Attached files
As filed with the Securities and Exchange Commission on ______, 2010.
Commission File No. ___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement Under
THE SECURITIES ACT OF 1933
SYNERGY RESOURCES CORPORATION
(Exact name of registrant as specified in charter)
Colorado 1311 20-2835920
--------------------------- ------------------------ ------------------
State or other jurisdiction (Primary Standard Classi- (IRS Employer
of incorporation) fication Code Number) I.D. Number)
20203 Highway 60
Platteville, CO 80651
(970) 737-1073
------------------------------------
(Address and telephone number of principal executive offices)
20203 Highway 60
Platteville, CO 80651
------------------------------------------------
(Address of principal place of business or intended principal place of business)
William E. Scaff, Jr.
20203 Highway 60
Platteville, CO 80651
(970)737-1073
-----------------------------------
(Name, address and telephone number of agent for service)
Copies of all communications, including all communications sent
to the agent for service, should be sent to:
William T. Hart, Esq.
Hart & Trinen, LLP
1624 Washington Street
Denver, Colorado 80203
303-839-0061
As soon as practicable after the effective date of this Registration Statement
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Securities Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (1) Price Fee
---------- ---------- ----------- ---------- -----------
Common Stock (2) 21,375,000 $2.60 $55,575,000 $3,946
(1) Offering price computed in accordance with Rule 457.
(2) Shares of common stock offered by selling shareholders.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
SYNERGY RESOURCES CORPORATION
Common Stock
By means of this prospectus a number of our shareholders are offering to
sell up to 21,375 000 shares of our common stock which they may acquire,
- upon the conversion of promissory notes;
- upon the exercise of our Series C warrants; or.
- upon the exercise of our Series D warrants.
Although we will receive proceeds if any of the Series C warrants are
exercised, we will not receive any proceeds from the sale of the common stock by
the selling stockholders. We will pay for the expenses of this offering which
are estimated to be $50,000.
Our common stock is traded on the OTC Bulletin Board under the symbol
SYRG. On May 24, 2010 the closing price for our common stock was $2.60.
There is no public market for our Series C or D warrants and it is not
expected that a market for the Series C or D warrants will ever develop.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. FOR A
DESCRIPTION OF CERTAIN IMPORTANT FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS
PROSPECTUS.
The date of this prospectus is ___________, 2010.
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PROSPECTUS SUMMARY
Synergy Resources Corporation ("we" or the "Company" or "Synergy") is the
entity that resulted from a business combination between Brishlin Resources,
Inc., a public company, ("predecessor Brishlin") and Synergy Resources
Corporation, a private company, ("predecessor Synergy"). We were incorporated in
Colorado in May 2005 and are involved in oil and gas exploration and
development.
Our website is: www.synergyresourcescorporation.com.
Our offices are located at 20203 Highway 60, Platteville, CO 80651.
The Platteville office telephone number is (970) 737-1073 and its fax number is
(970) 737-1045. We also maintain an office at 1200 17th Street, Suite 570,
Denver, CO 80202. Our telephone number at our Denver office is (303) 623-3966
and our fax number in Denver is (303) 534-0151.
See the "Glossary" section of this prospectus for the definition of terms
pertaining to the oil and gas industry which are used in this prospectus.
The Offering
Between December 2009 and March 2010, we sold 180 Units to a group of
private investors. The Units were sold at a price of $100,000 per Unit. Each
Unit consisted of one Promissory Note in the principal amount of $100,000 and
50,000 Series C warrants. At any time after May 31, 2010, the Notes can be
converted into shares of our common stock, initially at a conversion price of
$1.60 per share. Each Series C warrant entitles the holder to purchase one share
of our common stock at a price of $6.00 per share at any time on or before
December 31, 2014.
In connection with our private offering we paid the placement agent for
the offering a commission of $997,100 plus a non-accountable expense allowance
of $360,000. We also issued the placement agent 1,125,000 Series D warrants.
Each Series D warrant allows the holder to purchase one share of our common
stock at a price of $1.60 per share at any time on or before December 31, 2014.
By means of this prospectus a number of our shareholders are offering to
sell:
o up to 11,250,000 shares of our common stock which may be issued upon
the conversion of the notes;
o up to 9,000,000 shares of common stock which may be issuable upon the
exercise of our Series C warrants; and\
o up to 1,125,000 shares of common stock which may be issuable upon the
exercise of our Series D warrants.
See the section of this prospectus entitled "Selling Shareholders" for
more information.
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As of April 30, 2010, we had 11,998,000 outstanding shares of common
stock. The number of our outstanding shares does not include shares issuable
upon the exercise of options granted to our officers, directors and an employee.
See the section of this prospectus captioned "Management - Stock Option and
Bonus Plan" for more information concerning these options.
The purchase of the securities offered by this prospectus involves a high
degree of risk. Risk factors include the lack of any relevant operating history,
losses since we were incorporated, and the possible need for us to sell shares
of our common stock to raise capital. See "Risk Factors" section of this
prospectus below for additional Risk Factors.
Forward-Looking Statements
This prospectus contains or incorporates by reference "forward-looking
statements," as that term is used in federal securities laws, concerning our
financial condition, results of operations and business. These statements
include, among others:
o statements concerning the benefits that we expect will result from our
business activities and results of exploration that we contemplate or
have completed, such as increased revenues; and
o statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.
You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates" or similar expressions used in
this prospectus.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties that may cause our actual results to be materially
different from any future results expressed or implied in those statements.
Because the statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied. We caution you not to put
undue reliance on these statements, which speak only as of the date of this
prospectus. Further, the information contained in this prospectus, or
incorporated herein by reference, is a statement of our present intention and is
based on present facts and assumptions, and may change at any time.
RISK FACTORS
Investors should be aware that this offering involves certain risks,
including those described below, which could adversely affect the value of our
common stock. We do not make, nor have we authorized any other person to make,
any representation about the future market value of our common stock. In
addition to the other information contained in this prospectus, the following
factors should be considered carefully in evaluating an investment in our
securities.
WE MAY NEVER BE PROFITABLE. As of the date of this prospectus we were generating
only limited revenue and we expect to incur losses during the foreseeable
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future. Unless and until we are profitable, we will need to raise enough capital
to be able to fund the costs of our operations and our planned oil and gas
exploration and development activities.
OUR FAILURE TO OBTAIN CAPITAL MAY SIGNIFICANTLY RESTRICT OUR PROPOSED
OPERATIONS. We need additional capital to fund our operating losses and to
expand our business. We do not know what the terms of any future capital raising
may be but any future sale of our equity securities would dilute the ownership
of existing stockholders and could be at prices substantially below the price
investors paid for the shares of common stock sold in this offering. Our failure
to obtain the capital which we require will result in the slower implementation
of our business plan or our inability to implement our business plan. There can
be no assurance that we will be able to obtain the capital which we will need.
We will need to earn a profit or obtain additional financing until we are
able to earn a profit. As a result of our short operating history it is
difficult for potential investors to evaluate our business. There can be no
assurance that we can implement our business plan, that we will be profitable,
or that the securities which may be sold in this offering will have any value.
OIL AND GAS EXPLORATION IS NOT AN EXACT SCIENCE, AND INVOLVES A HIGH DEGREE OF
RISK. The primary risk lies in the drilling of dry holes or drilling and
completing wells which, though productive, do not produce gas and/or oil in
sufficient amounts to return the amounts expended and produce a profit. Hazards,
such as unusual or unexpected formation pressures, downhole fires, blowouts,
loss of circulation of drilling fluids and other conditions are involved in
drilling and completing oil and gas wells and, if such hazards are encountered,
completion of any well may be substantially delayed or prevented. In addition,
adverse weather conditions can hinder or delay operations, as can shortages of
equipment and materials or unavailability of drilling, completion, and/or
work-over rigs. Even though a well is completed and is found to be productive,
water and/or other substances may be encountered in the well, which may impair
or prevent production or marketing of oil or gas from the well.
Exploratory drilling involves substantially greater economic risks than
development drilling because the percentage of wells completed as producing
wells is usually less than in development drilling. Exploratory drilling itself
can be of varying degrees of risk and can generally be divided into higher risk
attempts to discover a reservoir in a completely unproven area or relatively
lower risk efforts in areas not too distant from existing reservoirs. While
exploration adjacent to or near existing reservoirs may be more likely to result
in the discovery of oil and gas than in completely unproven areas, exploratory
efforts are nevertheless high risk activities.
Although the completion of oil and gas wells is, to a certain extent, less
risky than drilling for oil and gas, the process of completing an oil or gas
well is nevertheless associated with considerable risk. In addition, even if a
well is completed as a producer, the well for a variety of reasons may not
produce sufficient oil or gas in order to repay our investment in the well.
THE ACQUISITION, EXPLORATION AND DEVELOPMENT OF OIL AND GAS PROPERTIES, AND THE
PRODUCTION AND SALE OF OIL AND GAS ARE SUBJECT TO MANY FACTORS WHICH ARE OUTSIDE
OUR CONTROL. These factors include, among others, general economic conditions,
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proximity to pipelines, oil import quotas, supply, demand, and price of other
fuels and the regulation of production, refining, transportation, pricing,
marketing and taxation by Federal, state, and local governmental authorities.
BUYERS OF OUR GAS, IF ANY, MAY REFUSE TO PURCHASE GAS FROM US IN THE EVENT OF
OVERSUPPLY. If wells which we drill are productive of natural gas, the
quantities of gas that we may be able to sell may be too small to pay for the
expenses of operating the wells. In such a case, the wells would be "shut-in"
until such time, if ever, that economic conditions permit the sale of gas in
quantities which would be profitable.
INTERESTS THAT WE MAY ACQUIRE IN OIL AND GAS PROPERTIES MAY BE SUBJECT TO
ROYALTY AND OVERRIDING ROYALTY INTERESTS, LIENS INCIDENT TO OPERATING
AGREEMENTS, LIENS FOR CURRENT TAXES AND OTHER BURDENS AND ENCUMBRANCES,
EASEMENTS AND OTHER RESTRICTIONS, ANY OF WHICH MAY SUBJECT US TO FUTURE
UNDETERMINED EXPENSES. We do not intend to purchase title insurance, title
memos, or title certificates for any leasehold interests we will acquire. It is
possible that at some point we will have to undertake title work involving
substantial costs. In addition, it is possible that we may suffer title failures
resulting in significant losses.
THE DRILLING OF OIL AND GAS WELLS INVOLVES HAZARDS SUCH AS BLOWOUTS, UNUSUAL OR
UNEXPECTED FORMATIONS, PRESSURES OR OTHER CONDITIONS WHICH COULD RESULT IN
SUBSTANTIAL LOSSES OR LIABILITIES TO THIRD PARTIES. Although we intend to
acquire adequate insurance, or to be named as an insured under coverage acquired
by others (e.g., the driller or operator), we may not be insured against all
such losses because insurance may not be available, premium costs may be deemed
unduly high, or for other reasons. Accordingly, uninsured liabilities to third
parties could result in the loss of our funds or property.
OUR OPERATIONS ARE DEPENDENT UPON THE CONTINUED SERVICES OF OUR OFFICERS. THE
LOSS OF ANY OF THESE OFFICERS, WHETHER AS A RESULT OF DEATH, DISABILITY OR
OTHERWISE, MAY HAVE A MATERIAL ADVERSE EFFECT UPON OUR BUSINESS.
OUR OPERATIONS WILL BE AFFECTED FROM TIME TO TIME AND IN VARYING DEGREES BY
POLITICAL DEVELOPMENTS AND FEDERAL AND STATE LAWS AND REGULATIONS REGARDING THE
DEVELOPMENT, PRODUCTION AND SALE OF CRUDE OIL AND NATURAL GAS. These regulations
require permits for drilling of wells and also cover the spacing of wells, the
prevention of waste, and other matters. Rates of production of oil and gas have
for many years been subject to Federal and state conservation laws and
regulations and the petroleum industry is subject to Federal tax laws. In
addition, the production of oil or gas may be interrupted or terminated by
governmental authorities due to ecological and other considerations. Compliance
with these regulations may require a significant capital commitment by and
expense to us and may delay or otherwise adversely affect our proposed
operations.
From time to time legislation has been proposed relating to various
conservation and other measures designed to decrease dependence on foreign oil.
No prediction can be made as to what additional legislation may be proposed or
enacted. Oil and gas producers may face increasingly stringent regulation in the
years ahead and a general hostility towards the oil and gas industry on the part
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of a portion of the public and of some public officials. Future regulation will
probably be determined by a number of economic and political factors beyond our
control or the oil and gas industry.
OUR ACTIVITIES WILL BE SUBJECT TO EXISTING FEDERAL AND STATE LAWS AND
REGULATIONS GOVERNING ENVIRONMENTAL QUALITY AND POLLUTION CONTROL. Compliance
with environmental requirements and reclamation laws imposed by Federal, state,
and local governmental authorities may necessitate significant capital outlays
and may materially affect our earnings. It is impossible to predict the impact
of environmental legislation and regulations (including regulations restricting
access and surface use) on our operations in the future although compliance may
necessitate significant capital outlays, materially affect our earning power or
cause material changes in our intended business. In addition, we may be exposed
to potential liability for pollution and other damages.
Risk Factors Related to this Offering
AS OF THE DATE OF THIS PROSPECTUS THERE WAS ONLY A LIMITED PUBLIC MARKET FOR OUR
COMMON STOCK. As a result, purchasers of the securities offered by this
prospectus may be unable to sell their securities or recover any amounts which
they paid for their securities.
DISCLOSURE REQUIREMENTS PERTAINING TO PENNY STOCKS MAY REDUCE THE LEVEL OF
TRADING ACTIVITY IN OUR SECURITIES AND INVESTORS MAY FIND IT DIFFICULT TO SELL
THEIR SHARES OR WARRANTS. Trades of our securities will be subject to Rule 15g-9
of the Securities and Exchange Commission, which rule imposes certain
requirements on broker/dealers who sell securities subject to the rule to
persons other than established customers and accredited investors. For
transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the
purchaser's written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system). The penny
stock rules require a broker/ dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Commission that provides information about penny stocks
and the nature and level of risks in the penny stock market. The broker/dealer
also must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker/dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations, and
the broker/dealer and salesperson compensation information, must be given to the
customer orally or in writing prior to effecting the transaction and must be
given to the customer in writing before or with the customer's confirmation.
MARKET FOR OUR COMMON STOCK.
On February 27, 2008, our common stock began trading on the OTC Bulletin
Board under the symbol "BRSH." Prior to that date there was no established
trading market for our common stock.
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On September 22, 2008, a 10-for-1 reverse stock split, approved by our
shareholders on September 8, 2008, became effective on the OTC Bulletin Board
and our trading symbol was changed to "SYRG."
Shown below is the range of high and low closing prices for our common
stock for the periods indicated as reported by the FINRA. The market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not necessarily represent actual transactions. The market quotations for
the quarters ended May 31, 2008 and August 31, 2008, have been adjusted to
reflect the 10-for-1 reverse stock split referred to above.
Quarter Ended High Low
May 31, 2008 $5.00 $1.50
August 31, 2008 $3.40 $2.50
November 30, 2008 $4.75 $3.10
February 28, 2009 $3.45 $1.25
May 31, 2009 $1.80 $1.45
August 31, 2009 $1.80 $1.10
November 30, 2009 $1.47 $1.00
February 28, 2010 $4.00 $1.35
As of April 30, 2010, we had 11,998,000 outstanding shares of common stock
and 130 shareholders of record.
Holders of our common stock are entitled to receive dividends as may be
declared by the Board of Directors. Our Board of Directors is not restricted
from paying any dividends but is not obligated to declare a dividend. No cash
dividends have ever been declared and it is not anticipated that cash dividends
will ever be paid.
Our Articles of Incorporation authorize our Board of Directors to issue
up to 10,000,000 shares of preferred stock. The provisions in the Articles of
Incorporation relating to the preferred stock allow our directors to issue
preferred stock with multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to the holders of our common
stock. The issuance of preferred stock with these rights may make the removal of
management difficult even if the removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if these
transactions are not favored by our management.
During the eight months ended August 31, 2008, we did not purchase any of
our securities. During this same period no person affiliated with us purchased
any of our securities on our behalf. On December 1, 2008, we purchased 1,000,000
shares of our common stock from the Synergy Energy Trust for $1,000, which was
the same amount which we received when the shares were sold to the Trust. During
the year ended August 31, 2009, and except for the one purchase mentioned in the
preceding sentence, we did not purchase any of our securities and no person
affiliated with us purchased any of our securities on our behalf.
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COMPARATIVE SHARE DATA
As of April 30, 2010, we had 11,998,000 outstanding shares of common stock
and 130 shareholders.
The following table lists additional shares of our common stock which may
be issued as the result of the conversion of notes or exercise of outstanding
options or warrants:
Number of Note
Shares Reference
Shares issuable upon exercise of Series A Warrants
that were sold to those persons owning shares of our
common stock prior to the acquisition of Synergy 1,038,000 A
Shares issuable upon exercise of Series A Warrants
sold in prior private offering. 2,060,000 B
Shares issuable upon exercise of Series A and
Series B Warrants sold in private offering 2,000,000 C
Shares issuable upon exercise of
Selling Agent Warrants. 126,932 C
Shares issuable upon exercise of options held by
our officers and an employee. 4,100,000 D
Shares issuable upon conversion of notes 11,250,000 E
Shares issuable upon exercise of Series C Warrants 9,000,000 E
Shares issuable upon exercise of Series D Warrants 1,125,000 E
A. Each shareholder of record on the close of business on September 9, 2008,
received one Series A warrant for each post-split share which they owned on that
date. However, the warrants will not be issued until a registration statement
covering the warrants, as well as the shares issuable upon the exercise of the
warrants, is declared effective by the Securities and Exchange Commission. Each
Series A Warrant entitles the holder to purchase one share of our common stock
at a price of $6.00 per share.
B. Prior to our acquisition of predecessor Synergy, predecessor Synergy sold
2,060,000 Units to a group of private investors. Each Unit consisted of one
share of predecessor Synergy's common stock and one Series A warrant. In
connection with the acquisition of predecessor Synergy, these Series A warrants
were exchanged for 2,060,000 of our Series A warrants. The Series A warrants are
identical to the Series A warrants described in Note A above.
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C. Between December 1, 2008 and June 30, 2009, we sold 1,000,000 Units at a
price of $3.00 per Unit. Each Unit consisted of two shares of our common stock,
one Series A Warrant and one Series B Warrant. Each Series A Warrant entitles
the holder to purchase one share of our common stock at a price of $6.00 per
share. Each Series B Warrant entitles the holder to purchase one share of our
common stock at a price of $10.00 per share.
In connection with this private offering we agreed to pay the selling
agent for the offering a commission of 10% of the amount the selling agent
raised in the offering. We also agreed to issue the selling agent one Warrant
(the "Selling Agent Warrants") for each five Units sold by the selling agent.
Each Selling Agent Warrant entitles the holder to purchase one Unit (which Unit
was identical to the Units sold in the offering) at a price of $3.60 per Unit.
The Selling Agent Warrants expire on the earlier of December 31, 2012 or twenty
days following written notification from us that our common stock had a closing
bid price at or above $7.00 per share for any ten of twenty consecutive trading
days.
D. See the "Executive Compensation" section of this prospectus for information
regarding shares issuable upon exercise of options held by our officers and an
employee.
E. Between December 2009 and March 2010, we sold 180 Units to a group of private
investors. The Units were sold at a price of $100,000 per Unit. Each Unit
consisted of one Promissory Note in the principal amount of $100,000 and 50,000
Series C warrants. The Notes bear interest at 8% per year, payable quarterly,
and mature on December 31, 2012. At the holder's option, the Notes can be
converted into shares of our common stock, initially at a conversion price of
$1.60 per share. Each Series C warrant entitles the holder to purchase one share
of our common stock at a price of $6.00 per share at any time on or before
December 31, 2014.
In connection with this private offering we paid the placement agent for
the offering a commission of $977,100, a non-accountable expense allowance of
$360,000 and issued the placement agent 1,125,000 Series D warrants.
We may sell additional shares of our common stock, warrants, convertible
notes or other securities to raise additional capital. We have not yet
determined the amount of securities which we may sell, or the price at which the
securities may be sold. We do not have any commitments or arrangements from any
person to purchase any of our securities and there can be no assurance that we
will be successful in selling any additional securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION
Our plan of operation is more fully disclosed in the "Business" section of
this prospectus. Our future plans will be dependent upon the amount of capital
we are able to raise.
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Contingent upon the amount of capital available, we plan to explore for
oil and gas. We expect that most of our wells will be drilled in the Denver -
Julesburg ("D-J") Basin in northeast Colorado.
On September 10, 2008, we acquired approximately 89% of the outstanding
shares of predecessor Synergy in exchange for 8,882,500 shares of our common
stock and 1,042,500 Series A warrants. On December 19, 2008, we acquired the
remaining shares of predecessor Synergy for 1,077,500 shares of our common stock
and 1,017,500 Series A warrants.
Although from a legal standpoint we acquired a controlling interest in
predecessor Synergy on September 10, 2008, for financial reporting purposes the
acquisition of predecessor Synergy constituted a recapitalization, and the
acquisition was accounted for as a reverse merger whereby Synergy was deemed to
have acquired the Company. As a result, all financial statements for periods
after August 31, 2008, reflect the historical operations of predecessor Synergy
for the period from predecessor Synergy's inception (December 28, 2007) through
September 10, 2008, and our operations combined with those of predecessor
Synergy after that date.
Subsequent to the acquisition, we changed our name to Synergy Resources
Corporation and we changed our fiscal year end from December 31 to August 31.
As a result of the reverse merger and the change in our fiscal year end,
any comparison of our operations for periods subsequent to the merger with our
operations for any period previous to the merger are not meaningful.
Included as part of this prospectus are our unaudited financial statements
as of and for the interim period ended February 28, 2010, and our audited
financial statements as of and for the year ended August 31, 2009, and for the
period from inception (December 28, 2007) to August 31, 2008.
The following discussion analyzes our financial condition at February 28,
2010, and summarizes the results of our operations for the year ended August 31,
2009, the period from inception (December 28, 2007) to August 31, 2008, and for
the three and six months ended February 28, 2010. This discussion and analysis
should be read in conjunction with our audited financial statements included
with this prospectus.
RESULTS OF OPERATIONS
For financial reporting purposes, our inception date was December 28,
2007, the day that Synergy was incorporated in the State of Colorado. Although
we incorporated in 2007, we did not commence business activities until June
2008. We were in the early stages of implementing our business plan through
August 31, 2009. For accounting purposes, we prepared our financial statements
as an exploration stage company stage from inception to August 31, 2009.
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The factors that will most significantly affect our results of operations
will be (i) the sale prices of crude oil and natural gas, (ii) the amount of
production from oil or gas wells in which we have an interest, and (iii) and
lease operating expenses. Our revenues will also be significantly impacted by
our ability to maintain or increase oil or gas production through exploration
and development activities.
Other than the foregoing, we do not know of any trends, events or
uncertainties that will have had or are reasonably expected to have a material
impact on our sales, revenues or expenses.
THREE MONTHS ENDED FEBRUARY 28, 2010
Oil and gas revenues and related expenses increased during the three
months ended February 28, 2010. Our first wells began producing in February
2009. In addition to the first two wells, four wells were brought on-stream
during the three months ended February 28, 2010.
Oil and gas sales for the three months ended February 28, 2010, are
summarized in the following table:
Oil Gas Total
------- ------ -----
(bbl) (mcf) (boe)
Production volumes 2,857 19,474 6,103
Revenues $198,392 $137,333 $335,725
Average sales price $ 69.44 $ 7.05 $ 55.01
General and administrative expenses decreased during the three-month
period, primarily because of a decrease in stock based compensation. In
connection with our acquisition of predecessor Synergy in September 2008, we
issued options covering 4,000,000 shares of common stock to replace similar
options that had previously been issued by predecessor Synergy. The pro-rata
portion of the fair value of the options allocated to the three months ended
February 28, 2009 was $3,427,849. During the three months ended February 28,
2010, we recognized a pro-rata portion ($6,188) of the fair value of 100,000
options which were issued in December 2008.
Other expenses increased in 2010 as a result of the accretion of the debt
discount and offering costs associated with the private sale of 180 units. In
future periods, we expect to also report a change in the estimated fair value of
the derivative conversion liability.
SIX MONTHS ENDED FEBRUARY 28, 2010
Oil and gas revenues and related expenses increased during the six months
ended February 28, 2010. Our first wells began producing in February 2009. In
addition to the first two wells, four wells were brought on-stream during the
six months ended February 28, 2010.
11
Oil and gas sales for the six months ended February 28, 2010, are
summarized in the following table:
Oil Gas Total
------- ------ -----
(bbl) (mcf) (boe)
Production volumes 3,491 21,221 7,028
Revenues $244,596 $143,915 $388,511
Average sales price $ 70.06 $ 6.78 $ 55.28
General and administrative expenses decreased during the current six-month
period, primarily because of a decrease in stock based compensation. In
connection with our acquisition of predecessor Synergy in September 2008, we
issued options covering 4,000,000 shares of common stock to replace similar
options that had previously been issued by predecessor Synergy. The pro-rata
portion of the fair value of the options allocated to the six months ended
February 28, 2009 was $6,852,604. During the six months ended February 28, 2010,
we recognized a pro-rata portion ($10,829) of the fair value of 100,000 options
which were issued in December 2008.
Other expenses increased in 2010 as a result of the accretion of the debt
discount and offering costs associated with the private sale of 180 units. In
the future periods, we expect to also report a change in the estimated fair
value of the derivative conversion liability.
YEAR ENDED AUGUST 31, 2009
For the year ended August 31, 2009, we reported a net loss of $12,351,873,
or $1.14 per share, on revenues of $94,121, compared to a net loss of $193,378,
or $0.07 per share for the period ended August 31, 2008. We recently commenced
active operations. We expect to report losses until such time, if ever, that we
begin to generate significant revenue from oil and gas sales.
For the year ended August 31, 2009, we recorded total oil and gas revenues
of $94,121. Our first two wells were completed and placed into production during
the year. Oil and gas sales are summarized in the following table:
Oil Gas Total
--- --- -----
(bbl) (mcf) (boe)
Production volumes 1,730 4,386 2,461
Revenues $78,872 $15,249 $94,121
Average sales price $ 45.59 $ 3.48 $ 38.25
Barrels of oil equivalent ("boe") are calculated using a conversion factor
of 6 mcf to 1 bbl.
We do not currently engage in any commodity hedging activities, although
we may do so in the future.
12
Operating expenses for the year ended August 31, 2009, were $12,462,847,
most of which was share-based compensation ($10,296,521). Excluding share based
compensation, operating expenses for the year were $2,166,326, consisting
primarily of expenses related directly to the oil and gas properties, salaries
and benefits, amounts paid under the administrative services arrangement with
Petroleum Management LLC, consulting and professional fees. In addition, and as
discussed below, $945,079 of impairment is included in operating expenses. These
costs may increase in future periods as we implement our business plan and
expand our business activities.
Lease operating expenses were $11,572 for the year ended August 31, 2009.
On a per unit basis, lease operating expenses were $4.70 per boe.
Depreciation, depletion, and amortization for the year ended August 31,
2009, was $97,309. Our depletion rate for the period was 18.7%.
We use the full cost accounting method, which requires recognition of an
impairment when the total capitalized costs of oil and gas properties exceed the
"ceiling" amount, as defined in the full cost accounting literature. During
2009, we recorded $945,079 of impairment because our capitalized costs subject
to the ceiling test exceeded the estimated future net revenues from proved
reserves discounted at 10% plus the lower of cost or market value of unevaluated
properties. We perform the ceiling test each quarter and further impairments may
be recognized in future periods.
Operating expenses for the year ended August 31, 2009, include $10,296,521
of share-based compensation related to the issuance of stock options. When stock
options are issued, we estimate their fair value using the Black-Scholes-Merton
option-pricing model. The estimated fair value is recorded as an expense on a
pro-rata basis over the vesting period. In connection with the merger, we agreed
to issue options covering 4,000,000 shares to replace similar options that had
previously been issued. We estimate that the fair value of the replacement
options exceeded the fair value of the surrendered options by $10,185,345 and
all of the options vested during the year ended August 31, 2009. Accordingly,
the expense amount allocated to the year ended August 31, 2009 was the entire
$10,296,521 and there is no remaining amount to be recognized in future periods.
During the year ended August 31, 2009, we also recognized a pro-rata portion of
the fair value of outstanding options which will vest over multiple reporting
periods.
13
PERIOD FROM INCEPTION (DECEMBER 28, 2007) TO AUGUST 31, 2008
For the period from inception (December 28, 2007) to August 31, 2008, we
recorded a net loss of $193,378, or $0.07 per share. As discussed below, we
recorded no revenues other than interest income for the period and operating
expenses were incurred to develop our business plan.
Although we incorporated on December 28, 2007, we were dormant until June
2008, when we commenced development of our business plan including activities
which resulted in the transaction on September 10, 2008. Operating expenses for
the period ended August 31, 2008, were $196,271, consisting primarily of
salaries and benefits, amounts paid under an administrative services arrangement
with an affiliate, Petroleum Management, LLC, professional fees and share-based
compensation.
On June 11, 2008, we entered into two-year employment agreements with our
two executive officers. Pursuant to the terms of those agreements, the salaries
of William E. Scaff, Jr. and Ed Holloway are each $12,500 per month.
Petroleum Management, LLC ("PM") provides us with various administrative
services. For the period ended August 31, 2008, we recorded expenses of $53,333
under the administrative services agreement.
Operating expenses include $28,200 of share-based compensation related to
the issuance of stock options. When stock options are issued, we estimate their
fair value using the Black-Scholes-Merton option-pricing model. The estimated
fair value is recorded as an expense on a pro-rata basis over the vesting
period.
During the period ended August 31, 2008, stock options were granted to
purchase 4,000,000 shares of common stock. Effective June 11, 2008, options
covering 2,000,000 shares were issued to our executive officers at an exercise
price of $10.00 and a term of five years. These options became fully vested in
June 2009. The fair value of these options was determined to be nil. Effective
June 30, 2008, options covering an additional 2,000,000 shares were granted to
our executive officers at an exercise price of $1.00 and a term of five years.
These options became fully vested in June 2009. Based upon a fair value
calculation, these options were determined to have a value of $127,000. Stock
option compensation expense of $28,200 was recorded for the period ended August
31, 2008, based on an allocation of the fair value over the vesting period.
14
LIQUIDITY AND CAPITAL RESOURCES
Our sources and (uses) of funds for the periods indicated are shown below:
Six Months Inception
Ended Year Ended (Dec. 28, 2007)
Feb. 28, 2010 Aug. 31, 2009 to Aug. 31, 2008
------------- ------------- ----------------
Cash used in operations $ (283,107) $ (493,454) $(139,264)
Acquisition of oil and gas
properties and equipment
and drilling and completion
costs (3,748,919) (2,690,720) --
Option on oil and gas
properties -- (100,000) --
Deposit (85,000) --
Sale of convertible notes,
net of issuance costs 10,818,283
Bank loan (repayments) (765,731) 1,161,811 --
Sale of common stock, net of
offering costs -- 2,766,694 2,431,605
Other 3,987 --
Between December 1, 2008 and June 30, 2009, we sold 1,000,000 units to
investors in a private offering at a price of $3.00 per unit. Each unit
consisted of two shares of our common stock, one Series A warrant and one Series
B warrant.
In May 2009 we entered into a loan agreement with a commercial bank which
allows us to borrow up to $1,161,811. The loan is collateralized primarily by
pipe used to drill and complete oil and gas wells. The loan bears interest at
the prime rate plus 1/2%, and requires monthly payments of principal and
interest of $16,737.68. The loan was paid in full on April 20, 2010.
Between December 2009 and March 2010 we sold 180 Units to a group of
private investors. The Units were sold at a price of $100,000 per Unit. Each
Unit consisted of one Promissory Note in the principal amount of $100,000 and
50,000 Series C warrants. The Notes bear interest at 8% per year, payable
quarterly, and mature on December 31, 2012. At any time after May 31, 2010, the
Notes can be converted into shares of our common stock, initially at a
conversion price of $1.60 per share. Each Series C warrant entitles the holder
to purchase one share of our common stock at a price of $6.00 per share at any
time on or before December 31, 2014.
See the section of this prospectus captioned "Comparative Share Data" for
information concerning the terms of the Series A, B and C warrants.
15
As of April 30, 2010, our operating expenses were approximately $95,000
per month which amount includes salaries and other corporate overhead. Our
capital requirements for the next twelve months include participation in 35
gross wells (in which our interest will approximate 28 net wells) and various
other projects for total costs of approximately $15,000,000 to $18,000,000. As
our capital expenditure plans exceed our capital resources, we plan to seek
additional funding. Our capital expenditure plans are subject to periodic
revision based upon the availability of funds and expected return on investment.
It is expected that our principal source of cash flow will be from the
production and sale of crude oil and natural gas reserves which are depleting
assets. Cash flow from the sale of oil and gas production depends upon the
quantity of production and the price obtained for the production. An increase in
prices will permit us to finance our operations to a greater extent with
internally generated funds, may allow us to obtain equity financing more easily
or on better terms, and lessens the difficulty of obtaining financing. However,
price increases heighten the competition for oil and gas prospects, increase the
costs of exploration and development, and, because of potential price declines,
increase the risks associated with the purchase of producing properties during
times that prices are at higher levels.
A decline in oil and gas prices (i) will reduce our cash flow which in
turn will reduce the funds available for exploring for and replacing oil and gas
reserves, (ii) will increase the difficulty of obtaining equity and debt
financing and worsen the terms on which such financing may be obtained, (iii)
will reduce the number of oil and gas prospects which have reasonable economic
terms, (iv) may cause us to permit leases to expire based upon the value of
potential oil and gas reserves in relation to the costs of exploration, (v) may
result in marginally productive oil and gas wells being abandoned as
non-commercial, and (vi) may increase the difficulty of obtaining financing.
However, price declines reduce the competition for oil and gas properties and
correspondingly reduce the prices paid for leases and prospects.
We plan to generate profits by drilling productive oil or gas wells.
However, we will need to raise the funds required to drill new wells through the
sale of its securities, from loans from third parties or from third parties
willing to pay our share of drilling and completing the wells. We do not have
any commitments or arrangements from any person to provide us with any
additional capital. If additional financing is not available when needed, we may
need to cease operations. We may not be successful in raising the capital needed
to drill oil or gas wells. Any wells which may be drilled by us may not be
productive of oil or gas.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of April 30,
2010:
Total 2010 2011 2012
----- ---- ---- ----
Notes payable $18,000,000 -- -- $18,000,000
16
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonable likely to have a current or future effect on our financial condition,
changes in financial condition, results of operations, liquidity or capital
resources
BUSINESS
We were incorporated in Colorado on May 11, 2005, under the name Blue Star
Energy, Inc. In December 2007 we changed our name to Brishlin Resources, Inc.
Prior to the acquisition of predecessor Synergy we were relatively inactive and
our only material asset was one shut-in oil and gas well.
On September 10, 2008, we acquired approximately 89% of the outstanding
shares of predecessor Synergy in exchange for 8,882,500 shares of our common
stock and 1,042,500 Series A warrants.
On December 19, 2008, we acquired the remaining shares of predecessor
Synergy for 1,077,500 shares of our common stock and 1,017,500 Series A
warrants.
In contemplation of the acquisition, our shareholders, at a special meeting
held on September 8, 2008, approved a 10-for-1 reverse split of our common stock
and approved a resolution to change our name to Synergy Resources Corporation.
As a result of the reverse stock split, we had 1,038,000 outstanding shares of
common stock at the time of the acquisition of predecessor Synergy.
The reverse stock split and name change became effective on the OTC
Bulletin Board on September 22, 2008. Subsequent to the acquisition, we changed
our fiscal year end from December 31 to August 31.
Each of our shareholders at the close of business on September 9, 2008,
received one Series A warrant for each post-split share which they owned in the
Company on that date. However, the warrants will not be issued until a
registration statement covering the warrants, as well as the shares issuable
upon the exercise of the warrants, had been declared effective by the Securities
and Exchange Commission.
Predecessor Synergy was incorporated in Colorado in December 2007. On the
date we acquired predecessor Synergy, its only asset was approximately $2.2
million in cash that was raised from private investors.
Although from a legal standpoint we acquired a controlling interest in
predecessor Synergy on September 10, 2008, for financial reporting purposes the
acquisition of predecessor Synergy constituted a recapitalization, and the
acquisition was accounted for as a reverse merger whereby predecessor Synergy
was deemed to have acquired the Company. As a result, all financial statements
for periods after August 31, 2008, reflect the historical operations of
predecessor Synergy for the period from predecessor Synergy's inception
17
(December 28, 2007) through September 10, 2008, and our operations combined with
those of predecessor Synergy after that date.
Unless otherwise indicated all references to us include the operations of
predecessor Synergy.
Effective December 1, 2008, we purchased 1,000,000 shares of our common
stock from one of the original predecessor Synergy shareholders for $1,000,
which was the price at which the shares were sold to the shareholder.
Between December 1, 2008 and June 30, 2009, we sold 1,000,000 units to
investors in a private offering at a price of $3.00 per unit. Each unit
consisted of two shares of our common stock, one Series A warrant and one Series
B warrant.
Between December 2009 and March 2010 we sold 180 Units to a group of
private investors. The Units were sold at a price of $100,000 per Unit. Each
Unit consisted of one Promissory Note in the principal amount of $100,000 and
50,000 Series C warrants. The Notes bear interest at 8% per year, payable
quarterly, and mature on December 31, 2012. At any time after May 31, 2010, the
Notes can be converted into shares of our common stock, initially at a
conversion price of $1.60 per share. Each Series C warrant entitles the holder
to purchase one share of our common stock at a price of $6.00 per share at any
time on or before December 31, 2014.
See the "Comparative Share Data" section of this prospectus for the terms
of the Series A, B, and C warrants.
Contingent upon the amount of capital available, we plan to explore for
oil and gas. We expect that most of our wells will be drilled in the Denver -
Julesburg ("D-J") Basin in northeast Colorado.
We plan to evaluate undeveloped oil and gas prospects and participate in
drilling activities on those prospects, which, in the opinion of management, are
favorable for the production of oil or gas. If, through our review, a
geographical area indicates geological and economic potential, we will attempt
to acquire leases or other interests in the area. We may then attempt to sell
portions of our leasehold interests in a prospect to third parties, thus sharing
the risks and rewards of the exploration and development of the prospect with
the other owners. One or more wells may be drilled on a prospect, and if the
results indicate the presence of sufficient oil and gas reserves, additional
wells may be drilled on the prospect.
We may also:
o acquire a working interest in one or more prospects from others and
participate with the other working interest owners in drilling, and if
warranted, completing oil or gas wells on a prospect, or
o purchase producing oil or gas properties.
18
Our activities will primarily be dependent upon available financing.
We are an oil and gas operator in Colorado.
Title to properties which may be acquired by us will be subject to
royalty, overriding royalty, carried, net profits, working and other similar
interests and contractual arrangements customary in the oil and gas industry, to
liens for current taxes not yet due and to other encumbrances. As is customary
in the industry, in the case of undeveloped properties little investigation of
record title will be made at the time of acquisition (other than a preliminary
review of local records). However, drilling title opinions may be obtained
before commencement of drilling operations.
Our two officers, Ed Holloway and William Scaff, Jr., are currently
involved in oil and gas exploration and development. Mr. Holloway and Mr. Scaff,
or their affiliates, may present us with opportunities to acquire leases or to
participate in drilling oil or gas wells.
Any transaction between us and Ed Holloway and William E. Scaff, Jr., or
any of their affiliates (collectively the "Holloway/Scaff parties") must be
approved by a majority of our disinterested directors. In the event the
Holloway/Scaff parties are presented with or become aware of any potential
transaction which they believe would be of interest to us, they are required to
provide us with the right to participate in the transaction. The Holloway/Scaff
parties are required to disclose any interest they have in the potential
transaction as well as any interest they have in any property which could
benefit from our participation in the transaction, such as by our drilling an
exploratory well on a lease which is in proximity to leases in which the
Holloway/Scaff parties have an interest. Without our consent, the Holloway/Scaff
parties may participate up to 25% in a potential transaction on terms which are
no different than those offered to us.
We have a letter agreement with Petroleum Management, LLC, and Petroleum
Exploration and Management, LLC, firms controlled by Ed Holloway and William E.
Scaff, Jr., which provides us with the option to acquire working interests in
oil and gas leases owned by these firms and covering lands on the
Denver-Julesburg ("D-J") basin in northeast Colorado. The oil and gas leases
cover 640 acres in Weld County, Colorado and, subject to certain conditions,
will be transferred to us for payment of $1,000 per net mineral acre. The
working interests in the leases we may acquire will vary, but the net revenue
interest in the leases, if acquired, will not be less than 75%. Pursuant to this
agreement, which has now expired, we acquired interests in three properties at a
total cost of $360,000.
DRILLING ACTIVITIES, OIL AND GAS PROPERTIES, AND PROVEN RESERVES
During the year ended December 31, 2007, and the eight-month transition
period ended August 31, 2008, we did not:
o drill or participate in the drilling of any oil or gas wells, or
o produce or sell any oil or gas.
19
During the year ended August 31, 2009, and the eight months ended April
30, 2010, we drilled or participated in the drilling of the following wells:
Year Ended Eight Months
August 31, 2009 Ended April 30, 2010
--------------- --------------------
Gross Net Gross Net
Exploratory Wells:
Productive:
Oil -- -- -- --
Gas -- -- -- --
Nonproductive: -- --
Development Wells:
Productive:
Oil 2 0.75 13 7.625
Gas -- -- -- --
Nonproductive -- -- -- --
Total Wells:
Productive:
Oil 2 0.75 13 7.625
Gas -- -- -- --
Nonproductive -- -- -- --
As of April 30, 2010, nine wells were in various stages of completion.
The following table shows, as of April 30, 2010, by state, our producing
wells, Developed Acreage, and Undeveloped Acreage, excluding service (injection
and disposal) wells:
Developed Undeveloped
State Productive Wells Acreage (1) Acreage (2)
----- ----------------- --------------- -------------------
Gross Net Gross Net Gross Net
Colorado 13 7.625 360 225 10,221 8,130
Nebraska 2,560 2,560
Wyoming 160 160
(1) Does not include 160 acres associated with a shut-in gas well.
(2) "Undeveloped Acreage" includes leasehold interests on which wells have not
been drilled or completed to the point that would permit the production of
commercial quantities of natural gas and oil regardless of whether the
leasehold interest is classified as containing proved undeveloped reserves.
20
The following table shows, as of April 30, 2010, the status of our gross
acreage.
State Held by Production Not Held by Production
Colorado 360 10,221
Nebraska 2,560
Wyoming 160
Acres Held By Production remain in force so long as oil or gas is produced
from the well on the particular lease. Leased acres which are not Held By
Production require annual rental payments to maintain the lease until the first
to occur of the following: the expiration of the lease or the time oil or gas is
produced from one or more wells drilled on the lease acreage. At the time oil or
gas is produced from wells drilled on the leased acreage the lease is considered
to be Held By Production.
We do not own any overriding royalty interests.
The following table shows our net production of oil and gas, average sales
prices and average production costs for the period presented:
Year Ended Six Months Ended
August 31, 2009 February 28, 2010
Production -
Oil (Bbls) 1,730 3,491
Gas (Mcf) 4,386 21,221
Average sales price -
Oil (Bbls) $45.59 $ 70.06
Gas (Mcf) $ 3.48 $ 6.78
Average production costs per
barrel of oil equivalent (BOE) $ 4.70 $ 7.83
Production costs may vary substantially among wells depending on the
methods of recovery employed and other factors, but generally include severance
taxes, administrative overhead, maintenance and repair, labor and utilities.
We are not obligated to provide a fixed and determined quantity of oil or
gas in the future. During the last three fiscal years, we have not had, nor do
we now have, any long-term supply or similar agreement with any government or
governmental authority.
Below are estimates of our net Proved Reserves and the present value of
estimated future net revenues from such reserves based upon the standardized
measure of discounted future net cash flows relating to proved oil and gas
reserves in accordance with the provisions of Accounting Standards Codification
Topic 932, "Disclosures about Oil and Gas Producing Activities". The
standardized measure of discounted future net cash flows is determined by using
estimated quantities of Proved Reserves and the periods in which they are
expected to be developed and produced based on period-end economic conditions.
The estimated future production is priced at period-end prices, except where
fixed and determinable price escalations are provided by contract. The resulting
21
estimated future cash inflows are then reduced by estimated future costs to
develop and produce reserves based on period-end cost levels. No deduction has
been made for depletion, depreciation or for indirect costs, such as general
corporate overhead. Present values were computed by discounting future net
revenues by 10% per year.
August 31, 2009
-------------------------
Oil (bbl) Gas (mcf)
Proved Reserves 6,430 25,680
Estimated future net cash flows from proved
oil and gas reserves $305,351
Present value of future net cash flows from
proved oil and gas reserves $232,957
Our Proved Reserves include only those amounts which we reasonably expect
to recover in the future from known oil and gas reservoirs under existing
economic and operating conditions, at current prices and costs, under existing
regulatory practices and with existing technology. Accordingly, any changes in
prices, operating and development costs, regulations, technology or other
factors could significantly increase or decrease estimates of Proved Reserves.
In general, the volume of production from our gas and oil properties
declines as reserves are depleted. Except to the extent we acquire additional
properties containing proved reserves or conducts successful exploration and
development activities, or both, our proved reserves will decline as reserves
are produced. Accordingly, volumes generated from our future activities are
highly dependent upon the level of success in acquiring or finding additional
reserves and the costs incurred in doing so.
GOVERNMENT REGULATION
Various state and federal agencies regulate the production and sale of oil
and natural gas. All states in which we plan to operate impose restrictions on
the drilling, production, transportation and sale of oil and natural gas.
The Federal Energy Regulatory Commission (the "FERC") regulates the
interstate transportation and the sale in interstate commerce for resale of
natural gas. The FERC's jurisdiction over interstate natural gas sales has been
substantially modified by the Natural Gas Policy Act under which the FERC
continued to regulate the maximum selling prices of certain categories of gas
sold in "first sales" in interstate and intrastate commerce.
FERC has pursued policy initiatives that have affected natural gas
marketing. Most notable are (1) the large-scale divestiture of interstate
pipeline-owned gas gathering facilities to affiliated or non-affiliated
companies; (2) further development of rules governing the relationship of the
pipelines with their marketing affiliates; (3) the publication of standards
relating to the use of electronic bulletin boards and electronic data exchange
by the pipelines to make available transportation information on a timely basis
and to enable transactions to occur on a purely electronic basis; (4) further
22
review of the role of the secondary market for released pipeline capacity and
its relationship to open access service in the primary market; and (5)
development of policy and promulgation of orders pertaining to its authorization
of market-based rates (rather than traditional cost-of-service based rates) for
transportation or transportation-related services upon the pipeline's
demonstration of lack of market control in the relevant service market. We do
not know what effect the FERC's other activities will have on the access to
markets, the fostering of competition and the cost of doing business.
Our sales of oil and natural gas liquids will not be regulated and will be
at market prices. The price received from the sale of these products will be
affected by the cost of transporting the products to market. Much of that
transportation is through interstate common carrier pipelines.
Federal, state, and local agencies have promulgated extensive rules and
regulations applicable to our oil and natural gas exploration, production and
related operations. Most states require permits for drilling operations,
drilling bonds and the filing of reports concerning operations and impose other
requirements relating to the exploration of oil and natural gas. Many states
also have statutes or regulations addressing conservation matters including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and natural gas wells and
the regulation of spacing, plugging and abandonment of such wells. The statutes
and regulations of some states limit the rate at which oil and natural gas is
produced from our properties. The federal and state regulatory burden on the oil
and natural gas industry increases our cost of doing business and affects its
profitability. Because these rules and regulations are amended or reinterpreted
frequently, we are unable to predict the future cost or impact of complying with
those laws.
COMPETITION AND MARKETING
We will be faced with strong competition from many other companies and
individuals engaged in the oil and gas business, many are very large, well
established energy companies with substantial capabilities and established
earnings records. We may be at a competitive disadvantage in acquiring oil and
gas prospects since we must compete with these individuals and companies, many
of which have greater financial resources and larger technical staffs. It is
nearly impossible to estimate the number of competitors; however, it is known
that there are a large number of companies and individuals in the oil and gas
business.
Exploration for and production of oil and gas are affected by the
availability of pipe, casing and other tubular goods and certain other oil field
equipment including drilling rigs and tools. We will depend upon independent
drilling contractors to furnish rigs, equipment and tools to drill its wells.
Higher prices for oil and gas may result in competition among operators for
drilling equipment, tubular goods and drilling crews which may affect our
ability expeditiously to drill, complete, recomplete and work-over wells.
The market for oil and gas is dependent upon a number of factors beyond our
control, which at times cannot be accurately predicted. These factors include
the proximity of wells to, and the capacity of, natural gas pipelines, the
extent of competitive domestic production and imports of oil and gas, the
availability of other sources of energy, fluctuations in seasonal supply and
23
demand, and governmental regulation. In addition, there is always the
possibility that new legislation may be enacted, which would impose price
controls or additional excise taxes upon crude oil or natural gas, or both.
Oversupplies of natural gas can be expected to recur from time to time and may
result in the gas producing wells being shut-in. Imports of natural gas may
adversely affect the market for domestic natural gas.
The market price for crude oil is significantly affected by policies
adopted by the member nations of Organization of Petroleum Exporting Countries
("OPEC"). Members of OPEC establish prices and production quotas among
themselves for petroleum products from time to time with the intent of
controlling the current global supply and consequently price levels. We are
unable to predict the effect, if any, that OPEC or other countries will have on
the amount of, or the prices received for, crude oil and natural gas.
Gas prices, which were once effectively determined by government
regulations, are now largely influenced by competition. Competitors in this
market include producers, gas pipelines and their affiliated marketing
companies, independent marketers, and providers of alternate energy supplies,
such as residual fuel oil. Changes in government regulations relating to the
production, transportation and marketing of natural gas have also resulted in
significant changes in the historical marketing patterns of the industry.
Generally, these changes have resulted in the abandonment by many pipelines of
long-term contracts for the purchase of natural gas, the development by gas
producers of their own marketing programs to take advantage of new regulations
requiring pipelines to transport gas for regulated fees, and an increasing
tendency to rely on short-term contracts priced at spot market prices.
General
Our offices are located at 20203 Highway 60, Platteville, CO 80651. The
Platteville office telephone number is (970) 737-1073 and its fax number is
(970) 737-1045. We also maintain an office at 1200 17th Street, Suite 570,
Denver, CO 80202. Our telephone number at the Denver office is (303) 623-3966
and our fax number at this location is (303) 534-0151.
The Platteville office and equipment yard is provided to us pursuant to an
Administrative Services Agreement with Petroleum Management, LLC, a firm
controlled by our two officers. For more information concerning this rental
arrangement see Item 13 of this report.
As of April 30, 2010, our only employees were our two officers, a landman
and an accountant.
MANAGEMENT
Our officers and directors are listed below. Our directors are generally
elected at our annual shareholders' meeting and hold office until the next
annual shareholders' meeting or until their successors are elected and
qualified. Our executive officers are elected by our directors and serve at
their discretion.
24
Name Age Position
Edward Holloway 58 President, Chief Executive Officer and a Director
William E. Scaff, Jr. 53 Vice President, Secretary, Treasurer and a Director
Frank L. Jennings 59 Principal Financial and Accounting Officer
Benjamin J. Barton 45 Director
Rick A. Wilber 61 Director
Raymond E. McElhaney 53 Director
Bill M. Conrad 53 Director
R.W. Noffsinger, III 35 Director
The principal occupations of our officers and directors during the past
several years are as follows:
Edward Holloway - Mr. Holloway has been an officer and director since September
2008. Mr. Holloway has been an officer and director of Synergy since June 2008.
Mr. Holloway co-founded Cache Exploration Inc., an oil and gas exploration and
development company that drilled over 350 wells. In 1987 Mr. Holloway sold the
assets of Cache Exploraton to LYCO Energy Corporation. He rebuilt Cache
Exploration and sold the entire company to Southwest Energy a decade later. In
1997 Mr. Holloway co-founded, and since that date has co-managed, Petroleum
Management, LLC, a company engaged in the exploration, operations, production
and distribution of oil and natural gas. In 2001 Mr. Holloway co-founded, and
since that date has co-managed, Petroleum Exploration and Management, LLC, a
company engaged in the acquisition of oil and gas leases and the production and
sale of oil and natural gas. Mr. Holloway holds a degree in Business Finance
from the University of Northern Colorado and is a past president of the Colorado
Oil & Gas Association.
William E. Scaff, Jr. - Mr. Scaff has been an officer and director since
September 2008. Mr. Scaff has been an officer and director of Synergy since June
2008. Between 1980 and 1990 Mr. Scaff oversaw financial and credit transactions
for Dresser Industries, a Fortune 50 oilfield equipment company. Immediately
after serving as a regional manager with TOTAL Petroleum between 1990 and 1997,
Mr. Scaff co-founded, and since that date co-managed, Petroleum Management, LLC,
a company engaged in the exploration, operations, production and distribution of
oil and natural gas. In 2001 Mr. Scaff co-founded, and since that date has
co-managed, Petroleum Exploration and Management, LLC, a company engaged in the
acquisition of oil and gas leases and the production and sale of oil and natural
gas. Mr. Scaff holds a degree in Finance from the University of Colorado.
Frank L. Jennings - Mr. Jennings has been our Principal Financial and Accounting
Officer since June 2007. Since 2001 Mr. Jennings has been an independent
consultant providing managing and financial services, primarily to smaller
public companies. From 2000 to 2005, he served as the Chief Financial Officer
and a director of Global Casinos, Inc., a publicly traded corporation, and from
2001 to 2005, he served as Chief Financial Officer and a director of OnSource
Corporation, now known as Ceragenix Pharmaceuticals, Inc., also a publicly
traded corporation.
25
Benjamin J. Barton - Mr. Barton has been one of our directors since September
2008. Mr. Barton has been a director of Synergy since June 2008. Between 2003
and 2005 Mr. Barton was a private wealth manager with Merrill Lynch. Since 1986
Mr. Barton has been active in all aspects of venture capital and public stock
offerings. Since 2005 Mr. Barton has been the Managing Director of Strategic
Capital Partners, LLC, a private investment company specializing in energy
companies. Prior to earning an MBA in Finance from UCLA, Mr. Barton received his
Bachelor of Science degree in Political Science from Arizona State University.
Rick A. Wilber - Mr. Wilber has been one of our directors since September 2008.
Since 1984 Mr. Wilber has been a private investor in, and a consultant to,
numerous development stage companies. In 1974 Mr. Wilber was co-founder of
Champs Sporting Goods, a retail sporting goods chain, and served as its
President from 1974-1984. He has been a Director of Ultimate Software Group Inc.
since October 2002 and serves as a member of its audit and compensation
committees. Mr. Wilber was a director of Ultimate Software Group between October
1997 and May 2000. He served as a director of Royce Laboratories, Inc., a
pharmaceutical concern, from 1990 until it was sold to Watson Pharmaceuticals,
Inc. in April 1997 and was a member of its compensation committee.
Raymond E. McElhaney - Mr. McElhaney has been one of our directors since May
2005, and prior to the acquisition of Synergy was our President and Chief
Executive Officer. Mr. McElhaney began his career in the oil and gas industry in
1983 as founder and President of Spartan Petroleum and Exploration, Inc. Mr.
McElhaney also served as a chairman and secretary of Wyoming Oil & Minerals,
Inc., a publicly traded corporation, from February 2002 until 2005. From 2000 to
2003 he served as vice president and secretary of New Frontier Energy, Inc., a
publicly traded corporation. McElhaney is a co-founder of MCM Capital Management
Inc., a privately held financial management and consulting company formed in
1990, and has served as its president of that company since inception.
Bill M. Conrad - Mr. Conrad has been one of our directors since May 2005, and
prior to the acquisition of Synergy was our Vice President and Secretary. Mr.
Conrad has been involved in several aspects of the oil & gas industry over the
past 20 years. From February 2002 until June 2005, Mr. Conrad served as
president and a director of Wyoming Oil & Minerals, Inc., and from 2000 until
April 2003, he served as vice president and a director of New Frontier Energy,
Inc. Since June 2006, Mr. Conrad has served as a director of Gold Resource
Corporation, a publicly traded corporation engaged in the mining industry. In
1990, Mr. Conrad co-founded MCM Capital Management Inc. and has served as its
vice president since that time.
R.W. "Bud" Noffsinger, III - Mr. Noffsinger was appointed as one of our
directors in September 2009. Mr. Noffsinger has been the President/ CEO of RWN3
LLC, a company involved with investment securities, since February 2009.
Previously, Mr. Noffsinger was the President (2005 to 2009) and Chief Credit
Officer (2008 to 2009) of First Western Trust Bank in Fort Collins, Colorado.
Prior to his association with First Western, Mr. Noffsinger was a manager with
Centennial Bank of the West (now Guaranty Bank and Trust). Mr. Noffsinger's
focus at Centennial was client development and lending in the areas of
26
commercial real estate, agriculture and natural resources. Mr. Noffsinger is a
graduate of the University of Wyoming and holds a Bachelor of Science degree in
Economics with an emphasis on natural resources and environmental economics.
With the exception of Edward Holloway and William E. Scaff, Jr., all of
our directors are independent as that term is defined Section 803.A of the NYSE
Amex.
Mr. McElhaney, Mr. Conrad and Mr. Noffsinger are the members of our audit
committee. Mr. Noffsinger is the audit committee's financial expert.
We do not have a compensation committee.
We have adopted a Code of Ethics applicable to our senior executive and
financial officers.
Executive Compensation
The following table shows the compensation paid or accrued to our
Principal Executive and Financial officers during the year ended August 31,
2009, and the years ended December 31, 2008 and 2007. During the periods shown
two of our officers received compensation in excess of $100,000.
Stock Option All Other
Name and Principal Salary Bonus Awards Awards Compensation
Position Period (1) (2) (3) (4) (5) Total
------------------ ------ ------ ----- ------ ------ ------------ -----
Ed Holloway, 2009 $150,000 -- -- $5,092,672 -- $5,242,672
Principal Executive
Officer (6)
William E. Scaff, Jr. 2009 $150,000 -- -- $5,092,672 -- $5,242,672
Vice President,
Secretary and
Treasurer
Frank L. Jennings, 2009 -- -- -- -- $ 63,716 $63,716
Principal Financial 2008 -- -- -- -- $ 6,778 $ 6,778
Officer 2007 -- -- -- -- $ 9,900 $ 9,900
(1) The dollar value of base salary (cash and non-cash) earned. (2) The dollar
value of bonus (cash and non-cash) earned.
(3) The fair value of stock issued for services computed in accordance with ASC
718 on the date of grant.
(4) The fair value of options granted computed in accordance with ASC 718 on
the date of grant.
(5) All other compensation received that we could not properly report in any
other column of the table.
27
(6) Mr. Holloway and Mr. Scaff became officers in September 2008. Mr. McElhaney
resigned as our Principal Executive Officer in September 2008. Mr.
McElhaney remains as one of our directors.
The compensation to be paid to our two executive officers is based upon
their employment agreements, which are described below. All material elements of
the compensation paid to these officers is discussed below.
We have employee agreements with Ed Holloway and William E. Scaff Jr. Each
employment agreement provides that the employee will be paid a monthly salary of
$12,500 and requires the employee to devote approximately 80% of his time to our
business. The employment agreements expire on June 11, 2010, but may be
terminated sooner by us as a result of the employee's disability or for cause.
For purposes of the employment agreements, "cause" is defined as:
(i) the conviction of the employee of any crime or offense involving,
or of fraud or moral turpitude, which significantly harms us;
(ii) the refusal of the employee to follow the lawful directions of our
Board of Directors;
(iii) the employee's negligence which shows a reckless or willful
disregard for reasonable business practices and significantly
harms us; or
(iv) a breach of the employment agreement by the employee.
We had a consulting agreement with Ray McElhaney and Bill Conrad which
provided that Mr. McElhaney and Mr. Conrad would render, on a part-time basis,
consulting services pertaining to corporate acquisitions and development. For
these services, Mr. McElhaney and Mr. Conrad were paid a monthly consulting fee
of $5,000. The consulting agreement expired on September 15, 2009.
Long-Term Incentive Plans. We do not provide our officers or employees
with pension, stock appreciation rights, long-term incentive or other plans and
have no intention of implementing any of these plans for the foreseeable future.
Employee Pension, Profit Sharing or other Retirement Plans. We do not have
a defined benefit, pension plan, profit sharing or other retirement plan,
although we may adopt one or more of such plans in the future.
Compensation of Directors. We did not compensate any person for acting as
a director during the year ended August 31, 2009.
Stock Option and Bonus Plan
We have a stock option and stock bonus plan. A summary description of the
plan follows.
Non-Qualified Stock Option Plan. Our Non-Qualified Stock Option Plan
authorizes the issuance of shares of our common stock to persons that exercise
options granted pursuant to the Plan. Our employees, directors, officers,
28
consultants and advisors are eligible to be granted options pursuant to the
Plan, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with
promoting our stock or the sale of securities in a capital-raising transaction.
The option exercise price is determined by our directors.
Stock Bonus Plan. Our Stock Bonus Plan allows for the issuance of shares
of common stock to our employees, directors, officers, consultants and advisors.
However, bona fide services must be rendered by the consultants or advisors and
such services must not be in connection with promoting our stock or the sale of
securities in a capital-raising transaction.
Summary. The following is a summary of options granted or shares issued
pursuant to the Plans as of April 30, 2010. Each option represents the right to
purchase one share of our common stock.
Total
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
------------ ----------- ------------ ---------- ---------------
Non-Qualified Stock
Option Plan 2,000,000 100,000 N/A 1,900,000
Stock Bonus Plan 500,000 N/A -- 500,000
Options
In connection with the acquisition of predecessor Synergy, we issued
options to the persons shown below in exchange for options previously issued by
predecessor Synergy. The terms of the options we issued are identical to the
terms of the Synergy options. The options were not granted pursuant to our
Non-Qualified Stock Option Plan. As of April 30, 2010 none of these options have
been exercised.
Shares Issuable
Grant Upon Exercise Exercise Expiration
Name Date of Options Price Date
---- ------- ---------------- -------- ----------
Ed Holloway (1) 9-10-08 1,000,000 $ 1.00 6-11-13
William E. Scaff, Jr. (2) 9-10-08 1,000,000 $ 1.00 6-11-13
Ed Holloway (1) 9-10-08 1,000,000 $10.00 6-11-13
William E. Scaff, Jr. (2) 9-10-08 1,000,000 $10.00 6-11-13
(1) Options are held of record by a limited liability company controlled by Mr.
Holloway.
(2) Options are held of record by a limited liability company controlled by Mr.
Scaff.
The following table shows information concerning our outstanding options
as of April 30, 2010.
29
Shares underlying
unexercised Option
which are: Exercise Expiration
Name Exercisable Unexercisable Price Date
---- ----------- ------------- -------- ----------
Ed Holloway 1,000,000 -- $ 1.00 6-11-13
William E. Scaff, Jr. 1,000,000 -- $ 1.00 6-11-13
Ed Holloway 1,000,000 -- $10.00 6-11-13
William E. Scaff, Jr. 1,000,000 -- $10.00 6-11-13
Employee 10,000 90,000 (1) $ 3.00 12-31-18
(1) Options were issued pursuant to Non-Qualified Stock Option Plan in December
2008.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to our Non-Qualified Stock Option Plan as
of August 31, 2009. Our Non-Qualified Stock Option Plan has not been approved by
our shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan category Options (a) Options Reflected in Column (a)
-------------------------------------------------------------------------------
Non-Qualified Stock
Option Plan 100,000 $3.00 1,900,000
Transactions with Related Parties
Prior to our acquisition of predecessor Synergy, predecessor Synergy made
the following sales of its securities:
Series A
Name Shares Warrants Consideration
Ed Holloway (1) 2,070,000 $2,070
William E. Scaff, Jr. (1) 2,070,000 $2,070
Benjamin Barton (1) 600,000 $ 600
John Staiano (1) 600,000 $ 600
Synergy Energy Trust 1,900,000 (2) $1,900
Third Parties 660,000 $ 660
Private Investors 1,000,000 1,000,000 $1.00 per Unit (3)
Private Investors 1,060,000 1,060,000 $1.50 per Unit (3)
--------- ----------
9,960,000 2,060,000
========= =========
(1) Shares are held of record by entities controlled by this person.
(2) In December 2008 we repurchased 1,000,000 shares from the Synergy Energy
Trust.
30
(3) Shares and warrants were sold as units, with each unit consisting of one
share of our common stock and one Series A Warrant.
In connection with our acquisition of predecessor Synergy, the 9,960,000
shares of predecessor Synergy, plus the 2,060,000 Series A warrants, were
exchanged for 9,960,000 shares of our common stock, plus 2,060,000 Series A
warrants.
In contemplation of the acquisition of predecessor Synergy, our directors
declared a dividend of Series A warrants. The dividend provided that each person
owning our shares at the close of business on September 9, 2008, will receive
one Series A warrant for each post-split share which they owned on that date.
Mr. McElhaney and Mr. Conrad, due to their ownership of our common stock on
September 9, 2008, will receive 271,000 and 247,000 Series A warrants,
respectively.
PRINCIPAL SHAREHOLDERS
The following table shows, as of April 30, 2010, information with respect
to those persons owning beneficially 5% or more of our common stock and the
number and percentage of outstanding shares owned by each of our directors and
officers and by all officers and directors as a group. Unless otherwise
indicated, each owner has sole voting and investment powers over his shares of
common stock.
Number Percent
Name of Shares (1) of Class
----- ------------- --------
Ed Holloway 4,070,000 (2) 33.9%
William E. Scaff, Jr. 4,070,000 (3) 33.9%
Frank L. Jennings 4,000 Nil
Benjamin Barton 600,000 (4) 5.0%
Rick A. Wilber 376,429 3.1%
Raymond E. McElhaney 212,000 1.8%
Bill M. Conrad 227,000 1.9%
R.W. Noffsinger, III 250,000 2.1%
John Staiano 600,000 (5) 5.0%
Steven Meyer 672,666 5.6%
John Barton 600,000 5.0%
All officers and directors
as a group (8 persons). 9,809,429 81.8%
(1) Share ownership includes shares issuable upon the exercise of options held
by the persons listed below.
31
Share Issuable Option
Upon Exercise Exercise Expiration
Name of Options Price Date
---- ----------------- ---------- ----------
Ed Holloway 1,000,000 $1.00 6-11-13
Ed Hollway 1,000,000 $10.00 6-11-13
William E. Scaff, Jr. 1,000,000 $1.00 6-11-13
William E. Scaff, Jr. 1,000,000 $10.00 6-11-13
(2) Shares are held of record by various trusts and limited liability companies
controlled by Mr. Holloway.
(3) Shares are held of record by various trusts and limited liability companies
controlled by Mr. Scaff.
(4) Shares are held of record by a partnership controlled by Mr. Barton.
(5) Shares are held of record by a trust and a limited liability company
controlled by Mr. Staiano.
SELLING SHAREHOLDERS
Between December 2009 and March 2010, we sold 180 Units to a group of
private investors. The Units were sold at a price of $100,000 per Unit. Each
Unit consisted of one Promissory Note in the principal amount of $100,000 and
50,000 Series C warrants. At any time after May 31, 2010, the Notes can be
converted into shares of our common stock, initially at a conversion price of
$1.60 per share. Each Series C warrant entitles the holder to purchase one share
of our common stock at a price of $6.00 per share at any time on or before
December 31, 2014.
In connection with our private offering we paid the placement agent for
the offering a commission of $977,100 plus a non-accountable expense allowance
of $360,000. We also issued to the placement agent 1,125,000 Series D warrants.
Each Series D warrant entitles the holder to purchase one share of our common
stock at a price of $1.60 per share at any time on or before December 31, 2014.
The persons listed in the following table, referred to as the "selling
shareholders", plan to offer the shares issuable upon the conversion of the
notes and or the exercise of the Series C warrants, shown opposite their
respective names, by means of this prospectus.
We will not receive any proceeds from the sale of the securities by the
selling shareholders. We will pay all costs of registering the securities
offered by the selling shareholders. The selling shareholders will pay all sales
commissions and other costs of the sale of the securities offered by them.
32
Shares
Shares Issuable
Issuable Upon Share
Upon Exercise Shares To Ownership
Name of Shares Conversion of Series Be Sold In After
Selling Shareholder Owned of Notes C Warrants This Offering Offering
------------------- ----- ---------- ---------- ------------- ---------
Accredited Members, Inc. -- 15,625 12,500 28,125 --
Stephen F. Albert -- 15,625 12,500 28,125 --
James D. Allard -- 62,500 50,000 112,500 --
Anchor Ventures, LLC -- 93,750 75,000 168,750 --
Jason Anderson -- 31,250 25,000 56,250 --
John David Anderson -- 31,250 25,000 56,250 --
Robert Anderson -- 31,250 25,000 56,250 --
Les D. Armstrong -- 31,250 25,000 56,250 --
Ronald Armstrong -- 68,750 55,000 123,750 --
Ronald L. Blach -- 62,500 50,000 112,500 --
Michael S. Barish -- 125,000 100,000 225,000 --
Margaret Bathgate -- 31,250 25,000 56,250 --
Steven M. Bathgate IRA,
Delaware Charter Guarantee
& Trust Co. as custodian -- 68,750 55,000 123,750 --
Larry Baucke & Laurie Baucke -- 250,000 200,000 450,000 --
William C. Bensler -- 62,500 50,000 112,500 --
Larry E. & Terryl A. Benson -- 20,000 16,000 36,000 --
Ruth Bluhm and Gary Bluhm -- 15,625 12,500 28,125 --
Gary and Theresa Boening -- 62,500 50,000 112,500 --
Alvin R. Bonnette, Trustee -- 125,000 100,000 225,000 --
Gary A. and Linda J. Brauns -- 46,875 37,500 84,375 --
Joseph P. Brophy -- 125,000 100,000 225,000 --
Brothers LLC -- 62,500 50,000 112,500 --
William J. Burcham, IRA, Delaware
Charter Guarantee & Trust as
custodian -- 31,250 25,000 56,250 --
The Burns Partnership, LLC -- 250,000 200,000 450,000 --
Busha Investments LLC -- 125,000 100,000 225,000 --
Butera Family Trust -- 62,500 50,000 112,500 --
Butera Family Trust -- 31,250 25,000 56,250 --
C & R Industries Inc. -- 31,250 25,000 56,250 --
Rodney D. Cerny IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 31,250 25,000 56,250 --
Lawrence Chimerine IRA, CGMI as
custodian -- 15,625 12,500 28,125 --
Michael and Teri Cox-Baldwin
2003 Family Trust -- 62,500 50,000 112,500 --
John E. & Patricia E. Crowley -- 31,250 25,000 56,250 --
Charles Curtis -- 62,500 50,000 112,500 --
D&P Kelsall Family LLLP -- 31,250 25,000 56,250 --
Leslie W. David Trust -- 62,500 50,000 112,500 --
Glen S. Davis -- 15,625 12,500 28,125 --
Diamond S DGT Trust -- 125,000 100,000 225,000 --
Michael E. Donnelly -- 6,360 5,087 11,447 --
Duncan Family Trust 1997 -- 125,000 100,000 225,000 --
33
Shares
Shares Issuable
Issuable Upon Share
Upon Exercise Shares To Ownership
Name of Shares Conversion of Series Be Sold In After
Selling Shareholder Owned of Notes C Warrants This Offering Offering
------------------- ----- ---------- ---------- ------------- ---------
William Max Duncan &
Kathleen Ann Duncan -- 250,000 200,000 450,000 --
James B. Edson -- 62,500 50,000 112,500 --
Betty B. Fisher and
William R. Fisher -- 62,500 50,000 112,500 --
Robert B. Fisher Revocable Trust -- 312,500 250,000 562,500 --
Elaine Foe -- 62,500 50,000 112,500 --
Eric Gagne -- 62,500 50,000 112,500 --
Johnny Galbraith -- 62,500 50,000 112,500 --
Roland & Cynthia Gentner -- 62,500 50,000 112,500 --
John D. Gibbs -- 156,250 125,000 281,250 --
Kim J. Gloystein IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 12,500 10,000 22,500 --
GrassRoutes -- 62,500 50,000 112,500 --
Cynthia & Rose Greenfield -- 12,500 10,000 22,500 --
Zenas N. Gurley -- 31,250 25,000 56,250 --
Zenas N. Gurley IRA, Southwest
Securities Inc., as custodian -- 31,250 25,000 56,250 --
Michele Hannan -- 62,500 50,000 112,500 --
Dennie C. Harms -- 31,250 25,000 56,250 --
Geraldine Haukos -- 93,750 75,000 168,750 --
Jan Haukos -- 62,500 50,000 112,500 --
Kim Haukos -- 62,500 50,000 112,500 --
Jack P. Herick -- 12,500 10,000 22,500 --
Debra Herman -- 125,000 100,000 225,000 --
Herman Enterprises, LLC -- 187,500 150,000 337,500 --
Robyne L. Huebner &
James W. Huebner -- 6,250 5,000 11,250 --
Wayne Huepenbecker -- 62,500 50,000 112,500 --
William & Cheryl Hughes
Family Trust -- 125,000 100,000 225,000 --
Iiams Family Trust -- 17,187 13,750 30,937 --
Judith C. Jacobsen Trust -- 62,500 50,000 112,500 --
John P. Jenkins IRA, Delaware
Charter Guarantee & Trust Co. -- 15,625 12,500 28,125 --
Greg A. Jones -- 62,500 50,000 112,500 --
Jung Capital Partners LLLP -- 62,500 50,000 112,500 --
Grace Kenkel Revocable Trust -- 31,250 25,000 56,250 --
Stephanie L. Kenkel &
David A. Kenkel -- 31,250 25,000 56,250 --
The Kleemann Family 2004
Revocable Trust -- 62,500 50,000 112,500 --
Bruce Kramer -- 31,250 25,000 56,250 --
34
Shares
Shares Issuable
Issuable Upon Share
Upon Exercise Shares To Ownership
Name of Shares Conversion of Series Be Sold In After
Selling Shareholder Owned of Notes C Warrants This Offering Offering
------------------- ----- ---------- ---------- ------------- ---------
Kimberly Krause IRA, Sterling
Trust as custodian -- 31,140 24,913 56,053 --
Jon B. Kruljac & Teri E. Kruljac -- 31,250 25,000 56,250 --
Alan Kurus, IRA, Delaware Charter
Guarantee & Trust as custodian -- 62,500 50,000 112,500 --
Gayle M. Laufer Revocable Trust -- 31,250 25,000 56,250 --
Wayne L. Laufer Revocable Trust -- 312,500 250,000 562,500 --
Lazarus Investment Partners LLLP -- 625,000 500,000 1,125,000 --
Brian Lewand -- 62,500 50,000 112,500 --
Christopher R. Lewand -- 62,500 50,000 112,500 --
Paul W. Lewis -- 62,500 50,000 112,500 --
Robert M. Liess -- 31,250 25,000 56,250 --
Lighthouse Capital LTD -- 64,688 51,750 116,438 --
Lucas Family Trust -- 43,750 35,000 78,750 --
Kent J. Lund IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 12,500 10,000 22,500 --
M&L Cattle Co. -- 125,000 100,000 225,000 --
M & T Farms LLC -- 62,500 50,000 112,500 --
Ronald & Patricia Mack -- 15,000 12,000 27,000 --
James A. Maisano -- 31,250 25,000 56,250 --
Mario Mapelli -- 62,500 50,000 112,500 --
Richard Martin -- 31,250 25,000 56,250 --
John Marx -- 15,625 12,500 28,125 --
Eugene C. McColley IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 20,000 16,000 36,000 --
Robert F. McCullough Jr. -- 93,750 75,000 168,750 --
Jerry McPherson -- 62,500 50,000 112,500 --
Lelya J. Menscher -- 31,250 25,000 56,250 --
Wilbert L. Miles -- 15,625 12,500 28,125 --
Robert N. Miller -- 18,750 15,000 33,750 --
Peter J. Mindock -- 125,000 100,000 225,000 --
H. Steven Mishket -- 12,500 10,000 22,500 --
MJ Energy, LLC -- 62,500 50,000 112,500 --
Paul Montanarella -- 27,500 22,000 49,500 --
Paul Montanarella IRA, Sterling
Trust as custodian -- 13,750 11,000 24,750 --
William D. Moreland -- 400,000 320,000 720,000 --
David R. Morgan -- 31,250 25,000 56,250 --
Mundon Anticline Investment, LLC -- 62,500 50,000 112,500 --
Joseph W. Newton -- 125,000 100,000 225,000 --
Bernard Orsi and Sandra Orsi -- 62,500 50,000 112,500 --
Mary Jane Peck IRA, Delaware
Charter Guarantee & Trust
as custodian -- 62,500 50,000 112,500 --
35
Shares
Shares Issuable
Issuable Upon Share
Upon Exercise Shares To Ownership
Name of Shares Conversion of Series Be Sold In After
Selling Shareholder Owned of Notes C Warrants This Offering Offering
------------------- ----- ---------- ---------- ------------- ---------
Jerry W. Peterson IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 9,375 7,500 16,875 --
Shane T. Petersen &
Kathrine M. Petersen -- 6,250 5,000 11,250 --
Sharon L. Pitkin Trust, Southwest
Securities, Inc. as custodian -- 62,500 50,000 112,500 --
Steven D. Plissey IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 12,500 10,000 22,500 --
Pooling Effect LLC -- 125,000 100,000 225,000 --
Roger Prenzlow and Vicki Prenzlow -- 15,625 12,500 28,125 --
Professional Project Mgmt, Inc.,
DBP Sandra S. Burcham &
William J. Burcham -- 31,250 25,000 56,250 --
Proteus Cap 401 (K) Plan,
Colorado State Bank & Trust
as custodian -- 31,250 25,000 56,250 --
Joe Raith -- 125,000 100,000 225,000 --
Beth A. Reid -- 62,500 50,000 112,500 --
Jason David Reid -- 62,500 50,000 112,500 --
Ruben Roy Richardson -- 312,500 250,000 562,500 --
J.W. Roth -- 15,625 12,500 28,125 --
Earl W. Sauder Irrevocable Trust -- 62,500 50,000 112,500 --
The Earl W. Sauder, LLC -- 125,000 100,000 225,000 --
Stephen L. Sauder -- 62,500 50,000 112,500 --
Sauder Family LLC -- 31,250 25,000 56,250 --
George F. or Mary Clare Schmitt -- 125,000 100,000 225,000 --
Jon F. Schutz -- 46,875 37,500 84,375 --
Daniel V. Seedorf -- 15,625 12,500 28,125 --
Roger Seedorf -- 15,625 12,500 28,125 --
H.L. Severance, Inc. Pension
Plan and Trust -- 93,750 75,000 168,750 --
H. L. Severance Inc. Profit
Sharing Plan & Trust -- 15,625 12,500 28,125 --
H. Leigh Severance -- 100,000 80,000 80,000 --
George L. Seward Alternative
Energy LLC -- 109,375 87,500 196,875 --
George L. Seward -- 437,500 350,000 787,500 --
Karen Seward -- 31,250 25,000 56,250 --
David C. Shatzer -- 87,500 70,000 157,500 --
Michael V. and Lori D. Shoop -- 125,000 100,000 225,000 --
Roy G. Shuman -- 22,500 18,000 40,500 --
Roy G. Shuman, Equity Trust Co.
dba Sterling Trust as custodian -- 40,000 32,000 72,000 --
Jolie Slaton -- 31,250 25,000 56,250 --
36
Shares
Shares Issuable
Issuable Upon Share
Upon Exercise Shares To Ownership
Name of Shares Conversion of Series Be Sold In After
Selling Shareholder Owned of Notes C Warrants This Offering Offering
------------------- ----- ---------- ---------- ------------- ---------
John H. Staiano IRA, Delaware
Charter Guarantee & Trust Co.
as custodian -- 62,500 50,000 112,500 --
Alva Terry Staples -- 18,750 15,000 33,750 --
Stucky Red Bluff, Inc. -- 31,250 25,000 56,250 --
Jo Svihorec IRA, Southwest
Securities Inc. as custodian -- 31,250 25,000 56,250 --
Steven A Thorn & Letha M. Thorn -- 15,625 12,500 28,125 --
William S. Vann -- 31,250 25,000 56,250 --
Lazaros and Patricia C. Voreadis -- 31,250 25,000 56,250 --
W&O Enterprises LLC -- 6,250 5,000 11,250 --
Stephanie Kulbacki-Welton -- 12,500 10,000 22,500 --
Michael Williams -- 12,500 10,000 22,500 --
James H.B. Wilson Testamentary
Trust -- 15,625 12,500 28,125 --
Jeffrey S. & Rhonda S. Wolff -- 62,500 50,000 112,500 --
Wooden Spoon Limited Partnership -- 31,250 25,000 56,250 --
YuCo Energy LLC -- 343,750 275,000 618,750 --
Alan Budd Zuckerman -- 6,250 5,000 11,250 --
John W. Zurbrigen -- 31,250 25,000 56,250 --
4X4 LLC -- 62,500 50,000 112,500 --
---------- --------- ----------
11,250,000 9,000,000 20,250,000
========== ========= ==========
Securities Issuable Upon Exercise of Series D Warrants (1)
Shares Issuable Share
Upon Exercise Shares To Ownership
Name of Shares of Series D Be Sold In After
Selling Shareholder Owned Warrants This Offering Offering
------------------- ----- ------------- ------------- -----------
Vicki D.E. Barone -- 85,661 85,661 --
Steven M. Bathgate -- 213,874 213,874 --
Andrea Bauer -- 4,000 4,000 --
Charles C. Bruner -- 6,988 6,988 --
CapWest Securities, Inc. -- 9,520 9,520 --
Michael E. Donnelly -- 193,323 193,323 --
David Drennen -- 18,080 18,080 --
Anita Dudley -- 1,000 1,000 --
Greg Fulton -- 30,737 30,737 --
Fulton Partners LLC -- 51,024 51,024 --
Zenas N.Gurley -- 50,452 50,452 --
Gary Herick -- 1,058 1,058 --
Dick Huebner -- 36,535 36,535 --
John Jung -- 1,875 1,875 --
37
Jon B. Kruljac -- 354,036 354,036 --
Joe Lavigne -- 10,305 10,305 --
Gene McColley -- 1,116 1,116 --
Morris McDonald -- 938 938 --
Michael J. Morgan -- 3,771 3,771 --
Eugene L. Neidiger -- 8,450 8,450 --
Guy Newman -- 5,625 5,625 --
Robert L. Parrish -- 3,449 3,449 --
Anthony B. Petrelli -- 16,639 16,639 --
Regina L. Roesener -- 11,093 11,093 --
Nancy Stratton -- 1,500 1,500 --
Katie Walker -- 1,020 1,020 --
WMS Enterprises, LLC -- 2,931 2,931 --
(1) The placement agent subsequently assigned the Series D warrants to a number
of its registered representatives and employees, as well as selected
dealers participating in the private offering. The selected dealers, in
turn, assigned most of the Series D warrants to a number of their
registered representatives and employees.
The controlling persons of the non-individual selling shareholders are:
Name of Shareholder Controlling Person
------------------- -------------------
Accredited Members, Inc. Kent Kiefer
Anchor Ventures, LLC Anne Wenaas
Brothers LLC William T Ahlborg
The Burns Partnership, LLC David A Burns
Busha Investments LLC Donald C. Busha
C & R Industries Inc. Richard Cruickshank
D&P Kelsall Family LLLP Pamela Kelsall
Diamond placeS DGT Trust Scott W. Sparkman
GrassRoutes Scott Lee
Herman Enterprises, LLC Benjamin Herman
Jung Capital Partners LLLP Jon Jung
Lazarus Investment Partners LLLP Justin Borus
Lighthouse Capital LTD Carl Caserta
M&L Cattle Co. Steve Winger
M & T Farms LLC Thomas L. Goding
MJ Energy, LLC Michael P. McNamara
Mundon Anticline Investment, LLC Kent E. Mundon-
Pooling Effect LLC Constance M. Sacco
The Earl W. Sauder, LLC Bobbie L. Agler
Sauder Family LLC Steven L. Sauder
George L. Seward Alternative
Energy LLC George L Seward
Stucky Red Bluff, Inc. Judith Jacobsen
W&O Enterprises LLC Christopher S. Wrolstad
Wooden Spoon Limited Partnership Robert A. Ingalls
38
Name of Shareholder Controlling Person
------------------- -------------------
YuCo Energy LLC Mark Roth
4X4 LLC Tim Warde
CapWest Securities, Inc. Chris Wrolstad
WMS Enterprises, LLC Dale Hall
No selling shareholder has, or had, any material relationship with us, or
our officers or directors. CapWest Securities, the holder of 9,520 Series D
warrants, is a broker registered with the Securities and Exchange Commission.
The other holders of the Series D warrants are affiliated with securities
brokers. To our knowledge no other selling shareholder is affiliated with a
securities broker.
Plan of Distribution
The shares of common stock owned by the selling shareholders may be
offered and sold by means of this prospectus from time to time as market
conditions permit.
The shares of common stock may be sold by one or more of the following
methods, without limitation:
o a block trade in which a broker or dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker/dealer.
In competing sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from selling shareholders in amounts to be
negotiated. As to any particular broker-dealer, this compensation might be in
excess of customary commissions. Neither we nor the selling stockholders can
presently estimate the amount of such compensation. Notwithstanding the above,
no FINRA member will charge commissions that exceed 8% of the total proceeds
from the sale.
The selling shareholders and any broker/dealers who act in connection with
the sale of their securities may be deemed to be "underwriters" within the
meaning of ss.2(11) of the Securities Acts of 1933, and any commissions received
by them and any profit on any resale of the securities as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
39
If any selling shareholder enters into an agreement to sell his or her
securities to a broker-dealer as principal, and the broker-dealer is acting as
an underwriter, we will file a post-effective amendment to the registration
statement, of which this prospectus is a part, identifying the broker-dealer,
providing required information concerning the plan of distribution, and
otherwise revising the disclosures in this prospectus as needed. We will also
file the agreement between the selling shareholder and the broker-dealer as an
exhibit to the post-effective amendment to the registration statement.
The selling stockholders may also sell their shares pursuant to Rule 144
under the Securities Act of 1933.
We have advised the selling shareholders that they, and any securities
broker/dealers or others who sell the common stock or warrants on behalf of the
selling shareholders, may be deemed to be statutory underwriters and will be
subject to the prospectus delivery requirements under the Securities Act of
1933. We have also advised each selling shareholder that in the event of a
"distribution" of the securities owned by the selling shareholder, the selling
shareholder, any "affiliated purchasers", and any broker/dealer or other person
who participates in the distribution may be subject to Rule 102 of Regulation M
under the Securities Exchange Act of 1934 ("1934 Act") until their participation
in that distribution is completed. Rule 102 makes it unlawful for any person who
is participating in a distribution to bid for or purchase securities of the same
class as is the subject of the distribution. A "distribution" is defined in Rule
102 as an offering of securities "that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of special
selling efforts and selling methods". We have also advised the selling
shareholders that Rule 101 of Regulation M under the 1934 Act prohibits any
"stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing
or stabilizing the price of the common stock in connection with this offering.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 100,000,000 shares of common stock. Holders of
our common stock are each entitled to cast one vote for each share held of
record on all matters presented to the shareholders. Cumulative voting is not
allowed; hence, the holders of a majority of our outstanding common shares can
elect all directors.
Holders of our common stock are entitled to receive such dividends as may
be declared by our Board of Directors out of funds legally available and, in the
event of liquidation, to share pro rata in any distribution of our assets after
payment of liabilities. Our Board of Directors is not obligated to declare a
dividend. It is not anticipated that dividends will be paid in the foreseeable
future.
Holders of our common stock do not have preemptive rights to subscribe to
additional shares if issued. There are no conversion, redemption, sinking fund
or similar provisions regarding the common stock. All outstanding shares of
common stock are fully paid and nonassessable.
40
Preferred Stock
We are authorized to issue 10,000,000 shares of preferred stock. Shares of
preferred stock may be issued from time to time in one or more series as may be
determined by our Board of Directors. The voting powers and preferences, the
relative rights of each such series and the qualifications, limitations and
restrictions of each series will be established by the Board of Directors. Our
directors may issue preferred stock with multiple votes per share and dividend
rights which would have priority over any dividends paid with respect to the
holders of our common stock. The issuance of preferred stock with these rights
may make the removal of management difficult even if the removal would be
considered beneficial to shareholders generally, and will have the effect of
limiting shareholder participation in transactions such as mergers or tender
offers if these transactions are not favored by our management. As of the date
of this prospectus, we had not issued any shares of preferred stock.
Promissory Notes
Between December 2009 and March 2010, we sold 180 Units to a group of
private investors. The Units were sold at a price of $100,000 per Unit. Each
Unit consisted of one Promissory Note in the principal amount of $100,000 and
50,000 Series C warrants. The Notes bear interest at 8% per year, payable
quarterly, and mature on December 31, 2012. At the holder's option, the Notes
can be converted into shares of our common stock, initially at a conversion
price of $1.60 per share. Each Series C warrant entitles the holder to purchase
one share of our common stock at a price of $6.00 per share at any time on or
before December 31, 2014.
Except for Exempt Issuances, if we sell any additional shares of common
stock, or any securities convertible into common stock, at a price below the
then applicable Conversion Price, the Conversion Price will be lowered to the
price at which the shares were sold or the lowest price at which the securities
are convertible, as the case may be. The Conversion Price will also be
proportionately adjusted in the event of any stock splits, or capital
reorganization.
We may prepay the notes without penalty at any time after December 31,
2010. Notwithstanding the above, we may repay the notes, without penalty, upon
ten days written notice to the note holders if, during any twenty trading days
within a period of thirty consecutive trading days, the closing price of our
common stock is $3.25 or greater and our common stock has an average trading
volume of 200,000 shares or more per day.
Any of the following are an event of default:
o we fail to make any interest or principal payment when due,
o we breach any representation, warranty or covenant or default in the
timely performance of any other obligation in our agreements with the
note holders and the breach or default continues uncured for a period
of five trading days after the date on which notice of the breach or
default is first given to us, or ten trading days after we become, or
should have become, aware of such breach or default,
41
o we file for protection from our creditors under the federal bankruptcy
code or a third party files an involuntary bankruptcy petition against
us,
o our common stock is not listed on the OTC Bulletin Board or other
public trading market, or
o we fail for any reason to deliver a certificate within five trading
days after delivery of the certificate is required pursuant to any
agreement with the note holders
For purposes of the Notes the term "Exempt Issuance" means the sale or
issuance of:
o shares of common stock or options to our officers or directors, not to
exceed 1,000,000 shares or options per year for any single officer or
director (not to exceed 5,000,000 shares or options per year in
total), pursuant to any stock or option plan duly adopted by our
directors.
o shares of common stock or options to our employees or independent
consultants, not to exceed 5,000,000 shares or options per year,
pursuant to any stock or option plan duly adopted by our directors.
o shares issued in connection with an acquisition of oil and gas
properties, the acquisition of an unaffiliated company, a joint
venture or similar strategic transaction where the primary purpose is
not to raise cash.
o securities upon the conversion of the notes or the exercise of the
warrants held by the note holders.
o securities upon the conversion of notes or the exercise of options or
warrants issued and outstanding on November 15, 2009, provided that
the securities have not been amended to increase the number of such
securities or to decrease the exercise, exchange or conversion price
of the securities.
Warrants
See the "Comparative Share Data" section of this prospectus for
information concerning our outstanding warrants.
Transfer Agent
Corporate Stock Transfer
3200 Cherry Creek Drive South, Suite 430
Denver, Colorado 80209
Phone: 303-282-4800
Fax: 303-282-5800
LEGAL PROCEEDINGS
We are not involved in any legal proceedings and we do not know of any
legal proceedings which are threatened or contemplated.
42
INDEMNIFICATION
Our Bylaws authorize indemnification of a director, officer, employee or
agent against expenses incurred by him in connection with any action, suit, or
proceeding to which he is named a party by reason of his having acted or served
in such capacity, except for liabilities arising from his own misconduct or
negligence in performance of his duty. In addition, even a director, officer,
employee, or agent found liable for misconduct or negligence in the performance
of his duty may obtain such indemnification if, in view of all the circumstances
in the case, a court of competent jurisdiction determines such person is fairly
and reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to our
directors, officers, or controlling persons pursuant to these provisions, we
have been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (together with all amendments and exhibits) under the
Securities Act of 1933, as amended, with respect to the securities offered by
this prospectus. This prospectus does not contain all of the information in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. For further
information, reference is made to the Registration Statement which may be read
and copied at the Commission's Public Reference Room at 100 F. Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
registration statement is also available at www.sec.gov, the website of the
Securities and Exchange Commission.
We are subject to the requirements of the Securities Exchange Act of 1934
and are required to file reports, proxy statements and other information with
the Securities and Exchange Commission. Copies of any of these reports, proxy
statements and other information we have filed can be read and copied at the
Commission's Public Reference Room or read and downloaded from the Commission's
website, www.sec.gov.
43
GLOSSARY
DEVELOPED ACREAGE. The number of acres that are allocated or assignable to
productive wells or wells capable of production.
HELD BY PRODUCTION. A provision in an oil, gas and mineral lease that
perpetuates an entity's right to operate a property or concession as long as the
property or concession produces a minimum paying quantity of oil or gas.
LANDOWNER'S ROYALTY. A percentage share of production, or the value
derived from production, which is granted to the lessor or landowner in the oil
and gas lease, and which is free of the costs of drilling, completing, and
operating an oil or gas well.
LEASE. Full or partial interests in an oil and gas lease, authorizing the
owner thereof to drill for, reduce to possession and produce oil and gas upon
payment of rentals, bonuses and/or royalties. Oil and gas leases are generally
acquired from private landowners and federal and state governments. The term of
an oil and gas lease typically ranges from three to ten years and requires
annual lease rental payments of $1.00 to $2.00 per acre. If a producing oil or
gas well is drilled on the lease prior to the expiration of the lease, the lease
will generally remain in effect until the oil or gas production from the well
ends. The owner of the lease is required to pay the owner of the leased property
a royalty which is usually between 12.5% and 16.6% of the gross amount received
from the sale of the oil or gas produced from the well.
NET ACRES OR WELLS. A net well or acre is deemed to exist when the sum of
fractional ownership working interests in gross wells or acres equals one. The
number of net wells or acres is the sum of the fractional working interests
owned in gross wells or acres expressed as whole numbers and fractions.
OPERATING COSTS. The expenses of producing oil or gas from a formation,
consisting of the costs incurred to operate and maintain wells and related
equipment and facilities, including labor costs, repair and maintenance,
supplies, insurance, production, severance and other production excise taxes.
OVERRIDING ROYALTY. A percentage share of production, or the value derived
from production, which is free of all costs of drilling, completing and
operating an oil or gas well, and is created by the lessee or working interest
owner and paid by the lessee or working interest owner to the owner of the
overriding royalty.
PRODUCING PROPERTY. A property (or interest therein) producing oil or gas
in commercial quantities or that is shut-in but capable of producing oil or gas
in commercial quantities. Interests in a property may include working interests,
production payments, royalty interests and other non-working interests.
PROSPECT. An area in which a party owns or intends to acquire one or more
oil and gas interests, which is geographically defined on the basis of
geological data and which is reasonably anticipated to contain at least one
reservoir of oil, gas or other hydrocarbons.
44
PROVED RESERVES. Proved oil and gas reserves are the estimated quantities
of crude oil, natural gas and natural gas liquids which geological and
engineering date demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions (prices and costs held constant as of the date the estimate is made).
SHUT-IN WELL. A well which is capable of producing oil or gas but which is
temporarily not producing due to mechanical problems or a lack of market for the
well's oil or gas.
UNDEVELOPED ACREAGE. Lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether or not such acreage contains proved
reserves. Undeveloped acreage should not be confused with undrilled acreage
which is "Held by Production" under the terms of a lease.
WORKING INTEREST. A percentage of ownership in an oil and gas lease
granting its owner the right to explore, drill and produce oil and gas from a
tract of property. Working interest owners are obligated to pay a corresponding
percentage of the cost of leasing, drilling, producing and operating a well.
After royalties are paid, the working interest also entitles its owner to share
in production revenues with other working interest owners, based on the
percentage of the working interest owned.
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Synergy Resources Corporation
We have audited the accompanying balance sheets of Synergy Resources Corporation
(an Exploration Stage Company) as of August 31, 2009 and 2008, and the related
statements of operations, changes in shareholders' equity, and cash flows for
the year ended August 31, 2009, the period of inception (December 28, 2007, to
August 31, 2008), and the period from inception (December 28, 2007) to August
31, 2009. 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 audits.
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. 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 by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinions.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Synergy Resources Corporation
(an Exploration Stage Company) as of August 31, 2009 and 2008, and the results
of its operations, and its cash flows for the for the year ended August 31,
2009, the period of inception (December 28, 2007, to August 31, 2008), and the
period from inception (December 28, 2007) to August 31, 2009, 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 2 to the
financial statements, the Company has suffered losses from operations and has
only recently commenced revenue generating operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Stark Winter Schenkein & Co., LLP
Denver, Colorado
November 12, 2009
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
August 31, August 31,
2009 2008
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $2,854,659 $2,292,341
Accounts receivable 84,643 -
Other current assets 21,105 27,412
------------ ------------
Total current assets 2,960,407 2,319,753
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method, net 1,786,120 -
Other property and equipment, net 1,041 -
------------ ------------
Property and equipment, net 1,787,161 -
------------ ------------
Other assets:
Option to acquire mineral interests - related party - -
Performance assurance deposit 85,000 -
Deferred offering costs - -
------------ ------------
Total other assets 85,000 -
------------ ------------
Total assets $ 4,832,568 $ 2,319,753
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 622,734 $ 12,473
Accrued taxes and expenses 45,379 40,853
Bank loan payable 1,161,811 -
Accrued interest 14,200 -
------------ ------------
Total current liabilities 1,844,124 53,326
------------ ------------
Shareholders' equity:
Preferred stock - $0.01 par value, 10,000,000 shares authorized:
no shares issued and outstanding - -
CCommon stock - $0.001 par value, 100,000,000
shares authorized:
11,998,000 and 9,943,571shares issued and
outstanding at August 31, 2009 and 2008,
respectively 11,998 9,944
Additional paid-in capital 15,521,697 2,477,511
Stock subscriptions receivable - (27,650)
(Deficit) accumulated during the exploration stage (12,545,251) (193,378)
------------ ------------
Total shareholders' equity 2,988,444 2,266,427
------------ ------------
Total liabilities and shareholders' equity $ 4,832,568 $ 2,319,753
============ ============
The accompanying notes are an integral part of these financial statements.
1
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
for the year ended August 31, 2009, for the period from
Inception (December 28, 2007) to August 31, 2008,
and for the period from Inception (December 28, 2007) to August 31, 2009
Inception Inception
Year (December 28, (December 28,
Ended 2007) to 2007) to
August 31, August 31, August 31,
2009 2008 2009
---------- ------------ ------------
Oil and gas revenues $ 94,121 $ - $ 94,121
---------- ---------- ----------
Expenses:
Lease operating expenses 11,572 - 11,572
Depreciation, depletion, and
amortization 97,309 - 97,309
Impairment of oil and gas properties 945,079 - 945,079
Administrative services contract -
related party 240,000 53,333 293,333
Salaries and payroll taxes 436,667 72,382 509,049
Consulting fees - related party 120,000 - 120,000
Professional fees 223,214 41,098 264,312
Insurance 43,101 - 43,101
Share based compensation - stock
options granted 10,296,521 28,200 10,324,721
All other general and administrative 49,384 1,258 50,642
---------- ---------- ----------
Total expenses 12,462,847 196,271 12,659,118
---------- ---------- ----------
Operating (loss) (12,368,726) (196,271) (12,564,997)
Interest income 16,853 2,893 19,746
---------- ---------- ----------
(Loss) before taxes (12,351,873) (193,378) (12,545,251)
Provision for income taxes - - -
---------- ---------- ----------
Net (loss) $(12,351,873) $(193,378) $(12,545,251)
============= ========== =============
Net (loss) per common share:
Basic and Diluted $ (1.14) $ (0.07)
============= ==========
Weighted average shares outstanding:
Basic and Diluted 10,831,053 2,892,700
============= ==========
The accompanying notes are an integral part of these financial statements.
2
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
for the year ended August 31, 2009, for the period from
Inception (December 28, 2007) to August 31, 2008,
and for the period from Inception (December 28, 2007) to August 31, 2009
Year Inception Inception
Ended (December 28, 2007) to (December 28, 2007) to
August 31, 2009 August 31, 2008 August 31, 2009
--------------- ---------------------- ----------------------
Cash flows from operating activities:
Net (loss) $ (12,351,873) $ (193,378) $ (12,545,251)
-------------- -------------- --------------
Adjustments to reconcile net (loss) to net cash (used in) operating
activities:
Share based compensation 10,296,521 28,200 10,324,721
Depreciation, depletion and amortization 97,605 - 97,605
Impairment of oil and gas properties 945,079 - 945,079
Changes in operating assets and liabilities
(Increase) in accounts receivable (84,643) - (84,643)
Decrease (Increase) in other current assets 6,307 (27,412) (21,105)
Increase in accounts payable 610,261 12,473 622,734
Increase in accrued taxes and expenses 4,526 40,853 45,379
Increase in accrued interest 14,200 - 14,200
Effect of merger on operating assets
(liabilities) (31,437) - (31,437)
-------------- -------------- --------------
Total adjustments 11,858,419 54,114 11,912,533
-------------- -------------- --------------
Net cash (used in) operating activities (493,454) (139,264) (632,718)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (2,690,720) - (2,690,720)
Option to acquire mineral interests -
related party (100,000) - (100,000)
Performance assurance deposit (85,000) - (85,000)
Cash acquired in merger 3,987 - 3,987
-------------- -------------- --------------
Net cash (used in) investing activities (2,871,733) - (2,871,733)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from bank loan payable 1,161,811 - 1,161,811
Cash proceeds from sale of stock 3,052,294 2,545,605 5,597,899
Offering costs (285,600) (114,000) (399,600)
Repurchase of shares (1,000) - (1,000)
-------------- -------------- --------------
Net cash provided by financing activities 3,927,505 2,431,605 6,359,110
-------------- -------------- --------------
Net increase (decrease) in cash and
equivalents 562,318 2,292,341 2,854,659
Cash and equivalents at beginning of period 2,292,341 - -
-------------- -------------- --------------
Cash and equivalents at end of period $ 2,854,659 $ 2,292,341 $ 2,854,659
============== ============== ==============
Supplemental Cash Flow Information:
Interest paid $ 5,325 $ - $ 5,325
============== ============== ==============
Income taxes paid $ - $ - $ -
============== ============== ==============
Non-cash investing and financing activities:
Net assets acquired in merger $ 11,675 $ - $ 11,675
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
3
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the
period from Inception (December 28, 2007) to August 31, 2009
(Deficit)
Accumulated
Number of Additional Stock During Total
Common Common Paid - In Subscriptions Exploration Shareholders'
Shares Stock Capital Receivable Stage Equity
--------- ------ ---------- ------------- ------------ -------------
Balance at Inception, December 28, 2007 - $ - $ - $ - $ - $ -
Founders' shares issued effective June 11, 2008 7,900,000 7,900 - (7,900) - -
Shares issued for cash at $1.00 per share
pursuant to June 20, 2008 offering memorandum 1,000,000 1,000 999,000 (19,750) - 980,250
Share based compensation - - 28,200 - - 28,200
Shares issued for cash at $1.50 per share
pursuant to July 16, 2008 offering memorandum 1,043,571 1,044 1,564,311 - - 1,565,355
Offering costs (114,000) (114,000)
Net (loss) - - - - (193,378) (193,378)
----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2008 9,943,571 9,944 2,477,511 (27,650) (193,378) 2,266,427
Stock subscription received - - - 27,650 - 27,650
Shares issued for net assets of Brishlin
pursuant to September 10, 2008 Exchange
Agreement 1,038,000 1,038 10,637 - - 11,675
Stock options exchanged pursuant
to September 10, 2008 Exchange Agreement - - 10,185,345 - - 10,185,345
Shares issued for cash at $1.50 per share
pursuant to July 16, 2008 offering memorandum 16,429 16 24,628 - - 24,644
Shares issued for cash at two shares for $3.00
pursuant to December 1, 2008 offering memorandum 2,000,000 2,000 2,998,000 - - 3,000,000
Offering costs - - (285,600) - - (285,600)
Repurchase of Founder's shares at $.001 (1,000,000) (1,000) - - - (1,000)
Share based compensation - - 111,176 - - 111,176
Net (loss) - - - - (12,351,873) (12,351,873)
----------- ----------- ----------- ----------- ----------- -----------
Balance, August 31, 2009 11,998,000 $ 11,998 $15,521,697 $ - $(12,545,251) $ 2,988,444
=========== =========== =========== =========== ============= =============
4
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
1. Summary of Significant Accounting Policies
Basis of Presentation: Synergy Resources Corporation (the "Company")
represents the result of a merger transaction on September 10, 2008, between
Brishlin Resources, Inc. ("Predecessor Brishlin"), a public company, and Synergy
Resources Corporation ("Predecessor Synergy"), a private company. In conjunction
with the transaction, Predecessor Brishlin changed its name to Synergy Resources
Corporation. The Company was organized under the laws of the State of Colorado
and for accounting purposes, the inception date is deemed to be December 28,
2007, the day that Predecessor Synergy was organized. The Company is in its
exploration stage and is engaged in oil and gas acquisitions, exploration,
development and production activities, primarily in the area known as the
Denver-Julesburg Basin. The Company has adopted August 31st as the end of its
fiscal year.
Merger Transaction: On September 10, 2008, Predecessor Brishlin
consummated an Agreement to Exchange Common Stock ("Exchange Agreement") with
certain shareholders of Predecessor Synergy to acquire approximately 89% of the
outstanding common stock of Predecessor Synergy. In subsequent transactions, all
the remaining outstanding common shares of Predecessor Synergy were acquired.
Prior to September 10, 2008, Predecessor Brishlin had 1,038,000 common shares
outstanding, and Predecessor Synergy had 9,960,000 common shares outstanding.
The merger transaction resulted in the Company with 10,998,000 common shares
outstanding, with the shareholders of Predecessor Synergy holding approximately
91% of the outstanding shares and the shareholders of Predecessor Brishlin
holding approximately 9% of the outstanding shares.
The Exchange Agreement further provided that the Company would issue
substitute Series A warrants to replace similar warrants held by certain
shareholders of Predecessor Synergy to purchase 2,060,000 shares of common stock
at $6.00 per share. Furthermore, the Company agreed to issue substitute options
to replace similar options outstanding prior to the merger transaction, which
options provide for the purchase of 2,000,000 shares of common stock at $1.00
per share and 2,000,000 shares of common stock at $10.00 per share.
Immediately prior to the transaction, Predecessor Brishlin completed a
one-for-ten reverse stock split of its outstanding common stock. All share and
per share data presented in the accompanying financial statements have been
retroactively restated to reflect the reverse stock split.
In anticipation of the merger transaction, Predecessor Brishlin declared a
dividend to its shareholders of record as of August 28, 2008, consisting of one
Series A warrant for each common share held.
F-5
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Although the legal form of the transaction reflects the acquisition of
Predecessor Synergy by Predecessor Brishlin, the Company determined that the
accounting form of the transaction is a "reverse merger", in which Predecessor
Synergy is identified as the acquiring company and Predecessor Brishlin is
identified as the acquired company. At the time of the transaction, Predecessor
Brishlin had ceased most of its operations and liquidated most of its assets and
liabilities. In accordance with SEC regulations, the transaction was recorded as
a capital transaction rather than a business combination. The transaction is
equivalent to the issuance of common stock by Predecessor Synergy in exchange
for the net assets of Predecessor Brishlin and a recapitalization of Predecessor
Synergy. The assets and liabilities of Predecessor Brishlin were not restated to
their estimated fair market values and no goodwill or other intangible assets
were recorded. Selected financial data for Predecessor Brishlin at the
transaction date follows:
Selected Financial Data:
Cash $ 3,987
Current assets 5,129
Oil and gas assets 39,125
Current liabilities 33,907
Net assets $ 11,675
Financial information for all periods subsequent to September 10, 2008,
includes the consolidated assets, liabilities and activities of both companies.
Historical financial information for periods prior to September 10, 2008,
presented for comparative purposes, includes only Predecessor Synergy.
Condensed pro-forma information assuming that the transaction occurred on
September 1, 2008, (beginning of fiscal year for the Company) has not been
presented. As Predecessor Brishlin had substantially reduced its operations
prior to the transaction, there is no material difference between the
information presented in the accompanying financial statements and the pro-forma
information.
Reclassifications: Certain amounts previously presented for prior periods
have been reclassified to conform with the current presentation. The
reclassifications had no effect on net loss, accumulated deficit, or net assets.
Cash and Cash Equivalents: The Company considers cash in banks, deposits
in transit, and highly liquid debt instruments purchased with original
maturities of three months or less to be cash and cash equivalents.
Oil and Gas Properties: The Company uses the full cost method of
accounting for costs related to its oil and gas properties. Accordingly, all
costs associated with acquisition, exploration, and development of oil and gas
reserves (including the costs of unsuccessful efforts) are capitalized into a
single full cost pool. These costs include land acquisition costs, geological
and geophysical expense, carrying charges on non-producing properties, costs of
drilling and overhead charges directly related to acquisition and exploration
activities.
F-6
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
All capitalized costs of oil and gas properties are amortized using the
unit-of-production method based upon estimates of proved reserves. For
amortization purposes, the volume of petroleum reserves and production is
converted into a common unit of measure at the energy equivalent conversion rate
of six thousand cubic feet of natural gas to one barrel of crude oil.
Investments in unevaluated properties and major development projects are not
amortized until proved reserves associated with the projects can be determined
or until impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In applying the full cost method, the capitalized costs are subject to a
quarterly "ceiling test". If capitalized costs, adjusted for such items as
accumulated depletion and deferred income taxes, exceed the "ceiling amount",
the excess is charged to earnings as an impairment expense. The "ceiling" is
estimated as the present value, discounted at 10%, of the future net cash flows
from proved oil and gas reserves plus the lower of cost or net realizable value
of unevaluated properties. The calculation of future net cash flows assumes
continuation of current economic conditions, including current prices and costs.
The "ceiling" is highly sensitive to changing prices for oil and gas. Once
impairment expense is recognized, it cannot be reversed in future periods, even
if increasing prices raise the "ceiling amount".
Oil and Gas Reserves: The determination of depreciation, depletion and
amortization expense, as well as ceiling test write-downs related to the
recorded value of the Company's oil and natural gas properties, will be highly
dependent on the estimates of the proved oil and natural gas reserves. Oil and
natural gas reserves include proved reserves that represent estimated quantities
of crude oil and 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. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
values, including many factors beyond the Company's control. Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
ultimately recovered and the corresponding lifting costs associated with the
recovery of these reserves
Major Customer and Operating Region: The Company operates exclusively
within the United States. Except for cash investments, all of the Company's
assets are employed in, and all of its revenues are derived from, the oil and
gas industry. For the year ended August 31, 2009, all of the Company's sales
were to one customer, thus at August 31, 2009, the entire accounts receivable
balance was due from this customer.
Revenue Recognition: Revenue is generally recognized for the sale of oil
and gas when there is persuasive evidence of a sale arrangement, delivery has
occurred, the price is determinable, and collection of sales proceeds is
reasonably assured. Revenue is accrued when these four conditions have been
satisfied and reasonable estimates can be made. Revenue estimates are prepared
for the quantity of petroleum product delivered to the customer and the price
that will be received. Payment is received at a later date, often sixty to
ninety days after production. Revenue accruals are adjusted to reflect updated
information as it is received.
F-7
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Lease Operating Expenses: Operating expenses of producing wells are
recognized when incurred. For properties operated by third parties, expenses are
estimated based upon activity reports. Expense accruals are adjusted to reflect
updated information as it is received.
Property Retirement Obligation: The Company follows the guidelines of SFAS
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period that it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset.
Stock Based Compensation: The Company accounts for stock-based
compensation in accordance with Statement of Financial Accounting Standards
(SFAS) 123(R), "Share Based Payment," requiring the Company to record
compensation costs determined in accordance with the fair value based method
prescribed in SFAS 123(R). The Company estimates the fair value of stock options
at their grant date by using the Black-Scholes-Merton option-pricing model and
provides for expense recognition over the service period, if any, of the stock
option. The Company accounts for common stock issued to employees for services
based on the fair value of the equity instruments issued, and accounts for
common stock issued to other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.
Per Share Amounts: SFAS 128, "Earnings Per Share," provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income (or loss) by
the weighted-average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings of the Company, assuming the issuance of an equivalent number of
common shares pursuant to options, warrants, or convertible debt arrangements.
Diluted earnings per share does not affect periods in which the Company incurs a
loss because it would be anti-dilutive. Similarly, potential common stock
equivalents are not included in the calculation if the effect would be
anti-dilutive. During the periods since inception, the Company has issued
9,198,000 potentially dilutive securities, all of which were excluded from the
calculation because they were anti-dilutive.
Income Taxes: Deferred income taxes are reported for timing differences
between items of income or expense reported in the financial statements and
those reported for income tax purposes in accordance with SFAS 109, "Accounting
for Income Taxes", which requires the use of the asset/liability method of
accounting for income taxes. Deferred income taxes and tax benefits are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and for tax loss and credit carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company provides for deferred taxes for
the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is more likely than not.
F-8
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Use of Estimates: The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management
routinely makes judgments and estimates about the effects of matters that are
inherently uncertain. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Estimates and assumptions are revised periodically
and the effects of revisions are reflected in the financial statements in the
period it is determined to be necessary. Actual results could differ from these
estimates.
Business Risks: The Company continually reviews the exploration and
political risks it encounters in its operations. It mitigates the likelihood and
potential severity of these risks through the application of high operating
standards. The Company's operations may be affected to various degrees by
changes in environmental regulations, including those for future site
restoration and reclamation costs. The oil and gas business is subject to
extensive licensing, permitting, governmental legislation, control and
regulations. The Company endeavors to be in compliance with these regulations at
all times.
Fair Value of Financial Instruments: SFAS 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments. Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to
management as of August 31, 2009.
The respective carrying values of certain on-balance-sheet financial
instruments approximate their fair values. These financial instruments include
cash, cash equivalents, prepaid expenses, accounts payable, accrued liabilities
and bank loan payable. Fair values were assumed to approximate carrying values
for these financial instruments since they are short term in nature and their
carrying amounts approximate fair value, or they are receivable or payable on
demand.
Concentration of Credit Risk: The Company's operating cash balances are
maintained in one primary financial institution and currently exceed federally
insured limits. The Company believes that the financial strength of this
institution mitigates the underlying risk of loss. To date, these concentrations
of credit risk have not had a significant impact on the Company's financial
position or results of operations.
F-9
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Environmental Matters: Environmental costs are expensed or capitalized
depending on their future economic benefit. Costs that relate to an existing
condition caused by past operations with no future economic benefit are
expensed. Liabilities for future expenditures of a non-capital nature are
recorded when future environmental expenditures and/or remediation are deemed
probable and the costs can be reasonably estimated. Costs of future expenditures
for environmental remediation obligations are not discounted to their present
value.
Recent Accounting Pronouncements: The Company evaluates the pronouncements
of various authoritative accounting organizations, primarily the Financial
Accounting Standards Board ("FASB"), the Securities and Exchange Commission
("SEC"), and the Emerging Issues Task Force ("EITF"), to determine the impact of
new pronouncements on accounting principles generally accepted in the United
States of America ("US GAAP") and the impact on the Company.
On December 29, 2008, the SEC announced final approval of new requirements
for reporting oil and gas reserves to be effective in January 2010. The new
disclosure requirements provide for consideration of new technologies in
evaluating reserves, allow companies to disclose their probable and possible
reserves to investors, report oil and gas reserves using an average price based
on the prior 12 month period rather than year-end prices, and revise the
disclosure requirements for oil and gas operations. The accounting for the
limitation on capitalized costs for full cost companies will also be revised.
The new rule is expected to be effective for years ending on or after December
31, 2009, although the transition may be extended. The Company has not yet
evaluated the effects on its financial statements and disclosures.
In June 2009 the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 will become the
source of authoritative US GAAP to be applied by nongovernmental entities. Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for public companies. The Codification
will supersede all non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. The Codification is effective for interim and
annual periods ending on or after September 15, 2009. Management is currently
evaluating the impact of adopting this statement.
In December 2007 the FASB issued FAS No. 141 (revised 2007), Business
Combinations ("SFAS 141R"). This statement replaces SFAS 141, Business
Combinations. The statement provides guidance for how the acquirer recognizes
and measures the identifiable assets acquired, liabilities assumed and any
non-controlling interest in the acquiree. SFAS 141R provides for how the
acquirer recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. The statement determines what
information to disclose to enable users to be able to evaluate the nature and
financial effects of the business combination. The provisions of SFAS 141R will
be effective for our fiscal year commencing September 1, 2009, and do not allow
F-10
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
early adoption. Management is currently evaluating the impact of adopting this
statement.
In May 2009 the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"),
which provides general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This topic was previously addressed only in auditing
literature. SFAS 165 is similar to the existing auditing guidance with some
exceptions that are not intended to result in significant changes to practice.
Entities are now required to disclose the date through which subsequent events
have been evaluated, with such date being the date the financial statements were
issued or available to be issued. The Company adopted SFAS 165 during the
quarter ended August 31, 2009, and provided the expanded disclosure contained in
the Subsequent Events footnote. The adoption had no other impact on the
Company's financial position, results of operations or cash flows.
There were various other accounting standards and interpretations issued
recently, none of which are expected to a have a material impact on the
Company's financial position, operations or cash flows.
2. Going Concern
The Company's financial statements are prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of obligations
in the normal course of business. Only recently has the Company commenced
revenue generating operations and it has financed operations primarily through
the sale of equity. The Company recently was successful in obtaining a bank loan
secured by oil and gas equipment. The Company has incurred losses since its
inception aggregating $12,545,251. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern.
The Company has raised cash proceeds of $5,198,299, net of offering costs,
in sales of common stock since inception. Management believes that the cash
balances of $2,854,659 at August 31, 2009, will not be sufficient to fund its
operating activities and other capital resource demands during the next twelve
months.
The Company continues to raise capital through the sale of its common
shares and may also seek other funding or corporate transactions to achieve its
business objectives. The Company's ability to continue as a going concern is
contingent upon its ability to raise additional funds, such as (1) through the
sale of equity or sale of its assets, (2) joint venture or partnership
arrangements, or (3) issuing debt instruments, and ultimately attaining
profitable operations. The financial statements do not include any adjustments
to the amount and classification of assets and liabilities that may be necessary
should the Company not continue as a going concern.
F-11
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
3. Property and Equipment
Oil and gas property primarily consists of various interests in oil and
gas leases, two producing wells, and tubular goods to be used in the development
of future wells.
Property and equipment at August 31, 2009, consisted of the following:
Oil and Gas Properties, full cost method:
Unevaluated costs, not subject to
amortization:
Acquisition and other costs $ 420,478
Tubular goods 1,132,685
-----------
Subtotal, unevaluated costs 1,553,163
Evaluated costs:
Producing and non-producing 1,275,345
Less, accumulated depletion & impairment (1,042,388)
-----------
Subtotal, evaluated costs 232,957
-----------
Oil and gas properties, net 1,786,120
-----------
Other property and equipment:
Office equipment 1,337
Less, accumulated depreciation (296)
-----------
Other property and equipment, net 1,041
-----------
Total Property and Equipment, net $1,787,161
===========
The Company commenced depletion of its full cost pool during the year
ended August 31, 2009. Costs of oil and gas properties are depleted using the
unit of production method based on estimated reserves and the calculation is
performed quarterly. Production volumes for the quarter are compared to
estimated total reserves to calculate a depletion rate. For the year ended
August 31, 2009, depletion of oil and gas properties was $97,309, or $13.86 per
barrel of oil equivalent, and depreciation of other property and equipment was
$296.
Under the full cost method of accounting, a ceiling test is performed each
quarter. The full cost ceiling test is an impairment test prescribed by SEC
Regulation S-X Rule 4-10. The ceiling test determines a limit on the book value
of oil and gas properties. The capitalized costs of proved oil and gas
properties, net of accumulated depreciation, depletion, and amortization, the
related deferred income taxes, and the cost of unevaluated properties, may not
exceed the estimated future net cash flows from proved oil and gas reserves
using prices in effect at the end of the period. Prices are held constant for
the productive life of each well. Net cash flows are discounted at 10%. If net
capitalized costs exceed this limit, the excess is charged to expense and
reflected as additional accumulated depreciation, depletion and amortization.
For the year ended August 31, 2009, the Company made a provision for impairment
of oil and gas properties of $945,079, primarily as a result of lower production
estimates.
F-12
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
4. Bank Loan Payable
The Company entered into a credit facility with a commercial bank. The
borrowing arrangement provides for maximum borrowings up to $1,161,811 and is
collateralized by tubular goods and certain other assets. The maximum amount
that can be borrowed is reduced by usage or sale of the tubular goods. The loan
bears interest at the prime rate plus 1/2%, payable quarterly, with a minimum
interest rate of 5.5%. The loan maturity date is May 8, 2010. Interest costs of
$19,525 and loan fees of $5,917 were incurred during the year ended August 31,
2009.
The Company capitalizes interest on expenditures made in connection with
exploration and development projects that are not subject to current
amortization. Interest is capitalizable during the period that activities are in
progress to bring the projects to their intended use. During the year ended
August 31, 2009, interest expense of $25,442, including loan fees, was
capitalized.
5. Shareholders' Equity
Preferred Stock The Company has authorized 10,000,000 shares of preferred
stock with a par value of $0.01 per share. These shares may be issued in series
with such rights and preferences as may be determined by the Board of Directors.
Since inception, the Company has not issued any preferred shares.
Common Stock The Company has authorized 100,000,000 shares of common stock
with a par value of $0.001 per share.
Issued and Outstanding The total issued and outstanding common stock at
August 31, 2009, is 11,998,000 common shares, as follows:
i. Effective June 11, 2008, the Company issued 7,900,000 common shares to
its founders at $0.001 per share, for aggregate proceeds of $7,900.
ii. Pursuant to a Private Offering Memorandum dated June 20, 2008, the
Company sold 1,000,000 units at $1.00 per unit. Each unit consists of
one share of restricted common stock and one Series A warrant that
entitles the holder to purchase one share of common stock at $6.00 per
share through December 31, 2012.
iii. Pursuant to a Private Offering Memorandum dated July 16, 2008, the
Company sold 1,060,000 units at $1.50 per unit for total cash proceeds
of $1,590,000. Each unit consists of one share of restricted common
stock and one Series A warrant that entitles the holder to purchase
one share of common stock at $6.00 per share through December 31,
2012.
F-13
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
iv. Effective September 10, 2008, the Company agreed to issue 1,038,000
common shares to the shareholders of Predecessor Brishlin, on an
exchange basis of one share of Synergy common stock for each share of
Brishlin common stock. In addition, the shareholders of Predecessor
Brishlin will receive 1,038,000 Series A warrants that entitle the
holder to purchase one share of common stock at $6.00 per share through
December 31, 2012.
v. Effective December 1, 2008, the Company repurchased 1,000,000 shares of
its common stock from one of the original Predecessor Synergy
shareholders for $1,000, the price at which the shares were originally
sold to the shareholder.
vi. Pursuant to a Private Offering Memorandum dated December 1, 2008, the
Company sold 1,000,000 units at $3.00 per unit for total cash proceeds
of $3,000,000. Offering costs associated with the offering aggregated
$285,600, resulting in net cash proceeds of $2,714,400. Each unit
consists of two shares of common stock, one Series A warrant and one
Series B warrant. Each Series A warrant entitles the holder to purchase
one share of common stock at a price of $6.00 per share. The Series A
warrants expire on December 31, 2012, or earlier under certain
conditions. Each Series B warrant entitles the holder to purchase one
share of common stock at a price of $10.00 per share. The Series B
warrants expire on December 31, 2012, or earlier under certain
conditions.
In addition to the warrant issuances described in the preceding
paragraphs, the Company issued 31,733 placement agent warrants in connection
with the Private Offering Memorandum dated December 1, 2008. Each placement
agent warrant entitles the holder to purchase one Unit (which Unit is identical
to the Units sold under the Private Offering Memorandum dated December 1, 2008)
at a price of $3.60. Each Unit consisted of two shares of common stock, one
Series A warrant, and one Series B warrant. To maintain comparability of the
placement agent warrants with the other warrants, we present the placement agent
warrants as 63,466 shares at an exercise price of $1.80. The Series A and Series
B warrants issuable upon exercise of the placement agent warrants are not
considered outstanding for accounting purposes until such time, if ever, that
the placement agent warrants are exercised, and are disclosed as a commitment in
the Related Party Transactions and Commitments footnote.
F-14
The following table summarizes activity for common stock warrants for the
period from inception (December 28, 2007) to August 31, 2009:
Number of Weighted average
warrants exercise price
Outstanding, December 28, 2007 -- --
-------------------------------------------------------------------------------
Granted 2,043,571 $6.00
Exercised -- --
------------
Outstanding, August 31, 2008 2,043,571 $6.00
Granted 3,117,895 $7.20
Exercised -- --
------------
Outstanding, August 31, 2009 5,161,466 $6.72
The following tables summarize information about the Company's issued and
outstanding common stock warrants as of August 31, 2009:
Remaining Exercise
Contractual Price times
Number of Life (in Number of
Exercise Price Shares years) Shares
-------------- --------- ----------- -------------
$1.80 63,466 3.4 $ 114,239
$6.00 4,098,000 3.4 $ 24,588,000
$10.00 1,000,000 3.4 $ 10,000,000
6. Stock Based Compensation
The Company accounts for stock option activities as provided by SFAS
123(R), "Share-Based Payment," which requires the Company to expense as
compensation the value of grants and options as determined in accordance with
the fair value based method prescribed in SFAS 123(R). The Company estimates the
fair value of each stock option at the grant date by using the
Black-Scholes-Merton option-pricing model.
As described in the following paragraphs, the Company recorded stock-based
compensation expense of $10,296,521 for the year ended August 31, 2009, and
$28,200 for the year ended August 31, 2008.
During June 2008 stock options were granted to purchase 4,000,000 shares
of common stock. Effective June 11, 2008, grants covering 2,000,000 shares were
issued to the executive officers at an exercise price of $10.00 and a term of
five years, and these options will vest over a one-year period. The fair value
of these options was determined to be nil based upon the following assumptions:
expected life of 2.5 years, stock price of $1.00 at date of grant, nominal
volatility, dividend yield of 0%, and interest rate of 2.63%. Effective June 30,
2008, grants covering an additional 2,000,000 shares were issued to the
executive officers at an exercise price of $1.00 and a term of five years, and
these options will vest over a one year period. Based upon a fair value
F-15
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
calculation, these options were determined to have a value of $127,000 using the
following assumptions: expected life of 2.5 years, stock price of $1.00 at date
of grant, nominal volatility, dividend yield of 0%, and interest rate of 2.63%.
Stock option compensation expense of $98,800 was recorded for the year ended
August 31, 2009, and stock option compensation expense of $28,200 was recorded
for the period ended August 31, 2008, based on a pro-ration of the fair value
over the vesting period.
In connection with the merger, the Company agreed to issue stock option
grants covering 4,000,000 shares to replace the similar options described in the
preceding paragraph. Using the Black-Scholes-Merton option-pricing model, the
Company estimated that the fair value of the replacement options exceeded the
fair value of the options surrendered by $10,185,345. The assumptions used in
the model were: expected life of 2.5 years, stock price of $3.50 at date of
grant, volatility of 166%, dividend yield of 0%, and interest rate of 2.63%. The
incremental expense of $10,185,345 was pro-rated over the vesting period and
stock option compensation expense for the year ended August 31, 2009, was
$10,185,345.
Effective December 31, 2008, the Company granted stock options to an
employee to purchase 100,000 shares of common stock at an exercise price of
$3.00 and a term of ten years. These options will vest over a five year period.
Based on a fair value calculation, these options were determined to have a value
of $185,640 using the following assumptions: expected life of 5 years, stock
price of $2.00 at date of grant, volatility of 166%, dividend yield of 0%, and
interest rate of 3.13%. Stock option compensation expense of $12,376 was
recorded for the year ended August 31, 2009, based on a pro-ration of the fair
value over the vesting period.
The estimated unrecognized compensation cost from unvested stock options
as of August 31, 2009, was approximately $173,000, which will be recognized
ratably through December 31, 2013.
The following table summarizes activity for stock options for the period
from inception (December 28, 2007) to August 31, 2009:
Number Weighted average
of shares exercise price
--------- -----------------
Outstanding, December 28, 2007 --
Granted 4,000,000 $5.50
Exercised --
-----------
Outstanding August 31, 2008 4,000,000 $5.50
Granted 100,000 $3.00
Exercised --
-----------
Outstanding, August 31, 2009 4,100,000 $5.44
===========
F-16
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
The following table summarizes information about outstanding stock options
as of August 31, 2009:
Remaining Weighted
Contractual Average
Exercise Number of Life (in Exercise Number
Prices Shares years) Price Exercisable
------------- ----------- ------------- ------------ -----------
$10.00 2,000,000 3.4 $10.00 2,000,000
$1.00 2,000,000 3.4 $1.00 2,000,000
$3.00 100,000 9.3 $3.00 --
----------- -----------
4,100,000 $5.44 4,000,000
=========== ===========
7. Related Party Transactions and Commitments
The Company's executive officers control two entities that have entered
into agreements with the Company. The entities are Petroleum Management, LLC
("PM") and Petroleum Exploration and Management, LLC ("PEM"). As discussed
below, one agreement provides various services to the Company and the other
agreement provides an option to acquire certain oil and gas interests.
Effective June 11, 2008, the Company entered into an Administrative
Services Agreement with PM. The Company will pay $10,000 per month for leasing
office space and an equipment yard located in Platteville, Colorado, and will
pay $10,000 per month for office support services including secretarial service,
word processing, communication services, office equipment and supplies.
Additional employees, independent contractors or oil and gas professionals
provided to the Company by PM will be reimbursed at actual cost. Either party
may terminate the agreement with 30 days notice. The Company paid $240,000 under
this agreement for the year ended August 31, 2009, and $60,000 for the period
from inception (December 28, 2007) to August 31, 2008.
Effective August 7, 2008, the Company entered into a letter of intent with
the related entities that provides an option to acquire working interests in oil
and gas leases which are owned by PM and/or PEM. The oil and gas leases cover
640 acres in Weld County, Colorado, and subject to certain conditions, will be
transferred to the Company for payment of $1,000 per net mineral acre. The
working interests in the leases vary but the net revenue interest in the leases,
if acquired by the Company, will not be less than 75%. The letter of intent had
an original expiration date of November 1, 2008, but has been extended by mutual
agreement to August 31, 2010.
F-17
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Effective May 13, 2009, the Company acquired oil and gas equipment
consisting of casing and tubing from PM. PM was paid $1,718,967 as reimbursement
for the original cost of the tubular goods.
On June 11, 2008, the Company entered into two year employment agreements
with its executive officers. Pursuant to the terms of those agreements, the
salaries of William E. Scaff, Jr. and Ed Holloway are each $12,500 per month.
The Company paid $300,000 under these agreements for the year ended August 31,
2009, and $75,000 for the period from inception (December 28, 2007) to August
31, 2008.
In June 2008 the Company sold 1,900,000 shares of its common stock to the
Synergy Energy Trust (the "Trust"). The Trust was created for the benefit of
consultants and others who have, or will in the future, benefit the Company. The
trustee is a shareholder of the Company. Effective December 1, 2008, the Company
repurchased 1,000,000 shares of its common stock from the Trust for $1,000, the
original selling price. During the year ended August 31, 2009, the Trust issued
900,000 shares to the Trustee in exchange for certain services directly related
to raising additional capital for the Company, and the Trustee terminated the
Trust.
On June 1, 2008, the Company entered into an agreement with Energy Capital
Advisors, an entity related through common ownership interests. Energy Capital
Advisors provided certain services directly related to raising additional
capital for the Company. Compensation under the agreement was $30,000 per month
through December 31, 2008, and $10,000 per month from January 1, 2009 to May 31,
2009, when the agreement terminated. During the year ended August 31, 2009, the
Company paid $170,000 related to this agreement. During the period from
inception (December 28, 2007) to August 31, 2008, the Company paid $90,000
related to this agreement.
On June 1, 2008, the Company entered into an agreement with J3 Energy LLC,
an entity related through common ownership interests. Pursuant to the Agreement,
J3 Energy LLC agreed to provide certain services directly related to raising
additional capital for the Company. The agreement terminated on September 30,
2008. Compensation under the agreement was $8,000 per month. During the year
ended August 31, 2009, the Company paid $8,000 related to this agreement. During
the period from inception (December 28, 2007) to August 31, 2008, the Company
paid $24,000 related to this agreement.
In connection with the merger, the Company entered into an agreement with
two directors to provide consulting services. The initial term of the agreement
is one year. Compensation under the agreement is $10,000 per month. During the
year ended August 31, 2009, the Company paid $120,000 related to this agreement.
The Company issued 31,733 placement agent warrants in connection with the
Private Offering Memorandum dated December 1, 2008. Each placement agent warrant
entitles the holder to purchase one Unit (which Unit is identical to the Units
sold under the Private Offering Memorandum dated December 1, 2008) at a price of
$3.60. Each Unit consisted of two shares of common stock, one Series A warrant,
and one Series B warrant. The Series A and Series B warrants issuable upon
F-18
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
exercise of the placement agent warrants are not considered outstanding for
accounting purposes until such time, if ever, that the placement agent warrants
are exercised. In the event that the placement agent warrants are exercised, the
Company will be obligated to issue 31,733 Series A warrants and 31,733 Series B
warrants.
8. Income Taxes
The Company records deferred taxes in accordance with Statement of
Financial Accounting Standards 109 "Accounting for Income Taxes". The statement
requires recognition of deferred tax assets and liabilities for temporary
differences between the tax bases of assets and liabilities and the amounts at
which they are carried in the financial statements, the effect of net operating
losses, based upon the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount expected to be realized.
The Company's deferred tax assets, valuation allowance, and change in
valuation allowance are as follows:
Estimated Estimated Change in
NOL carry- NOL tax benefit Valuation valuation Net tax
Period Ending forward expires from NOL allowance allowance benefit
------------- ---------- ------- ----------- --------- --------- -------
August 31, 2009 $1,301,000 2029 $420,000 $(420,000) $(420,000) $ --
August 31, 2008 $ 165,000 2028 $ 61,000 $ (61,000) $ (61,000) $ --
Income taxes at the statutory rate are reconciled to reported income tax
expense (benefit) as follows:
2009 2008
Federal tax expense (benefit) at statutory rate (34%) (34%)
State tax expense (benefit) at statutory rate, net ( 3%) ( 3%)
Deferred income tax valuation allowance 37% 37%
----- -----
Reported tax rate --% --%
===== =====
At this time, the Company is unable to determine if it will be able to
benefit from its deferred tax asset. There are limitations on the utilization of
net operating loss carry-forwards, including a requirement that losses be offset
against future taxable income, if any. In addition, there are limitations
imposed by certain transactions which are deemed to be ownership changes.
Accordingly, a valuation allowance has been established for the entire deferred
tax asset.
F-19
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
9. Supplemental Oil and Gas Information (unaudited)
Costs Incurred: Costs incurred in oil and gas property acquisition,
exploration and development activities and related depletion per barrel of oil
equivalent for the year ended August 31, 2009, were:
Acquisition costs $420,478
Exploration costs --
Development costs 2,408,030
----------
Total Costs Incurred $2,828,508
==========
Depletion per barrel of
oil equivalent $ 13.86
==========
Supplemental Oil and Gas Reserve Information: Reserve information for the
properties was prepared in accordance with guidelines established by the SEC.
The Company engaged Ryder Scott Company to estimate proved reserves for all
properties as of August 31, 2009.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering date
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions (prices and
costs held constant as of the date the estimate is made). Proved developed oil
and gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped
oil and gas reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
As of August 31, 2009, all of the Company's proved reserves were located
within the United States and all were considered to be proved developed
reserves.
The following table sets forth information regarding the Company's
estimated net total proved oil and gas reserve quantities for the year ended
August 31, 2009:
Oil Gas BOE
---------------------------------------
Balance, August 31, 2008 - - -
Revision of previous estimates - - -
Purchase of reserves in place - - -
Extensions, discoveries, and
other additions 8,160 30,066 13,171
Sale of reserves in place - - -
Production (1,730) (4,386) (2,461)
-------- --------- ---------
Balance, August 31, 2009 6,430 25,680 10,710
======== ======== =========
F-20
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
Oil reserves are stated in barrels, gas reserves are stated in mcf, and
barrels of oil equivalent (Boe) are calculated using a conversion of 6 mcf to 1
barrel.
Standardized Measure of Discounted Future Net Cash Flows: Guidelines are
prescribed by SFAS 69, "Disclosures about Oil and Gas Producing Activities" for
computing a standardized measure of future net cash flows and changes therein
related to estimated proved reserves. Future oil and gas sales and production
and development costs have been estimated using prices and costs in effect at
the end of the fiscal year. All cash flow amounts are discounted at 10%.
As of August 31, 2009, based on our net oil and gas prices of $61.24 per
barrel of oil and $2.05 per mcf of natural gas, the value of proved reserves did
not support the costs included in the full cost pool. Accordingly, an impairment
allowance of $945,079 was recorded for the year ended August 31, 2009.
The following table sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in SFAS 69.
Future cash inflows $ 446,485
Future production costs (141,134)
Future development costs --
Future income tax expense --
-----------
Future net cash flows 305,351
10% annual discount (72,394)
-----------
Standardized measure of discounted
future net cash flows $ 232,957
===========
The principle sources of change in the standardized measure of discounted
future net cash flows are:
Balance, August 31, 2008 $ --
Sales of oil and gas, net (82,549)
Extensions and discoveries 315,506
----------
Balance, August 31, 2009 $ 232,957
==========
F-21
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2009 and 2008
10. Subsequent Events
The Company evaluated all events subsequent to the balance sheet date of
August 31, 2009, through the date of issuance of these financial statements and
has determined that, except as set forth below, there are no subsequent events
that require disclosure.
After the end of the fiscal year, and through October 31, 2009, the
Company commenced a drilling program comprising seven wells with an estimated
total cost, to its interest, of approximately $2,200,000.
F-22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Synergy Resources Corporation, formerly Brishlin Resources, Inc.
We have audited the accompanying balance sheets of Synergy Resources
Corporation, formerly Brishlin Resources, Inc. (an Exploration Stage Company) as
of August 31, 2008 and December 31, 2007, and the related statements of
operations, changes in shareholders' equity, and cash flows for the eight months
ended August 31, 2008, the year ended December 31, 2007, and the period from
inception (May 11, 2005) to August 31, 2008. 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 audits.
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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 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 Synergy Resources Corporation,
formerly Brishlin Resources, Inc. (an Exploration Stage Company) as of August
31, 2008 and December 31, 2007, and the results of its operations and cash flows
for the eight months ended August 31, 2008, the year ended December 31, 2007,
and the period from inception (May 11, 2005) to August 31, 2008, 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 2 to the
financial statements, the Company has suffered recurring losses from operations
and has no revenue generating operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Stark Winter Schenkein & Co., LLP
Denver, Colorado
January 23, 2009
F-23
SYNERGY RESOURCES CORPORATION
(Formerly Brishlin Resources, Inc.)
(An Exploration Stage Company)
BALANCE SHEETS
August 31, December 31,
2008 2007
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,569 $ 20,440
Prepaid expenses 1,428 -
---------- ----------
Total current assets 8,997 20,440
---------- ----------
Oil and gas properties, at cost, using full
cost method
Oil and gas properties, net 39,125 39,125
Other assets 1,328 1,265
---------- ----------
Total assets $ 49,450 $ 60,830
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 44,906 $ 26,395
Accrued salaries, benefits, and taxes 3,604 33,855
---------- ----------
Total current liabilities 48,510 60,250
---------- ----------
Shareholders' equity:
Preferred stock - $0.01 par value, 10,000,000
shares authorized:
no shares issued and outstanding - -
Common stock - $0.001 par value, 100,000,000
shares authorized:
1,038,000 and 978,000 shares issued and
outstanding at August 31, 2008 and December
31, 2007, respectively 1,038 978
Additional paid-in capital 1,015,262 815,322
(Deficit) accumulated during the exploration stage (1,015,360) (815,720)
---------- ----------
Total shareholders' equity 940 580
---------- ----------
Total liabilities and shareholders' equity $ 49,450 $ 60,830
========== ==========
The accompanying notes are an integral part of these financial statements.
F-24
SYNERGY RESOURCES CORPORATION
(Formerly Brishlin Resources, Inc.)
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
for the eight months ended August 31, 2008,
the year ended December 31, 2007,
and for the period from Inception (May 11, 2005) to August 31, 2008
Eight Months Inception
Ended Year Ended (May 11, 2005) to
August 31, 2008 December 31, 2007 August 31, 2008
--------------- ----------------- -----------------
Revenues $ - $ - $ -
------------- ------------- -------------
Expenses:
Oil and gas lease expense 5,000 - 13,325
Impairment of oil and gas
properties - - 223,738
General and administrative 194,730 282,641 785,240
------------- ------------- -------------
Total expenses 199,730 282,641 1,022,303
------------- ------------- -------------
Operating (loss) (199,730) (282,641) (1,022,303)
Other income (expense):
Interest income 90 1,280 6,943
------------- ------------- -------------
(Loss) before taxes (199,640) (281,361) (1,015,360)
Provision for income taxes - - -
------------- ------------- -------------
Net (loss) $ (199,640) $ (281,361) $ (1,015,360)
============= ============= =============
Net (loss) per common share:
Basic and Diluted $ (0.20) $ (0.29)
============= =============
Weighted average shares
outstanding:
Basic and Diluted 1,005,869 962,422
============= =============
The accompanying notes are an integral part of these financial statements.
F-25
SYNERGY RESOURCES CORPORATION
(Formerly Brishlin Resources, Inc.)
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
for the eight months ended August 31, 2008,
the year ended December 31, 2007,
and for the period from Inception (May 11, 2005) to August 31, 2008
Eight Months Inception
Ended Year Ended (May 11, 2005
August 31, December 31, August 31,
2008 2007 2008
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) $(199,640) $ (281,361) $(1,015,360)
Adjustments to reconcile net (loss)
to net cash used by operating activities:
Impairment of oil and gas properties - - 223,738
Changes in operating assets and liabilities:
Prepaid expenses and other assets (1,491) - (2,756)
Accounts payable and accrued expenses 38,260 25,942 91,350
--------- ---------- -----------
Total adjustments 36,769 25,942 312,332
--------- ---------- -----------
Net cash (used in) operating
activities (162,871) (255,419) (703,028)
--------- ---------- -----------
Cash flows from investing activities:
Proceeds from sale of oil and gas
properties - 23,922 23,922
Investment in oil and gas properties - - (123,625)
--------- ---------- -----------
Net cash provided by (used in)
investing activities - 23,922 (99,703)
--------- ---------- -----------
Cash flows from financing activities:
Common stock subscription receivable - 10,000 -
Cash proceeds from sale of stock 150,000 225,000 810,300
--------- ---------- -----------
Net cash provided by financing
activities 150,000 235,000 810,300
--------- ---------- -----------
Net increase (decrease) in cash and
equivalents (12,871) 3,503 7,569
Cash and equivalents at beginning of
period 20,440 16,937 -
--------- ---------- -----------
Cash and equivalents at end of period $ 7,569 $ 20,440 $ 7,569
========= ========== ===========
Supplemental Cash Flow Information
Interest paid $ - $ - $ 370
========= ========== ===========
Income taxes paid $ - $ - $ -
========= ========== ===========
Non-cash investing and financing activities:
Shares issued in exchange for oil and
gas properties $ - $ - $ 156,000
========= ========== ===========
Liabilities assumed in exchange for
oil and gas properties $ - $ - $ 7,160
========= ========== ===========
Common stock issued for
accrued compensation $ 50,000 $ - $ 50,000
========= ========== ===========
The accompanying notes are an integral part of these financial statements.
F-26
SYNERGY RESOURCES CORPORATION
(Formerly Brishlin Resources, Inc.)
(An Exploration Stage Company)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
for the period from Inception (May 11, 2005) to August 31, 2008
(Deficit)
Accumulated
Common Stock Additional During Total
------------------- Paid-in Exploration Shareholders'
Number Amount Capital Stage Equity
------ ------ ---------- ------------ -------------
Balance at Inception,
May 11, 2005 - $ - $ - $ - $ -
Shares issued for cash
at $0.01 630,000 630 5,670 - 6,300
Shares issued for cash
at $0.20 25,000 25 4,975 - 5,000
Shares issued in
exchange for oil
and gas properties 6,000 6 5,994 - 6,000
Shares issued for cash
at $2.00 117,500 118 234,882 - 235,000
Net (loss) - - - (111,759) (111,759)
---------- ---------- ---------- ---------- ----------
Balance, December 31,
2005 778,500 779 251,521 (111,759) 140,541
Shares issued for cash
at $2.00 94,500 94 188,906 - 189,000
Shares issued in
exchange for oil
and gas properties 60,000 60 149,940 - 150,000
Net (loss) - - - (422,600) (422,600)
---------- ---------- ---------- ---------- ----------
Balance, December 31,
2006 933,000 933 590,367 (534,359) 56,941
Shares issued for cash
at $5.00 45,000 45 224,955 - 225,000
Net (loss) - - - (281,361) (281,361)
---------- ---------- ---------- ---------- ----------
Balance, December 31,
2007 978,000 978 815,322 (815,720) 580
Shares issued for cash
at $5.00 30,000 30 149,970 - 150,000
Shares issued for
accrued Compensation
at $1.67 30,000 30 49,970 - 50,000
Net (loss) - - - (199,640) (199,640)
---------- ---------- ---------- ---------- ----------
Balance, August 31,
2008 1,038,000 $ 1,038 $1,015,262 $(1,015,360) $ 940
=========== ========== ========== ============ ==========
The accompanying notes are an integral part of these financial statements.
F-27
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
1. Summary of Significant Accounting Policies
Basis of Presentation: Synergy Resources Corporation (formerly Brishlin
Resources, Inc.) (the "Company") was organized under the laws of the State of
Colorado on May 11, 2005. The Company plans to engage in oil, gas and mineral
acquisitions, exploration, development and production service activities,
primarily in the western region of the United States. The Company is in its
exploration stage and has not yet generated any revenues from operations.
Reverse Stock Split: On September 8, 2008, Brishlin shareholders approved a
reverse stock split of the outstanding shares of common stock, pursuant to which
each ten shares of the Company's pre-split common stock issued and outstanding
was exchanged for one share of the Company's post-split common stock. After
giving effect to the reverse stock split, there were 1,038,000 shares of
Brishlin common stock issued and outstanding. All share and per share amounts
presented in this report have been retroactively adjusted to reflect the reverse
stock split.
Cash and Cash Equivalents: The Company considers cash in banks, deposits in
transit, and highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Oil and Gas Properties: The Company uses the full cost method of accounting for
costs related to its oil and natural gas properties. All of the properties
acquired by the Company since inception are currently undergoing evaluation and
are not yet included in the depletion, depreciation, and amortization
calculation. After the properties are evaluated, the capitalized costs included
in the full cost pool will be depleted on an aggregate basis using the
units-of-production method. A change in proved reserves without a corresponding
change in capitalized costs will cause the depletion rate to increase or
decrease.
Both the volume of proved reserves and any estimated future expenditures to be
used for the depletion calculation will be based on estimates such as those
described under "Oil and Gas Reserves" below.
The capitalized costs in the full cost pool will be subject to a ceiling test
that limits such pooled costs to the aggregate of the present value of future
net revenues attributable to proved oil and natural gas reserves discounted at
10 percent plus the lower of cost or market value of unproved properties less
any associated tax effects. If such capitalized costs exceed the ceiling, the
Company will record a write-down to the extent of such excess as a non-cash
charge to earnings. Any such write-down will reduce earnings in the period of
occurrence and result in lower depreciation and depletion in future periods. A
write-down may not be reversed in future periods, even though higher oil and
natural gas prices or increased reserves may subsequently increase the ceiling.
F-28
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
Changes in oil and natural gas prices are expected to have the most significant
impact on the Company's ceiling test. In general, the ceiling is lower when
prices are lower. Even though oil and natural gas prices can be highly volatile
over weeks and even days, the ceiling calculation dictates that prices in effect
as of the last day of the test period be used and held constant. The resulting
valuation is a snapshot as of that day and, thus, is not necessarily indicative
of a true fair value that would be placed on the Company's reserves by the
Company or by an independent third party. Therefore, the future net revenues
associated with the estimated proved reserves are not based on the Company's
assessment of future prices or costs, but rather are based on prices and costs
in effect as of the end the test period.
Oil and Gas Reserves: The determination of depreciation and depletion expense as
well as ceiling test write-downs related to the recorded value of the Company's
oil and natural gas properties will be highly dependent on the estimates of the
proved oil and natural gas reserves. Oil and natural gas reserves include proved
reserves that represent estimated quantities of crude oil and 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. There are numerous uncertainties inherent in estimating
oil and natural gas reserves and their values, including many factors beyond the
Company's control. Accordingly, reserve estimates are often different from the
quantities of oil and natural gas ultimately recovered and the corresponding
lifting costs associated with the recovery of these reserves
Property Retirement Obligation: The Company follows the guidelines of Statement
of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset
Retirement Obligations." SFAS 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the period that it is incurred
if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. The Company has determined that it has no
material property retirement obligations as of August 31, 2008.
Stock Based Compensation: The Company's 2005 Non-Qualified Stock Option and
Stock Grant Plan (the "Plan") authorizes the granting of nonqualified options to
purchase shares of the Company's common stock. The Plan is administered by the
Board of Directors which determines the terms pursuant to which any option is
granted.
The Company accounts for this Plan in accordance with SFAS 123(R), "Share-Based
Payment," requiring the Company to record compensation costs for the Company's
stock option plans determined in accordance with the fair value based method
prescribed in SFAS 123(R). The Company estimates the fair value of stock option
at their grant date by using the Black-Scholes-Merton option pricing model and
provides for expense recognition over the service period, if any, of the stock
option. Since inception, the Company has not granted any options under the Plan,
and, accordingly, has not recognized any stock based compensation expense.
F-29
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
The Company accounts for common stock issued to employees for services based on
the fair value of the equity instruments issued, and accounts for common stock
issued to other than employees based on the fair value of the consideration
received or the fair value of the equity instruments, whichever is more reliably
measurable.
Per Share Amounts: SFAS 128, "Earnings Per Share," provides for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing net income (or loss) by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings of the Company, assuming the issuance of an equivalent number of
common shares pursuant to options, warrants, or convertible debt arrangements.
Diluted earnings per share does not include dilutive common stock equivalents
for periods in which the Company incurs a loss because they would be
anti-dilutive.
Income Taxes: Deferred income taxes are reported for timing differences between
items of income or expense reported in the financial statements and those
reported for income tax purposes in accordance with SFAS 109, "Accounting for
Income Taxes", which requires the use of the asset/liability method of
accounting for income taxes. Deferred income taxes and tax benefits are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and for tax loss and credit carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company provides for deferred taxes for
the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is more likely than not.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States (US GAAP) requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management routinely makes judgments and
estimates about the effects of matters that are inherently uncertain. Estimates
that are critical to the accompanying financial statements include the
identification and valuation of proved and probable reserves, treatment of
exploration and development costs as either an asset or an expense, valuation of
deferred tax assets, and the likelihood of loss contingencies Management bases
its estimates and judgements on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates. Estimates and assumptions are revised
periodically and the effects of revisions are reflected in the financial
statements in the period it is determined to be necessary.
F-30
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
Business Risks: The Company continually reviews the exploration and political
risks it encounters in its operations. It mitigates the likelihood and potential
severity of these risks through the application of high operating standards. The
Company's operations have been and in the future may be, affected to various
degrees by changes in environmental regulations, including those for future site
restoration and reclamation costs. The Company's business is subject to
extensive licensing, permitting, governmental legislation, control and
regulations. The Company endeavors to be in compliance with these regulations at
all times.
Fair Value of Financial Instruments: SFAS 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as
of August 31, 2008.
The respective carrying value of certain on-balance-sheet financial instruments
approximate their fair values. These financial instruments include cash, cash
equivalents, accounts payable and accrued expenses. Fair values were assumed to
approximate carrying values for these financial instruments since they are short
term in nature and their carrying amounts approximate fair value, or they are
receivable or payable on demand.
Concentration of Credit Risk: The Company's operating cash balances are
maintained in one primary financial institution and periodically exceed
federally insured limits. The Company believes that the financial strength of
these institutions mitigates the underlying risk of loss. To date, these
concentrations of credit risk have not had a significant impact on the Company's
financial position or results of operations.
Environmental Matters: Environmental costs are expensed or capitalized depending
on their future economic benefit. Costs that relate to an existing condition
caused by past operations with no future economic benefit are expensed.
Liabilities for future expenditures of a non-capital nature are recorded when
future environmental expenditures and/or remediation is deemed probable and the
costs can be reasonably estimated. Costs of future expenditures for
environmental remediation obligations are not discounted to their present value.
Recent Accounting Pronouncements: In March 2008 the Financial Accounting
Standards Board ("FASB") issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement No. 133
(SFAS 161), which becomes effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. This standard
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
Management is currently evaluating the impact of adopting this statement.
F-31
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
In May 2008 the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162), which becomes effective upon approval by the
SEC. This standard sets forth the sources of accounting principles and provides
entities with a framework for selecting the principles used in the preparation
of financial statements that are presented in conformity with GAAP. It is not
expected to change any of our current accounting principles or practices and
therefore, is not expected to have a material impact on our financial
statements.
There were various other accounting standards and interpretations issued during
2008, none of which are expected to a have a material impact on the Company's
financial position, operations or cash flows.
2. Going Concern
The Company's financial statements are prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of obligations in the
normal course of business. The Company has no source of operating revenue and
has financed operations through the sale and exchange of equity. The Company has
incurred losses since its inception aggregating $1,015,360. These conditions
raise substantial doubt about the ability of the Company to continue as a going
concern.
The Company has raised total cash proceeds of $810,300 in sales of common stock
from inception through August 31, 2008. Management believes that these proceeds
will not be sufficient to fund its operating activity and other capital resource
demands during the next twelve months.
The Company's ability to continue as a going concern is contingent upon its
ability to raise funds through the sale of equity, joint venture or sale of its
assets, and attaining profitable operations. The financial statements do not
include any adjustments to the amount and classification of assets and
liabilities that may be necessary should the Company not continue as a going
concern.
3. Oil and Gas Properties
In June 2005 the Company purchased a 2% interest in a shut-in well in Morgan
County, Colorado in exchange for 6,000 shares of the Company's restricted common
stock, valued at $6,000. In January 2006 the Company purchased from a related
party an additional 7.875% interest in the same property for the sum of $23,625.
The well's primary producing zones are the D-Sand, J-Sand and a variety of
shallower sands, such as the Niobrara and the Greenhorn. The Morgan County well
holds 160 acres of surrounding leasehold interest and is shut-in awaiting a
pipeline for delivery.
F-32
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
In May 2006 the Company purchased an additional 11.875% working interest in the
Morgan County well outlined above. As part of the same transaction, the Company
purchased an 11.875% working interest in 2 wells and 1,160 leased acres located
in Logan County, Colorado in exchange for $250,000, of which $100,000 was paid
in cash at closing, and the balance of $150,000 was paid in the form of 60,000
shares of the Company's restricted common stock.
None of the wells were in production and no depletion, depreciation or
amortization was recorded. As of December 31, 2006, the Company determined that
these properties may have been impaired. Accordingly, a valuation allowance of
$223,738 to reduce the carrying value of the properties to their estimated net
realizable value was recorded as of December 31, 2006.
Effective August 31, 2007, the Company sold its interests in certain oil and gas
properties located on Logan County, Colorado for net cash proceeds of $23,922.
The value of these properties had previously been adjusted to reflect estimated
fair market value and no additional loss was recognized in connection with the
sale transaction
The Company is evaluating its remaining property to determine the appropriate
future actions that should be taken. The Company may decide to commence
production or dispose of the property. Since the interest in this property is a
minority interest, the final decision with respect to the property will be
jointly decided with the other ownership interests.
4. Income Taxes
A reconciliation of the tax provision for 2008 and 2007 at statutory rates is
comprised of the following components:
2008 2007
---- ----
Tax expense (benefit) at statutory rates $ (74,000) $ (95,000)
Increase in estimated tax rates (23,000) --
Valuation allowance 97,000 95,000
---------- ----------
Reported tax provision $ -- $ --
========== ==========
Deferred tax assets and liabilities represent the future impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. Those items consist of the following as of August 31, 2008 and
December 31, 2007:
2008 2007
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 374,000 $ 277,000
Less valuation allowance (374,000) (277,000)
---------- -----------
Net deferred tax asset $ -- $ --
========== ===========
F-33
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
Total deferred tax assets and the valuation allowance increased by approximately
$97,000 during 2008.
At August 31, 2008, the Company has tax loss carryforwards approximating
$1,012,000 that expire at various dates through 2028. At this time, the Company
is unable to determine if it will be able to benefit from its deferred tax
asset. There are limitations on the utilization of net operating loss
carryforwards, including a requirement that losses be offset against future
taxable income, if any. In addition, there are limitations imposed by certain
transactions which are deemed to be ownership changes. Accordingly, a valuation
allowance has been established for the entire deferred tax asset.
5. Shareholders' Equity
Preferred Stock: The Company has authorized 10,000,000 shares of preferred stock
with a par value of $0.01. These shares may be issued in series with such rights
and preferences as may be determined by the Board of Directors. Since inception,
the Company has not issued any preferred shares.
Common Stock: The Company has authorized 100,000,000 shares of $0.001 par value
common stock.
Reverse Stock Split: On September 8, 2008, Brishlin shareholders approved a
reverse stock split of the outstanding shares of common stock, pursuant to which
each ten shares of Brishlin's pre-split common stock issued and outstanding was
exchanged for one share of the Company's post-split common stock. After giving
effect to the reverse stock split, there were 1,038,000 shares of Brishlin
common stock issued and outstanding. All share and per share amounts presented
in this report have been retroactively adjusted to reflect the reverse stock
split.
At inception, the Company issued 630,000 common shares to its founders for cash
proceeds of $6,300.
On June 6, 2005, the Company issued 25,000 common shares to a private investor
for cash proceeds of $5,000.
During 2005 the Company issued 6,000 shares of common stock in exchange for a 2%
working interest in the Stroh #1 lease. The shares were valued at $6,000. In
private transactions, the Company sold 117,500 shares of common stock at $2.00
per share for cash proceeds of $235,000.
During 2006 the Company issued 94,500 shares of common stock at $2.00 per share
for cash proceeds of $189,000. In addition, the Company issued 60,000 shares of
common stock in exchange for oil and gas properties including the Stroh #1,
Marostica #1, and Lutin #1. The shares were valued at $150,000, or $2.50 per
F-34
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
share, based upon the negotiated value between the seller and the buyer.
During the year ended December 31, 2007, the Company issued 45,000 shares of
common stock at $5.00 per share for cash proceeds of $225,000.
During the eight months ended August 31, 2008, the Company issued 30,000 shares
of common stock at $5.00 per share for cash proceeds of $150,000.
Effective June 16, 2008, the Company exchanged 30,000 restricted shares of
common stock, valued at $1.67 per share, based upon quoted market prices, for
accrued and unpaid compensation of $50,000 payable to officers.
6. Commitments and Contingencies
Effective October 1, 2007, the Company entered into a twelve month lease on
office space in Colorado Springs, Colorado. Rental payments approximate $1,328
per month. As of August 31, 2008, future minimum lease obligations consisted of
one month's rent, approximating $1,328. Rent expense approximated $10,624 for
the eight months ended August 31, 2008, and $15,400 for the year ended December
31, 2007.
Pursuant to employment agreements with its executive officers which were
effective from June 1, 2005 through June 30, 2008, the officers each earned
$5,000 per month. Effective June 16, 2008, the officers agreed to exchange
accrued and unpaid compensation of $50,000 for 30,000 restricted shares of the
Company's common stock, valued at a price of $1.67 per share, based on quoted
market prices. In anticipation of the business combination with Synergy
Resources Corporation (see Note 7), the employment agreements were terminated
effective June 30, 2008. Total compensation expense recorded under the
agreements was $60,000 for the eight months ended August 31, 2008, and $120,000
for the year ended December 31, 2007.
7. Subsequent Events
On September 10, 2008, the Company acquired approximately 89% of the outstanding
shares of Synergy Resources Corporation ("Synergy") pursuant to an Agreement to
Exchange Common Stock ("Share Exchange Agreement"). The Company acquired all the
remaining outstanding shares of Synergy in separate transactions. In total,
9,960,000 shares of common stock were issued in exchange for 9,960,000
outstanding shares of Synergy.
The Share Exchange Agreement further provides that the Company agree to issue
substitute Series A warrants to replace similar warrants held by certain
shareholders of Predecessor Synergy to purchase 2,060,000 shares of common stock
at $6.00 per share. Furthermore, the
F-35
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
August 31, 2008
Company agreed to issue substitute options to replace similar options
outstanding prior to the merger transaction, which options provide for the
purchase of 2,000,000 shares of common stock at $1.00 per share and 2,000,000
shares of common stock at $10.00 per share. Using the Black-Scholes-Merton
option-pricing model, the Company estimated that the fair value of the
replacement options exceeded the fair value of the options surrendered by
$10,185,345. The assumptions used in the model were: expected life of 2.5 years,
stock price of $3.50 at date of grant, volatility of 166%, dividend yield of 0%,
and interest rate of 2.63%. The additional expense of $10,185,345 will be
pro-rated over the remaining vesting period.
.
In conjunction with the acquisition of Synergy, the majority of the shareholders
of the Company also voted to change its name to Synergy Resources Corporation.
On September 8, 2008, the Company's Board of Directors declared a dividend in
the form of one Series A Warrant to purchase one share of post-split common
stock for $6.00, exercisable upon issuance until the earlier of December 31,
2012, or twenty days following written notification from the Company that its
common stock had a closing price at or above $7.00 for any of twenty consecutive
trading days. Shareholders of record as of September 9, 2008, are entitled to
receive the dividend, which is payable only after receipt by the Company of an
effective date for a registration statement covering the warrants and underlying
common stock.
In connection with the merger, the Company entered into an agreement with two
directors to provide consulting services. The initial term of the agreement is
one year. Compensation under the agreement is $10,000 per month.
In October 2008, certain directors and former officers paid accrued legal fees
on behalf of the Company in the amount of $17,000, which was recorded as
contributed capital.
In December 2008, the Company commenced a private offering to sell shares of its
common stock and warrants. As of January 23, 2009, the Company had received cash
proceeds of $278,001 for the sale of 185,334 common shares and warrants.
Effective December 1, 2008, the Company purchased 1,000,000 shares of its common
stock from one of the original Predecessor Synergy shareholders for $1,000,
which was the price at which the shares were sold to the shareholder.
Effective December 31, 2008, the Company granted stock options to an employee to
purchase 100,000 shares of common stock at an exercise price of $3.00 and a term
of ten years. Using the Black-Scholes-Merton option-pricing model, the Company
estimates the fair value of the options to be approximately $186,000. The
assumptions used in the model were: expected life of 5 years, stock price of
$2.00 at date of grant, volatility of 166%, dividend yield of 0%, and interest
rate of 3.13%.
F-36
SYNERGY RESOURCES CORPORATION
INTERIM FINANCIAL STATEMENTS
FEBRUARY 28, 2010
(Unaudited)
F-37
SYNERGY RESOURCES CORPORATION
BALANCE SHEETS
February 28, August 31,
2010 2009
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,875,185 $ 2,854,659
------------ ------------
Accounts receivable 459,528 84,643
Accounts receivable, related party 65,536 -
Inventory 799,570 1,132,685
Other current assets 52,743 21,105
------------ ------------
Total current assets 10,252,562 4,093,092
------------ ------------
Property and equipment:
Oil and gas properties, full cost method, net 4,471,750 653,435
Other property and equipment, net 819 1,041
------------ ------------
Property and equipment, net 4,472,569 654,476
------------ ------------
Debt issuance costs, net of amortization 1,295,038 -
Other assets 85,000 85,000
------------ ------------
Total assets $16,105,169 $ 4,832,568
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 833,570 $ 622,734
Accounts payable, related party 20,989 -
Accrued expenses 150,786 59,579
Bank loan payable 396,080 1,161,811
------------ ------------
Total current liabilities 1,401,425 1,844,124
Asset retirement obligation 51,000 -
Convertible promissory notes, net of discount 8,598,360 -
Derivative conversion liability 2,257,987 -
------------ ------------
Total liabilities 12,308,772 1,844,124
------------ ------------
Commitments and contingencies (See Note 7)
Shareholders' equity:
Preferred stock - $0.01 par value, 10,000,000
shares authorized:
no shares issued and outstanding - -
Common stock - $0.001 par value, 100,000,000
shares authorized:
11,998,000 shares issued and outstanding 11,998 11,998
Additional paid-in capital 17,134,980 15,521,697
Accumulated (Deficit) (13,350,581) (12,545,251)
------------ ------------
Total shareholders' equity 3,796,397 2,988,444
------------ ------------
Total liabilities and shareholders' equity $16,105,169 $ 4,832,568
============ ============
The accompanying notes are an integral part of these financial statements.
F-38
SYNERGY RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
for the three months ended February 28, 2010 and 2009,
(unaudited)
Three Months Three Months
Ended Ended
February 28, 2010 February 28, 2009
----------------- -----------------
Oil and gas revenues $ 335,725 $ -
-------------- --------------
Expenses:
Lease operating expenses 47,152 3,176
Depreciation and depletion 64,733 -
General and administrative 294,278 3,629,035
Administrative services contract -
related party 60,000 60,000
Consulting fees - related party - 30,000
-------------- --------------
Total expenses 466,163 3,722,211
-------------- --------------
Operating loss (130,438) (3,722,211)
-------------- --------------
Other (expense) income:
Accretion of debt discount (245,343) -
Amortization of debt issuance costs (100,137) -
Interest expense, net (68,656) -
Interest income 913 4,179
-------------- --------------
Total other (expense) income (413,223) 4,179
-------------- --------------
Loss before taxes (543,661) (3,718,032)
Provision for income taxes - -
-------------- --------------
Net loss $ (543,661) $ (3,718,032)
============== ==============
Net loss per common share:
Basic and Diluted $ (0.05) $ (0.36)
============== ==============
Weighted average shares outstanding:
Basic and Diluted 11,998,000 10,228,393
============== ==============
The accompanying notes are an integral part of these financial statements.
F-39
SYNERGY RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
for the six months ended February 28, 2010, and 2009,
(unaudited)
Six Months Six Months
Ended Ended
February 28, 2010 February 28, 2009
----------------- -----------------
Oil and gas revenues $ 388,511 $ -
-------------- --------------
Expenses:
Lease operating expenses 55,042 5,576
Depreciation and depletion 92,939 -
General and administrative 515,410 7,259,034
Administrative services contract -
related party 120,000 120,000
Consulting fees - related party - 60,000
-------------- --------------
Total expenses 783,391 7,444,610
-------------- --------------
Operating loss (394,880) (7,444,610)
-------------- --------------
Other (expense) income:
Accretion of debt discount (245,343) -
Amortization of debt issuance costs (100,137) -
Interest expense, net (68,656) -
Interest income 3,686 11,642
-------------- --------------
Total other (expense) income (410,450) 11,642
-------------- --------------
Loss before taxes (805,330) (7,432,968)
Provision for income taxes - -
-------------- --------------
Net loss $ (805,330) $ (7,432,968)
============== ==============
Net loss per common share:
Basic and Diluted $ (0.07) $ (0.70)
============== ==============
Weighted average shares outstanding:
Basic and Diluted 11,998,000 10,553,073
============== ==============
The accompanying notes are an integral part of these financial statements.
F-40
SYNERGY RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
for the six months ended February 28, 2010 and 2009,
(unaudited)
Six Months Ended Six Months Ended
February 28, 2010 February 28, 2009
----------------- -----------------
Cash flows from operating activities:
Net loss $ (805,330) $ (7,432,968)
-------------- --------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and depletion 92,939 74
Accretion of debt discount 245,343 -
Amortization of debt issuance cost 100,137 -
Stock-based compensation 10,829 6,852,604
Changes in operating assets and
liabilities:
Increase in accounts receivable (374,885) -
Increase in accounts receivable -
related party (65,536) -
Decrease in inventory 333,115 -
Increase in other current assets (31,638) (14,057)
Increase in accounts payable 99,722 235,979
Increase in accounts payable -
related party 20,989 -
Increase in accrued taxes and
expenses 91,207 5,030
Effect of merger on operating
assets (liabilities) - (31,438)
-------------- --------------
Total adjustments 522,222 7,048,192
-------------- --------------
Net cash used in operating activities (283,108) (384,776)
-------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (3,748,918) (640,057)
Cash acquired in merger - 3,987
-------------- --------------
Net cash used in investing activities (3,748,918) (636,070)
-------------- --------------
Cash flows from financing activities:
Cash proceeds from convertible
promissory notes 11,761,000 -
Cash proceeds from sale of stock - 774,295
Debt Issuance Costs (942,717) (243,900)
Debt principal payments (765,731) -
Repurchase of shares - (1,000)
-------------- --------------
Net cash provided by financing
activities 10,052,552 529,395
-------------- --------------
Net increase (decrease) in cash and
equivalents 6,020,526 (491,451)
Cash and equivalents at beginning of
period 2,854,659 2,292,341
-------------- --------------
Cash and equivalents at end of period $ 8,875,185 $ 1,800,890
============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Net assets acquired in merger $ - $ 11,675
Asset Retirement Obligation 51,000 -
Placement Agent Warrants 452,458 -
Accrued Capital Expenditures 111,114 -
Cash paid interest 124,128 -
The accompanying notes are an integral part of these financial statements.
F-41
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Basis of Presentation: Synergy Resources Corporation (the "Company")
represents the result of a merger transaction on September 10, 2008, between
Brishlin Resources, Inc. ("Predecessor Brishlin"), a public company, and Synergy
Resources Corporation ("Predecessor Synergy"), a private company. In conjunction
with the transaction, Predecessor Brishlin changed its name to Synergy Resources
Corporation. The Company was organized under the laws of the State of Colorado
and, for accounting purposes, the inception date is deemed to be December 28,
2007, the day that Predecessor Synergy was organized. The Company is engaged in
oil and gas acquisitions, exploration, development and production activities,
primarily in the area known as the Denver-Julesburg Basin. The Company has
adopted August 31st as the end of its fiscal year.
Interim Financial Information: The interim financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") as promulgated
in Item 210 of Regulation S-X. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP") have
been condensed or omitted pursuant to such SEC rules and regulations. The
Company believes that the disclosures included are adequate to make the
information presented not misleading, and recommends that these financial
statements be read in conjunction with the audited financial statements and
notes thereto for the year ended August 31, 2009.
In management's opinion, the unaudited financial statements contained
herein reflect all adjustments, consisting solely of normal recurring items,
which are necessary for the fair presentation of the Company's financial
position, results of operations, and cash flows on a basis consistent with that
of its prior audited financial statements. However, the results of operations
for interim periods may not be indicative of results to be expected for the full
fiscal year.
Exploration Stage Company: As of August 31, 2009, the Company was
considered an exploration stage company for accounting purposes. Subsequent to
August 31, 2009, the Company completed the requirements to exit the exploration
stage.
Reclassifications: Certain amounts previously presented for prior periods
have been reclassified to conform with the current presentation. The
reclassifications had no effect on net loss, total assets, or total
shareholders' equity.
Cash and Cash Equivalents: The Company considers cash in banks, deposits
in transit, and highly liquid debt instruments purchased with original
maturities of three months or less to be cash and cash equivalents.
Inventory: Inventories consist primarily of tubular goods and well
equipment to be used in future drilling operations or repair operations and are
carried at the lower of cost or market.
F-42
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Oil and Gas Properties: The Company uses the full cost method of
accounting for costs related to its oil and gas properties. Accordingly, all
costs associated with acquisition, exploration, and development of oil and gas
reserves (including the costs of unsuccessful efforts) are capitalized into a
single full cost pool. These costs include land acquisition costs, geological
and geophysical expense, carrying charges on non-producing properties, costs of
drilling and overhead charges directly related to acquisition and exploration
activities.
Capitalized costs of oil and gas properties are amortized using the
unit-of-production method based upon estimates of proved reserves. For
amortization purposes, the volume of petroleum reserves and production is
converted into a common unit of measure at the energy equivalent conversion rate
of six thousand cubic feet of natural gas to one barrel of crude oil.
Investments in unevaluated properties and major development projects are not
amortized until proved reserves associated with the projects can be determined
or until impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
Under the full cost method of accounting, a ceiling test is performed each
quarter. The full cost ceiling test is an impairment test prescribed by SEC
regulations. The ceiling test determines a limit on the book value of oil and
gas properties. The capitalized costs of proved oil and gas properties, net of
accumulated depreciation, depletion, and amortization, the related deferred
income taxes, and the cost of unevaluated properties, may not exceed the
estimated future net cash flows from proved oil and gas reserves, less future
cash outflows associated with asset retirement obligations that have been
accrued plus the lower of cost or estimated fair value of unevaluated properties
not being amortized. Prices are held constant for the productive life of each
well. Net cash flows are discounted at 10%. If net capitalized costs exceed this
limit, the excess is charged to expense and reflected as additional accumulated
depreciation, depletion and amortization. The calculation of future net cash
flows assumes continuation of current economic conditions, including current
prices and costs. The ceiling is highly sensitive to changing prices for oil and
gas. Once impairment expense is recognized, it cannot be reversed in future
periods, even if increasing prices raise the ceiling amount. For the year ended
August 31, 2009, the Company made a provision for impairment of oil and gas
properties of $945,079. For the six months ended February 28, 2010, no provision
for impairment was required.
Oil and Gas Reserves: The determination of depreciation, depletion and
amortization expense, as well as ceiling test write-downs related to the
recorded value of the Company's oil and natural gas properties, will be highly
dependent on the estimates of the proved oil and natural gas reserves. Oil and
natural gas reserves include proved reserves that represent estimated quantities
of crude oil and 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. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
values, including many factors beyond the Company's control. Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
ultimately recovered and the corresponding lifting costs associated with the
recovery of these reserves.
F-43
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Capitalized Interest: The Company capitalizes interest on expenditures
made in connection with exploration and development projects that are not
subject to current amortization. Interest is capitalized during the period that
activities are in progress to bring the projects to their intended use. During
the six months ended February 28, 2010, interest expense of $55,472 was
capitalized.
Asset Retirement Obligations. The Company's activities are subject to
various laws and regulations, including legal and contractual obligations to
reclaim, remediate, or otherwise restore properties at the time the property is
removed from service. A liability is initially recorded at the estimated present
value for an obligation associated with the retirement of tangible long-lived
assets in the period in which it is incurred if a reasonable estimate of fair
value can be made. The amount of the liability is accreted each period by the
Company's credit adjusted risk free interest rate. The costs associated with the
obligation are added to the capitalized costs of the property and amortized
using the unit of production method.
Major Customer and Operating Region: The Company operates exclusively
within the United States. Except for cash investments, all of the Company's
assets are employed in, and all of its revenues are derived from, the oil and
gas industry. For the six months ended February 28, 2010, the Company's sales
were to three customers, all of which exceeded 10% of revenues. As of February
28, 2010, the accounts receivable balance was due from six customers, including
other working interest owners which have been billed for their proportionate
share of wells in progress and each customers' balance exceeded 10% of the
total.
Derivative Liability: The Company accounts for its embedded conversion
features in its convertible promissory notes in accordance with the guidance for
derivative instruments, which require a periodic valuation of their fair value
and a corresponding recognition of liabilities associated with such derivatives.
The recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at
the date of the issuance. Any subsequent increase or decrease in the fair value
of the derivative liabilities is recognized as a charge or credit to operations.
Revenue Recognition: Revenue is generally recognized for the sale of oil
and gas when there is persuasive evidence of a sale arrangement, delivery has
occurred, the price is determinable, and collection of sales proceeds is
reasonably assured. Revenue is accrued when these four conditions have been
satisfied and reasonable estimates can be made. Revenue estimates are prepared
for the quantity of petroleum product delivered to the customer and the price
that will be received. Payment is received at a later date, often sixty to
ninety days after production. Revenue accruals are adjusted to reflect updated
information as it is received.
F-44
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Earnings Per Share Amounts: Basic earnings per share includes no dilution
and is computed by dividing net income (or loss) by the weighted-average number
of shares outstanding during the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of the
Company. As of February 28, 2010, the Company has outstanding 23,227,654
potentially dilutive securities, (4,100,000 options, 11,777,029 warrants, and
7,350,625 conversion shares) all of which were excluded from the calculation
because they were anti-dilutive. Also as of February 28, 2010, the Company had a
contingent obligation to issue 63,466 potentially dilutive securities, all of
which were excluded from the calculation because the contingency conditions had
not been met.
Stock-Based Compensation: The Company records stock-based compensation by
estimating the fair value of stock options at their grant date using the
Black-Scholes-Merton option-pricing model and provides for expense recognition
over the service period, if any, of the stock option. The Company accounts for
common stock issued to employees for services based on the fair value of the
equity instruments issued, and accounts for common stock issued to other than
employees based on the fair value of the consideration received or the fair
value of the equity instruments, whichever is more reliably measurable.
Income Taxes: Deferred income taxes are reported for timing differences
between items of income or expense reported in the financial statements and
those reported for income tax purposes using the asset/liability method of
accounting for income taxes. Deferred income taxes and tax benefits are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and for tax loss and credit carry-forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company provides for deferred taxes for
the estimated future tax effects attributable to temporary differences and
carry-forwards when realization is more likely than not.
Use of Estimates: The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management
routinely makes judgments and estimates about the effects of matters that are
inherently uncertain. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Estimates and assumptions are revised periodically
and the effects of revisions are reflected in the financial statements in the
period it is determined to be necessary. Actual results could differ from these
estimates.
Concentration of Credit Risk: The Company's operating cash balances are
maintained in multiple financial institutions and, as of February 28, 2010, did
not exceed federally insured limits. However, federal deposit insurance is
subject to changes in rules and regulations, and the Company's operating cash
balances may exceed coverage limits in the future. The Company reviews the
F-45
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
financial strengths and weaknesses of its depository institutions and attempts
to mitigate the underlying risk of loss. To date, these concentrations of credit
risk have not had a significant impact on the Company's financial position or
results of operations.
Debt Issuance Costs: Debt issuance costs include issuance costs incurred
in connection with the sale of the Company's Convertible Promissory Notes, as
well as the issuance of warrants to the placement agent for the offering, which
are being amortized over the three year term of the Notes (see Note 4). The
Company recorded amortization expense of $100,137 for the period ended February
28, 2010.
Fair Value Measurements: Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price).
The Company uses market data or assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk. These
inputs can either be readily observable, market corroborated or generally
unobservable. Given the Company's historical market transactions, its markets
and instruments are not liquid. Therefore, the Company expects that its fair
value estimates will primarily be calculated using unobservable inputs and
comparable market data from other industry participants using the best available
information. Fair value balances are classified based on the observability of
the various inputs.
A fair value hierarchy was established that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
Level 1--Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis. Level 1 primarily
consists of financial instruments such as exchange-traded derivatives, listed
securities and U.S. government treasury securities.
Level 2--Pricing inputs are other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as of
the reporting date. Level 2 includes those financial instruments that are valued
using models or other valuation methodologies, where substantially all of these
assumptions are observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the marketplace.
Level 3--Pricing inputs include significant inputs that are generally less
observable than objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair value.
Level 3 includes those financial instruments that are valued using models or
other valuation methodologies, where substantial assumptions are not observable
in the marketplace throughout the full term of the instrument, cannot be derived
from observable data or are not supported by observable levels at which
F-46
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
transactions are executed in the marketplace. At each balance sheet date, the
Company performs an analysis of all applicable instruments and includes in Level
3 all of those whose fair value is based on significant unobservable inputs.
Recently Adopted Accounting Standards. The Company evaluates the
pronouncements of various authoritative accounting organizations, primarily the
Financial Accounting Standards Board ("FASB"), the SEC, and the Emerging Issues
Task Force ("EITF"), to determine the impact of new pronouncements on US GAAP
and the impact on the Company. The Company has recently adopted the following
new accounting standards:
Accounting Standards Codification - In June 2009 FASB established the
Accounting Standards Codification ("ASC") as the single source of authoritative
US GAAP to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative US GAAP for SEC registrants. The ASC is a new structure which
took existing accounting pronouncements and organized them by accounting topic.
The ASC did not change current US GAAP, but was intended to simplify user access
to all authoritative US GAAP by providing all the relevant literature related to
a particular topic in one place. All previously existing accounting standards
were superseded and all other accounting literature not included in the ASC is
considered non-authoritative. New accounting standards issued subsequent to June
30, 2009, will be communicated by the FASB through Accounting Standards Updates
(ASUs). The ASC was effective during the period ended September 30, 2009.
Adoption of the ASC did not have an impact on the Company's financial position,
results of operations or cash flows.
Subsequent Events - In May 2009 the ASC guidance for subsequent events was
updated to establish accounting and reporting standards for events that occur
after the balance sheet date but before financial statements are issued. The
guidance was amended in February 2010. ASU 2010-09 sets forth: (i) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
in its financial statements, and (iii) the disclosures that an entity should
make about events or transactions occurring after the balance sheet date in its
financial statements. The amended ASU was effective immediately and its adoption
had no impact on the Company's financial position, results of operations or cash
flows.
Business Combinations - In December 2007 the guidance for business
combinations was updated to provide new guidance for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed, and any
non-controlling interest in the acquiree. The updated guidance also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The Company
adopted the updated guidance on September 1, 2009, and it will be applied to any
future acquisitions.
F-47
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Non-controlling Interests - In December 2007 the guidance for
non-controlling Interests was updated to establish accounting and reporting
standards pertaining to: (i) ownership interests in subsidiaries held by parties
other than the parent ("non-controlling interest"), (ii) the amount of net
income attributable to the parent and to the non-controlling interest, (iii)
changes in a parent's ownership interest, and (iv) the valuation of any retained
non-controlling equity investment when a subsidiary is deconsolidated. If a
subsidiary is deconsolidated, any retained non-controlling equity investment in
the former subsidiary is measured at fair value and a gain or loss is recognized
in net income based on such fair value. For presentation and disclosure
purposes, the guidance requires non-controlling interests (formerly referred to
as minority interest) to be classified as a separate component of equity. The
Company adopted the updated guidance on September 1, 2009. The adoption had no
impact on the Company's financial position, results of operations or cash flows.
Recent Accounting Pronouncements. The following accounting standards
updates were recently issued and have not yet been adopted by the Company. These
standards are currently under review to determine their impact on the Company's
financial position, results of operations, or cash flows.
Oil and Gas Disclosures - On December 29, 2008, the SEC announced final
approval of new requirements for reporting oil and gas reserves to be effective
in January 2010. The new disclosure requirements provide for consideration of
new technologies in evaluating reserves, allow companies to disclose their
probable and possible reserves to investors, report oil and gas reserves using
an average price based on the prior 12 month period rather than year-end prices,
and revise the disclosure requirements for oil and gas operations. The
accounting for the limitation on capitalized costs for full cost companies will
also be revised. The new rule is effective for years ending on or after December
31, 2009, and early adoption is not permitted. The Company has not yet evaluated
the effects of these new rules on its financial statements and disclosures.
In January 2010 the FASB issued ASU 2010-03, Extractive Industries-Oil and
Gas: Oil and Gas Reserve Estimation and Disclosure. This ASU amends the
codification to align the reserve calculation and disclosure requirements with
the requirements in the new SEC Rule, Modernization of Oil and Gas Reporting
Requirements. The ASU is effective for fiscal years ending on or after December
31, 2009.
ASU 2010-6 amends existing disclosure requirements about fair value
measurements by adding required disclosures about items transferring into and
out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures
about purchase, sales, issuances, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value
disclosures about the level of disaggregation. This ASU will be effective for
the third quarter of 2010.
F-48
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
ASU 2009-17 revises the consolidation guidance for variable-interest
entities. The modifications include the elimination of the exemption for
qualifying special purpose entities, a new approach for determining who should
consolidate a variable-interest entity, and changes to when it is necessary to
reassess who should consolidate a variable-interest entity. This ASU will be
effective for the third quarter of 2010.
There were various other updates recently issued, most of which
represented technical corrections to the accounting literature or application to
specific industries. None of the updates referred to above are expected to a
have a material impact on the Company's financial position, results of
operations or cash flows.
2. Management Plan
The report of the Company's independent registered public accounting firm
on the Company's audited financial statements as of August 31, 2009, contained
an explanatory paragraph expressing significant uncertainty about the Company's
ability to continue as a going concern. Since August 31, 2009, events have
occurred that mitigate the uncertainties.
During the six months ended February 28, 2010, the Company drilled eleven
wells to total depth and each well encountered commercially productive
formations. Seven of these wells are undergoing completion activities and four
were brought on-stream during the six months ended February 28, 2010. Between
December 29, 2009 and March 12, 2010, the Company received net proceeds of
$16,651,023 from the sale of 180 units in a private offering. It is believed
that the proceeds from this offering are sufficient to fund the completion of
wells in progress and to meet existing obligations for the next twelve months.
With the additional funding, the Company plans to expand its drilling
program to include 24 new wells and may raise additional capital through the
sale of its common stock and the issuance of debt instruments, and may also seek
other funding or corporate transactions to achieve its business objectives.
3. Property and Equipment
Oil and gas property primarily consists of various interests in oil and
gas leases, wells in progress, and producing and non-producing wells.
Capitalized costs of property and equipment at February 28, 2010 and
August 31, 2009, consisted of the following:
F-49
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Oil and Gas Properties, full cost
method:
February 28, 2010 August 31, 2009
----------------- ---------------
Unevaluated costs, not subject
to amortization:
Acquisition and other costs $ 1,352,046 $ 420,478
Wells in progress 1,811,032 --
------------ ------------
Subtotal, unevaluated costs 3,163,078 420,478
------------ ------------
Evaluated costs:
Producing and non-producing 1,858,211 689,779
Less, accumulated depletion (549,539) (456,822)
------------ ------------
Subtotal, evaluated costs 1,308,672 232,957
------------ ------------
Oil and gas properties, net 4,471,750 653,435
------------ ------------
Other property and equipment:
Office equipment 1,337 1,337
Less, accumulated depreciation (518) (296)
------------ ------------
Other property and equipment, net 819 1,041
------------ ------------
Total Property and Equipment, net $ 4,472,569 $ 654,476
============ ============
The capitalized costs of evaluated oil and gas properties are depleted
using the unit-of-production method based on estimated reserves and the
calculation is performed quarterly. Production volumes for the quarter are
compared to beginning of quarter estimated total reserves to calculate a
depletion rate. For the six months ended February 28, 2010, depletion of oil and
gas properties was $92,717 or $5.04 per barrel of oil equivalent, and
depreciation of other property and equipment was $222.
4. Bank Loan Payable
The Company has a credit facility with a commercial bank. The borrowing
arrangement provides for maximum borrowings up to $1,161,811 and is
collateralized by tubular goods and certain other assets. The maximum allowable
borrowing amount may be reduced by a reduction in the collateral. Effective
November 1, 2009, terms of the agreement were modified to provide for 24 monthly
payments of $16,738, including principal and interest. The loan bears interest
at the prime rate plus 1/2%, with a minimum interest rate of 5.5%. The loan
maturity date is November 1, 2011, at which time the entire remaining principal
balance will be due. Interest costs of $27,473 were incurred and principal
payments of $765,731 were made during the period ended February 28, 2010. As of
February 28, 2010, the outstanding principal balance was $396,080. The loan is
classified as a current liability because the outstanding principal balance will
be reduced as the tubular goods are utilized, which is expected to occur during
the next twelve months.
F-50
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
5. Convertible Promissory Notes and Derivative Conversion Liability
During the six months ended February 28, 2010, the Company received gross
proceeds of $11,761,000 for the sale of 117.61 Units at $100,000 per Unit. Each
Unit consists of one Convertible Promissory Note ("Note") in the principal
amount of $100,000 and 50,000 warrants. The Notes bear interest at 8% per year,
payable quarterly, and mature on December 31, 2012. Each warrant entitles the
holder to purchase one share of common stock at a price of $6.00 per share and
expires on December 31, 2014.
With the proceeds from the offering, the Company plans to drill and
complete oil and gas wells in the Wattenburg field, located in the
Denver-Julesburg Basin. The Notes will be collateralized by any oil and gas
wells drilled, completed, or acquired with the proceeds from the offering.
Subsequent to February 28, 2010, the Company sold an additional 62.39
Units for gross proceeds of $6,239,000. In the aggregate, the Company sold 180
Units at $100,000 per Unit and received net proceeds of $16,651,023 after
deducting commissions and offering costs.
Proceeds received from sale of the Units have been allocated to the
components of the Units based upon their estimated fair values. The estimated
fair value of the warrants was $1,149,996, which was credited to additional paid
in capital. The Notes contain an initial conversion price of $1.60, subject to
adjustment under certain circumstances. The conversion feature was evaluated and
is deemed to be an embedded derivative liability. The estimated fair value of
the conversion feature was $2,257,987, which was credited to derivative
conversion liability.
Allocation of value to the components resulted in a debt discount of
$3,407,983, which will be amortized over the 36 month life of the Notes. Certain
details of the value allocation are presented in the following table:
Derivative
Warrants Liability Promissory Note
-------------------------------------------------------------------------
Face value of debt $11,761,000
Allocation of value to $ 1,149,996 $ 2,257,987 (3,407,983)
components
Accretion of debt 245,343
discount
---------------------------------------------
Carrying value at $ 1,149,996 $ 2,257,987 $ 8,598,360
February 28, 2010
=============================================
F-51
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
6. Asset Retirement Obligations
During the six months ended February 28, 2010, the Company incurred
obligations for its oil and gas operations which include estimated reclamation,
remediation and closure costs. The estimated present value of the obligation is
$51,000. There were no other liability additions, liability settlements,
revision in estimated cash flows or accretion expense for the current period.
7. Shareholders' Equity
As of February 28, 2010, there were various warrants outstanding to
purchase 11,777,029 shares of common stock. Each Series A warrant entitles the
holder to purchase one share of common stock at a price of $6.00 per share. The
Series A warrants expire on December 31, 2012, or earlier under certain
conditions. As of February 28, 2010, there were Series A warrants outstanding to
purchase 4,098,000 shares of common stock. Each Series B warrant entitles the
holder to purchase one share of common stock at a price of $10.00 per share. The
Series B warrants expire on December 31, 2012, or earlier under certain
conditions. As of February 28, 2010, there were Series B warrants outstanding to
purchase 1,000,000 shares of common stock. In addition to the Series A and B
warrants, the Company issued 31,733 placement agent warrants in connection with
the Private Offering Memorandum dated December 1, 2008. Each placement agent
warrant entitles the holder to purchase one Unit (which Unit is identical to the
Units sold under the Private Offering Memorandum dated December 1, 2008) at a
price of $3.60. Each Unit consists of two shares of common stock, one Series A
warrant, and one Series B warrant. To maintain comparability of the placement
agent warrants with the other warrants, the placement agent warrants are
presented as 63,466 shares at an exercise price of $1.80. The Series A and
Series B warrants issuable upon exercise of the placement agent warrants are not
considered outstanding for accounting purposes until such time, if ever, that
the placement agent warrants are exercised, and are disclosed as a commitment in
the Related Party Transactions and Commitments footnote.
In connection with the Units sold during the six months ended February 28,
2010, the Company issued warrants to purchase common stock at a price of $6.00
per share. As of February 28, 2010, there were warrants outstanding to purchase
5,880,500 shares of common stock. In addition to the $6.00 warrants issued as
part of the Units, the Company issued 735,063 placement agent warrants to the
offering placement agent. The placement agent warrants are exercisable at a
price of $1.60 per share.
F-52
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
The following table summarizes activity for common stock warrants for the
period from August 31, 2009 to February 28, 2010:
Weighted
Number of average
warrants exercise price
---------- --------------
Outstanding, August 31, 2009 5,161,466 $6.72
Granted 6,615,563 $5.51
Exercised -- --
--------- --------
Outstanding, February 28, 2010 11,777,029 $6.04
========== =====
The following table summarizes information about the Company's issued
and outstanding common stock warrants as of February 28, 2010:
Remaining Exercise
Contractual Price times
Number of Life (in Number of
Exercise Price Shares years) Shares
-------------- --------- ------------ ------------
$1.60 735,063 4.8 $ 1,176,101
$1.80 63,466 2.8 $ 114,239
$6.00 4,098,000 2.8 $24,588,000
$6.00 5,880,500 4.8 $35,283,000
$10.00 1,000,000 2.8 $10,000,000
8. Stock-Based Compensation
The Company recorded stock-based compensation expense of $10,829 and
$6,852,604 for the six months ended February 28, 2010 and 2009, respectively.
The estimated unrecognized compensation cost from unvested stock options
as of February 28, 2010, was approximately $165,000, which will be recognized
ratably through December 31, 2013.
The following table summarizes activity for options for the period from
August 31, 2009 to February 28, 2010:
Weighted
Number of average
options exercise price
--------- --------------
Outstanding August 31, 2009 4,100,000 $ 5.44
Granted -- --
Exercised -- --
--------- -------
Outstanding, February 28, 2010 4,100,000 $ 5.44
========= ======
F-53
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
The following table summarizes information about outstanding stock options
as of February 28, 2010:
Remaining Weighted
Contractual Average Aggregate
Exercise Number of Life (in Exercise Number Intrinsic
Prices Shares years) Price Exercisable Value
------------- ----------- ------------- ---------- ------------------------
$10.00 2,000,000 3.3 $10.00 2,000,000 --
$1.00 2,000,000 3.3 $1.00 2,000,000 $3,200,000
$3.00 100,000 8.8 $3.00 10,000 --
----------- -----------
4,100,000 $5.44 4,010,000
=========== ===========
9. Related Party Transactions and Commitments
The Company's executive officers control two entities that have entered
into agreements with the Company. The entities are Petroleum Management, LLC
("PM") and Petroleum Exploration and Management, LLC ("PEM"). One agreement
provides various administrative services to the Company and the other agreement
provides an option to acquire certain oil and gas interests.
Effective June 11, 2008, the Company entered into an Administrative
Services Agreement with PM. The Company pays $10,000 per month for leasing
office space and an equipment yard located in Platteville, Colorado, and pays
$10,000 per month for office support services including secretarial service,
word processing, communication services, office equipment and supplies.
Additional goods or services provided to the Company by PM, such as employees,
independent contractors or oil and gas professionals, and equipment, are
reimbursed at actual cost. Either party may terminate the agreement with 30 days
notice. For each of the six month periods ended February 28, 2010 and 2009, the
Company paid $120,000 under the administrative services agreement.
Effective August 7, 2008, the Company entered into a letter of intent with
the related entities that provides an option to acquire working interests in oil
and gas leases which are owned by PM and/or PEM. The oil and gas leases cover
640 acres in Weld County, Colorado, and subject to certain conditions, will be
transferred to the Company for payment of $1,000 per net mineral acre. The
working interests in the leases vary but the net revenue interest in the leases,
if acquired by the Company, will not be less than 75%. The letter of intent had
an original expiration date of November 1, 2008, but has been extended by mutual
agreement to August 31, 2010. As of February 28, 2010, the Company had exercised
its options on all available leases at a total cost of $360,000.
During the six months ended February 28, 2010, the Company agreed to
purchase certain oil and gas equipment with an aggregate cost of $356,278 from
PM. As of February 28, 2010, accounts payable of $20,988 was due to PM. PEM is a
F-54
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
joint working interest owner of certain wells in progress. During the six months
ended February 28, 2010, costs of $792,563 were incurred on behalf of PEM. As of
February 28, 2010, PEM was indebted to the Company for $65,536 for costs
incurred on their behalf.
On June 11, 2008, the Company entered into two year employment agreements
with its executive officers. For each of the six month periods ended February
28, 2010 and 2009, the Company paid $150,000 under these agreements.
The Company issued 31,733 placement agent warrants in connection with the
Private Offering Memorandum dated December 1, 2008. Each placement agent warrant
entitles the holder to purchase one Unit (which Unit is identical to the Units
sold under the Private Offering Memorandum dated December 1, 2008) at a price of
$3.60. Each Unit consists of two shares of common stock, one Series A warrant,
and one Series B warrant. The Series A and Series B warrants issuable upon
exercise of the placement agent warrants are not considered outstanding for
accounting purposes until such time, if ever, that the placement agent warrants
are exercised. In the event that the placement agent warrants are exercised, the
Company will be obligated to issue 31,733 Series A warrants and 31,733 Series B
warrants.
10. Fair Value Measurements
The following table sets forth by level within the fair value hierarchy
the Company's financial assets and financial liabilities as of February 28,
2010, that were measured at fair value. Assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the
fair value measurement. The Company's assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation of assets and liabilities and their placement within the fair
value hierarchy levels.
Level Level 2 Level 3 Total
--------- ------- --------- -----------
None $ -- $ -- $ -- $ --
Liabilities
Derivative Conversion -- -- 2,257,987 2,257,987
Equity
Warrants -- -- 1,602,454 1,602,454
The following methods and assumptions were used to estimate the fair
values of the assets and liabilities in the table above.
Level 1 Fair Value Measurements--As of February 28, 2010, the Company did
not have assets or liabilities measured under a Level 1 fair value hierarchy.
Level 2 Fair Value Measurements--As of February 28, 2010, the Company did
not have assets or liabilities measured under a Level 2 fair value hierarchy.
F-55
SYNERGY RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
February 28, 2010
(Unaudited)
Level 3 Fair Value Measurements--The fair values of the derivative
conversion liability and the warrants were estimated at their inception using
assumptions with respect to the Company's reserves, interest rates, and expected
term of the instruments. The expected term, as opposed to the contract term, was
used to determine the fair value of the derivative liability relating to the
Notes since certain provisions in the Notes will likely cause the expected term
to be less than the contract term. The contractual terms were used to determine
the fair value of the warrants (see Note 5). Certain of the values were based
upon industry benchmarks about the value of in-ground reserves, and are not
readily observable. As neither the warrants nor the derivative liability are
currently traded, and as the Company's common stock is not actively traded, it
is believed that a Level 3 measurement represents the best available
information.
11. Subsequent Events
Subsequent to February 28, 2010, the Company received net proceeds of
$5,832,740 from the sale of 62.39 Units at $100,000 per Unit in a private
offering. The terms of the offering and the units are described in Note 4.
F-56
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ..............................................
RISK FACTORS ....................................................
COMPARATIVE SHARE DATA...........................................
MARKET FOR DISCOVERY'S COMMON STOCK .............................
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION ......................................
BUSINESS.........................................................
MANAGEMENT ......................................................
PRINCIPAL SHAREHOLDERS...........................................
PLAN OF DISTRIBUTION ............................................
SELLING SHAREHOLDERS.............................................
DESCRIPTION OF SECURITIES........................................
LEGAL PROCEEDINGS................................................
INDEMNIFICATION .................................................
AVAILABLE INFORMATION............................................
GLOSSARY ........................................................
FINANCIAL STATEMENTS.............................................
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and
if given or made, such information or representations must not be relied upon as
having been authorized by Synergy Resources Corporation. This prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, any of
the securities offered in any jurisdiction to any person to whom it is unlawful
to make an offer by means of this prospectus.
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table show the costs and expenses payable by the Company in
connection with this registration statement.
SEC Filing Fee $ 3,946
Blue Sky Fees and Expenses 1,000
Printing Expenses 1,000
Legal Fees and Expenses 30,000
Accounting Fees and Expenses 10,000
Miscellaneous Expenses 4,054
-------
TOTAL $50,000
=======
All expenses other than the SEC filing fee are estimated.
Item 14. Indemnification of Officers and Directors
The Colorado Business Corporation provides that the Company may indemnify
any and all of its officers, directors, employees or agents or former officers,
directors, employees or agents, against expenses actually and necessarily
incurred by them, in connection with the defense of any legal proceeding or
threatened legal proceeding, except as to matters in which such persons shall be
determined to not have acted in good faith and in the Company's best interest.
Item 15. Recent Sales of Unregistered Securities.
Note
Reference
In May 2005 the Company issued 600,000 shares of common
stock to Raymond McElhaney and Bill Conrad, its two officers
and directors, and 30,000 shares to a group of private investors
for cash of $6,300. A
In June 2005 the Company sold 250,000 shares to an
investor for cash of $5,000 and issued 6,000 shares to another
person in exchange for a 2% working interest in an oil and gas
prospect, valued at $6,000. A
Between August 2005 and June 2006 the Company sold
212,000 shares of common stock to 21 persons for $424,000.
The shares were purchased by individuals or entities that
were friends, relatives or business contacts of the founders
of the Company. B
1
On September 21, 2006, the Company issued 20,000 shares
of common stock, valued at $50,000, as well as a promissory
note in the principal amount of $200,000 to Prospector
Capital Inc. in partial payment for an oil and gas property.
The promissory note was converted on December 31, 2006 into
40,000 shares of common stock. B
Between February 2007 and April 2007 the Company sold
33,000 shares of common stock to eight persons for $165,000. B
On September 10, 2008, the Company acquired approximately
89% of the outstanding shares of Synergy Resources Corporation
in exchange for 8,882,500 shares of the Company's common stock
and 1,042,500 Series A warrants. On December 19, 2008 the Company
acquired the remaining shares of Synergy for 1,077,500 shares of
the Company's common stock and 1,017,500 Series A warrants.
All but three of the Synergy shareholders were accredited investors. C
Between December 8, 2008 and June 30, 2009, the Company
sold Units to 1,000,000 investors in a private offering at a
price of $3.00 per unit. Each unit consisted of two shares of
the Company's common stock, one Series A warrant and one Series B
warrant. The Company agreed to pay sales agents participating
in the private offering a commission of up to 10% of the amount
the sales agents raised in this offering. The Company also agreed
to issue to selected sales agents one Sales Agent warrant for each
five Units sold by the selected sales agents. C
Between December 2009 and March 2010 the Company sold 180
Units to a group of private investors. The Units were sold at a
price of $100,000 per Unit. Each Unit consisted of one Promissory
Note in the principal amount of $100,000 and 50,000 Series C warrants.
At any time after May 31, 2010, the Notes can be converted into
shares of the Company's common stock, initially at a conversion
price of $1.60 per share. Each Series C warrant entitles the holder
to purchase one share of the Company's common stock at a price of
$6.00 per share at any time on or before December 31, 2014. C
In connection with the private offering the Company paid
the placement agent for the offering a commission of $997,100,
plus a non-accountable expense allowance of $360,000. The Company
also issued the Placement Agent 1,125,000 Series D warrants.
Each Series D warrant entitles the holder to purchase one
share of the Company's common stock at a price of $1.60 per
share at any time on or before December 31, 2014. C
A. The Company relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933 with respect to the issuance of these shares. The persons
who acquired these shares were sophisticated investors and were provided full
information regarding the Company. There was no general solicitation in
connection with the offer or sale of these securities. The persons who acquired
these shares acquired them for their own accounts. The certificates representing
these shares bear a restricted legend providing that they cannot be sold except
2
pursuant to an effective registration statement or an exemption from
registration. No commission or other form of remuneration was given to any
person in connection with the issuance of these shares. Share numbers are
post-split.
B. The Company relied on the exemption from registration provided by Rule
504 of the Securities and Exchange Commission in connection with the sale of
these shares. The Company did not engage in any general solicitation or
advertising. The shares which were sold or issued were restricted securities as
that term is defined in Rule 144 of the Securities and Exchange Commission. No
commission or other form of remuneration was given to any person in connection
with the issuance of these shares. Share numbers are post-split.
C. The Company relied upon the exemption provided by Rule 506 of the
Securities and Exchange Commission with respect to the issuance of these
securities. The persons who acquired these securities were sophisticated
investors and were provided full information regarding the Company. There was no
general solicitation in connection with the offer or sale of these securities.
The persons who acquired these securities acquired them for their own accounts.
The certificates representing these securities bear a restricted legend
providing that they cannot be sold except pursuant to an effective registration
statement or an exemption from registration. No commission or other form of
remuneration was given to any person in connection with the acquisition of
Synergy. The Company paid a commission to Scottsdale Capital Advisors in
connection with the sale of the units.
Item 16. Exhibits and Financial Statement Schedules
The following exhibits are filed with this Registration Statement:
Exhibits Page Number
3.1.1 Articles of Incorporation (1)
3.1.2 Amendment to Articles of Incorporation (2)
3.1.2 Bylaws (1)
5. Opinion of Counsel ___
10.1 Employment Agreement with Ed Holloway (2)
10.2 Employment Agreement with William E.
Scaff, Jr. (2)
10.4 Agreement regarding Conflicting Interest
Transactions (2)
10.5 Letter agreement regarding acquisition of
oil and gas properties from Petroleum
Management (2)
10.6 Agreement with Energy Capital, LLC (2)
3
14. Code of Ethics (2)
23(a) Consent of Hart & Trinen ___
23(b) Consents of Stark Winter Schenkein & Co., LLP ___
(1) Incorporated by reference to the same exhibit filed with the Company's
registration statement on Form SB-2, File #333-146561.
(2) Incorporated by reference to the same exhibit filed with the Company's
transition report on Form 10-K for the period ended August 31, 2008.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section l0 (a)(3) of the
Securities Act:
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of l933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
4
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; or
(ii) If the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
5
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(6) That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
The undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser bye means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
6
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Denver, Colorado on the 28th day
of May, 2010.
SYNERGY RESOURCES CORPORATION
By: /s/ Ed Holloway
-------------------------------------
Ed Holloway, President
By: /s/ Frank L. Jennings
-------------------------------------
Frank L. Jennings, Principal Financial
Officer and Principal Accounting Officer
In accordance with the requirements of the Securities Act of l933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Ed Holloway Director May 28, 2010
----------------------
Ed Holloway
/s/ William E. Scaff Director May 28, 2010
----------------------
William E. Scaff, Jr.
/s/ Benjamin Barton Director May 28, 2010
----------------------
Benjamin Barton
/s/ Rick Wilber Director May 28, 2010
----------------------
Rick Wilber
/s/ Raymond E. McElhaney Director May 28, 2010
----------------------
Raymond E. McElhaney
/s/ Bill M. Conrad Director May 28, 2010
----------------------
Bill M. Conrad
/s/ R.W. Noffsinger Director May 28, 2010
----------------------
R.W. Noffsinger, III
EXHIBITS
SYNERGY RESOURCES CORPORATION
REGISTRATION STATEMENT ON FORM S-1
