTY TRANSACTIONS - NOT DISCLOSED ELSEWHERE
In
January 2008, John Hurley resigned as our Board Director and Everett Miller and
Hercules Pappas were elected to fill in the two vacancies of our Board of
Directors. As compensation for their services as members of our Board of
Directors, Mr. Miller and Mr. Pappas each received an option to purchase 250,000
shares of our common stock pursuant to our 2007 Stock Option Plan. The options
vested immediately on the option grant date, have an exercise price of $0.25 per
share and expire on October 16, 2017 (see Stock Option Granted section under
Note 7). During the twelve months ended December 31, 2008, we recorded an
aggregate consulting expense of $59,660 for the options issued to Messrs. Miller
and Pappas.
F -
40
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
January 2008, the Company entered into a consulting agreement with Everett
Miller, our Board Member and a related party, to provide consulting services and
support for business development of energy related properties, assist in
development of the Company’s strategic marketing and business plan and to handle
other duties as assigned by Company management. As compensation, the Company was
required to issue a non-qualified stock option to Mr. Miller under its 2007
Stock Option Plan to purchase 2,500,000 shares of the Company’s common stock
with an exercise price of $0.25 per share. This option was issued by the Company
on February 26, 2008 (see Stock Options Granted section under Note 7). The
Company recorded consulting expense in the amount of $298,250 related to this
option in the twelve month period ending December 31, 2008. The term of this
agreement was for a three month period commencing January 1, 2008 and is subject
to cancellation by either party with 30-day written notice.
On
December 2, 2008, the Company engaged the law firm, Pappas & Richardson, LLC
(the “Law Firm”), to institute legal action against certain entities and
individuals that the Company believes it has a claim against. 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 Company agreed to pay
the Law Firm a flat fee $80,000 up front, and a 25% contingent fee upon
recovery. On December 4, 2008, the Company paid to the Law Firm the $80,000 up
front fee.
In
December 2008, Brad Hoffman and Steve Durdin were elected as our Board Directors
for one year term. In addition, Brad Hoffman was appointed as Chair of the Audit
Committee. Everett Miller, Hercules Pappas, and Stan Teeple were re-elected to
two-year terms.
NOTE
12 - SUBSEQUENT EVENTS NOT DISCLOSED ELSEWHERE
The
Company has evaluated subsequent events through April 13, 2010, 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.
NOTE
13 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid
for interest expense and income taxes for 2009 were as follows:
2009
|
2008
|
|||||||
Interest
|
$
|
105,882
|
$
|
156,724
|
||||
Income
taxes
|
$
|
-
|
$
|
-
|
Non-Cash
Investing and Financing Transactions:
For the
year ended December 31, 2008, the Company recorded capitalized interest of
$7,531 related to interest incurred on the promissory notes.
During
2008, the Company acquired oil and gas properties in the total amount of
$442,403, of which $109,482 was accrued for at December 31, 2008.
At
December 31, 2008, the Company had 30 shares of Series C Preferred Stock
issuable to Carr Miller in connection with the GFA, which were valued at
$600,000 and recorded as a deferred loan fee.
In
February 2008, a noteholder converted the principal and interest of his note of
$27,542 into 285,110 shares of the Company’s common stock.
In
December 2008, pursuant to the GFA, Carr Miller converted $1,000,000 of its
promissory notes into 50,000,000 shares of the Company’s common
stock.
F -
41
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
December 2008, pursuant to the GFA, the Company issued a new promissory note to
Carr Miller in the amount of $2,861,218 to replace certain notes issued to Carr
Miller previously, in consideration for which the Company issued 125,000,000
shares of common stock to Carr Miller. The shares were valued at
$2,500,000. The Company recorded a discount of $1,420,832 on the new
note.
During
2008, the Company issued a total of 146,829,993 shares of common stock to
various lenders in connection with the issuance, amendment, or penalty shares of
promissory notes. The value of these shares together with the value assigned to
the beneficial conversion feature or variable conversion feature on certain of
the convertible notes were valued at $7,245,874 and recorded as discounts on the
notes.
The
Company has recorded asset retirement obligations in the aggregate amount of
$290,580 as of December 31, 2009 and increased oil and gas properties for
$40,000 in 2009.
For the
year ended December 31, 2009 the Company recorded capitalized interest of
$88,381 related to interest incurred on the promissory notes.
During
2009, the Company acquired oil and gas properties in the total amount of
$3,301,333, of which $1,633,380 was accrued for at December 31,
2009.
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.
In
February 2009, the Company issued warrants to purchase 400,000 shares of the
Company’s common stock to two consultants, which were valued at $20,000 and
recorded as interest expense.
In March
2009, the Company issued an aggregate of 40,000,000 shares of common stock to
Steven Durdin and James Walter Jr., which were valued at $2,000,000 and recorded
as interest expense.
In April
2009, 75 shares of Series C Preferred Stock issued to Carr Miller in connection
with the GFA were converted into 75,000,000 shares of the Company’s common
stock.
In May
2009, the Company settled its outstanding obligation to Leo Moore and the Moore
Family with 6,000,000 shares of the Company’s common stock, which were valued at
$180,000.
During
2009, the Company issued a total of 13,910,000 shares of common stock to various
lenders in connection with the issuance, amendment, or penalty shares of
promissory notes. The value of these shares together with the value assigned to
the beneficial conversion feature or variable conversion feature on certain
of the convertible notes were valued at $620,300 and recorded as discounts on
the notes.
NOTE
14 - SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
Gas
Reserves
Users of
this information should be aware that the process of estimating quantities of
“proved” and “proved developed” natural gas reserves is very complex, requiring
significant subjective decisions in the evaluation of all available geological,
engineering and economic data for each reservoir. The data for a given reservoir
may also change substantially over time as a result of numerous factors
including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. Consequently, material revisions to existing
reserve estimates occur from time to time. Although every reasonable effort is
made to ensure that reserve estimates reported represent the most accurate
assessments possible, the significance of the subjective decisions required and
variances in available data for various reservoirs make these estimates
generally less precise than other estimates presented in connection with
financial statement disclosures.
F -
42
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Proved
gas reserves are the estimated quantities of natural gas, which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed gas reserves are those reserves expected to be
recovered through existing wells with existing equipment and operating
methods. The reserve data is based on studies prepared by an outside
petroleum engineer. The proved developed reserves of gas are located in the
state of West Virginia and Pennsylvania in the United States of
America.
In 2008,
Wright & Company, Inc. performed an evaluation to estimate proved reserves
and cash flow for the Company’s oil and gas properties. Wright & Co.
specializes in petroleum consulting and related property evaluations, economic
reviews/forcasts, SEC reports, and other services required by the Oil and Gas
Industry. D. Randall Wright, the founder of Wright & Company, is a
Registered Professional Engineer in the State of Texas. In 2009, the Company
revised these estimates using average, first-day-of-the-month price during the
12-month period before the end of the year rather than the year-end price when
estimating whether reserve quantities as required by the SEC Modernization of
Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008
(more fully described below).
The
following table presents estimates of the Company's net proved developed gas
reserves:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Proved
reserves (mmcf), beginning of year
|
572.0 | 392.4 | ||||||
Discovery
of proved developed reserves (mmcf)
|
- | - | ||||||
Revisions
of previous estimates
|
- | 241.7 | ||||||
Production
|
(35.8 | ) | (62.1 | ) | ||||
Proved
developed reserves (mmcf), end of year
|
536.2 | 572.0 |
Capitalized
Costs Relating to Gas Producing Activities:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Unproved
oil and gas properties (1)
|
$ | 3,743,736 | $ | 442,403 | ||||
Proved
oil and gas properties
|
9,766,409 | 9,766,409 | ||||||
Total
capitalized costs
|
13,510,145 | 10,208,812 | ||||||
Accumulated
depletion
|
(347,643 | ) | (300,837 | ) | ||||
Impairment
of oil and gas properties
|
(8,992,131 | ) | (8,739,585 | ) | ||||
Net
capitalized costs
|
$ | 4,170,371 | $ | 1,168,390 |
F -
43
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Costs
Incurred in Gas Property Acquisition, Exploration and Development Activities for
the Years Ended December 31:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Acquisition
of properties
|
||||||||
Proved
|
$ | - | $ | - | ||||
Unproved
(1)
|
3,301,333 | 442,403 | ||||||
Exploration
costs
|
- | - | ||||||
Total
|
$ | 3,301,333 | $ | 442,403 |
(1) These
amounts represent costs incurred by the Company in the Dubois Field in Indiana
and are excluded from the amortization base until proved reserves are
established or impairment is determined.
Results
of Operations for Gas Producing Activities for the Years Ended December
31:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Gas
sales
|
$ | 139,765 | $ | 676,969 | ||||
Operating
costs
|
(95,802 | ) | (285,765 | ) | ||||
Depreciation,
depletion and amortization
|
(46,807 | ) | (125,912 | ) | ||||
Proved
property impairment
|
(252,545 | ) | - | |||||
Results
of operations
|
$ | (255,389 | ) | $ | 265,292 |
Standardized Measure of
Discounted Future Net Cash Flows (Unaudited)
In
December 2009, the Company adopted revised oil and gas reserve estimation and
disclosure requirements. The primary impact of the new disclosures is to conform
the definition of proved reserves with the SEC Modernization of Oil and Gas
Reporting rules, which were issued by the SEC at the end of 2008. The accounting
standards update revised the definition of proved oil and gas reserves to
require that the average, first-day-of-the-month price during the 12-month
period before the end of the year rather than the year-end price, must be used
when estimating whether reserve quantities are economical to produce. This same
12-month average price is also used in calculating the aggregate amount of (and
changes in) future cash inflows related to the standardized measure of
discounted future net cash flows. The rules also allow for the use of reliable
technology to estimate proved oil and gas reserves if those technologies have
been demonstrated to result in reliable conclusions about reserve volumes. The
unaudited supplemental information on oil and gas exploration and production
activities for 2009 has been presented in accordance with the new reserve
estimation and disclosure rules, which may not be applied retrospectively. The
2008 data is presented in accordance with FASB oil and gas disclosure
requirements effective during those periods.
The
supplemental unaudited presentation of proved reserve quantities and related
standardized measure of discounted future net cash flows provides estimates only
and does not purport to reflect realizable values or fair market values of the
Company’s reserves. Volumes reported for proved reserves are based on reasonable
estimates. These estimates are consistent with current knowledge of the
characteristics and production history of the reserves.
The
Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of producing oil and
gas properties. Accordingly, significant changes to these estimates can be
expected as future information becomes available.
Proved
reserves are those estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
F -
44
INDIGO-ENERGY,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
reserve estimates have been prepared by the Company from data prepared by an
independent petroleum engineer in respect to certain producing
properties. Revisions in previous estimates as set forth above
resulted from analysis of new information, as well as from additional production
experience or from a change in economic factors.
The
reserve estimates are believed to be reasonable and consistent with presently
known physical data concerning size and character of the reservoirs and are
subject to change as additional knowledge concerning the reservoirs becomes
available.
Future
cash inflows and future production and development costs are determined by
applying year-end prices and costs to the estimated quantities of gas to be
produced. Estimated future income taxes are computed using current
statutory income tax rates for where production occurs. The resulting
future net cash flows are reduced to present value amounts by applying a 10%
annual discount factor.
The
following summary sets forth the Company's future net cash flows relating to
proved gas reserves.
December 31, (In Thousands)
|
||||||||
2009
|
2008
|
|||||||
Future
cash inflows
|
$ | 2,296,400 | $ | 3,168,100 | ||||
Future
production costs
|
(1,219,400 | ) | (1,293,200 | ) | ||||
Future
net cash flows (undiscounted)
|
1,077,000 | 1,874,900 | ||||||
Annual
discount of 10% for estimated timing
|
650,200 | 874,700 | ||||||
Standardized
measure of future net
|
$ | 426,800 | $ | 1,000,200 |
Changes in Standardized
Measure (Unaudited)
The
following are the principal sources of change in the standardized measure of
discounted future net cash flows at December 31 in thousands:
2009
|
2008
|
|||||||
Standardized
measure, beginning of period
|
$ | 1,000 | $ | 852 | ||||
Net
changes in prices and production costs
|
(488 | ) | (142 | ) | ||||
Development
costs incurred during the period
|
- | - | ||||||
Revisions
of previous quantity estimates
|
(396 | ) | 145 | |||||
Additions
to proved reserves resulting from extensions,
|
||||||||
discoveries
and improved recovery
|
- | - | ||||||
Purchase
(sale) of reserves in place
|
- | - | ||||||
Sale
of gas, net of production costs
|
(81 | ) | (391 | ) | ||||
Accretion
of discount
|
47 | 60 | ||||||
Changes
in income taxes, net
|
- | - | ||||||
Change
in production timing and other
|
345 | 476 | ||||||
Standardized
measure, end of period
|
$ | 427 | $ | 1,000 |
F -
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS AND FINANCIAL DISCLOSURE
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 LJ Soldinger Associates LLC 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.
On
October 5, 2009, the Company engaged Mark Bailey & Company, Ltd. (“Mark
Bailey”) as the Company’s new independent accountants.
ITEM 9A. CONTROLS AND
PROCEDURES
(a)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, 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.
18
(b)
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for establishing and maintaining internal
controls over financial reporting and disclosure controls. Internal Control Over
Financial Reporting is a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the issuer’s board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
|
1.
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
issuer;
|
|
2.
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with
authorizations of management and directors of the registrant;
and
|
|
3.
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the issuer’s assets that
could have a material effect on the financial
statements.
|
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934, as
amended, is appropriately recorded, processed, summarized and reported within
the specified time periods.
Management
has conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the framework established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
Based on
this assessment, management concluded that as of December 31, 2009 it had
material weaknesses in its internal control procedures over financial
reporting.
A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim
financial statements would not be prevented or detected on a timely
basis.
As of
December 31, 2009, we have concluded that our internal control over
financial reporting was ineffective as of December 31, 2009.
The
Company’s assessment identified certain material weaknesses which are set forth
below:
Financial
Statement Close Process
There are
insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements.
There is
insufficient supervision and review by our corporate management, particularly
relating to complex transactions relating to equity and debt
instruments.
There is
a lack of formal process and timeline for closing the books and records at the
end of each reporting period.
19
There is
a lack of expertise with US generally accepted accounting principles, SEC rules
and regulations, and oil and gas operations for review of critical accounting
areas and disclosures and material non-standard transactions.
The
Company currently has an insufficient level of monitoring and oversight controls
for review and recording of stock issuances, agreements and
contracts, including insufficient documentation and review of the selection
and application of generally accepted accounting principles to significant
non-routine transactions. In addition this has resulted in a lack of control
over the issuance of the Company's stock which resulted in several instances of
extra or duplicate shares being issued.
There is
a lack of support for certain of the Company’s cash disbursements to Epicenter,
which the Company initially expensed as lease forbearance expenses in the total
amount of $940,000 during 2008. In addition, in 2008 and through
March 12, 2009, the Company paid Epicenter $1,500,000 for the drilling of oil
and gas wells prior to obtaining the assignment of well interests or having a
drilling contract with the Company as a named party.
These
weaknesses restrict the Company's ability to timely gather, analyze and report
information relative to the financial statements. However, the
Company utilizes the services of a recognized accounting firm that specialized
in public companies engaged in the oil and gas business for accounting
activities and oversight.
Entity
Level Controls
There are
insufficient corporate governance policies. Our corporate governance activities
and processes are not always formally documented. Specifically, decisions made
by the board to be carried out by management should be documented and
communicated on a timely basis to reduce the likelihood of any misunderstandings
regarding key decisions affecting our operations and management.
There are
no human resource policies or controls in place to address the risks of fraud
nor are there: procedures for background checks on hiring and
promotions; formal Board of director and audit committee oversight parameters;
or a Risk Assessment policy in concurrence with its securities counsel and
insurance carrier. During the year 2008, the Company implemented a
code of ethics and conduct and a hotline/whistleblower program in the event an
employee or outsider discovers fraudulent or questionable activities taking
place.
The board
devotes almost all of its time and resources to raising funds to allow the
Company to sustain its operations. There is very little time spent by
the board monitoring the activities of the Company or review and oversight of
the operating wells and other assets owned by the Company.
The
Company currently has insufficient resources and an insufficient level of
monitoring and oversight, which may restrict the Company's ability to gather,
analyze and report information relative to the financial statements in a timely
manner, including insufficient documentation and review of the selection and
application of generally accepted accounting principles to significant
non-routine transactions. In addition, the limited size of the accounting
department makes it impractical to achieve an optimum segregation of
duties.
There are
limited processes and limited or no documentation in place for the
identification and assessment of internal and external risks that would
influence the success or failure of the achievement of entity-wide and
activity-level objectives.
The
Company’s size (1 full time employee/CEO plus 1 consultant/CFO) dictates that
most policies are self policing and adjusted on-the-fly as required so formal
policies are essentially not formed and recorded.
Due to
insufficient resources, the company does not have the capacity nor does it take
action to monitor the functioning of its system of internal control, which is a
material weakness.
20
The board
members lack expertise and experience in the oil and gas
industry. However, the Company utilizes the services of an accounting
firm for accounting activities and oversight.
Computer
Controls
The
top-down, risk based approach evaluation of the IT department revealed that
although the Company only uses two laptop computers which have sensitive and
financial materials on their system, the systems are properly backed
up on a routine basis.
The
computer systems were not properly password protected from outside intrusion,
but have virus and firewall protection.
The
Company utilizes standard accounting software that does not prevent erroneous or
unauthorized changes to previous reporting periods and does not provide an
adequate audit trail of entries made in the accounting software.
Functional
Controls and Segregation of Duties
The
Company has ineffective controls relating to the revenue cycle.
Because
of the Company’s limited resources, there are limited controls over information
processing, and no internal controls over the accuracy, completeness and
authorization of transactions.
There is
an inadequate segregation of duties consistent with control
objectives. Our Company’s management is composed of a small number of
individuals resulting in a situation where limitations on segregation of duties
exist. In order to remedy this situation we would need to hire additional staff
to provide greater segregation of duties. Currently, it is not feasible to hire
additional staff to obtain optimal segregation of duties. Management will
reassess this matter in the following year to determine whether improvement in
segregation of duty is feasible.
Because
of the small size of the Company, the limited nature of its activities, and its
inadequate financial resources, there are limited or no written policies or
procedures in place for various areas, which is a material weakness in the
company’s control activities.
There is
a lack of top level reviews in place to review targets, product development,
joint ventures or financing. All major business decisions are carried
out by the officers with board of director approval when needed.
Accordingly,
as the result of identifying the above material weaknesses we have concluded
that these control deficiencies resulted in a reasonable possibility that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by the Company’s internal
controls.
Management
believes that the material weaknesses set forth above were the result of the
scale of our operations and are intrinsic to our small
size. Management believes these weaknesses did not have a material
effect on our financial results and intends to take remedial actions upon
receiving funding for the Company’s business operations.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report
herein.
21
(c)
CHANGES IN INTERNAL CONTROLS 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
December 31, 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.
ITEM 9B. OTHER INFORMATION
None.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Our
bylaws provide that we have at least one director. The number of Directors which
shall constitute the whole board shall be five (5). The number of Directors may
from time to time be increased or decreased to not less than one nor more than
seven (7) by action of the Board of Directors. The Directors shall be elected at
the annual meeting of the stockholders and each Director elected shall hold
office until his successor is elected and qualified. Directors need not be
stockholders. Vacancies in the Board of Directors including those caused by an
increase in the number of directors, may be filled by a majority of the
remaining Directors, though less than a quorum, or by a sole remaining Director,
and each Director so elected shall hold office until his successor is elected at
an annual or a special meeting of the stockholders. The holders of two-thirds of
the outstanding shares of stock entitled to vote may at any time peremptorily
terminate the term of office of all or any of the Directors by vote at a meeting
called for such purpose or by a written statement filed with the secretary or,
in his absence, with any other officer. Such removal shall be effective
immediately, even if successors are not elected simultaneously and the vacancies
on the Board of Directors resulting there from shall only be filled from
the stockholders.
A vacancy
or vacancies in the Board of Directors shall be deemed to exist in case of the
death, resignation or removal of any Directors, or if the authorized number of
Directors be increased, or if the stockholders fail at any annual or special
meeting of stockholders at which any Director or Directors are elected to elect
the full authorized number of Directors to be voted for at that
meeting.
The
stockholders may elect a Director or Directors at any time to fill any vacancy
or vacancies not filled by the Directors. If the Board of Directors accepts the
resignation of a Director tendered to take effect at a future time, the Board or
the stockholders shall have power to elect a successor to take office when the
resignation is to become effective.
No
reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of his term of
office.
The
directors and executive officers of the Company currently serving are as
follows:
Name
|
Age
|
Office
|
||
Steven
P. Durdin
|
44
|
Director,
President and Chief Executive Officer
|
||
Stanley
L. Teeple
|
61
|
Director
and Chief Financial Officer
|
||
Everett
Miller
|
40
|
Director
and Chief Operating Officer
|
||
Hercules
Pappas
|
39
|
Director
|
||
Brad
Hoffman
|
39
|
Director
|
22
Management
Significant
Employees / Consultants
Steven P. Durdin – Mr.
Durdin joined the Company as a Director in April 2007 and was later appointed as
the Company’s President and Chief Executive Officer. He graduated from Rider
University in Lawrenceville, New Jersey with a degree in Finance and, upon
graduation, went to work for Allstate Insurance Company. During a career that
lasted for over 16 years, Steve moved from the ranks of associate agent to
Senior Account agent and was asked to join the management team of the
corporation in 1999. In his management role, Steve was promoted through multiple
levels of responsibility and eventually was given a seat on the Senior Staff
Board for the company in the Midlantic Region. In both of his tracks through
Allstate (Agency Owner and Corporate Management), Steve was consistently
recognized with awards for outstanding results and leadership. During his tenure
there, he learned volumes about building and growing organizations, raising
capital, financial management and accountability and working within the public
company arena. During his last 5 years with Allstate, Steve had started to
pursue other business interests which led him through many successful projects
in real estate development and the formation of an international trading company
in Colon, Panama. He also began consulting with small companies in the U.S. on
expansion into international markets and simultaneously helped them to develop
stronger infrastructure bases from which to operate. Because of the successes in
his other pursuits, Steve officially retired from Allstate in 2000 and
eventually sold his remaining agency interests. Steve became involved with
Indigo-Energy in the Fall of 2005 and has been the foundation for the Company’s
fund raising since its inception. As a founding member of Indigo-Partners, L.P.
and core investor representing several different groups within the Company, he
has personally been responsible for raising approximately 95% of the company
funding to date and has been responsible for raising in excess of $ 500,000
within the past 45 days to help the company meet its short-term obligations.
Additionally, Steve has personally invested over $ 1.2 million of personal funds
over the past year. Steve is a key link with major shareholder groups and has
demonstrated through his actions his commitment to the future success of the
Company.
Stanley L. Teeple – Over
the last 30 years Stan has held numerous senior management positions in a number
of public and private companies across a broad spectrum of industries. In his
capacity as a turnaround consultant he has taken over and ultimately owned,
operated, and then sold two $50 plus million perishables distribution businesses
involved in commercial, wholesale, franchise and retail operations. Additionally
he has operated and worked for various court appointed trustees and principals
as CEO, COO, and CFO in the entertainment, pharmaceuticals, food, travel, and
tech industries. He presently operates his consulting business on a
project-to-project basis, and holds various other directorships. His businesses
operational strengths include knowing how to manage and maximize the resources
and preserve the integrity of a company from start-up through to maturity. In
his capacity as President of Stan Teeple, Inc. for the last 25 plus years, he
has provided services to various bankruptcy Trustees and Counsel primarily in
the Central District of California. These services included interim operator,
CEO, CFO, appraisals, plan structuring and various other capacities as required.
These situations required delicate negotiations with creditors, vendors,
lenders, and the debtors themselves to evolve and maximize the assets of the
corporations. Some of the companies included as clients are United Artists
Theatre Circuit, Chiquita Brands, Inc., United Airlines, Warner Lambert, General
Mills, Coca-Cola Foods, Numero Uno Pizza, Pro Image Entertainment Corporation,
and Compass Microsystems.
Everett Miller – Mr.
Miller joined the Company in January 2008. He has been in the investment
banking, venture capital and securities business for more than 25 years. He
started and operated Carr Miller Capital, LLC in November of 2006, a developer
of real estate, banking and securities funding techniques, which has since
partnered with global financial companies such as ICA Investment Group and
Fortis Bank. From March 2005 until June 2006, he operated Everett Miller
Financial, a developer of funding techniques. He also operated Millenium
Brokerage LLC from June 2002 to January 2005. Mr. Miller has several securities
licenses, including the Series 55 Equity Floor trader and Series 24 General
Principal. He is a member of both the New Jersey Energy Traders and the
Securities and Trading Advisory Board of Seton Hall University, where he acts as
a mentor and advisory teacher of securities and financial software and real time
operations/practices. Mr. Miller attended college at University of Maryland and
Embry-Riddle Aeronautical College in Florida. He lived in Europe for several
years, has worked for the United States DOD as a GS-12 rated employee, has a
Paralegal Certification in New Jersey and Pennsylvania.
23
Hercules Pappas– Mr. Pappas
joined the Company in January 2008. Mr. Pappas formed the law firm of Pappas
& Richardson, LLC in October 1998 and is currently the firm’s Managing
Partner His practice since opening the firm has primarily been in the
business litigation related practice fields. The firm changed ownership to
Pappas & Wolf in 2009, with the addition of Captain Matthew S. Wolf,
Esquire. Mr. Pappas currently holds licenses to practice in New Jersey,
Pennsylvania, New York, the United States Court in the Eastern District of
Pennsylvania and the District of New Jersey. He is also admitted to
practice in the Supreme Court of the United States. As well as his
litigation practice, Mr. Pappas is also a Court approved mediator and maintains
a private practice offering economic mediation services as an alternative to
business and commercial litigation. He also acts as the General Legal
Counsel to Carr Miller Capital and has held the position of Economic Advisor to
ICA Investments. Mr. Pappas has advised many business entities throughout his
career and has partnered with several real estate developers for residential and
commercial real estate development projects in the Northeast. Mr. Pappas
obtained his Bachelor of Arts degree in Economics and Political Science from
East Stroudsburg University and earned his Juris Doctor from Widener University
School of Law.
Brad Hoffman – Mr. Hoffman
launched his career in financing fifteen years ago as co-founder of Hoffman,
Hoffman & Associates (HH&A), a financial services company specific to
the financing and factoring markets with clients which included hospitals,
surgery centers, manufacturers and transportation companies. In 1995,
HH&A merged with IHRS, Inc. to provide a broader set of financing services
to the healthcare, manufacturing and transportation industries. In
1999, Mr. Hoffman joined the merchant banking and private equity firm of Dubrow
Kavanaugh Capital, LLC (DKCap) overseeing new business development, M&A due
diligence, and portfolio management. Two years later, Mr. Hoffman joined Ashford
Capital, LLC (Ashford) a new venture firm created by several former partners
from DKCap in partnership with Japan’s largest Venture Capital firm, Hikari
Capital. In January 2004, Mr. Hoffman co-founded Surgifund, Inc. (SFI) and
acquired California-based healthcare accounts receivables. In
conjunction with SFI, Mr. Hoffman also co-founded Castlegate Holdings in 2005,
which is the J.V. partner with Fortress, one of the larger New York hedge
funds. Mr. Hoffman attended UCLA and Pepperdine University and is
degreed in Business Science Financing and Management.
Involvement
in certain legal proceedings
No
director, person nominated to become a director, executive officer, promoter or
control person of the Company has, during the last ten years: (i) been convicted
in or is currently subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (ii) been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting or mandating activities subject to any
Federal or state securities or banking or commodities laws including, without
limitation, in any way limiting involvement in any business activity, or finding
any violation with respect to such law, nor (iii) any bankruptcy petition been
filed by or against the business of which such person was an executive officer
or a general partner, whether at the time of the bankruptcy or for the two years
prior thereto.
Section
16(a) Beneficial Ownership Reporting Compliance
Under the
securities laws of the United States, our directors, executive (and certain
other) officers, and any persons holding ten percent or more of our common stock
must report on their ownership of the common stock and any changes in that
ownership to the Commission. Specific due dates for these reports have been
established. During the fiscal year ended December 31, 2009, we believe that all
reports required to be filed by Section 16(a) were filed.
24
ITEM 11. EXECUTIVE
COMPENSATION
Executives
and Directors Compensation
The
following table provides certain summary information concerning compensation
paid to or accrued by the executive officers named below during the fiscal years
ended December 31, 2009 and 2008.
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-
equity
Incentive
Plan
Comp
|
Non-
qualified
Deferred
Comp.
Earnings
|
All Other
Comp
|
Total
|
|||||||||||||||||||||||||||
Name
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||||||||||||
Steven
P. Durdin (1)
|
2008
|
114,000 | - | - | - | - | - | 9,000 | 123,000 | |||||||||||||||||||||||||
2009
|
210,333 | - | 1,000,000 | - | - | - | - | 1,210,333 | ||||||||||||||||||||||||||
Stanley
Teeple (2)
|
2008
|
260,000 | - | - | 596,500 | - | - | 856,500 | ||||||||||||||||||||||||||
2009
|
260,000 | - | - | - | - | - | - | 260,000 | ||||||||||||||||||||||||||
Everett
Miller (3)
|
2008
|
- | - | - | 328,080 | - | - | - | 328,080 | |||||||||||||||||||||||||
2009
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Hercules
Pappas (4)
|
2008
|
- | - | 17,500 | 29,830 | - | - | - | 47,330 | |||||||||||||||||||||||||
2009
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
Brad
Hoffman (5)
|
2008
|
- | - | 17,500 | - | - | - | - | 17,500 | |||||||||||||||||||||||||
2009
|
- | - | - | - | - | - | - | - |
(1)
|
On
October 8, 2007, we entered into an employment agreement with Steve Durdin
to become our President, which replaced the consulting agreement we had
with Mr. Durdin as described above. We agreed to pay Mr. Durdin $9,500 per
month, and issue to Mr. Durdin options or cashless exercise warrants to
acquire a minimum of 10,000,000 shares of our common stock pursuant to our
2007 Stock Option Plan. Mr. Durdin will also receive immediate family
medical and dental insurance coverage and life insurance equal to three
times his annual base salary. In addition, Mr. Durdin will receive an auto
allowance of $1,000 per month and a home office allowance of $1,000 per
month, as well as reimbursement for reasonable out-of-pocket expenses. As
part of the agreement, Mr. Durdin will not be entitled to additional
compensation by reason of service as a member of the Board of Directors.
The agreement was effective on October 1, 2007 for a fifteen-month period
and will automatically renew for consecutive one-year periods unless
terminated by either party.
|
On April
2, 2009, pursuant to the recommendation of the Company’s Compensation Committee,
the Company increased the base salary of its Chief Executive Officer, Steven
Durdin, to $250,000 a year. Mr. Durdin has agreed that the Company shall only
pay such portion of the base salary, as increased, permitted by the Company’s
current cash flow. Any balance thereof shall be accrued until the
Company has sufficient positive cash flow to allow an additional payment of Mr.
Durdin’s base salary. The Company also issued 20 shares of the
Company’s Series D to Mr. Durdin. On April 21, 2009, upon the increase in the
Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares, 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 increase in Mr.
Durdin’s base salary, as well as the issuance of Series D to Mr. Durdin are in
consideration for his extensive efforts extended in relation to the completion
of the drilling on the Wells and for his continued efforts in preparation for
other drilling activities in the Illinois Basin.
25
(2)
|
On
December 21, 2006, we entered into a third consulting agreement with
Stanley Teeple, Inc. (“STI”), an entity affiliated with Stanley Teeple,
our then Secretary and Treasurer and Board Director, pursuant to which we
agreed to pay STI a weekly consulting fee of $5,000, and issue to STI
options or cashless exercise warrants during the first quarter of 2007 to
acquire a minimum of 5,000,000 shares of our common stock at terms to be
determined by our Board of Directors. The agreement was effective on
January 1, 2007 for a two-year period and would be automatically renewed
for consecutive one-year periods unless terminated by either party. On
March 8, 2007, the Company entered into a fourth consulting agreement with
STI, which superseded but provided for the identical terms of cash
compensation as STI’s agreement of December 21, 2006. In addition, STI is
to be reimbursed for certain medical and dental insurance coverage, an
auto allowance of $1,000 per month, and certain other fringe benefits. STI
was also entitled to receive options or cashless warrants to acquire
20,000,000 shares of our common stock at prices to be determined by the
terms of a stock option plan to be adopted by the Company. In 2007, STI
waived its rights to 10,000,000 of the options to acquire our common
stock. Mr. Teeple currently owns options to purchase 10,000,000 shares of
the Company’s common stock personally of which 5,000,000 options were
granted in 2007, at an exercise price of $0.25 per share, and 5,000,000
options were granted in April 2008, pursuant to the Company’s Stock Option
Plan.
|
(3)
|
In January
2008 Everett Miller was elected to our Board of Directors. As compensation
for his services, Mr. Miller received an option to purchase 250,000 shares
of our common stock pursuant to our 2007 Stock Option Plan. In January
2008, the Company entered into a consulting agreement with Everett Miller,
our Board Member and a related party, to provide consulting services and
support for business development of energy related properties, assist in
development of the Company’s strategic marketing and business plan and to
handle other duties as assigned by Company management. As compensation,
the Company was required to issue a non-qualified stock option to Mr.
Miller under its 2007 Stock Option Plan to purchase 2,500,000 shares of
the Company’s common stock with an exercise price of $0.25 per share. This
option was issued by the Company on February 26,
2008.
|
(4)
|
In December
2008 Hercules Pappas was elected to our Board of Directors. As
compensation for his services, Mr. Pappas received 250,000 shares of our
common stock as well as 250,000 options to purchase the Company’s common
stock.
|
(5)
|
In December
2008 Brad Hoffman was elected to our Board of Directors. As compensation
for his services, Mr. Hoffman received 250,000 shares of our common
stock.
|
Outstanding
Equity Awards at Fiscal Year End
The table
below sets forth the options and stock awards received by the executive officers
of the Company as of December 31, 2009.
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock that
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock that
Have Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights that
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights that
Have Not
Vested
(#)
|
||||||||||||||||||||||||
Steven
P.
Durdin
|
10,000,000 | - | - | $ | 0.25 |
10/16/17
|
- | - | - | - | |||||||||||||||||||||||
Stanley
L. Teeple
|
10,000,000 | - | - | $ | 0.25 |
10/16/17
|
- | - | - | - | |||||||||||||||||||||||
Everett
Miller
|
2,750,000 | - | - | $ | 0.25 |
10/16/17
|
- | - | - | - |
26
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth information, as of April 1, 2010, with respect to the
beneficial ownership of the Company’s common stock by each person known by the
Company to be the beneficial owner of more than 5% of the outstanding common
stock, by each of the Company’s officers and directors, and by the officers and
directors of the Company as a group.
Name and Address of Stockholders*
|
Shares
Beneficially
Owned (1)
|
Percentage
Ownership(1) |
||||||
|
|
|||||||
Beneficial
Owners
|
||||||||
James
Walter, Sr. (Former Director)
|
47,941,400 | (2) | 5.78 | % | ||||
Officers
and Directors
|
||||||||
Steve
Durdin (CEO, Director)
|
35,859,031 | (3) | 4.33 | % | ||||
Stan
Teeple (CFO, Director)
|
10,000,000 | (4) | 1.20 | % | ||||
Everett
Miller (COO, Director)
|
345,153,457 | (5) | 41.64 | % | ||||
Hercules
Pappas (Director)
|
20,500,000 | (6) | 2.47 | % | ||||
Brad
Hoffman (Director)
|
250,000 | (7) | ** | |||||
Officers
and Directors as a group (5) persons
|
411,762,488 | 49.68 | % |
*Each
stockholder’s address is c/o Indigo Energy, Inc. 701 N. Green Valley Pkwy, Suite
200, Henderson, Nevada 89074
** Less
than 1%
|
(1)
|
Based
on an aggregate of 828,861,382 shares outstanding as of April 1,
2010.
|
|
(2)
|
Consists
of 250,000 stock options pursuant to the Company’s 2007 Stock Option
Plan, 2,400,000 warrants issued in the name of James Walter, Sr. and
1,950,000 warrants issued in the name of Tammy Walter, a family
member of James Walter, Sr., 25,000,000 shares of common stock issued to
James Walter, Sr., 7,975,800 shares of common stock issued to Tammy
Walter, and 10,365,600 shares of common stock issued to Infinity
Investments, LLC an entity controlled by James Walter
Sr.
|
|
(3)
|
Consists
of 10,000,000 stock options pursuant to the Company’s 2007 Stock Option
Plan, 1,800,000 warrants, and 23,959,031 shares of common stock issued in
the name of Mr. Durdin and 100,000 shares of common stock issued in the
name of S. Durdin Insurance Agency, Inc, an entity of which Mr. Durdin is
the controlling person.
|
4) | Consists of options pursuant to the Company’s 2007 Stock Option Plan. |
|
(5)
|
Consists
of 2,750,000 stock options pursuant to the Company’s 2007 Stock Option
Plan, 37,950,000 warrants to purchase shares of the Company’s common stock
issued pursuant to a Global Financing Agreement and 304,453,457 shares of
common stock that have been issued to Carr Miller Capital, LLC and which
are beneficially owned by Mr. Miller as a principal of Carr Miller
Capital, LLC.
|
|
(6)
|
Consists
of 250,000 stock options pursuant to the Company’s 2007 Stock Option Plan
and 20,250,000 shares of Common Stock.
|
|
(7)
|
Consists
of 250,000 shares of common
stock.
|
27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
Other
than as disclosed below, none of the following persons have, since our date of
incorporation, had any material interest, direct or indirect, in any transaction
with us or in any presently proposed transaction that has or will materially
affect us:
|
¨
|
Any
person proposed as a nominee for election as a
director;
|
o | Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock; |
|
¨
|
Any
of our promoters;
|
|
¨
|
Any
relative or spouse of any of the foregoing persons who has the same house
as such person.
|
Related
Stockholder Matters
On April
14, 2007, we entered into a consulting agreement with Steve Durdin, who was
appointed our Board Director on April 11, 2007. Pursuant to the consulting
agreement, Mr. Durdin will assist the Company in raising funds and developing
financial strategy, act as a liaison with current investors and assist with
business development. We agreed to pay Mr. Durdin a weekly consulting fee of
$1,200 commencing August 2007, and issue to Mr. Durdin options or cashless
exercise warrants to acquire a minimum of 6,000,000 shares of our common stock
pursuant to our 2007 Stock Option Plan, which has been approved by our Board of
Directors and stockholders. Payment of the weekly consulting fee may be deferred
by the Company, but must be paid no later than August 1, 2007. The agreement was
effective on April 1, 2007 for a one-year period and would be automatically
renewed for consecutive one-year periods unless terminated by either party.
During the year 2007, we have paid $9,600 to Mr. Durdin for consulting
fees.
On
October 8, 2007, we entered into an employment agreement with Steve Durdin to
become our President, which replaced the consulting agreement we had with Mr.
Durdin as described above. We agreed to pay Mr. Durdin $9,500 per month, and
issue to Mr. Durdin options or cashless exercise warrants to acquire a minimum
of 10,000,000 shares of our common stock pursuant to our 2007 Stock Option Plan.
On October 29, 2007, our Board of Directors approved the issuance of stock
option to Mr. Durdin to purchase 10,000,000 shares of our common stock. Mr.
Durdin will also receive immediate family medical and dental insurance coverage
and life insurance equal to three times his annual base salary. In addition, Mr.
Durdin will receive an auto allowance of $1,000 per month and a home office
allowance of $1,000 per month, as well as reimbursement for reasonable
out-of-pocket expenses. The agreement was effective on October 1, 2007 for a
fifteen-month period and will automatically renew for consecutive one-year
periods unless terminated by either party.
On April
2, 2009, pursuant to the recommendation of the Company’s Compensation Committee,
the Company increased the base salary of its Chief Executive Officer, Steven
Durdin, to $250,000 a year. Mr. Durdin has agreed that the Company shall only
pay such portion of the base salary, as increased, permitted by the Company’s
current cash flow. Any balance thereof shall be accrued until the
Company has sufficient positive cash flow to allow an additional payment of Mr.
Durdin’s base salary. The Company also issued 20 shares of the
Company’s Series D to Mr. Durdin. On April 21, 2009, upon the increase in the
Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares, 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 increase in Mr.
Durdin’s base salary, as well as the issuance of Series D to Mr. Durdin are in
consideration for his extensive efforts extended in relation to the completion
of the drilling on the Wells and for his continued efforts in preparation for
other drilling activities in the Illinois Basin.
28
On May
26, 2006, we executed a consulting agreement with Stanley Teeple, Inc. (“STI”)
to provide services related to accounting and SEC reporting for a one-time fee
of $10,000 plus reimbursement of certain expenses. On June 15, 2006, we executed
a new consulting agreement with STI to provide the aforementioned services for a
compensation of $5,000 per week for six months and reimbursement of related
costs. In July 2006, our Board of Directors appointed Stan Teeple to replace
Alex Winfrey as our new Secretary and Treasurer and Board Director. On December
21, 2006, we entered into a third consulting agreement with STI pursuant to
which we agreed to pay STI a weekly consulting fee of $5,000, and issue to STI
options or cashless exercise warrants during the first quarter of 2007 to
acquire a minimum of 5,000,000 shares of our common stock at terms to be
determined by our Board of Directors. The agreement was effective on January 1,
2007 for a two-year period and would be automatically renewed for consecutive
one-year periods unless terminated by either party. On March 8, 2007, the
Company entered into a fourth consulting agreement with STI, which superceded
but provided for the identical terms of cash compensation as STI’s agreement of
December 21, 2006. In addition, STI is to be reimbursed for certain medical and
dental insurance coverage, an auto allowance of $1,000 per month, and certain
other fringe benefits. STI is also entitled to receive options or cashless
warrants to acquire shares of our common stock pursuant to our 2007 Stock Option
Plan. On October 29, 2007, our Board of Directors approved the issuance of stock
option to STI to purchase 5,000,000 shares of our common stock at an exercise
price of $0.25. Subsequently on February 28, 2008, our Board of Directors
approved the issuance of stock option to STI to purchase another 5,000,000
shares of our common stock pursuant to our 2007 Stock Option Plan. The option
vested immediately on the option grant date, has an exercise price of $0.25 per
share and expires on October 16, 2007.
On March
6, 2008, the Company borrowed $500,000 from Carr Miller and issued a promissory
note that provided for interest at 20% per annum with a maturity date of
September 10, 2008. Carr Miller became a related party of the Company at the end
of January 2008 upon the appointment of Everett Miller, who controls Carr
Miller, as one of the Company’s Board of Directors. Within thirty days of
funding of the loan, Carr Miller is also to receive shares of the Company’s
common stock equal to eleven times the numerical dollars of the principal of the
loan. As a result, 5,500,000 shares of the Company’s common stock were issued to
Carr Miller on April 2, 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. On September 29, 2008, the Company modified the terms of this note
by extending its due date until December 31, 2008. In exchange, the Company
agreed to issue 1,022,222 shares of its common stock. These shares
were issued in October 2008.
On April
11, 2008, the Company borrowed $120,000 from Carr Miller and issued a promissory
note that provided for interest at 20% per annum with a maturity date of October
11, 2008. Within thirty days of funding of the loan, the lender is also to
receive shares of the Company’s common stock equal to eleven times the numerical
dollars of the principal of the loan. As a result, 1,320,000 shares of the
Company’s common stock were issued to Carr Miller on May 1, 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. On September 29, 2008, the
Company modified the terms of this note by extending its due date until December
31, 2008. In exchange, the Company agreed to issue 458,667 shares of its common
stock. These shares were issued in October 2008.
On
September 30, 2008, the Company borrowed $150,000 from Carr Miller and issued a
promissory note that provided for interest at 20% per annum with a maturity date
of April 1, 2009. 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. As a result, 1,500,000 shares of the
Company’s common stock were issuable to Carr Miller as of September 30, 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.
29
On
November 4, 2008, the Company borrowed $150,000 from Carr Miller, a related
party, and issued a promissory note that provided for interest at 20% per annum
with a maturity date of May 4, 2009. Within thirty days of funding of the loan,
Carr Miller is to receive 1,500,000 shares of our common stock. In addition,
Carr Miller has the option to either receive all principal and interest due on
the loan within ten days of the maturity date or to convert the principal and
interest due on the notes into shares of our common stock at a conversion price
equal to 80% of the average ten-day closing price of the stock immediately
preceding the due date. 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.
On
November 19, 2008, the Company borrowed $250,000 from Carr Miller, a related
party, and issued a promissory note that provided for interest at 20% per annum
with a maturity date of May 19, 2009. Within thirty days of funding of the loan,
Carr Miller is to receive 2,500,000 shares of our common stock. 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.
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.
On
December 5, 2008, the Company entered into a Global Financing Agreement (the
“GFA”) with Carr Miller wherein Carr Miller agreed to restructure the Company’s
existing debt obligations to Carr Miller (as set forth above). Under
the terms of the GFA, Carr Miller irrevocably agreed that the promissory notes
previously issued by the Company to Carr Miller in the aggregate amount of One
Million Dollars ($1,000,000) (the “First Notes”) shall be converted into fifty
million (50,000,000) shares of the Company’s common stock, which was the per
share price when the Agreement was negotiated. Further, the parties
agreed that promissory notes previously issued to Carr Miller in the aggregate
principal amount of Two Million Four Hundred Thousand ($2,400,000) (the “Second
Notes”) shall be amended and replaced by a new promissory note (“New
Note”). The New Note shall be secured by all the assets of the
Company, shall have a maturity date of no earlier than sixty (60) months from
the date of its issuance and shall bear interest at the rate of 10% per
annum.
On
December 30, 2008, the Company issued two (2) promissory notes (the “Notes”) in
favor of Carr Miller Capital in the aggregate principal amount of Nine Hundred
Thousand Dollars ($900,000) (the “Loan”). The purpose of the Loan
was: (i) to procure an accounts payable settlement on ten (10) 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
and fourth well in the DuBois field, which well is, adjacent to, but separate
and distinct from the two (2) wells currently being drilled by the
Company. The Notes earn interest at the rate of twenty percent (20%)
per annum.
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. 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.
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. 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 year ended
December 31, 2009 in the amount of $89,520 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 to being designated for general and operating expenses. In
exchange, the lender received 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.
30
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. 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.
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. 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.
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 and includes $36,789 for unpaid interest as required under a
promissory note with Carr Miller dated December 16, 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.
Settlement
with Previous Shareholders
On
October 6, 2008, the Company issued shares of the Company’s common stock to
various creditors pursuant to the terms of settlement agreements (the
“Settlement Agreements”) previously entered into with a total of 21 of the
Company’s creditors, including one of the Company’s former directors, Mr. James
Walter, Sr. The Settlement Agreements were related to various
promissory notes previously issued by the Company in the aggregate amount of
$1,500,816 (the “Promissory Notes”), including promissory notes in the total
amount of $372,823 issued to Mr. Walter, Sr. Under the terms of the
Settlement Agreements, each of the creditors agreed to the retirement of the
Promissory Notes held by them.
Stock
Options Granted
On
October 29, 2007, the Board of Directors approved the issuance of stock options
to the individuals named below in accordance with the 2007 Stock Option Plan.
The options vest immediately.
Name of Optionee
|
Number of
Stock Options
Issued
|
Exercise Price
|
Expiration
|
||||||
Steven
P. Durdin
|
10,000,000 | $ | 0.25 per share |
October
16, 2017
|
|||||
Stanley
L. Teeple
|
5,000,000 | $ | 0.25 per share |
October
16, 2017
|
|||||
Stacey
Yonkus
|
250,000 | $ | 0.25 per share |
October
16, 2017
|
|||||
John
Hurley
|
250,000 | $ | 0.25 per share |
October
16, 2017
|
|||||
James
C. Walter, Sr.
|
250,000 | $ | 0.25 per share |
October
16, 2017
|
On
February 26, 2008, the Company’s Board of Directors approved the issuance of
non-qualified stock options to the following individuals in accordance with the
2007 Stock Option Plan. The options vested immediately.
31
Name of Optionee
|
Number of
Stock Options
Issued
|
Exercise Price
|
Expiration
|
|||
Everett
Miller (consulting service)
|
2,500,000 |
$0.25
per share
|
October
16, 2017
|
|||
Stanley
L. Teeple (Board Director)
|
5,000,000 |
$0.25
per share
|
October
16, 2017
|
|||
Hercules
Pappas (Board Director)
|
250,000 |
$0.25
per share
|
October
16, 2017
|
|||
Everett
Miller (Board Director)
|
250,000 |
$0.25
per share
|
October
16, 2017
|
|||
Gersten
Savage (legal service)
|
1,000,000 |
$0.25
per share
|
October
16, 2017
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Our Audit
Committee pre-approved all audit and non-audit services provided to us and
during the periods listed below. The Audit Committee approves discrete projects
on a case-by-case basis that may have a material effect on our operations and
also considers whether proposed services are compatible with the independence of
the public accountants.
The
following table presents fees for professional services rendered by our auditors
for the calendar years 2009 and 2008:
Services
Performed
|
2009
|
2008
|
||||||
Audit
Fees
|
$
|
325,000
|
$
|
451,000
|
||||
Audit-Related
Fees
|
$
|
-
|
51,000
|
|||||
Tax
Fees
|
$
|
25,000
|
39,000
|
|||||
All
Other Fees
|
-
|
-
|
||||||
Total
Fees
|
$
|
350,000
|
$
|
541,000
|
Audit
fees represent fees billed for professional services provided in connection with
the audit of the Company’s annual financial statements, reviews of its quarterly
financial statements, audit services provided in connection with statutory and
regulatory filings for those years and audit services provided in connection
with securities registration and/or other issues resulting from that
process.
Audit-related
fees represent fees billed primarily for assurance and related services
reasonably related to securities registration and/or other issues resulting from
that process and the Company’s amendment to Form 10-K.
Tax fees
principally represent fees billed for tax preparation, tax advice and tax
planning services.
All other
fees principally would include fees billed for products and services provided by
the accountant, other than the services reported under the three captions
above.
32
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND
SCHEDULES
Exhibits
and Index of Exhibits
Exhibit
No.
|
Identification
of Exhibit
|
|
2.1
|
Exchange
Agreement dated December 15, 2005 (1)
|
|
2.2
|
Amended
Exchange Agreement dated December 15, 2005 (1)
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Articles
of Amendment dated November 8, 1982 (1)
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation dated May 29, 1987
(1)
|
|
3.4
|
Articles
of Amendment dated December 4, 1987 (1)
|
|
3.5
|
Certificate
of Amendment dated February 25, 1999 (1)
|
|
3.6
|
Certificate
of Amendment dated January 11, 2006 (1)
|
|
3.7
|
By-Laws
dated January 25, 2006 (1)
|
|
4.1
|
Form
of Specimen of Common Stock (1)
|
|
10.1
|
Agreement
between Epicenter Oil & Gas and Indigo-Energy, Inc. dated March 26,
2009 (1)
|
|
10.2
|
Promissory
Note dated October 10, 2009 in favor of Oliver/Polycomp
|
|
10.3
|
Promissory
Note Extension dated December 2009 in favor of Janelle M.
Anderson
|
|
10.4
|
Global
Financing Agreement between Carr Miller Capital, LLC and Indigo-Energy,
Inc. (1)
|
|
10.5
|
Global
Financing Agreement Extension between Carr Miller Capital, LLC and
Indigo-Energy, Inc. dated February 22, 2010
|
|
10.6
|
Memorandum
of Understanding by and among Indigo-Energy, Inc., Epicenter Oil & Gas
LLC and Reef, LLC dated March 17, 2010
|
|
10.7
|
Agreement
with consultant dated March 24, 2010
|
|
10.8
|
Agreement
between Everett Miller and Indigo-Energy, Inc. dated March 25,
2010
|
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
|
(1)
Previously filed.
33
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
|
|
Chief Executive Officer
|
Pursuant to
the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed by the following persons in the capacities and on the dates
indicated.
NAME
|
TITLE
|
DATE
|
||||||
/s/
Steven Durdin
|
Chief
Executive Officer,
President
and Director
|
April
15, 2010
|
||||||
Steven
Durdin
|
||||||||
/s/
Stanley L. Teeple
|
Chief
Financial Officer and
Director
|
April
15, 2010
|
||||||
Stanley
L. Teeple
|
||||||||
/s/
Everett Miller
Everett
Miller
|
Chief
Operating Officer and
Director
|
April
15, 2010
|
||||||
/s/Hercules
Pappas
|
Director
|
April
15, 2010
|
||||||
Hercules
Pappas
|
||||||||
/s/Brad
Hoffman
|
Director
|
April
15, 2010
|
||||||
Brad
Hoffman
|
34
Exhibits
and Index of Exhibits
Exhibit
No.
|
Identification
of Exhibit
|
|
2.1
|
Exchange
Agreement dated December 15, 2005 (1)
|
|
2.2
|
Amended
Exchange Agreement dated December 15, 2005 (1)
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Articles
of Amendment dated November 8, 1982 (1)
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation dated May 29, 1987
(1)
|
|
3.4
|
Articles
of Amendment dated December 4, 1987 (1)
|
|
3.5
|
Certificate
of Amendment dated February 25, 1999 (1)
|
|
3.6
|
Certificate
of Amendment dated January 11, 2006 (1)
|
|
3.7
|
By-Laws
dated January 25, 2006 (1)
|
|
4.1
|
Form
of Specimen of Common Stock (1)
|
|
10.1
|
Agreement
between Epicenter Oil & Gas and Indigo-Energy, Inc. dated March 26,
2009 (1)
|
|
10.2
|
Promissory
Note dated October 10, 2009 in favor of Oliver/Polycomp
|
|
10.3
|
Promissory
Note Extension dated December 2009 in favor of Janelle M.
Anderson
|
|
10.4
|
Global
Financing Agreement between Carr Miller Capital, LLC and Indigo-Energy,
Inc. (1)
|
|
10.5
|
Global
Financing Agreement Extension between Carr Miller Capital, LLC and
Indigo-Energy, Inc. dated February 22, 2010
|
|
10.6
|
Memorandum
of Understanding by and among Indigo-Energy, Inc., Epicenter Oil & Gas
LLC and Reef, LLC dated March 17, 2010
|
|
10.7
|
Consulting
Agreement with J. Cory Martelli dated March 24, 2010
|
|
10.8
|
Agreement
between Everett Miller and Indigo-Energy, Inc. dated March 25,
2010
|
|
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
|
(1)
Previously filed.
35