FORM 10-K
SECURITIES AND EXCHANGE COMMISSIONincluding area code: (970) 737-1073 Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No [X]
[ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No [X]
[ ]
Indicate by check mark whether the issuerregistrant (1) has filed all reports required to be
filed by SectionsSection 13 or 15(d) of the Securities Exchange Act of 1934 during the
pastpreceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No |_|
[ ]
Indicate by checkmarkcheck mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrant’sRegistrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
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"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller
reporting company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_|: [ ] Yes [X] No
The aggregate market value of the Common Stock of Brishlin Resources, Inc.voting stock held by non-affiliates as of the
last business dayregistrant, based upon the closing sale price of the registrant's most recently completed fiscal quartercommon stock
on February 29, 2008, as quoted on the OTC Bulletin Board, was nil.approximately
$1,867,000.
As of March 27, 2008, there were 9,880,000January 23, 2009, the Registrant had 10,183,334 issued and outstanding
shares of Common Stock outstanding.
Descriptionscommon stock.
Documents Incorporated by Reference: None
agreementsthe Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of management and information currently available to management. The use of
words such as "believes", "expects", "anticipates", "intends", "plans",
"estimates", "should", "likely" or other documents containedsimilar expressions, indicates a
forward-looking statement.
The identification in this report are intended as summariesof factors that may affect future
performance and the accuracy of forward-looking statements is meant to be
illustrative and by no means exhaustive. All forward-looking statements should
be evaluated with the understanding of their inherent uncertainty.
Factors that could cause actual results to differ materially from those
expressed or implied by forward-looking statements include, but are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the exhibit index at the endlimited
to:
o The success of this report for a complete list of those exhibits.
Please see the note under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation,” for a description of special factors potentially affecting forward-looking statements included in this report.
We are engaged in the acquisition,our exploration and development efforts;
o The price of oil and gas;
o The worldwide economic situation;
o Any change in interest rates or inflation;
o The willingness and ability of third parties to honor their
contractual commitments;
o The Company's ability to raise additional capital, as it may be
affected by current conditions in the stock market and competition in
the oil and gas industry for risk capital;
o The Company's capital costs, as they may be affected by delays or cost
overruns;
o The Company's costs of production;
o Environmental and mineral properties. We were organized underother regulations, as the lawssame presently exist or
may later be amended;
o The Company's ability to identify, finance and integrate any future
acquisitions; and
o The volatility of the State ofCompany's stock price.
ITEM 1. BUSINESS
The Company was incorporated in Colorado in May 2005 under the name Blue
Star Energy, Inc. WeIn December 2007 the Company changed ourits name to Brishlin
Resources, Inc. on December 11, 2007. In October 2007, we registered ourSince its formation the Company has been relatively inactive.
The Company has never generated any revenue and prior to the acquisition of
Synergy Resources Corporation the Company's only material asset was one shut-in
oil well.
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 its common stock withand 1,042,500 Series A warrants.
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United States Securities and Exchange Commission (“SEC”). On February 27,acquisition, the shareholders of the Company, at a
special meeting held on September 8, 2008, ourapproved a 10-for-1 reverse split of
the Company's common stock was first traded over-the-counterand approved a resolution to change the Company's
name to Synergy Resources Corporation. As a result of the reverse stock split,
the Company had 1,038,000 outstanding shares of common stock at the time of the
acquisition of Synergy.
The reverse stock split and name change became effective on the OTC
Bulletin Board underon September 22, 2008.
Each shareholder of the symbol “BRSH.”
We presently hold an interestCompany at the close of business on September 9,
2008 will receive one Series A warrant for each post-split share which they
owned in 160 gross leased acres which includesthe 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, has been filed and declared
effective by the Securities and Exchange Commission.
On December 19, 2008 the Company acquired the remaining shares of Synergy
for 1,077,500 shares of the Company's common stock. As part of this transaction,
the Company issued 1,017,500 Series A warrants in exchange for a like number of
Series A warrants held by the Synergy shareholders.
Each Series A Warrant entitles the holder to purchase one share of the
Company's common stock at a price of $6.00 per share. The Series A Warrants
expire on the earlier of December 31, 2012 or twenty days following written
notification from the Company that its common stock had a closing bid price at
or above $7.00 for any ten of twenty consecutive trading days.
Synergy Resources was incorporated in Colorado in December 2007. As of the
date of its acquisition by the Company, Synergy's only asset was approximately
$2.2 million in cash that it raised from private investors.
Unless otherwise indicated all references to the Company include the
operations of Synergy.
The Company plans to evaluate undeveloped oil and gas well locatedprospects and
participate in northeastern Coloradodrilling activities on those prospects which, in anthe opinion of
management, are favorable for the production of oil or gas. If, through its
review, a geographical area indicates geological and economic potential, the
Company will attempt to acquire leases or other interests in the area. The
Company may then attempt to sell portions of its 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.
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region known asoil or gas properties.
The Company's activities will primarily be dependent upon available
financing.
Title to properties which may be acquired by the Denver-Julesburg Basin. This wellCompany 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 operated by our operator, Energy Oil & Gas, Inc. (“Energy Oil”) but is presently shut-incustomary
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.
The Company's two officers, Ed Holloway and not producing.See“Item 2. Properties” for more information about our properties. BecauseWilliam Scaff, Jr., are
currently involved in oil and gas exploration and development requires significant capitaldevelopment. Mr. Holloway and
because our assets and resources are limited, we purchase minority interests in either producing wellsMr. Scaff, or oil and gas exploration and development projects. We have not received revenue from operationstheir affiliates, may present the Company with opportunities to
date.
Energy Oil, an independent third party, serves as the operator of our Stroh prospect under a Model Form Operating Agreement dated September 9, 2005 by and among Energy Oil, MCM Capital Management, Inc. (“MCM Capital”) and the Dolphin Group, Inc. (the “Operating Agreement”). We became a party to the Operating Agreement after acquiring a working interest in the prospect. Pursuant to the Operating Agreement, Energy Oil makes substantially all decisions affecting the exploration, development and operation of the prospect. We have an optionacquire leases or to participate in drilling oil or gas wells.
Any transaction between the Company and Ed Holloway and William E. Scaff,
Jr., or any additional exploration or developmentof their affiliates (collectively the "Holloway/Scaff parties") must
be approved by a majority of the prospect.
Company's 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 the Company, they are
required to provide the Company with the right to participate in the
transaction. The Operating Agreement requiresHolloway/Scaff parties are required to disclose any interest
they have in the parties to share operating expenses incurred under the lease and allows them to sharepotential transaction as well as any interest they have in any
revenue. Each party’s expense contributionproperty which could benefit from the Company's participation in the
transaction, such as by the Company drilling an exploratory well on a lease
which is limitedin proximity to its proportionate shareleases in which the Holloway/Scaff parties have an
interest. Without the consent of the costs of developmentCompany, the Holloway/Scaff parties may
participate up to 25% in a potential transaction on terms which are no different
than those offered to the Company.
The Company has a letter agreement with Petroleum Management, LLC, and
operation. The Operating Agreement furtherPetroleum Exploration and Management, LLC, firms controlled by Ed Holloway and
William E. Scaff, Jr., which provides that the parties are entitled to a proportionate share of working interest revenues resulting fromCompany with the development and operation of the lease. Costs and production allocations are modified proportionately in cases of specific operations where all parties do not participate.
Our success in generating revenue from the production of oil and gas will depend at least in part upon the skill and expertise of Energy Oil as the operator of the well. Energy Oil’s President is Duane Bacon, who was active in the development of the Codell formation, one of the largest producing oil and gas formations in the Denver-Julesburg Basin. Energy Oil currently owns and operates over twenty oil and gas properties in Colorado.
We anticipate further development of our oil and gas prospect to attempt to generate revenues. We are also evaluating opportunitiesoption to acquire
otherworking interests in oil and gas properties.See“Item 7. Management’s Discussionleases owned by these firms and Analysis of Financial Condition and Results of Operation” for more information.
Pursuant to the terms of the Operating Agreement, the operator of our property is required to maintain a general liability policy covering our prospect and operations. Under that policy we are required to be named as an additional insured. We do not separately carry any insurancelands
on the prospect. Our management believes the properties are adequately covered by the insurance provided by our operator.
Denver-Julesburg ("D-J") basin in northeast Colorado. The oil and gas
industryleases 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 option requires an initial payment of $100,000, which will be applied
against any leases acquired by the Company. As of January 23, 2009 this $100,000
had not yet been paid.
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highly competitive. Our competitors and potential competitors include majorclassified as containing proved undeveloped reserves.
(2) Includes 160 acres associated with a shut-in gas well.
The following table shows, as of January 23, 2009 the status of Company's
gross acreage.
State Held by Production Not Held by Production
----- ------------------ ----------------------
Colorado 320 1,994
Nebraska -- 2,560
Acres Held By Production remain in force so long as oil companies and independent producers of varying sizesor gas is produced
from the well on the particular lease. Leased acres which are engaged innot Held By
Production require annual rental payments to maintain the acquisitionlease until the first
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producing properties and the exploration and developmentfollowing: the expiration of prospects. Most of our competitors have greater financial, personnel and other resources than we do and therefore has greater leverage with respectthe 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 acquiring prospects and producingbe Held By Production.
The Company does not own any Overriding Royalty Interests.
The Company plans to file an application to become an oil and gas. We believe a high degree of competitiongas operator
in this industry will continue forColorado.
GOVERNMENT REGULATION
Various state and federal agencies regulate the foreseeable future.
Intense competition in the industry is not limited to the acquisitionproduction and sale of oil
and natural gas. All states in which the Company plans 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 properties but also extendssales 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 technical expertiseuse of electronic bulletin boards and electronic data exchange
by the pipelines to find, advance,make available transportation information on a timely basis
and operate such properties,to enable transactions to occur on a purely electronic basis; (4) further
review of the laborrole of the secondary market for released pipeline capacity and
its relationship to operateopen access service in the properties,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. The
Company does not know what effect the FERC's other activities will have on the
access to markets, the fostering of competition and the capital for the purposecost of funding such properties. Our inability to compete with other companies for these resources may have a material adverse effect on our resultsdoing business.
The Company's sales of operation and business.
Our operations are subject to extensive and continually changing regulation because legislation affecting the oil and natural gas industryliquids 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 under constant review for amendment and expansion. Many departments and agencies, federal,through interstate common carrier pipelines.
Federal, state, and local are authorized by statute to issue andagencies have issuedpromulgated extensive rules and
regulations bindingapplicable to The Company's 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
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and its individual participants. The failure to comply with such rules and regulations can result in large penalties. The regulatory burden on this industry increases ourthe
Company's cost of doing business and therefore, affects our ability to become profitable. However, we do not believe that we are affected in a significantly different way byits profitability. Because these
regulations than our competitors are affected.
The sale of liquid hydrocarbons was subject to federal regulation under the Energy Policy and Conservation Act of 1975 which amended various acts, including the Emergency Petroleum Allocation Act of 1973. These regulations and controls included mandatory restrictions upon the prices at which most domestic crude oil and various petroleum products could be sold. All price controls and restrictions on the sale of crude oil at the wellhead have been withdrawn. It is possible, however, that such controls may be imposed again in the future, however we are unable to predict when, if ever, such imposition might occur.
The sale of certain categories of natural gas in interstate commerce is subject to regulation under the Natural Gas Act and the Natural Gas Policy Act of 1978 (“NGPA”). Under the NGPA, a comprehensive set of statutory ceiling prices applies to all first sales of natural gas unless the gas is specifically exempt from regulation (i.e., unless the gas is “deregulated”). Administration and enforcement of the NGPA ceiling prices are delegated to the Federal Energy Regulatory Commission (“FERC”). In June 1986, the FERC issued Order No. 451, which is generally designed to provide a higher NGPA ceiling price for certain vintages of old gas. It is possible, though unlikely, that we may in the future acquire significant amounts of natural gas subject to NGPA price regulations and/or FERC Order No. 451.
The price that we might receive from the sale of these products is affected by our ability to transport and the cost of transporting these products to market. The FERC regulates the construction of natural gas pipeline facilities and the rates for transportation of these products in interstate commerce. The FERC’s more recent proposals may affect the availability of interruptible transportation service on interstate pipelines. These initiatives may also affect the intrastate transportation of gas in some cases. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry. These initiatives generally reflect more light-handed regulation of the natural gas industry. The FERC has also implemented regulations establishing an indexing system for transportation rates for oil. These regulations could increase the cost of transporting oil to the purchaser.
Any potential drilling and production operations are subject to regulation under a wide range of state and federal statutes, rules orders and regulations. Among other matters, these statutes and regulations govern:
Under these various regulations, we may be required to obtain permits for any proposed drilling operations, post drilling bonds and publish reports concerning operations. Any one of these activities may result in considerable time and expense dedicated by our company to these efforts.
Our operations are affected by the various state, local and federal environmental laws and regulations, including the:
Violations are subject to reporting requirements, civil penalties and criminal sanctions. As with the industry generally, compliance with existing regulations increases our overall cost of business and these increased costs may not be easily determinable.
Environmental regulations historically have been subject to frequent change by regulatory authorities. Therefore, we areCompany is
unable to predict the ongoingfuture cost of compliance with these laws and regulations or the future impact of such regulations on its operations. However, we do not believe that changes to these regulations will have a significant negative affect on our operations.
A discharge of hydrocarbons or hazardous substances into the environment could subject us to substantial expense, including both the cost to complycomplying with applicable regulations pertaining to the clean up of releases of hazardous substances into the environment and claims by neighboring landowners and other third parties for personal injury and property damage. We do not maintain insurance for protection against certain types of environmental liabilities.
those laws.
COMPETITION AND MARKETING
The Clean Air Act requires or will require most industrial operations in the United States to incur capital expenditures in order to meet air emission control standards developed by the EPA and state environmental agencies. Although no assurances can be given, we believe the Clean Air Act requirements will not have a material adverse effect on our financial condition or results of operations.
The Oil Pollution Act of 1990 requires owners and operators of facilities that could be the source of an oil spill into “waters of the United States” (a term defined to include rivers, creeks, wetlands and coastal waters) to adopt and implement plans and procedures to prevent any spill of oil into waters of the United States. The Oil Pollution Act also requires affected facility owners and operators to demonstrate that they have sufficient financial resources to pay for the costs of cleaning up an oil spill and compensating any parties damaged by an oil spill. Substantial civil and criminal fines and penalties can be imposed for any violations.
The Federal Water Pollution Control Act imposes restrictions and strict controls regarding the discharge of produced waters and other oil and gas wastes into waters of the United States. Permits must be obtained to discharge pollutants into state and federal waters. This federal law and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and may impose substantial potential liability for the costs of removal, remediation and damages.
RCRA is the principal federal statute governing the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements, and liability for failure to meet such requirements, on a person who is either a “generator” or “transporter” of hazardous waste, or an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility. At present, RCRA includes a statutory exemption that allows oil and natural gas exploration and production wastes to be classified as non-hazardous waste. As a result, we will not be subject to many of RCRA’s requirements because if and when we commence production or exploratory activities, we will probably generate minimal quantities of hazardous wastes, if any.
CERCLA imposes liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a “hazardous substance” into the environment. These persons include the “owner” or “operator” of the site where hazardous substances have been released and companies that disposed or arranged for the disposal of the hazardous substances found at the site. CERCLA also authorizes the U.S. Environmental Protection Agency and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of our operations, we could generate waste that may fall within CERCLA’s definition of a “hazardous substance.” As a result, we may be liable under CERCLA or under analogous state laws for all or part of the costs required to clean up sites at which such wastes have been disposed.
While the foregoing regulations appear extensive, we believe that because we are presently not involved in drilling and production activities with respect to our wells, compliance with the foregoing regulations will not have any material adverse affect upon us.
We currently have two full-time employees, both of whom serve as our executive officers. These individuals devote the majority of their business time to our affairs. We also have one part-time administrative employee. We engage one consultant to assist with our administrative and financial affairs.
This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operation, contains forward-looking statements that may be materially affected by several risk factors, including those summarized below:
Since we are a new business with no operating history, investors have no basis to evaluate our ability to operate profitably. We were organized in 2005 and have had no revenue from operations since our inception. Our activities to date have been limited to organizational efforts, raising financing and acquiring interests in a limited number of oil and gas properties. We face all of the risks commonly encountered by other new businesses, including the lack of an established operating history, need for additional capital and personnel, and intense competition. There is no assurance that our business plan will be successful.
The report of our independent accountants on our financial statements for the year ended December 31, 2007 includes a “going concern” qualification, meaning that there is substantial doubt about our ability to continue in operation. The report cited the following factors in support of our accountant’s conclusion: (i) the substantial losses we incurred for the years ended December 31, 2007faced with strong competition from many other
companies and 2006 and the period from inception (May 11, 2005) to December 31, 2007; (ii) our lack of operating revenue; and (iii) our dependence on sale of equity securities and receipt of capital from outside sources to continue in operation. From inception to December 31, 2007, we have accumulated a loss of $815,720. If we are unable to obtain additional financing or eventually produce revenue, we may be forced to sell our assets, curtail or cease operations. In any event, investors in our common stock could lose all or part of their investment.
We are dependent upon receipt of additional working capital to fund our business plan. Our working capital at December 31, 2007 was a deficit of $39,810 which is insufficient to fund our business plan. We will require additional capital to continue our business operations and for development of any one of our existing properties or for acquisition of additional oil and gas prospects. If we believe drilling at our property is warranted, we will require significant additional capital to fund the drilling program. We will need to obtain additional financing from outside sources within the next 12 months in order to continue to fund our business needs. If we are unsuccessful in addressing these needs, we may cease our business activities. As a result, investors may lose all or a part of their investment.
The feasibility of profitably producing oil and gas at our property has not been established, meaning that we have not completed work necessary to determine if it is commercially feasible to develop our property. We have no proved oil and gas reserves on our property. “Proved oil and gas reserves,” as defined by regulation of the SEC, are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Development of oil and gas reserves involves the risk that no commercial production will be obtained or that production will be insufficient to recover drilling and completion or cleaning and reworking costs. Drilling also may be curtailed, delayed or canceled as a result of many factors, including, among other things, unacceptably low prices, title problems, weather conditions, labor shortages and equipment delivery problems. Additional work such as installation of an electrical generator or construction of a delivery system at the Stroh property will be necessary before production may be commercially feasible at the property.
At the present time, we are totally dependent upon production of oil or gas from one shut-in well, raising the risk if this property should prove unproductive. Since we have no proved reserves, there is no assurance that oil or gas can be economically produced under existing and future prices and costs. If we are unable to economically produce oil or gas from this lease, it would significantly impact our business plan since we do not have a large portfolio of properties. In that event, we might be forced to identify and invest substantial sums in one or more additional interests, and there is no assurance that such properties would be available on terms favorable to us.
If we cannot establish or acquire reserves, we may never generate revenue. The future success of our operations will be largely dependent on our ability to establish and/or expand our oil and gas reserves through production at our current properties or to acquire producing properties. Successful acquisition of producing properties generally requires, among other things, accurate assessments of recoverable reserves, future gas and oil prices, operating costs and potential environmental risks and other liabilities. Such assessments are necessarily inexact and their accuracy is inherently uncertain. Without successful acquisitions and exploitation, exploration and development operations, we may not be able to establish reserves and may not generate revenue from oil and gas production.
If we decide to attempt electricity production at our Stroh prospect, we must bear our proportionate share of the substantial cost to install an electrical generator and construct the necessary infrastructure to deliver this product to market. In order for us to sell any electricity generated from natural gas at our Stroh prospect, a natural gas-fired electrical generator must be acquired and installed and any necessary infrastructure will have to be constructed and maintained. Installation and construction has not yet begun and there is no assurance that the project will be constructed. If we or our working interest partners are unable to obtain the capital necessary to acquire and install the generator or construct the additional infrastructure, commencement of the project will be postponed or cancelled and the marketing and sale of the electricity or natural gas may be postponed indefinitely. Also, construction and maintenance of the project will likely be supervised by a third party over which we have no control.
Decisions by the operator of our property may affect our capital requirements. Our property is currently subject to an operating agreement with Energy Oil, the owner of a 47.5% interest in the prospect. The operator has control over the management of operations and makes decisions regarding development of the prospect. These decisions may affect our capital requirements by requiring us to pay our proportionate share of costs. Under the terms of the operating agreement, we also have the option to participate in subsequent operations. If we elect to participate in drilling or other operations, we are obligated to contribute our pro rata share of the costs (as may be adjusted for less than 100% participation by all the parties to the operating agreement) and the operator will continue to exercise control and make decisions concerning the project.
Oil and gas operations are affected by fluctuations in oil and natural gas prices and low prices could have a material adverse effect on the future of our operations. Our future success will depend largely on the prices received for natural gas and oil production. Prices received also will affect the amount of future cash flow available for capital expenditures and may affect the ability to raise additional capital. Lower prices may also affect the amount of natural gas and oil that can be economically produced from reserves either proved, discovered or acquired.
Prices for natural gas and oil fluctuate widely. For example, natural gas and oil prices declined significantly in 1998 and 2001, and, for an extended period of time, remained below prices obtained in previous years. Factors that can cause price fluctuations include:
We are in the oil and natural gas business which involves many operating risks that can cause substantial losses. The oil and natural gas business involves a variety of operating risks, including:
If any of these events occur, we could incur substantial losses as a result of:
If we were to experience any of these problems, it could affect well bores, gathering systems and processing facilities, any one of which could adversely affect our ability to conduct operations. We may be affected by any of these events more than larger companies, since we have limited working capital. We currently maintain $1,000,000 of liability insurance. However, for some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could adversely affect operations. Moreover, we cannot assure our shareholders that we will be able to maintain adequate insurance in the future at rates considered reasonable.
Governmental laws and regulations may add to our costs or limit our activities. Our operations are affected from time to time in varying degrees by governmental laws and regulations. The oil and gas market is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws relating to the energy business generally. We may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly to our operating costs or may significantly limit our activities.
Competitionindividuals engaged in the oil and gas industrybusiness, many are very
large, well established energy companies with substantial capabilities and
established earnings records. The Company may be at a competitive disadvantage
in acquiring oil and gas prospects since it must compete with these individuals
and companies, many of which have greater financial resources and larger
technical staffs. It is intense,nearly impossible to estimate the number of competitors;
however, it is known that there are a large number of companies and we have limited financial and personnel resources with which to compete. Competitionindividuals
in the oil and gas industrybusiness.
Exploration for desirable properties, investment capital and personnel is intense. We are an insignificant participant in theproduction of oil and gas industry dueare affected by the
availability of pipe, casing and other tubular goods and certain other oil field
equipment including drilling rigs and tools. The Company will depend upon
independent drilling contractors to our limited financialfurnish rigs, equipment and personnel resources. We may be unabletools to attract the necessary investment capital to fully develop or further explore our interests and unable to acquire other desirable properties.
Title to ourdrill
its wells. Higher prices for oil and gas leases could be defectivemay result in competition among
operators for drilling equipment, tubular goods and drilling crews which case we may
not ownaffect the interests that we believe we do. It is customary in theCompany's ability expeditiously to drill, complete, recomplete and
work-over wells.
The market for oil and gas industry thatis dependent upon acquiring an interest in a property, that only a preliminary title investigation be done at that time. If the title to the prospects should prove to be defective, we could lose the costs of acquisition, or incur substantial costs for curative title work.
Our property is subject to royalties, the payment of which will decrease our revenues. Our current prospect is subject to overriding royalty payments of up to a maximum of 18% of gross revenues if revenues are ever generated. These payments will be made to certain individuals, including our executive officers and the principal of our operating partner, Energy Oil. Since our share of any revenues received from production will be calculated net of expenses and costs, the payment of these royalties will reduce our potential revenue.
We depend upon a limited number of personnel and the loss of any of these individuals could adversely affect our business. If any of our current employees were to die, become disabled or leave the company, we would be forced to identify and retain individuals to replace them. Messrs. Raymond McElhaney and Bill Conrad are our only officers at this time. Frank L. Jennings is our consultant for financial and accounting matters who currently serves as our principal financial officer. There is no assurance that we can find suitable individuals to replace them or to add to our employee base if that becomes necessary. We are entirely dependent on these individuals as our key personnel at this time. We have no life insurance on any individual at this time, and we may be unable to hire a suitable replacement for them on favorable terms, should that become necessary.
While we believe we have adequate internal controls over financial reporting, we are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have a material adverse effect on the price of our common stock. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on internal controls for the fiscal year ending December 2007. Such a report must contain, among other matters, an assessment of the effectiveness of our internal controls over financial reporting, including a statement as to whether or not our internal controls are effective. This assessment must include disclosure of any material weaknesses in our internal controls over financial reporting identified by our management. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. If we are unable to assert that our internal controls over financial reporting are effective, or if we disclose significant deficiencies or material weaknesses in our internal controls, investors could lose confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on our stock price.
Because we do not have an audit or compensation committee, shareholders will have to rely on our Board of Directors, all members of which are also our executive officers and as such are not “independent” as defined by a national securities exchange, to perform these functions. We do not have an audit or compensation committee. These functions are performed by our Board of Directors as a whole and none of the members of our Board meets the definition of “independent” under the rules of any national securities exchange. Since both of our current Board members are also our management, there is a potential conflict where these individuals participate in discussions concerning management compensation and audit issues that may affect management decisions.
Since none of the members of our Board of Directors has met the definition of “independent” since our inception, all corporate decisions have thus far been by “non-independent” or “interested” directors, including decisions regarding executive compensation and related party transactions.
The laws of the State of Colorado and our Articles of Incorporation may protect our directors from certain types of lawsuits. The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
The sale of a substantial number of shares of our common stock may cause the price of our common stock to decline. A significant number of shares of our common stock are currently eligible for sale under Rule 144. Under Rule 144, and under certain circumstances, an owner is permitted to sell every three months the greater of: (i) 1% of the amount of our outstanding common stock, or (ii) the average weekly trading volume of our common stock for the four weeks preceding the sale. It is likely that market sales of large amounts of common stock (or the potential for those sales even if they do not actually occur) could cause the market price of our common stock to decline, if a trading market is ever established, which may make it difficult to sell our common stock in the future at a time and price which we deem reasonable or appropriate and may also cause you to lose all or a part of your investment.
A small number of existing shareholders own a significant amount of our common stock, which could limit your ability to influence the outcome of any shareholder vote. Our executive officers and directors beneficially own approximately 50% of our common stock as of the date of this report. Under our Articles of Incorporation and Colorado law, the vote of a majority of the shares outstanding is generally required to approve most shareholder action. As a result, these individuals will be able to control the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers or other significant corporate transactions. We have no existing agreements or plans for mergers or other corporate transactions that would require a shareholder vote at this time. However, shareholders should be aware that they may have limited ability to influence the outcome of any vote in the future.
Since there is presently a limited trading market for our common stock, purchasers of our common stock may have difficulty selling their shares, should they desire to do so. Due to a number of factors includingbeyond
the lackCompany's control, which at times cannot be accurately predicted. These
factors include the proximity of listingwells to, and the capacity of, our common stock on a national securities exchange,natural gas
pipelines, the trading volumeextent of competitive domestic production and imports of oil and
gas, the availability of other sources of energy, fluctuations in our common stockseasonal
supply and demand, and governmental regulation. In addition, there is limited. Our trading volume onalways the
OTC Bulletin Board since we commenced trading has averaged approximately 13,000 shares per day. As a result, the sale of a significant amount of common stock by the selling shareholders may depress the price of our common stock and you may lose all or a portion of your investment.
Since our common stock is not presently listed on a national securities exchange, trading in our shares will likely be subject to rules governing “penny stocks,” which will impair trading activity in our shares. Our common stockpossibility that new legislation may be subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. Those disclosure rules applicable to penny stocks require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized disclosure document required by the SEC. These rules also require a cooling off period before the transaction can be finalized. These requirements may have the effect of reducing the level of trading activity in any secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for stockholders to dispose of their shares.
Our stockenacted which would impose price
may be volatile and as a result you could lose allcontrols or part of your investment. In addition to volatility associated with over-the-counter securities in general, the value of your investment could decline due to the impact of any of the following factorsadditional excise taxes upon the market price of our common stock:
In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance andnatural 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 our common stock. As a result, investors may beOrganization 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. The Company
is unable to resellpredict 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 shares at a fair price.
Issuancesaffiliated marketing
companies, independent marketers, and providers of our stockalternate energy supplies,
such as residual fuel oil. Changes in government regulations relating to the
7
future could dilute existing shareholders and adversely affecthistorical marketing patterns of the market price of our common stock. Weindustry.
Generally, these changes have the authority to issue up to 100,000,000 shares of common stock, 10,000,000 shares of preferred stock, and to issue options and warrants to purchase shares of our common stock without stockholder approval. Because our common stock is not currently listed on a national securities exchange, we are not required to solicit shareholder approval prior to issuing large blocks of our stock. These future issuances could be at values substantially below the price paid for our common stock by our current shareholders. In addition, we could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval. Because there is presently no trading market for our common stock, the issuance of our stock may have a disproportionately large impact on its price compared to larger companies.
We have never paid dividends on our common stock and we do not anticipate paying anyresulted in the foreseeable future. We have not paid dividends on our common stock to date, and we may not be in a position to pay dividendsabandonment by many pipelines of
long-term contracts for the foreseeable future. Our abilitypurchase of natural gas, the development by gas
producers of their own marketing programs to pay dividends will dependtake advantage of new regulations
requiring pipelines to transport gas for regulated fees, and an increasing
tendency to rely on our ability to successfully developshort-term contracts priced at spot market prices.
General
- --------
As of January 23, 2009 the Company's only employees were its two officers
and one or more properties and generate revenue from operations. Further, our initial earnings, if any, will likely be retained to finance our operations. Any future dividends will depend upon our earnings, our then-existing financial requirements and other factors, and will be at the discretion of our Board of Directors.
None.
COMMENTS
-------------------------
Not applicable
ITEM 2. PROPERTIES.
We currently hold a leasehold interest in 160 undeveloped gross acres (34.8 net acres) containing onePROPERTIES
----------
See Item 1 of this report for information concerning the Company's oil and
gas well (0.2175 net wells) known asproperties.
The Company's 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. The Company also maintains an office at 1200 17th
Street, Suite 570, Denver, CO 80202. The Company's telephone number at its
Denver office is (303) 623-3966 and its fax number is (303) 534-0151.
The Platteville office and equipment yard is provided to the Stroh prospect. The prospect is located inCompany
pursuant to an Administrative Services Agreement with Petroleum Management, LLC,
a firm controlled by the Denver-Julesburg Basin area in Morgan County in northeastern Colorado. Our prospect is held byCompany's two officers. For more information, see Item
13 of this report.
Energy Capital, a mineral lease. Underconsultant to the lease terms, we and the other working interest owners as a group are entitled to develop the prospect for oil and gas production and are requiredCompany, has agreed to pay the lessor a royalty of 13% of gross revenue from any production. Additionally, the working interest owners are required to make a compensatory payment of $200 per month to the lessor for each month the well remains shut-in, which payments hold the lease so long as we are not producing. The well is presently shut-inrent
and we are not involved in any drilling activity.
The table below sets forth the other working interest owners and ownership percentages for the Stroh prospect as set forth in the Operating Agreement:
In June 2005 we acquired a 2% working interest in the Stroh prospect from an investor in exchange for our common stock. In January 2006, we purchased an additional 7.875% working interest in Stroh from MCM Capital, a corporation controlled by our executive officers. In September 2006, we acquired an 11.875% working interest in Stroh from one of our original operating partners, which brought our total interest in the Stroh prospect to 21.75%.
The Stroh #1 well is located in what is known as the Lee Field in the Denver-Julesburg Basin. The well is located southeast of the city of Fort Morgan, Colorado, which is located along Interstate 76. Access to the Stroh #1 well is via County Road 21. Drilling for the well commenced in 1977 and it is approximately 5,500 feet (1,676 meters) deep.
The Stroh #1 well has no historical production and no proved oil and gas reserves. The Stroh #1 well is presently shut-in and will likely remain so until the working interest owners acquire the appropriate equipment and construct required infrastructure to produce and sell the gas. Our options for further developing the property include installing a generator to produce electricity for sale to the local electric grid or constructing a gathering system to deliver gas to a pipeline.
We acquired an 11.875% working interest in each of the Lutin prospect and the Marostica prospect in September 2006 in conjunction with our purchase of an additional interest in the Stroh prospect. Both prospects are developed and include one well located on each respective prospect known as the Lutin #1 well and the Marostica #1 well. Historically, the Lutin #1 well and Marostica #1 well were producing, however, both of these wells were shut-in due to excess formation water prior to the purchase of our interest. We have never received revenue from these prospects.
Effective August 31, 2007, along with our operating partners, we sold our interest in the Lutin and Marostica prospects and the associated equipment to an independent third party. We received approximately $23,900 from the sale in proportion with our interest. We sold the prospects after extensive testing revealed excessive water surrounding the formation. The decision was made in conjunction with our other working interest partners to sell the project due to the economic uncertainty going forward.
Our Stroh prospect is subject to royalties in favor of certain individuals, including our executive officers and the principal of our operator. The Stroh landowner retained a 13% royalty in connection with granting the oil and gas lease. Additional royalty interests were reserved to our executive officers and others in connection with their participation in the project prior to the formation of our company. The royalty interests represent an obligation to make payments of percentages of gross revenue generated from the prospect prior to payment of any costs or expenses associated with production. The royalty payments for each of the leases in which we currently hold an interest are set forth below:
These royalties mean that although our company is responsible for paying its percentage of costs andall expenses associated with the property, the amountDenver office. For more information, see
Item 13 of future revenues received by us in proportion to our interest will be reduced by royalties paid to the individuals in the amounts listed above.
Office Facilities
Effective October 1, 2007, we leased approximately 1,500 square feet of office space under a one year agreement with an independent third party requiring payments of $1,328 per month. We share this space with MCM Capital. We believe this space is adequate for our needs for the foreseeable future.
report.
ITEM 3. LEGAL PROCEEDINGS.
On November 16, 2007, BlueStar Energy Services, Inc., an Illinois corporation ("BSE Services"), filed a complaint against our company in U.S. District Court for the Northern District of Illinois alleging damages from trademark infringement related to our use of the name "Blue Star Energy." While we disputed the allegations in the complaint, the Board of Directors concluded it was in the best interest of the company to pursue settlement with BSE Services. On December 7, 2007, we entered into a settlement agreement with BSE whereby we agreed to cease all use of the name "Blue Star Energy" in exchange for dismissal of the lawsuit with prejudice. Our shareholders approved the amendment to our Articles of Incorporation to facilitate the name change at a special meeting held for this purpose on December 11, 2007. The lawsuit was subsequently dismissed with prejudice effective December 18, 2007.
We are not currently subject to any other legal proceedings, and to the best of our knowledge, no such proceeding is threatened, the results of which would have a material impact on our properties, results of operation, or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.
PROCEEDINGS
-----------------
None.
8
HOLDERS.
As discussed in Item 3 above, on December 11, 2007, the Board of Directors held aHOLDERS
A special meeting of the Company's shareholders forwas held on September 8,
2008.
At the purposespecial meeting the following proposals were ratified by the
shareholders:
1. A 10-for-1 reverse split of approving an amendmentthe Company's common stock.
2. Changing the name of the Company to our ArticlesSynergy Resources Corporation.
The following is a tabulation of Incorporation to facilitate a name change of our company. There were 9,600,000 votes cast in favor of approving the amendment and zero votes cast against or withheld from the amendment.
PART II
with respect to these
proposals:
Votes
------------------------------------- Broker
Proposal For Against Abstain Non-Votes
-------- --- ------- ------- ---------
1. 9,750,530 5,000 -- --
2. 9,755,530 -- -- --
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Effective----------------------------------------------------------------------
On February 27, 2008, ourthe Company's common stock began trading over-the-counter and is quoted on the OTC
Bulletin Board under the symbol "BRSH." Prior to that date, there was no
established trading market for ourthe Company's common stock. The table below sets forthBetween February 27,
2008 and September 22, 2008 less than 50,000 shares traded.
On September 22, 2008 the high and low bid prices for our common10-for-1 reverse stock as reflectedsplit, approved by the
Company's shareholders on September 8, 2008, became effective on the OTC
Bulletin Board and the Company's trading symbol was changed to "SYRG."
Shown below are the range of high and low closing prices for the period commencing February 27, 2008 to date. Quotations representCompany's
common stock for the periods indicated as reported by the NASD. The market
quotations reflect inter-dealer prices, between dealers, do not includewithout retail markups, markdownsmark-up, mark-down or
commissions and domay not necessarily represent prices at which actual transactions were effected. Trading in ourtransactions. The market
quotations do not reflect the 10-for-1 reverse stock split referred to above.
Month Ended High Low
February 2008 $0.70 $0.35
March 2008 $0.50 $0.20
April 2008 $0.25 $0.20
May 2008 $0.25 $0.15
June 2008 $0.27 $0.25
July 2008 $0.34 $0.28
August 2008 $0.37 $0.30
9
extremely limited.
| Year Ending | High | Low | ||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2008 | ||||||||
| First Quarter (commencing February 27, 2008) | $0.70 | $0.20 | ||||||
On March 27,not
restricted from paying any dividends but is not obligated to declare a dividend.
No dividends have ever been declared and it is not anticipated that dividends
will ever be paid.
The Company's Articles of Incorporation authorize its 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 the Company's
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 the Company's 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 the Company's
management.
During the eight months ended August 31, 2008 the last salesCompany did not purchase
any of its securities. During this same period no person affiliated with the
Company purchased any of the Company's securities on behalf of the Company.
Other Shares Which May Be Issued
- --------------------------------
The following table lists additional shares of the Company's common stock
which may be issued.
Number of Note
Shares Reference
--------- ---------
Shares sold in a private offering including shares
issuable upon exercise of warrants. (92,667 Units) 370,668 A
Series A Warrants to be issued to those persons
owning shares of the Company's common stock prior
to the acquisition of Synergy. 1,038,000 B
Shares issuable upon exercise of Series A Warrants
sold in prior offerings. 2,060,000 C
Shares issuable upon exercise of options held by the
Company's officers and employees. 4,100,000 D
10
our$3.00 and consisted of
two shares of the Company's common stock, one Series A Warrant and one Series B
Warrant. Each Series A Warrant entitles the holder to purchase one share of the
Company's common stock at a price of $6.00 per share. Each Series B Warrant
entitles the holder to purchase one share of the Company's common stock at a
price of $10.00 per share.
The Company has agreed to pay the sales agents for the private offering a
commission of up to 10% of the amount the sales agent raise in this offering.
The Company has also agreed to issue to selected sales agents one warrant (the
"Sales Agent Warrants") for each five Units sold by selected sales agents. Each
Sales Agent Warrant will entitle the holder to purchase one share of the
Company's common stock at a price of $3.60 per share. The Sales Agent Warrants
will expire on the OTC Bulletin Board was $0.25, and weearlier of December 31, 2012 or twenty days following written
notification from the Company that its common stock had approximately 50 holdersa closing bid price at
or above $7.00 per share for any ten of recordtwenty consecutive trading days.
In order to raise additional capital the Company may sell additional
shares of ourits common stock.
Due tostock or other securities. There is no assurance that the
priceCompany will be successful in raising additional capital.
B. Each shareholder of our common stock,the Company on the close of business on September 9, 2008
will receive 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 fact that we are not listed on a national securities exchange, our stock is characterized as “penny stocks” under applicable securities regulations. Our stock will therefore be subject to rules adoptedshares issuable
upon the exercise of the warrants, has been filed and declared effective by the
SEC regulating broker-dealer practicesSecurities and Exchange Commission. The Series A warrants to be issued to these
shareholders are identical to those referred to in Note A above.
C. Prior to August 31, 2008, Synergy sold 2,060,000 Units to a group of private
investors. Each Unit consisted of one share of Synergy's common stock and one
Series A warrant. In connection with transactions in penny stocks.the acquisition of Synergy, these Series A
warrants were exchanged for 2,060,000 Series A warrants of the Company. The
broker or dealer proposing to effect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security priorSeries A warrants are identical to the transaction and with the written confirmationSeries A warrants referred to in Note A
above.
D. See Item 11 of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customerthis report for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.
We have appointed Corporate Stock Transfer, Inc. (“CST”) as the transfer agent for our common stock. The principal office of CST is located at 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209 and its telephone number is (303) 282-4800.
We have never declared or paid dividends on our common stock. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, includinginformation concerning the terms of any credit arrangements, our financial condition, operating results, current and anticipated cash needs and plans for expansion. At the present time, we are not party to any agreement that would limit our ability to pay dividends.
DATA
-----------------------
Not required.
OPERATIONS
The Company was incorporated in Colorado on May 11, 2005. Since its
formation the Company has been relatively inactive. The Company has never
generated any revenue and prior to the acquisition of Synergy Resources
Corporation the Company's only material asset was one shut-in oil well.
11
discussion analyzes ourwritten
notification from the Company that its common stock had a closing bid price at
or above $7.00 for any ten of twenty consecutive trading days.
Synergy was incorporated in Colorado in December 2007. As of the date of
the acquisition by the Company, Synergy's only material asset was approximately
$2.2 million in cash that it raised from private investors.
Contingent upon the amount of capital available, the Company plans to
explore for oil and gas. The Company expects that its first wells will be
drilled in the Denver - Julesburg ("D-J") Basin in northeast Colorado.
The Company's plan of operation is disclosed in Item 1 of this report. The
Company's future plans will be dependent upon the amount the Company is able to
raise.
As of January 23, 2009, the Company was not generating any revenue.
RESULTS OF OPERATIONS
Although from a legal standpoint the Company, on September 10, 2008,
acquired a controlling interest in Synergy, for financial reporting purposes,
the acquisition of 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 filed in subsequent
10-K or 10-Q reports will reflect the historical operations of Synergy for the
period of Synergy's inception (December 28, 2007) through September 10, 2008 and
the combined operations of the Company and Synergy after that date.
Subsequent to the Synergy acquisition, the Company changed its fiscal year
end from December 31st to August 31st. Since the acquisition of Synergy took
place after August 31, 2008, the financial statements included with this report
reflect the operating results of the Company prior to the September 10, 2008
acquisition of Synergy.
For information concerning Synergy's financial condition atas of August 31,
2008, and Synergy's results of operations from the date of its inception
(December 28, 2007) to August 31, 2008, refer to the Company's report on Form
12
and compares it to our financial condition at December 31, 2006.would not be
meaningful.
The discussion also summarizesfactors that will most significantly affect the Company's results of
our 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 the Company has an interest,
and (iii) and lease operating expenses. The Company's revenues will also be
significantly impacted by its ability to maintain or increase oil or gas
production through exploration and development activities.
Other than the foregoing, the Company does not know of any trends, events
or uncertainties that will have had or are reasonably expected to have a
material impact on its sales, revenues or expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources and (uses) of funds for the eight months ended
August 31, 2008 and the year ended December 31, 2007 and compares those results to the year ended Decemberare shown below:
Eight Months Ended Year Ended
August 31, 2006. This discussion and analysis should be read in conjunction with our audited financial statements as of2008 December 31, 2007
included------------------- -----------------
Cash used in Item 8 below.
We are considered an exploration stage company for accounting purposes, since we have not received any revenueoperating activities $(162,871) $(255,419)
Proceeds from operations. We are unable to predict with any degreesale of accuracy when that classification will change.
We currently hold an interest in one oil and
gas prospect known as the “Stroh Prospect” which is located within an area known as the Denver-Julesburg Basinproperty -- 23,922
Proceeds from sale of common stock 150,000 235,000
Net change in northeastern Colorado.cash balance (12,871) 3,503
The well on this prospect is presently shut-in.
We anticipate we will participate in the further development of the Stroh prospect, either by installing a natural gas powered electrical generatorCompany's material future capital requirements are (i) approximately
$2,700,000 for exploration and selling electricity into the local grid or constructing a gathering system and delivering natural gas to market, and to evaluate opportunities to acquire other interests in oil and gas properties. Based on the absence of sufficient working capital to meet these objectives, we expect to solicit interest from third party investors to provide financing for these purposes. Although no specific commitments have been made, we expect to obtain such financing in the form of private equity financing. If we are unable to obtain such financing, we may be forced to forego participation in either development project as well as any opportunity to acquire an interest in other oil and gas properties.
Stroh Prospect. Between June 2005 and September 2006, we acquired an aggregate 21.75% interest in the Stroh prospect. During 2001, the lease owner conducted mechanical integrity tests on the existing well located on the prospect. Additional gas quality tests were conducted by Energy Oil, the prospect operator, to confirm the quality of the producible quantities of gas. To date, we have been advised by Energy Oil that the tests were favorable, that the presence of gas was confirmed and that the well is intact. However, these tests are not definitive, and we will have to wait for further production efforts to evaluate the well.
We hope to make the Stroh prospect our pilot project for our concept of electricity generation utilizing shut-in natural gas wells that are located in remote areas where pipeline delivery is unavailable. We believe there is a strong demand for this type of program and have worked with a local electrical cooperative to determine whether this type of operation in this area would be profitable to the company. Along with our operating partners, we plan to acquire and install the necessary equipment to evaluate the concept, including a modern natural gas-fired generator, a transformer and the lines to connect the transformer to the power system via a power pole locateddevelopment; (ii) approximately two miles from the prospect.
We believe we can economically generate and sell approximately 250 kilowatts of electricity per hour, which equates to approximately 180 megawatts of electricity$125,000 per
month by acquiring a new or used natural gas-fired generator and installing it at the location of the Stroh #1 well. Gas released from the well would be used to rotate the shaft and spins the armature which in turn will produce electricity. The amount of electricity produced would be metered and delivered to the local power grid. We expect to execute a “take and pay” contract with the local cooperative, meaning it would be obligated to pay for all of the electricity we produce. Revenue we would receive would be calculated based upon a formula which includes generation output in half hour increments and total energy produced each month. The rates range from $45.00 to $70.00 per megawatt hour.
If we move forward with the electricity generation project, we anticipate that within the next twelve months we will install a modern natural gas-fired electrical generator at the prospect and construct the necessary infrastructure to deliver electricity to the local electrical cooperative. We estimate our portion of the cost of acquiring the generator and constructing the infrastructure at approximately $34,800, based on a total estimate of $160,000 and our contemplated participation of 21.75%. After the initial investment in the equipment, we anticipate that continuing production costs will be minimal.
If development efforts at the prospect and installation of the electrical generator and additional infrastructure proceed as anticipated, we expect to begin producing electricity during 2008. We believe, based upon the results of the testing of the well, the close proximity to existing producing oil and gas fields, and information concerning the oil and gas potential in the area, that there is likelihood that natural gas can be used to economically produce electricity from the prospect. However, there is no assurance that any reserves are present or will be in the future. We believe that the prospect also has potential for oil production, although this is not our primary objective for this field at this time.
Proceeds from electricity generation would provide capital to pay our proportionate share of costs and expenses in developing the property as well as our general and administrative expenses. Excess cash flow, if any, would be used to investigate and acquire additional properties.
As an alternative to selling electricity generated from natural gas produced at the Stroh prospect, we may investigate construction of a gathering pipeline system with our operating partners to provide an additional source of revenue. This gathering system may provide additional revenue to us through payments made by other owners and operators in the area. The fee for this service is customarily based on the amount of gas transported through the system. The attractiveness of a gas gathering pipeline system to other producers will depend on the amount of the fee and other alternatives for transporting gas to market.
We estimate our portion of the cost of constructing the gathering pipeline at approximately $40,000, based on a total estimate of $180,000 and our contemplated participation of 21.75%, which is based on construction estimates obtained by our operator. If we, along with our operating partners, opt instead to construct this gathering and delivery system, we would expect Energy Oil to also propose drilling at least one new well in the foreseeable future to further develop the property. Based upon several factors, including discussions with representatives of Energy Oil and our prior experience at the property, we expect to participate in construction of the additional well which is estimated to cost $49,000 to our interest. We believe that the additional well is necessary to further develop the prospect and fully exploit the estimated reserves.
Prospect Acquisition Philosophy. Assuming the receipt of additional financing through the sale of our securities or from cash flow derived from operations, we anticipate undertaking investigation of additional properties in the next twelve months. Due to our relatively small size and competitive position in the industry, we do not anticipate acquiring a large inventory of properties to hold for future development.
December 31, 2007.As of December 31, 2007, we had a working capital deficit of $39,810 comprised of current assets of $20,440 and current liabilities of $60,250. This represents an increased deficit of $32,439 from the working capital deficit of $7,371 reported at December 31, 2006. Our working capital position declined because we have utilized our capital resources as we continue to develop our business plan.
We anticipate that we will need to obtain more funding in the next 12 months to continue our business operations. The most significant of our future operating expenses, include (i) the amount of $35,000 to $89,000 for our expected portion of the development costs of the Stroh prospect; (ii) approximately $17,500 per month forincluding salaries and other corporate overhead;
and (iii) approximately $4,000$30,000 per month for legal and accounting fees associated with our status as a public company requiredconsulting services relating to
file reports withraising capital.
It is expected that the SEC.
Our future plans to raise capital include additional salesCompany's principal source of equity securities. During January and February 2008, we sold 100,000 shares of common stock for cash proceeds of $50,000. Since we do not believe that we are candidates for conventional debt financing, we mayflow will be forced to postpone or curtail our operations until we can obtain equity financing.
The report of our independent accountants on our financial statements at December 31, 2007 contains a question about our ability to continue as a going concern. This qualification is based on our lack of operating revenue and limited working capital, among other things. We remain dependent on receipt of capital from outside sources, and ultimately, generating revenue from operations, to continue as a going concern.
All of our capital resources to date have been provided exclusively through the sale of equity securities. We completed a private placement in April 2007 during which we sold 330,000 shares at a price of $0.50 per share for total proceeds of $165,000, and sold an additional 120,000 shares during the fourth quarter of 2007 at $0.50 per share for proceeds of $60,000. From inception through December 31, 2007, we received $660,300 in cash
from the issuance of our common stock. Since we are an exploration stage companyproduction and have not generated any cash from operations, we have relied on sale of equity to fund all of our capital needs. Our prospects for generating meaningful cash from operations in the near term are remote, as we presently hold an interest in only one property. Accordingly, we are dependent on the sale of stock to acquire additional properties to generate revenue in the future.
Net cash used in our operating activities during 2007 was $245,419. This represents an increase of $46,147 compared to $199,272 of cash used during 2006. We used additional cash in 2007 to prepare and file various reports associated with our status as a public reporting company.
During the year ended December 31, 2007, we made no investments in oil and gas properties. Effective August 31, 2007, we sold our interests in the Logan County properties for net cash proceeds of $23,922. In comparison, during 2006, we invested $123,625 in the acquisition of oil and gas properties.
Cash provided by financing activities during 2007 was $225,000 compared with $189,000 during 2006. In both years, all of the activities represent proceeds from the sale of common stock.
December 31, 2006. As of December 31, 2006, we had a working capital deficit of $7,371 consisting of $26,937 of current assets and $34,308 of current liabilities. This was a decrease of $140,730 from our working capital balance at December 31, 2005 of $133,359. Cash decreased during 2006 primarily because of our investment to acquire oil and gas prospects.
During 2006, we spent $123,625 on acquisition and development of our oil and gas properties.
From inception through December 31, 2006, we received $591,300 in cash, services and other consideration in exchange for issuance of our common stock in private transactions. During 2006, we issued 945,000 shares of our common stock for cash of $189,000 and 600,000 shares of common stock in exchange for an interest in our oil and gas properties valued at $150,000.
Our operating activities during 2006 used $199,272 of cash compared to $95,466 used during 2005. The use of cash in operating activities during 2006 otherwise resulting from our net loss was reduced by a write-down in our oil and gas properties of $223,738.
During the year ended December 31, 2007, we reported a net loss of $281,361 or $(0.03) per share, compared to a net loss of $422,600, or $(0.05) per share for 2006. In neither period did we report any revenue except interest income.
We are in the exploration stage since planned principal operations have not commenced. Our activities to date have been limited to implementing our plan of operation, including the investigation and evaluation of oil, gas and mineral properties. We expect to incur losses until such time, if ever, we begin generating revenue from operations.
Our net loss for the year ended December 31, 2007 decreased by $141,239 compared to 2006. The decrease is primarily attributable to an impairment of oil and gas properties of $223,738 recorded in 2006, reflecting the reduced value of the properties in Logan County. We did not record any such impairments during 2007.
General and administrative expense for the year ended December 31, 2007 increased to $282,641 compared to $194,442 during 2006. The increase of $88,199 is primarily attributable to legal and accounting fees incurred in connection with the preparation and filing of our registration statement with the SEC.
We believe the following more critical accounting policies are used in the preparation of our financial statements:
Oil and Gas Reserves. The determination of depreciation and depletion expense as well as ceiling test write-downs related to the recorded value of our 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 reserves 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 our control. Accordingly, reserve estimates are often differentdepleting assets. Cash flow from the quantitiessale of oil and natural gas ultimately recoveredproduction depends upon
the quantity of production and the corresponding liftingprice obtained for the production. An
increase in prices will permit the Company to finance its operations to a
greater extent with internally generated funds, may allow the Company to obtain
13
recoverypurchase of these reserves.
Oil & Gas Properties. We use the full cost method of accounting for costs related to our oil and natural gas properties. All of theproducing properties acquired by us since inceptionduring times that prices are currently undergoing evaluation and are not yet includedat higher levels.
A decline 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, if any, without a corresponding change in capitalized costs will cause the depletion rate to increase or decrease. We have no proved reserves at December 31, 2007.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). Under this standard, an entity is required to provide additional information that will assist investors and other users of financial information to more easily understand the effect of the company’s choice to use fair value on its earnings. Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This standard does not eliminate the disclosure requirements about fair value measurements included in SFAS 157 and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the requirements of SFAS 159 and has not yet determined the impact on its financial statements.
In December 2007 the FASB issued SFAS 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 are effective as of January 1, 2009 and do not allow early adoption. Management is currently evaluating the impact of adopting this statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), which becomes effective on January 1, 2009. This standard establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. Management is currently evaluating the impact of adopting this statement.
There were various other accounting standards and interpretations issued during 2007 and 2006, none of which are expected to a have a material impact on our financial position, operations or cash flows.
This report contains or incorporates by reference forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 concerning our future business plans and strategies, the proposed exploration and development of our property, the receipt of working capital, future revenues and other statements that are not historical in nature. In this report, forward-looking statements are often identified by the words “anticipate,�� “plan,” “believe,” “expect,” “estimate,” and the like. These forward-looking statements reflect our current beliefs, expectations and opinions with respect to future events, and involve future risks and uncertainties which could cause actual results to differ materially from those expressed or implied.
In addition to the specific factors identified under “RISK FACTORS” above, other uncertainties that could affect the accuracy of forward-looking statements include:
This list, togethercompleting the
wells. The Company does not have any commitments or arrangements from any person
to provide the Company with the factors identified under “RISK FACTORS,”any additional capital. If additional financing is
not exhaustive ofavailable when needed, the factors thatCompany may affect any of our forward-looking statements. You should read this report completely and withneed to cease operations. The Company
may not be successful in raising the understanding that our actual future resultscapital needed to drill oil or gas wells.
Any wells which may be materially different from what we expect. These forward-looking statements represent our beliefs, expectations and opinions only asdrilled by the Company may not be productive of the date of this report. We do not intend to update these forward looking statements except as required by law. We qualify all of our forward-looking statements by these cautionary statements.
oil or
gas.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
OurAND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its periodic reports to
the SEC is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and regulations, and that such information is
accumulated and communicated to the Company's management, including its
14
as such term isand for the assessment of the
effectiveness of internal control over financial reporting. As defined in Rules 13a-15(f)by the
Securities and 15d-15(f) under the Exchange Act.
OurCommission, internal control over financial reporting is
a process designed by, or under the supervision of the Company's principal
executive officer and principal financial officer and implemented by the
Company's Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external purposes in accordance with U.S.
generally accepted accounting principles and includes those policies and procedures that:
Internalprinciples.
Because of its inherent limitations, internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems that are determined to be effective provide only reasonable assurance with respect toover financial
statement preparation and presentation.reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed
Ed Holloway, the Company's Principal Executive Officer and Frank L.
Jennings, the Company's Principal Financial Officer, evaluated the effectiveness
of our internal control over financial reportingthe Company's disclosure controls and procedures as of August 31, 2008 based
on criteria for effective internal control over financial reporting describedestablished in Internal Control –- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, as determined to apply to a company our size.
Based on itsor the COSO
Framework. Management's assessment management concluded that we maintained effectiveincluded an evaluation of the design of the
Company's internal control over financial reporting and testing of the
operational effectiveness of those controls.
Based on this evaluation, management concluded that the Company's internal
control over financial reporting was effective as of August 31, 2008.
There was no change in the Company's internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
This report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management's report on
internal control in this report.
ITEM 9B. OTHER INFORMATION
-----------------
None.
15
Sales of Unregistered Securities
- --------------------------------
Prior to its acquisition by the Company, Synergy made the following sales
of its securities:
Name Shares Series A 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 $1,900
Third Parties 660,000 $ 660
Private Investors 1,000,000 1,000,000 $1.00 per Unit (2)
Private Investors 1,060,000 1,060,000 $1.50 per Unit (2)
----------- -----------
9,960,000 2,060,000
=========== ===========
(1) Shares are held of record by entities controlled by this person.
(2) Shares and Warrants were sold as Units, with each Unit consisting of one
share of the Company's common stock and one Series A Warrant.
In connection with the acquisition of Synergy, the 9,960,000 shares of
Synergy, plus the 2,060,000 Series A warrants, were exchanged for 9,960,000
shares of the Company's common stock, plus 2,060,000 Series A warrants.
Each Series A warrant entitles the holder to purchase one share of the
Company's common stock at a price of $6.00 per share. The Series A Warrants
expire on the earlier of December 31, 2007.
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 2006, and the related statements of
operations, changes in shareholders’shareholders' equity, and cash flows for the yearseight months
ended August 31, 2008, the year ended December 31, 2007, and 2006,and the period from
inception (May 11, 2005) to DecemberAugust 31, 2007.2008. These financial statements are the
responsibility of the Company’sCompany'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 2006, and the results of its operations and its cash flows
for the yearseight months ended August 31, 2008, the year ended December 31, 2007, and 2006,
and the period from inception (May 11, 2005) to DecemberAugust 31, 2007,2008, 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’sCompany's ability to continue as a going concern. Management’sManagement'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/
/s/ Stark Winter Schenkein & Co., LLP
Denver, ColoradoMarch 13, 2008
BRISHLIN
January 23, 2009
2
INC.(formerly Blue Star Energy,CORPORATION
(Formerly Brishlin Resources, Inc.)(An
(An Exploration Stage Company)
BALANCE SHEETSas of
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 2006
| 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 20,440 | $ | 16,937 | ||||
| Common stock subscription receivable | — | 10,000 | ||||||
| Total current assets | 20,440 | 26,937 | ||||||
| Oil and gas properties, at cost, using full cost method | ||||||||
| Oil and gas properties, net | 39,125 | 63,047 | ||||||
| Other assets | 1,265 | 1,265 | ||||||
| Total assets | $ | 60,830 | $ | 91,249 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 26,395 | $ | 17,354 | ||||
| Accrued salaries, benefits, and taxes | 33,855 | 16,954 | ||||||
| Total current liabilities | 60,250 | 34,308 | ||||||
| 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: | ||||||||
| 9,780,000 and 9,330,000 shares issued and outstanding at December 31, 2007 and 2006, respectively | 9,780 | 9,330 | ||||||
| Additional paid-in capital | 806,520 | 581,970 | ||||||
| (Deficit) accumulated during the exploration stage | (815,720 | ) | (534,359 | ) | ||||
| Total shareholders' equity | 580 | 56,941 | ||||||
| Total liabilities and shareholders' equity | $ | 60,830 | $ | 91,249 | ||||
shareholders' equity $ 49,450 $ 60,830 ========== ========== The accompanying notes are an integral part of these financial statements.
BRISHLIN
3
INC.(formerly Blue Star Energy,CORPORATION
(Formerly Brishlin Resources, Inc.)(An
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
for the yearseight months ended August 31, 2008,
the year ended December 31, 2007,
and 2006,
and for the period from Inception (May 11, 2005) to DecemberAugust 31, 2007
| 2007 | 2006 | Inception (May 11, 2005) to December 31, 2007 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | $ | — | $ | — | $ | — | |||||
| Expenses: | |||||||||||
| Oil and gas lease expense | — | 8,325 | 8,325 | ||||||||
| Impairment of oil and gas properties | — | 223,738 | 223,738 | ||||||||
| General and administrative | 282,641 | 194,442 | 590,510 | ||||||||
| Total expenses | 282,641 | 426,505 | 822,573 | ||||||||
| Operating (loss) | (282,641 | ) | (426,505 | ) | (822,573 | ) | |||||
| Interest income | 1,280 | 3,905 | 6,853 | ||||||||
| (Loss) before taxes | (281,361 | ) | (422,600 | ) | (815,720 | ) | |||||
| Provision for income taxes | — | — | — | ||||||||
| Net (loss) | $ | (281,361 | ) | $ | (422,600 | ) | $ | (815,720 | ) | ||
| Net (loss) per common share: | |||||||||||
| Basic and Diluted | $ | (0.03 | ) | $ | (0.05 | ) | |||||
| Weighted average shares outstanding: | |||||||||||
| Basic and Diluted | 9,624,219 | 8,492,425 | |||||||||
2008
BRISHLIN
4
INC.(formerly Blue Star Energy,CORPORATION
(Formerly Brishlin Resources, Inc.)(An
(An Exploration Stage Company)STATEMENTS
STATEMENT OF CASH FLOWSfor the years ended December 31, 2007 and 2006,andCHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
for the period from Inception ( May(May 11, 2005) to DecemberAugust 31, 2007
| 2007 | 2006 | Inception (May 11, 2005) to December 31, 2007 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | |||||||||||
| Net (loss) | $ | (281,361 | ) | $ | (422,600 | ) | $ | (815,720 | ) | ||
| Adjustments to reconcile net (loss) to net cash | |||||||||||
| used by operating activities: | |||||||||||
| Common stock subscription receivable | 10,000 | (10,000 | ) | — | |||||||
| Impairment of oil and gas properties | — | 223,738 | 223,738 | ||||||||
| Increase in accounts payable and accrued liabilities | 25,942 | 9,673 | 53,090 | ||||||||
| Other assets | — | (83 | ) | (1,265 | ) | ||||||
| Total adjustments | 35,942 | 223,328 | 275,563 | ||||||||
| Net cash (used in) operating activities | (245,419 | ) | (199,272 | ) | (540,157 | ) | |||||
| 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 | ) | (123,625 | ) | ||||||
| Net cash provided by (used in) investing activities | 23,922 | (123,625 | ) | (99,703 | ) | ||||||
| Cash flows from financing activities: | |||||||||||
| Cash proceeds from sale of stock | 225,000 | 189,000 | 660,300 | ||||||||
| Net cash provided by financing activities | 225,000 | 189,000 | 660,300 | ||||||||
| Net increase (decrease) in cash and equivalents | 3,503 | (133,897 | ) | 20,440 | |||||||
| Cash and equivalents at beginning of year | 16,937 | 150,834 | — | ||||||||
| Cash and equivalents at end of year | $ | 20,440 | $ | 16,937 | $ | 20,440 | |||||
| Supplemental Cash Flow Information | |||||||||||
| Interest paid | $ | — | $ | 186 | $ | 370 | |||||
| Income taxes paid | $ | — | $ | — | $ | — | |||||
| Non-cash investing and financing activities: | |||||||||||
| Shares issued in exchange for | |||||||||||
| oil and gas properties | $ | — | $ | 150,000 | $ | 156,000 | |||||
| Liabilities assumed in exchange for | |||||||||||
| oil and gas properties | $ | — | $ | 7,160 | $ | 7,160 | |||||
2008
BRISHLIN
5
INC.(formerly Blue Star Energy,CORPORATION
(Formerly Brishlin Resources, Inc.)(An
(An Exploration Stage Company)STATEMENT
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYForCASH 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 DecemberAugust 31, 2007
| Number of Common Shares | Par Value of Common Shares | Additional Paid - in Capital | (Deficit) Accumulated During Exploration Stage | Total Shareholders' Equity | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at Inception, May 11, 2005 | — | $ | — | $ | — | $ | — | $ | — | ||||||||
| Shares issued for cash at par | 6,300,000 | 6,300 | — | — | 6,300 | ||||||||||||
| Shares issued for cash at $0.02 | 250,000 | 250 | 4,750 | — | 5,000 | ||||||||||||
| Shares issued in exchange for | |||||||||||||||||
| oil and gas properties | 60,000 | 60 | 5,940 | — | 6,000 | ||||||||||||
| Shares issued for cash at $0.20 | 1,175,000 | 1,175 | 233,825 | — | 235,000 | ||||||||||||
| Net (loss) | — | — | — | (111,759 | ) | (111,759 | ) | ||||||||||
| Balance, December 31, 2005 | 7,785,000 | 7,785 | 244,515 | (111,759 | ) | 140,541 | |||||||||||
| Shares issued for cash at $0.20 | 945,000 | 945 | 188,055 | — | 189,000 | ||||||||||||
| Shares issued in exchange for | |||||||||||||||||
| oil and gas properties | 600,000 | 600 | 149,400 | — | 150,000 | ||||||||||||
| Net (loss) | — | — | — | (422,600 | ) | (422,600 | ) | ||||||||||
| Balance, December 31, 2006 | 9,330,000 | 9,330 | 581,970 | (534,359 | ) | 56,941 | |||||||||||
| Shares issued for cash at $0.50 | 450,000 | 450 | 224,550 | — | 225,000 | ||||||||||||
| Net (loss) | — | — | — | (281,361 | ) | (281,361 | ) | ||||||||||
| Balance, December 31, 2007 | 9,780,000 | $ | 9,780 | $ | 806,520 | $ | (815,720 | ) | $ | 580 | |||||||
2008
2008
1. Summary of Significant Accounting Policies
Basis of Presentation: Synergy Resources Corporation (formerly Brishlin
Resources, Inc.) (the “Company”"Company") was organized under the laws of the State of
Colorado on May 11, 2005 as Blue Star Energy, Inc. Effective December 11, 2007, the Company filed an amendment to its Articles of Incorporation with the Colorado Secretary of State to change the corporate name to Brishlin Resources, Inc.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 estimated proved reserves if any, 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"Oil and Gas Reserves”Reserves" below.
The capitalized costs in the full cost pool will be subject to a quarterly ceiling test
that limits such pooled costs to the aggregate of the present value of estimated 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 estimated reserves may subsequently increase the ceiling.
7
Company’sCompany'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 estimatedCompany's reserves by the
Company or by an independent third party. Therefore, the future net revenues
associated with anythe estimated proved reserves are not based on the Company’sCompany'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’sCompany'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’sCompany'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 SFASStatement
of Financial Accounting Standards No. 143 “Accounting(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 DecemberAugust 31, 2007.
2008.
Stock Based Compensation: The Company’sCompany's 2005 Non-Qualified Stock Option and
Stock Grant Plan (the “Plan”"Plan") authorizes the granting of nonqualified options to
purchase shares of the Company’s common stock and the outright grant of shares ofCompany'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"Share-Based
Payment,”" requiring the Company to record compensation costs for the Company’sCompany'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 each stock option
at thetheir grant date by using the Black-Scholes option-pricingBlack-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.
8
“Earnings"Earnings Per Share,”" provides for the calculation
of “Basic”"Basic" and “Diluted”"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, similarassuming the issuance of an equivalent number of
common shares pursuant to fully dilutedoptions, warrants, or convertible debt arrangements.
Diluted earnings per share. During theshare does not include dilutive common stock equivalents
for periods since inception,in which the Company has not issued any potentially dilutive securities.
incurs a loss because they would be
anti-dilutive.
Income Taxes: The Company accounts Deferred income taxes are reported for timing differences between
items of income or expense reported in the financial statements and those
reported for income taxestax purposes in accordance with SFAS 109, “Accounting"Accounting for
Income Taxes”Taxes", which requires the use of the asset and asset/liability method of
computing deferredaccounting for income taxes. The objectiveDeferred income taxes and tax benefits are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of the assetexisting assets and liability method is to establish deferredliabilities and
their respective tax bases, and for tax loss and credit carry-forwards. Deferred
tax assets and liabilities for the temporary differences between the book basis and the tax basis of the Company’s assets and liabilities atare measured using enacted tax rates expected to
beapply to taxable income in effect when such amountsthe years in which those temporary differences are realized or settled.
On July 13, 2006, the FASB issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of SFAS 109” (“FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.recovered or settled. The Company adoptedprovides for deferred taxes for
the provisions of FIN 48 on January 1, 2007, which did not have any impact on the financial statements.
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 GAAPaccounting 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. Actual results could differ from those estimates. 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, if any, treatment of
exploration and development costs as either an asset or an expense, valuation of
deferred tax assets, and the likelihood of loss contingencies.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.
9
Company’sCompany'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’sCompany'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"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 DecemberAugust 31, 2007.
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 liabilities.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’sCompany'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’sCompany'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
Pronouncements: In February 2007,March 2008, the FASBFinancial Accounting
Standards Board ("FASB") issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). Under this standard, an entity is required to provide additional information that will assist investors and other users of financial information to more easily understand the effect of the company’s choice to use fair value on its earnings. Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This standard does not eliminate the disclosure requirements about fair value measurements included in SFAS 157 and SFAS No. 107,161, Disclosures about Fair ValueDerivative
Instruments and Hedging Activities - an Amendment of Financial Instruments. SFAS 159 isFASB Statement No. 133
(SFAS 161), which becomes effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2007. Management is currently evaluating2008. This standard
changes the disclosure requirements offor 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 159133 and has not yet determined the impact on its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This statement replaces SFAS 141, Business Combinations. The statement provides guidance for how the acquirer recognizesposition, financial performance, 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 are effective as of January 1, 2009 and do not allow early adoption.cash flows.
Management is currently evaluating the impact of adopting this statement.
10
December 2007,May 2008, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 160)162), which becomes effective on January 1, 2009.upon approval by the
SEC. This standard establishessets forth the sources of accounting principles and reporting standardsprovides
entities with a framework for ownership interestsselecting the principles used in subsidiaries held by parties other than the parent, the amountpreparation
of consolidated net income attributablefinancial statements that are presented in conformity with GAAP. It is not
expected to the parentchange any of our current accounting principles or practices and
therefore, is not expected to the noncontrolling interest, changes inhave a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures to clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. Management is currently evaluating thematerial impact of adopting this statement.
on our financial
statements.
There were various other accounting standards and interpretations issued during
2007 and 2006,2008, none of which are expected to a have a material impact on the Company’sCompany's
financial position, operations or cash flows.
| 2. Going Concern |
The Company’sCompany'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. 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 $815,720.$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 $660,300$810,300 in sales of common stock
from inception through DecemberAugust 31, 2007.2008. 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’sCompany'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 60,0006,000 shares of the Company’sCompany'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’swell'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.
11
600,00060,000 shares of the Company’sCompany's restricted common stock.
The Logan County wells also targeted production primarily for the D-Sand and J-Sand. Included with this purchase was approximately 7.5 miles of pipeline, a natural gas compressor, stripping plant, marketing tap and contract with Kinder-Morgan Energy, Inc. All of the properties were operated by Energy Oil and Gas, Inc. of Niwot, Colorado.
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.
transaction
The Company is evaluating theits 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 the years ended December 31,2008 and 2007 and 2006 at statutory rates is
comprised of the following components:
| 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Tax expense (benefit) at statutory rates | $ | (95,000 | ) | $ | (144,000 | ) | ||
| Book to tax adjustments: | ||||||||
| Valuation allowance | 95,000 | 144,000 | ||||||
| Tax provision | $ | — | $ | — | ||||
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 $ -- $ --
======== =========
12
and 2006:
| Deferred tax assets: | 2007 | 2006 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net operating loss carryforwards | $ | 277,000 | $ | 106,000 | ||||
| Book to tax adjustments: | ||||||||
| Impairment of oil and gas properties | — | 76,000 | ||||||
| Less valuation allowance | (277,000 | ) | (182,000 | ) | ||||
| Net deferred tax asset | $ | — | $ | — | ||||
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 374,000 $ 277,000
Less valuation allowance (374,000) (277,000)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
Total deferred tax assets and the valuation allowance increased by approximately
$95,000$97,000 during 2007.
2008.
At DecemberAugust 31, 2007,2008, the Company has tax loss carryforwards of approximately $813,000approximating
$1,012,000 that expire at various dates through 2027.2028. 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 StockStock: The Company has authorized 10,000,000 shares of preferred stock.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 StockStock: 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 6,300,000630,000 common shares to its founders for cash
proceeds of $6,300.
13
250,00025,000 common shares to a private investor
for cash proceeds of $5,000.
During 2005, the Company issued 60,0006,000 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 1,175,000117,500 shares of common stock at $0.20$2.00
per share for cash proceeds of $235,000.
During 2006, the Company issued 945,00094,500 shares of common stock at $0.20$2.00 per share
for cash proceeds of $189,000. In addition, the Company issued 600,00060,000 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.
$150,000, or $2.50 per
share, based upon the negotiated value between the seller and the buyer.
During the year ended December 31, 2007, the Company issued 450,00045,000 shares of
common stock at $0.50$5.00 per share for cash proceeds of $225,000.
The
During the eight months ended August 31, 2008, the Company may continueissued 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 raise capital through the sale of its common sharesofficers.
6. Commitments and may also seek other funding or corporate transactions to achieve its business objectives.
Effective October 1, 2007, the Company entered into a twelve month lease on
office space in Colorado Springs, Colorado. RequiredRental payments approximate $1,328
per month. The previous lease required paymentsAs of approximately $1,265 per month. RemainingAugust 31, 2008, future minimum lease obligations consisted of
one month's rent, approximating $1,328. Rent expense approximated $10,624 for
the lease, which terminates duringeight months ended August 31, 2008, will be $11,952. Rent expenseand $15,400 for 2007 and 2006 approximated $15,400 and $15,000 respectively.
Effective June 1, 2005, the Company entered intoyear ended December
31, 2007.
Pursuant to employment agreements with its executive officers which extendwere
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 three-year term. Pursuant toprice of $1.67 per share, based on quoted
market prices. In anticipation of the terms of those agreements, each officer is being paid $60,000 annually. Thebusiness combination with Synergy
Resources Corporation (see Note 7), the employment agreements are automatically renewablewere terminated
effective June 30, 2008. Total compensation expense recorded under the
agreements was $60,000 for one-year termsthe eight months ended August 31, 2008, and may be terminated by$120,000
for the Company by providing not less than 60 days notice.
During 2006,2008
7. Subsequent Events
On September 10, 2008, the Company purchased a working interest in a property located in Morgan County, Colorado from a company controlled by Messrs. Ray McElhaney and Bill Conrad. Messrs. McElhaney and Conrad are officers and directorsacquired approximately 89% of the Company.outstanding
shares of Synergy Resources Corporation ("Synergy") pursuant to an Agreement to
Exchange Common Stock ("Share Exchange Agreement"). The purchase price was $23,625, which was paidCompany acquired all the
remaining outstanding shares of Synergy in cash.
Subsequent to December 31, 2007,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 issued an additional 100,000 restrictedagree 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 $0.50$6.00 per share for cash proceeds of $50,000.
There have been no changes in our accountants duringshare. Furthermore, the last two fiscal years, and we have not had any disagreements with our existing accountants during that time.
ITEM 9A(T). CONTROLS AND PROCEDURES.
(a) Our management supervised and participated in an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007. Based on that evaluation, our management, including our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effectiveCompany agreed to ensure that information requiredissue substitute options
to be disclosed in the reports filed or submitted by the company under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure within the time periods specified in the SEC’s rules and forms.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report, which is included in Item 8 above, was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
(b) There were no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
The following individuals presently serve as our officers and directors:
The following individuals presently serve as our officers and directors:
Name | Age | Positions With the Company | Board Position Held Since | |||
Raymond E. McElhaney | 51 | President, Chief Executive Officer and Chairman | 2005 | |||
Bill M. Conrad | 51 | Vice President, Secretary and Director | 2005 | |||
Frank L. Jennings | 56 | Principal Financial Officer | N/A | |||
Each of our directors is serving a term which expires at the next annual meeting of shareholders and until his successor is elected and qualified or until he resigns or is removed. Our officers serve at the will of our Board of Directors. There are no family relationships among our officers or directors.
Messrs. Raymond McElhaney and Bill Conrad should be considered founders of our company, as each has taken initiative in the organization of our business.
The following information summarizes the business experience of each of our officers and directors for at least the last five years:
Raymond E. McElhaney. Mr. McElhaney began his career in the oil and gas industry in 1983 as founder and President of Spartan Petroleum and Exploration, Inc., a company engaged in the business of oil and gas exploration. Mr. McElhaney also served as a chairman and secretary of Wyoming Oil & Minerals, Inc., a publicly traded Wyoming corporation, from February 2002 until 2005. Prior to that, he served as vice president and secretary of New Frontier Energy, Inc., a publicly traded Colorado corporation, from 2000 to April 2003. The securities of Sun Motor International, Inc. (formerly known as Wyoming Oil & Minerals), and New Frontier Energy, Inc. are quoted on the OTC Bulletin Board. From May 1990 until February 1992, Mr. McElhaney also served as a director of United States Exploration, Inc., a Colorado corporation engaged in the acquisition, development and production of oil and gas properties whose securities were traded on the OTC Bulletin Board until being listed on the American Stock Exchange, and which was eventually taken private. 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 president of that company since inception. Mr. McElhaney received his Bachelor of Science degree in Business Administration in 1978.
Bill M. Conrad. 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 Colorado corporation engaged in the mining industry. The securities of Gold Resource Corporation are traded on the OTC Bulletin Board. In 1990, Mr. Conrad co-founded MCM Capital Management Inc. and has served as vice president since that time.
Frank L. Jennings. Mr. Jennings serves as our principal financial officer on a part-time basis as his services are deemed necessary. Since 2001, Mr. Jennings has been a financial consultant and provides management and contract 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 Utah corporation, and from 2001 to 2005, he served as Chief Financial Officer and a director of OnSource Corporation, now known as Ceragenix Pharmaceuticals, Inc., a publicly traded Delaware corporation. During his tenure with Global Casinos and Ceragenix Pharmaceuticals, each company had common stock quoted on the OTC Bulletin Board.
None of our securities are registered under the Securities Exchange Act of 1934, as amended, and as a result, we are not subjectreplace similar options outstanding prior to the reporting requirements of Section 16(a).
We have not yet adopted a written Code of Ethics; however, we believe our executive officers conduct themselves honestly and ethically with respect to our business affairs. As the company is still in the process of organizing its formal corporate governance structure, we plan to adopt a formal Code of Ethics in the near future.
Any security holder who wishes to recommend a prospective director nominee should do so in writing by sending a letter to the Board of Directors. The letter should be signed, dated and include the name and address of the security holder making the recommendation, information to enable the Board to verify that the security holder was the holder of record or beneficial owner of the company’s securities as of the date of the letter, and the name, address and resumé of the potential nominee. Specific minimum qualifications for directors and director nominees which the Board believes must be met in order to be so considered include, but are not limited to, management experience, exemplary personal integrity and reputation, sound judgment, and sufficient time to devote to the discharge of his or her duties. There have been no changes to the procedures by which a security holder may recommend a nominee to the Board during our most recently ended fiscal year.
We are not a listed issuer as defined in Rule 10A-3 of the regulations promulgated under the Securities Exchange Act of 1934, as amended. Presently, we have no standing audit committee or designated audit committee financial expert since no members of our Board of Directors are “independent” as defined in Rule 4200(a)(15) of the Marketplace Rules of the NASDAQ Stock Market, Inc.
The following table summarizes the total compensationoptions provide for the two fiscal years ended December 31, 2007purchase of our executive officers at the end of our last fiscal year (the “Named Executive Officers”). Our company did not award cash bonuses, stock awards, stock options or non-equity incentive plan compensation to any Named Executive Officer during the past two fiscal years, thus these items are omitted from the table below:
Name and Principal Position |
| Year |
| Salary |
| All Other Compensation |
| Total |
Raymond E. McElhaney |
| 2007 |
| $ 60,000 |
| $ — |
| $60,000 |
Chairman, Chief Executive Officer |
| 2006 | $ 60,000 |
| $ — |
| $60,000 | |
and President(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill M. Conrad, |
| 2007 |
| $ 60,000 |
| $ — |
| $60,000 |
Vice President and Secretary(1) |
| 2006 |
| $ 60,000 |
| $ — |
| $60,000 |
|
|
|
|
|
|
|
| |
|
|
|
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(1) The executive officer was not paid any additional compensation for his service as a director of our company.
Effective June 1, 2005, we entered into employment agreements with our Named Executive Officers which extend for a three-year term. Pursuant to the terms of those agreements, Raymond McElhaney and Bill Conrad each receive $60,000 annually as salary. The employment agreements are automatically renewable for one-year terms on each anniversary of the effective date unless either party gives notice to the other that they do not wish to renew the agreement, not less than 60 days prior to expiration.
Pursuant to the terms of the employment agreements, our Named Executive Officers would be entitled to certain payments in the event his employment is terminated without cause. If we terminate the agreement without “cause” we are required to immediately pay the remaining amount under the agreement. If the agreement is terminated for any other reason, including a change in control, we would be obligated to pay the amount of compensation remaining in accordance with our regular pay periods.
Our Named Executive Officers did not have any unexercised options or stock awards that have not vested outstanding at the end of our last fiscal year. We did not grant any equity awards to our Named Executive Officers or directors during 2007 or 2006.
We have not paid any cash compensation to our directors in their capacities as such in the past. If we retain independent directors in the future, we reserve the right to compensate them in accordance with industry standards as may be determined by our Board of Directors. All directors are reimbursed for reasonable and necessary expenses incurred in their capacities as such.
As of March 27, 2008, there are a total of 9,880,000 shares of our common stock outstanding, our only class of voting securities currently outstanding. The following table describes the ownership of our voting securities by: (i) each of our officers and directors; (ii) all of our officers and directors as a group; and (iii) each shareholder known to us to own beneficially more than 5% of our common stock. Unless otherwise stated, the address of each of the individuals is our address, 5525 Erindale Dr., Suite 201, Colorado Springs, Colorado 80918. All ownership is direct, unless otherwise stated.
Name and Address of | Shares Beneficially Owned | |||
Number | Percent | |||
Bill M. Conrad(1) | 2,320,000 | 23.5% | ||
Raymond E. McElhaney(1) | 2,560,000 | (2) | 25.9% | |
Michael Herman PO Box 60446 | 700,000 | 7.1% | ||
Dewey L. Williams | 600,000 | 6.1% | ||
Frank L. Jennings(3) | 40,000 | 0.4% | ||
All officers and directors as a Group (3 individuals): | 4,920,000 | (2) | 49.8% | |
We know of no arrangements, including any pledge by any person of our securities, the operation of which may result in a change in control.
Our Non-Qualified Stock Option and Stock Grant Plan (also as referred to as the “Plan”) was adopted effective June 1, 2005. The Plan terminates by its terms on June 1, 2015. Under the Plan, a total of 2,500,0002,000,000 shares of common stock are reserved for issuance thereunder. We have not issued anyat $1.00
per share and 2,000,000 shares of common stock orat $10.00 per share. Using the
Black-Scholes-Merton option-pricing model, the Company estimated that the fair
value of the replacement options pursuantexceeded 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 Plan.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted- average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity compensation plans approved by shareholders | 0 | — | 2,500,000 | |||||||||
| Equity compensation plans not approved by shareholders | 0 | — | 0 | |||||||||
| TOTAL: | 0 | 2,500,000 | ||||||||||
Under the Plan, non-qualified stock options and/or grants of our common stock may be issued to key persons. Key persons include officers, directors, employees, consultants and others providing service to us. The Plan was established to advance the interests of our company and our stockholders by affording key persons, upon whose judgment, initiative and efforts we may rely for the successful conduct of our businesses, an opportunity for investment in our company and the incentive advantages inherent in stock ownership in our company. This Plan gives ourCompany's Board of Directors broad authoritydeclared a dividend in
the form of one Series A Warrant to grant options and makepurchase one share of post-split common
stock grantsfor $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
key persons selectedreceive the dividend, which is payable only after receipt by the Board while considering criteria such as employment position or other relationship with us, duties and responsibilities, ability, productivity, length of service or association, morale, interest in us, recommendations by supervisors, and other matters, and to set the option price, term of option, and other broad authorities. Options may not be granted at less than the fair market value at the date of grant and may not have a term in excess of 10 years.
Options granted under the Plan do not generally give rise to taxable income to the recipient or any tax consequence to us, since the Plan requires that the options be issued at a price not less than the fair market value of the common stock on the date of grant. However, when an option is exercised, the holder is subject to tax on the difference between the exercise price of the option and the fair market value of the stock on the date of exercise. We receive a corresponding deduction for income tax purposes. Recipients of stock grants are subject to tax on the fair market value of the stock on the date of grant and we receive a corresponding deduction. The foregoing is intended as a summary of the income tax consequences to an individual recipientCompany of an
option or stock grant, and should not be construed as tax advice. Holders of stock options or common stock should consult their own tax advisors.
Shares issued upon exercise of options or upon stock grants under the Plan are “restricted securities” as defined under the Securities Act unlesseffective date for a registration statement covering such shares is effective. Restricted shares cannot be freely soldthe warrants and must be sold pursuant to an exemption from registration (such as Rule 144) which exemptions typically impose conditions on the sale of the shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Assignment of Overriding Royalty Interests. Prior to our inception in May 2005, the operator of our property assigned an overriding royalty interest in our current and former prospects to individuals involved with the project, including our executive officers. The royalty calls for payment of a certain percentage of any gross revenue generated from the prospect. Messrs. McElhaney and Conrad continue to hold these royalty interests as individuals and are each entitled to royalty payments of 0.625% of gross revenue from Stroh #1.
Issuance of Stock to Promoters. Messrs. McElhaney and Conrad, our executive officers and the only members of our Board of Directors, are the founders of our company.underlying
common stock.
In connection with the merger, the Company entered into an agreement with two
directors to provide consulting services. The initial capitalizationterm of our company, we issued 3,000,000the 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.
15
each of them for a price equal to par value ($0.001 per share or a total of $3,000 each). Messrs. McElhaney and Conrad were the only members of our Board of Directors who considered and approved the transaction.
MCM Capital Management, Inc. On January 10, 2006, our company acquired a 7.875% working interestbe approximately $186,000. The
assumptions used in the Stroh #1 prospect from MCM Capital for a cash paymentmodel were: expected life of $23,625. Messrs. McElhaney5 years, stock price of
$2.00 at date of grant, volatility of 166%, dividend yield of 0%, and Conrad are our executive officers and directors and are also the executive officers and directorsinterest
rate of MCM Capital. Messrs. McElhaney and Conrad were the only members of our Board of Directors who considered and approved the transaction. The price was determined with reference to the cost to drill and complete the well and associated leasehold costs. MCM Capital originally acquired its interest in Stroh #1 in a package of other wells that were purchased with a contingent liability to equip and construct associated transportation equipment to market the gas for $333,685.
At present, neither member of our Board of Directors is “independent” as defined in Rule 4200(a)(15) of the Marketplace Rules of the NASDAQ Stock Market, Inc. since each director also serves as our executive officer. We have not established any board committees. We hope in the future to add at least one independent director and establish one or more board committees, especially an audit committee.
The following table sets forth fees paid to our independent registered accounting firm, Stark Winter Schenkein & Co., LLP, for the last two fiscal years:
| 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| Audit Fees | $ | 17,300 | $ | 0 | ||||
| Audit Related Fees | 0 | 0 | ||||||
| Tax Fees | 1,500 | 1,250 | ||||||
| All Other Fees | 0 | 0 | ||||||
| Total Fees | $ | 18,800 | $ | 1,250 | ||||
It is the policy of the Board of Directors, which presently completes the functions of the Audit Committee, to engage the independent accountants selected to conduct our financial audit and to confirm, prior to such engagement, that such independent accountants are independent of the company. All services of the independent registered accounting firm reflected above were pre-approved by the Board of Directors.
ITEM 15. EXHIBITS.
The following exhibits are filed with or incorporated by referenced in this report:
* filed herewith
In accordance with Section 13 or 15(d)15(a) of the Exchange Act, of 1934, the registrantRegistrant
has caused this reportReport to be signed on its behalf by the undersigned, thereunto
duly authorized.
In accordance withauthorized on the 26th day of January, 2009.
SYNERGY RESOURCES CORPORATION
By: /s/ Ed Holloway
------------------------------------
Ed Holloway, President
By: /s/ Frank L. Jennings
------------------------------------
Frank L. Jennings, Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this
Report has been signed below by the following persons on behalf of the
CompanyRegistrant and in the capacities and on the dates indicated.
The following exhibits are filed with or incorporated by referenced in this report:
* filed herewith