UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended May 31, 2009
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _____ to _______
Commission File Number: 333-146561
SYNERGY RESOURCES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Colorado 20-2835920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20203 Highway 60, Platteville, Colorado 80651
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (970) 737-1073
N/A
----------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Larger accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company [x]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 11,998,000 shares outstanding
as of July 2, 2009.
SYNERGY RESOURCES CORPORATION
Index
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of May 31, 2009 (unaudited) and August 31,
2008 3
Statements of Operations for the three months ended May 31,
2009 and 2008 (unaudited) 4
Statements of Operations for the nine months ended May 31, 2009, for
the period from inception (December 28, 2007) to May 31, 2008, and
for the period from inception (December 28, 2007) to May 31, 2009
(unaudited) 5
Statements of Cash Flows for the nine months ended May 31, 2009, for
the period from inception (December 28, 2007) to May 31, 2008, and
for the period from inception (December 28, 2007) to May 31, 2009
(unaudited) 6
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 4. Controls and Procedures 27
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
SIGNATURES 30
2
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
May 31, August 31,
2009 2008
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,052,985 $ 2,292,341
Accounts receivable 25,928 -
Other current assets 32,825 27,412
------------ ------------
Total current assets 1,111,738 2,319,753
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method, net 2,665,479 -
Other property and equipment, net 1,152 -
------------ ------------
Property and equipment, net 2,666,631 -
------------ ------------
Other assets:
Option to acquire mineral interests - related
party 60,000 -
Performance assurance deposit 85,000 -
Deferred offering costs 5,000 -
------------ ------------
Total other assets 150,000 -
------------ ------------
Total assets $ 3,928,369 $ 2,319,753
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 577,087 $ 12,473
Accrued taxes and expenses 45,378 40,853
Bank loan payable 1,161,811 -
Accrued interestb 3,195 -
------------ ------------
Total current liabilities 1,787,471 53,326
------------ ------------
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:
10,601,334 and 9,943,571shares issued and
outstanding at May 31, 2009 and August 31,
2008, respectively 10,601 9,944
Additional paid-in capital 13,428,773 2,477,511
Stock subscriptions receivable - (27,650)
(Deficit) accumulated during the exploration
stage (11,298,476) (193,378)
------------ ------------
Total shareholders' equity 2,140,898 2,266,427
------------ ------------
Total liabilities and shareholders' equity $ 3,928,369 $ 2,319,753
============ ============
The accompanying notes are an integral part of these financial statements.
3
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
for the three months ended May 31, 2009 and 2008
(Unaudited)
Three Months Three Months
Ended Ended
May 31, 2009 May 31, 2008
--------------- ---------------
Oil and gas revenues $ 28,832 $ -
--------------- ---------------
Expenses:
Lease operating expenses 1,138 -
Depreciation, depletion, and amortization 21,973 -
Administrative services contract -
related party 60,000 -
Salaries and payroll taxes 110,610 -
Consulting fees - related party 30,000 -
Professional fees 33,430 -
Insurance 12,306 -
Share based compensation - stock
options granted 3,429,396 -
All other general and administrative 4,033 -
--------------- ---------------
Total expenses 3,702,886 -
--------------- ---------------
Operating (loss) (3,674,054) -
Interest income 1,924 -
--------------- ---------------
(Loss) before taxes (3,672,130) -
Provision for income taxes - -
--------------- ---------------
Net (loss) $ (3,672,130) $ -
=============== ===============
Net (loss) per common share:
Basic and Diluted $ (0.35) $ -
=============== ===============
Weighted average shares outstanding:
Basic and Diluted 10,531,051 -
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
for the nine months ended May 31, 2009,
for the period from Inception (December 28, 2007) to May 31, 2008,
and for the period from Inception (December 28, 2007) to May 31, 2009
(Unaudited)
Inception Inception
Nine Months (December 28, (December 28,
Ended 2007) to 2007) to
May 31, 2009 May 31, 2008 May 31, 2009
-------------- -------------- --------------
Oil and gas revenues $ 28,832 $ - $ 28,832
-------------- -------------- --------------
Expenses:
Lease operating expenses 3,712 - 3,712
Depreciation, depletion, and
amortization 21,973 - 21,973
Administrative services contract -
related party 180,000 - 233,333
Salaries and payroll taxes 326,056 - 398,438
Consulting fees - related party 90,000 - 90,000
Professional fees 174,486 - 215,584
Insurance 32,317 - 32,317
Share based compensation - stock
options granted 10,282,000 - 10,310,200
All other general and
administrative 36,952 - 38,210
-------------- -------------- --------------
Total expenses 11,147,496 - 11,343,767
-------------- -------------- --------------
Operating (loss) (11,118,664) - (11,314,935)
Interest income 13,566 - 16,459
-------------- -------------- --------------
(Loss) before taxes (11,105,098) - (11,298,476)
Provision for income taxes - - -
-------------- -------------- --------------
Net (loss) $ (11,105,098) $ - $ (11,298,476)
============== ============== ==============
Net (loss) per common share:
Basic and Diluted $ (1.05) $ -
============== ==============
Weighted average shares outstanding:
Basic and Diluted 10,545,652 -
============== ==============
The accompanying notes are an integral part of these financial statements.
5
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
for the nine months ended May 31, 2009,
for the period from Inception (December 28, 2007) to May 31, 2008,
and for the period from Inception (December 28, 2007) to May 31, 2009
(Unaudited)
Inception Inception
Nine Months (December 28, (December 28,
Ended 2007) to 2007) to
May 31, 2009 May 31, 2008 May 31, 2009
-------------- -------------- --------------
Cash flows from operating
activities:
Net (loss) $ (11,105,098) $ - $ (11,298,476)
-------------- -------------- --------------
Adjustments to reconcile
net (loss) to net cash
(used in) operating activities:
Share based compensation 10,282,000 - 10,310,200
Depreciation, depletion and
amortization 21,973 - 21,973
Changes in operating assets and
liabilities
(Increase) in accounts receivable (25,928) - (25,928)
(Increase) in other current assets (5,413) - (32,825)
Increase in accounts payable 234,561 - 247,034
Increase in accrued taxes and
expenses 4,525 - 45,378
Increase in accrued interest 3,195 - 3,195
Effect of merger on operating
assets (liabilities) (31,438) - (31,438)
-------------- -------------- --------------
Total adjustments 10,483,475 - 10,537,589
-------------- -------------- --------------
Net cash (used in) operating
activities (621,623) - (760,887)
-------------- -------------- --------------
Cash flows from investing
activities:
Acquisition of property and
equipment (2,279,426) - (2,279,426)
Option to acquire mineral
interests - related party (100,000) - (100,000)
Performance assurance deposit (85,000) - (85,000)
Cash acquired in merger 3,987 - 3,987
-------------- -------------- --------------
Net cash (used in) investing
activities (2,460,439) - (2,460,439)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from bank loan payable 1,161,811 - 1,161,811
Cash proceeds from sale of stock 957,295 - 3,502,900
Offering costs (270,400) - (384,400)
Payment of deferred offering costs (5,000) - (5,000)
Repurchase of shares (1,000) - (1,000)
-------------- -------------- --------------
Net cash provided by financing
activities 1,842,706 - 4,274,311
-------------- -------------- --------------
Net increase (decrease) in cash
and equivalents (1,239,356) - 1,052,985
Cash and equivalents at beginning
of period 2,292,341 - -
-------------- -------------- --------------
Cash and equivalents at end
of period $ 1,052,985 $ - $ 1,052,985
============== ============== ==============
Supplemental Cash Flow Information:
Interest paid $ - $ - $ -
============== ============== ==============
Income taxes paid $ - $ - $ -
============== ============== ==============
Non-cash investing and financing
activities:
Net assets acquired in merger $ 11,675 $ - $ 11,675
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
6
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Basis of Presentation: Synergy Resources Corporation (the "Company")
represents the result of a merger transaction on September 10, 2008 between
Brishlin Resources, Inc. ("Predecessor Brishlin"), a public company, and Synergy
Resources Corporation ("Predecessor Synergy"), a private company. In conjunction
with the transaction, Predecessor Brishlin changed its name to Synergy Resources
Corporation and Predecessor Synergy changed its name to Synergy Resources, Ltd.
The Company was organized under the laws of the State of Colorado. The Company
is in its exploration stage and plans to engage in oil and gas acquisitions,
exploration, development and production service activities, primarily in the
area known as the Denver-Julesburg Basin. The Company has adopted August 31st as
the end of its fiscal year.
Interim Financial Information: The interim financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") as promulgated
in Item 210 of Regulation S-X. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP") have
been condensed or omitted pursuant to such SEC rules and regulations. The
Company believes that the disclosures included are adequate to make the
information presented not misleading, and recommends that these financial
statements be read in conjunction with the audited financial statements and
notes thereto for the period ended August 31, 2008, included in our Report on
Form 8-K/A filed on November 26, 2008.
In management's opinion, the unaudited balance sheet as of May 31, 2009,
the unaudited statements of operations for the three month and nine month
periods ended May 31, 2009, and the unaudited statement of cash flows for the
nine month period ended May 31, 2009, contained herein, reflect all adjustments,
consisting solely of normal recurring items, which are necessary for the fair
presentation of the Company's financial position, results of operations, and
cash flows on a basis consistent with that of its prior audited financial
statements. However, the results of operations for interim periods may not be
indicative of results to be expected for the full fiscal year.
Reclassifications: Certain amounts previously presented for prior periods
have been reclassified to conform with the current presentation. The
reclassifications had no effect on net loss, total assets, or total
shareholders' equity.
Merger Transaction: On September 10, 2008, Predecessor Brishlin consummated
an Agreement to Exchange Common Stock ("Exchange Agreement") with certain
shareholders of Predecessor Synergy to acquire approximately 89% of the
outstanding common stock of Predecessor Synergy. In subsequent transactions, all
the remaining outstanding common shares of Predecessor Synergy were acquired.
Prior to September 10, 2008, Predecessor Brishlin had 1,038,000 common shares
outstanding, and Predecessor Synergy had 9,960,000 common shares outstanding.
7
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
The merger transaction resulted in the Company with 10,998,000 common shares
outstanding, with the shareholders of Predecessor Synergy holding approximately
91% of the outstanding shares and the shareholders of Predecessor Brishlin
holding approximately 9% of the outstanding shares.
The Exchange Agreement further provided that the Company would issue
substitute Series A warrants to replace similar warrants held by certain
shareholders of Predecessor Synergy to purchase 2,060,000 shares of common stock
at $6.00 per share. Furthermore, the Company agreed to issue substitute options
to replace similar options outstanding prior to the merger transaction, which
options provide for the purchase of 2,000,000 shares of common stock at $1.00
per share and 2,000,000 shares of common stock at $10.00 per share.
Immediately prior to the transaction, Predecessor Brishlin completed a
one-for-ten reverse stock split of its outstanding common stock. All share and
per share data presented in this Report have been retroactively restated to
reflect the reverse stock split.
In anticipation of the merger transaction, Predecessor Brishlin declared a
dividend to its shareholders of record as of August 28, 2008, consisting of one
Series A warrant for each common share held.
Although the legal form of the transaction reflects the acquisition of
Predecessor Synergy by Predecessor Brishlin, the Company determined that the
accounting form of the transaction is a "reverse merger", in which Predecessor
Synergy is identified as the acquiring company and Predecessor Brishlin is
identified as the acquired company. At the time of the transaction, Predecessor
Brishlin had ceased most of its operations and liquidated most of its assets and
liabilities. In accordance with SEC regulations, the transaction was recorded as
a capital transaction rather than a business combination. The transaction is
equivalent to the issuance of common stock by Predecessor Synergy in exchange
for the net assets of Predecessor Brishlin and a recapitalization of Predecessor
Synergy. The assets and liabilities of Predecessor Brishlin were not restated to
their estimated fair market values and no goodwill or other intangible assets
were recorded. Selected financial data for Predecessor Brishlin at the
transaction date follows:
Selected Financial Data:
Cash $ 3,986
Current assets 5,129
Oil and gas assets 39,125
Current liabilities 33,907
Net assets $ 11,675
Financial information for all periods subsequent to September 10, 2008
includes the combined assets, liabilities and activities of both companies.
Historical financial information for periods prior to September 10, 2008,
8
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
presented for comparative purposes, includes only Predecessor Synergy.
Condensed pro-forma information assuming that the transaction occurred on
September 1, 2008 (beginning of fiscal year for the Company) has not been
presented. As Predecessor Brishlin had substantially reduced its operations
prior to the transaction, there is no material difference between the
information presented in the financial statements and the pro-forma information.
Oil and Gas Properties: The Company uses the full cost method of accounting
for costs related to its oil and gas properties. Accordingly, all costs
associated with acquisition, exploration, and development of oil and gas
reserves (including the costs of unsuccessful efforts) are capitalized into a
single full cost pool. These costs include land acquisition costs, geological
and geophysical expense, carrying charges on non-producing properties, costs of
drilling and overhead charges directly related to acquisition and exploration
activities.
All capitalized costs of oil and gas properties are amortized using the
unit-of-production method based upon estimates of proved reserves. For
amortization purposes, the volume of petroleum reserves and production is
converted into a common unit of measure at the energy equivalent conversion rate
of six thousand cubic feet of natural gas to one barrel of crude oil.
Investments in unevaluated properties and major development projects are not
amortized until proved reserves associated with the projects can be determined
or until impairment occurs. If the results of an assessment indicate that the
properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In applying the full cost method, the capitalized costs are subject to a
quarterly "ceiling test". If capitalized costs, adjusted for such items as
accumulated depletion and deferred income taxes, exceed the "ceiling amount",
the excess is charged to earnings as an impairment expense. The "ceiling" is
estimated as the present value, discounted at 10%, of the future net cash flows
from proved oil and gas reserves plus the lower of cost or net realizable value
of unevaluated properties. The calculation of future net cash flows assumes
continuation of current economic conditions, including current prices and costs.
The "ceiling" is highly sensitive to changing prices for oil and gas. Once
impairment expense is recognized, it cannot be reversed in future periods, even
if increasing prices raise the "ceiling amount".
Revenue Recognition: Revenue is generally recognized for the sale of oil
and gas when there is persuasive evidence of a sale arrangement, delivery has
occurred, the price is determinable, and collection of sales proceeds is
reasonably assured. Revenue is accrued when these four conditions have been
satisfied and reasonable estimates can be made. Revenue estimates are prepared
for the quantity of petroleum product delivered to the customer and the price
that will be received. Payment is received at a later date, often sixty to
ninety days after production. Revenue accruals are adjusted to reflect updated
information as it is received.
9
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
Lease Operating Expenses: Operating expenses of producing wells are
recognized when incurred. For properties operated by third parties, expenses are
estimated based upon activity reports. Expense accruals are adjusted to reflect
updated information as it is received.
Per Share Amounts: SFAS 128, "Earnings per Share," provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share include 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, similar to fully diluted earnings per share.
During the periods since inception, the Company has issued 7,801,334 potentially
dilutive securities, all of which were excluded from the calculation because
they were anti-dilutive.
Use of Estimates: The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management
routinely makes judgments and estimates about the effects of matters that are
inherently uncertain. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Estimates and assumptions are revised periodically
and the effects of revisions are reflected in the financial statements in the
period it is determined to be necessary. Actual results could differ from these
estimates.
Recent Accounting Pronouncements: On December 29, 2008, the SEC announced
final approval of new requirements for reporting oil and gas reserves to be
effective in January 2010. The new disclosure requirements provide for
consideration of new technologies in evaluating reserves, allow companies to
disclose their probable and possible reserves to investors, report oil and gas
reserves using an average price based on the prior 12 month period rather than
year-end prices, and revise the disclosure requirements for oil and gas
operations. The accounting for the limitation on capitalized costs for full cost
companies will also be revised. The new rule is expected to be effective for
years ending on or after December 31, 2009, although the transition may be
extended. The Company has not yet evaluated the effects on its financial
statements and disclosures.
In May 2009 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 165, "Subsequent Events" (SFAS
165). SFAS 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. This disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date in the set of
financial statements being presented. SFAS 165 is effective for interim and
annual periods ending after June 15, 2009. The adoption of SFAS 165 is not
10
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
expected to have a material impact on the Company's financial statements.
There were various other accounting standards and interpretations issued
recently, none of which are expected to a have a material impact on the
Company's financial position, operations or cash flows.
2. Going Concern
The Company's financial statements are prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of obligations
in the normal course of business. Only recently has the Company commenced
revenue generating operations and it has financed operations primarily through
the sale of equity. The Company recently was successful in obtaining a bank loan
secured by oil and gas equipment. The Company has incurred losses since its
inception aggregating $11,298,476. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern.
The Company has raised cash proceeds of $3,112,500, net of offering costs,
in sales of common stock since inception. Management believes that the cash
balances of $1,052,985 at May 31, 2009 will not be sufficient to fund its
operating activities and other capital resource demands during the next twelve
months.
The Company's ability to continue as a going concern is contingent upon its
ability to raise additional funds, such as (1) through the sale of equity or
sale of its assets, (2) joint venture or partnership arrangements, or (3)
issuing debt instruments, and ultimately attaining profitable operations. The
financial statements do not include any adjustments to the amount and
classification of assets and liabilities that may be necessary should the
Company not continue as a going concern.
3. Property and Equipment
Oil and gas property consists of various interests in oil and gas leases,
two wells, one of which is operating and one of which is in the completion
stage, and tubular goods to be used in the development of future wells.
In November 2008, the Company participated in an auction of oil and gas
leases conducted by the State of Colorado and was awarded leases to 1,600 acres
for total consideration of $113,600. The leases have a term of five years. In
February 2009, the Company participated in an auction of leases conducted by the
Bureau of Land Management and was awarded leases to 2,000 acres for total
consideration of $45,000. The leases have a term of ten years. The Company also
acquired several leases in private transactions covering approximately 3,000
acres for total consideration approximating $136,000. The leases have terms
11
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
ranging from two to five years. As of May 31, 2009, these leases covered
approximately 6,700 net acres, and none of them were included in the full cost
pool subject to amortization.
The Company has an option to acquire working interests in oil and gas
leases currently owned by related parties PM and PEM as described in Note 7. In
connection therewith, the Company recently participated in two wells drilled by
Kerr-McGee Oil & Gas Onshore LP ("KM"). As of May 31, 2009, one well was
operating and one well was in the completion stage. The Company has a 37.5%
working interest (28.125% net revenue interest) in each well.
Property and equipment at May 31, 2009, consisted of the following:
Oil and Gas Properties, full cost method:
Unevaluated costs, not subject to amortization:
Acquisition and other costs $ 355,992
Tubular goods 1,718,968
Well in progress 287,934
----------
Subtotal, unevaluated costs 2,362,894
---------
Evaluated costs 324,373
Less, accumulated depletion (21,788)
-----------
Subtotal, evaluated costs 302,585
----------
Oil and gas properties, net 2,665,479
---------
Other property and equipment:
Office equipment 1,337
Less, accumulated depreciation (185)
-------------
Other property and equipment, net 1,152
------------
Total Property and Equipment, net $ 2,666,631
=============
The Company commenced depletion of its full cost pool during the three
months ended May 31, 2009. Costs of oil and gas properties are depleted using
the unit of production method based on estimated reserves. Production volumes
for the quarter are compared to estimated total reserves to calculate a
depletion rate. For the nine months ended May 31, 2009, depletion of oil and gas
properties was $21,788 and depreciation of other property and equipment was
$185.
12
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
4. Bank Loan Payable
The Company entered into a credit facility with a commercial bank. The
borrowing arrangement provides for maximum borrowings up to $1,161,811 and is
collateralized by tubular goods and certain other assets. The maximum amount
that can be borrowed is reduced by usage or sale of the tubular goods. The loan
bears interest at the prime rate plus 1/2%, payable quarterly, with a minimum
interest rate of 5.5%. The loan maturity date is May 8, 2010. Interest costs of
$3,195 and loan fees of $5,917 were incurred during the period ended May 31,
2009.
The Company capitalizes interest on expenditures made in connection with
exploration and development projects that are not subject to current
amortization. Interest is capitalizable during the period that activities are in
progress to bring the projects to their intended use. During the nine months
ended May 31, 2009, interest expense of $9,112, including loan fees, was
capitalized.
5. Shareholders' Equity
Preferred Stock The Company has authorized 10,000,000 shares of preferred
stock with a par value of $0.01 per share. These shares may be issued in series
with such rights and preferences as may be determined by the Board of Directors.
Since inception, the Company has not issued any preferred shares.
Common Stock The Company has authorized 100,000,000 shares of common stock
with a par value of $0.001 per share.
Issued and Outstanding The total issued and outstanding common stock at May
31, 2009 is 10,601,334 common shares, as follows:
i. Effective June 11, 2008, the Company issued 7,900,000 common shares to
its founders at $0.001 per share, for aggregate proceeds of $7,900.
ii. Pursuant to a Private Offering Memorandum dated June 20, 2008, the
Company sold 1,000,000 units at $1.00 per unit. Each unit consists of
one share of restricted common stock and one Series A warrant that
entitles the holder to purchase one share of common stock at $6.00 per
share through December 31, 2012.
iii. Pursuant to a Private Offering Memorandum dated July 16, 2008, the
Company sold 1,060,000 units at $1.50 per unit for total cash proceeds
of $1,590,000. Each unit consists of one share of restricted common
stock and one Series A warrant that entitles the holder to purchase
one share of common stock at $6.00 per share through December 31,
2012.
13
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
iv. Effective September 10, 2008, the Company agreed to issue 1,038,000
common shares to the shareholders of Predecessor Brishlin, on an
exchange basis of one share of Synergy common stock for each share of
Brishlin common stock. In addition, the shareholders of Predecessor
Brishlin will receive 1,038,000 Series A warrants that entitle the
holder to purchase one share of common stock at $6.00 per share
through December 31, 2012.
v. Effective December 1, 2008, the Company repurchased 1,000,000 shares
of its common stock from one of the original Predecessor Synergy
shareholders for $1,000, the price at which the shares were originally
sold to the shareholder.
vi. Pursuant to a Private Offering Memorandum dated December 1, 2008, the
Company sold 301,667 units at $3.00 per unit for total cash proceeds
of $905,001. Offering costs associated with the offering aggregated
$275,400, resulting in net cash proceeds of $629,601. Each unit
consists of two shares of common stock, one Series A warrant and one
Series B warrant. Each Series A warrant entitles the holder to
purchase one share of common stock at a price of $6.00 per share. The
Series A warrants expire on December 31, 2012, or earlier under
certain conditions. Each Series B warrant entitles the holder to
purchase one share of common stock at a price of $10.00 per share. The
Series B warrants expire on December 31, 2012, or earlier under
certain conditions.
The following tables summarize information about the Company's issued and
outstanding common stock warrants for the period ended May 31, 2009:
Exercise
Remaining Price times
Number of Contractual Number
Exercise Price Shares Life (in years) of Shares
-------------- --------- --------------- -----------
$ 6.00 3,399,667 3.5 $20,398,002
$10.00 301,667 3.5 $ 3,016,670
Number of Weighted average
warrants exercise price
--------- -----------------
Outstanding, August 31, 2008 2,043,571 $6.00
Granted 1,657,763 $6.73
Exercised -- --
------------ ---------
Outstanding, May 31, 2009 3,701,334 $6.33
============ =========
14
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
6. Stock Based Compensation
The Company accounts for stock options activities as provided by SFAS
123(R), "Share-Based Payment," which requires the Company to expense as
compensation the value of grants and options as determined in accordance with
the fair value based method prescribed in SFAS 123(R). The Company estimates the
fair value of each stock option at the grant date by using the
Black-Scholes-Merton option-pricing model.
As described in the following paragraphs, the Company recorded stock-based
compensation expense of $10,282,000 for the nine months ended May 31, 2009.
During June 2008, stock options were granted to purchase 4,000,000 shares
of common stock. Effective June 11, 2008, grants covering 2,000,000 shares were
issued to the executive officers at an exercise price of $10.00 and a term of
five years, and these options will vest over a one-year period. The fair value
of these options was determined to be nil based upon the following assumptions:
expected life of 2.5 years, stock price of $1.00 at date of grant, nominal
volatility, dividend yield of 0%, and interest rate of 2.63%. Effective June 30,
2008, grants covering an additional 2,000,000 shares were issued to the
executive officers at an exercise price of $1.00 and a term of five years, and
these options will vest over a one-year period. Based upon a fair value
calculation, these options were determined to have a value of $127,000 using the
following assumptions: expected life of 2.5 years, stock price of $1.00 at date
of grant, nominal volatility, dividend yield of 0%, and interest rate of 2.63%.
Stock option compensation expense of $88,920 was allocated to the nine months
ended May 31, 2009, based on a pro-ration of the fair value over the vesting
period.
In connection with the merger, the Company agreed to issue stock option
grants covering 4,000,000 shares to replace the similar options described in the
preceding paragraph. Using the Black-Scholes-Merton option-pricing model, the
Company estimated that the fair value of the replacement options exceeded the
fair value of the options surrendered by $10,185,345. The assumptions used in
the model were: expected life of 2.5 years, stock price of $3.50 at date of
grant, volatility of 166%, dividend yield of 0%, and interest rate of 2.63%. The
incremental expense of $10,185,345 was pro-rated over the vesting period and
stock option compensation expense for the nine months ended May 31, 2009 was
$10,185,345.
Effective December 31, 2008, the Company granted stock options to an
employee to purchase 100,000 shares of common stock at an exercise price of
$3.00 and a term of ten years. These options will vest over a five year period.
Based on a fair value calculation, these options were determined to have a value
of $185,640 using the following assumptions: expected life of 5 years, stock
price of $2.00 at date of grant, volatility of 166%, dividend yield of 0%, and
interest rate of 3.13%. Stock option compensation expense of $7,735 was recorded
for the period ended May 31, 2009, based on a pro-ration of the fair value over
the vesting period.
15
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
The estimated unrecognized compensation cost from unvested stock options
as of May 31, 2009 was approximately $187,785, which will be recognized ratably
through December 31, 2013.
The following tables summarize information about stock options for the
period ended May 31, 2009:
Remaining Exercise Weighted
Contractual Price times Average
Number of Life (in Number of Exercise
Exercise Price Shares years) Shares Price
- ---------------------------------------------------------------------
$ 10.00 2,000,000 4.3 $ 20,000,000 $10.00
$ 1.00 2,000,000 4.3 2,000,000 $ 1.00
$ 3.00 100,000 9.5 300,000 $ 3.00
---------- -------------
4,100,000 $ 22,300,000 $ 5.44
========= =============
Number of Weighted average
shares exercise price
Outstanding, August 31, 2008 4,000,000 $5.50
Granted 4,100,000 $5.44
Terminated (4,000,000) $5.50
----------
Outstanding, May 31, 2009 4,100,000 $5.44
==========
Exercisable at June 30, 2009 4,000,000
==========
7. Related Party Transactions and Commitments
The Company's executive officers control two entities that have entered
into agreements with the Company. The entities are Petroleum Management, LLC
("PM") and Petroleum Exploration and Management, LLC ("PEM"). One agreement
provides various administrative services to the Company and the other agreement
provides an option to acquire certain oil and gas interests.
For the nine months ended May 31, 2009, the Company paid $180,000 under the
administrative services agreement.
Effective August 7, 2008, the Company entered into a letter of intent with
the related entities that provides an option to acquire working interests in oil
and gas leases which are owned by PM and/or PEM. The oil and gas leases cover
640 acres in Weld County, Colorado, and subject to certain conditions, will be
transferred to the Company for payment of $1,000 per net mineral acre. The
16
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
working interests in the leases vary but the net revenue interest in the leases,
if acquired by the Company, will not be less than 75%. The letter of intent, as
amended, has an expiration date of August 31, 2009.
Effective May 13, 2009, the Company acquired oil and gas equipment
consisting of casing and tubing from PM. PM was paid $1,718,967 as reimbursement
for the original cost of the tubular goods
On June 11, 2008, the Company entered into two year employment agreements
with its executive officers. Pursuant to the terms of those agreements, the
salaries of William E. Scaff, Jr. and Ed Holloway are each $12,500 per month.
For the nine months ended May 31, 2009, the Company paid $225,000 under these
agreements.
In June 2008, the Company sold 1,900,000 shares of its common stock to the
Synergy Energy Trust (the "Trust"). The Trust was created for the benefit of
consultants and others who have, or will in the future, benefit the Company. The
trustee is a shareholder of the Company. Effective December 1, 2008, the Company
repurchased 1,000,000 shares of its common stock from the Trust for $1,000, the
original selling price. During the nine months ended May 31, 2009, 900,000
shares were issued to the Trustee in exchange for certain services directly
related to raising additional capital for the Company, and the Trustee
terminated the Trust.
On June 1, 2008, the Company entered into an agreement with Energy Capital
Advisors, an entity related through common ownership interests. Energy Capital
Advisors provided certain services directly related to raising additional
capital for the Company. Compensation under the agreement was $30,000 per month
through December 31, 2008, and $10,000 per month from January 1, 2009 to May 31,
2009, when the agreement terminated. During the nine months ended May 31, 2009,
the Company paid $170,000 related to this agreement.
On June 1, 2008, the Company entered into an agreement with J3 Energy LLC,
an entity related through common ownership interests. Pursuant to the Agreement,
J3 Energy LLC agreed to provide certain services directly related to raising
additional capital for the Company. The agreement terminated on September 30,
2008. Compensation under the agreement was $8,000 per month. During the nine
months ended May 31, 2009, the Company paid $8,000 related to the agreement.
In connection with the merger, the Company entered into an agreement with
two directors to provide consulting services. The initial term of the agreement
is one year. Compensation under the agreement is $10,000 per month. During the
nine months ended May 31, 2009, the Company recorded costs of $90,000 related to
this agreement.
17
SYNERGY RESOURCES CORPORATION
(An Exploration Stage Company)
NOTES TO FINANCIAL STATEMENTS
May 31, 2009
(Unaudited)
8. Subsequent Events
Effective June 29, 2009, the Company completed the private sale of
1,000,000 units at a price of $3.00 per unit. Each unit consisted of two shares
of the Company's common stock, one Series A Warrant and one Series B warrant.
The sale of 1,000,000 units included 301,667 units sold on or before May 31,
2009 and 698,333 units sold subsequent to May 31, 2009.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Overview
The following discussion updates our plan of operation for the next twelve
months. It also analyzes our financial condition at May 31, 2009 and compares it
to our financial condition at August 31, 2008. Finally, the discussion
summarizes the results of our operations for the three months and nine months
ended May 31, 2009. This discussion and analysis should be read in conjunction
with our audited financial statements for the period ended August 31, 2008,
including footnotes thereto, and the discussion and analysis included in our
reports as filed with the SEC.
Merger Transaction Between Brishlin Resources, Inc. and Synergy Resources
Corporation
Synergy Resources Corporation represents the result of a merger transaction
between Brishlin Resources, Inc. ("Predecessor Brishlin"), a public company, and
Synergy Resources Corporation ("Predecessor Synergy"), a private company. In
conjunction with the transaction, Predecessor Brishlin changed its name to
Synergy Resources Corporation and Predecessor Synergy changed its name to
Synergy Resources, Ltd.
On September 10, 2008, Predecessor Brishlin consummated an Agreement to
Exchange Common Stock ("Exchange Agreement") with certain shareholders of
Predecessor Synergy to acquire approximately 89% of the outstanding common stock
of Predecessor Synergy. In subsequent transactions, all of the remaining
outstanding common shares of Predecessor Synergy were acquired. Prior to
September 10, 2008, Predecessor Brishlin had 1,038,000 common shares outstanding
and Predecessor Synergy had 9,960,000 common shares outstanding. The merger
transaction resulted in an entity with 10,998,000 shares outstanding, with the
shareholders of Predecessor Synergy holding approximately 91% of the outstanding
shares and the shareholders of Predecessor Brishlin holding approximately 9% of
the outstanding shares.
As additional consideration in the transaction, the Exchange Agreement
required Predecessor Brishlin to issue 2,060,000 Series A warrants to certain
shareholders of Predecessor Synergy to replace similar warrants previously
issued by Predecessor Synergy. Each Series A warrant entitles the holder to
purchase one share of common stock at an exercise price of $6.00 per share.
Although the legal form of the transaction reflects the acquisition of
Predecessor Synergy by Predecessor Brishlin, we determined that the accounting
form of the transaction is a "reverse merger", in which Predecessor Synergy is
identified as the acquiring company and Predecessor Brishlin is identified as
the acquired company. Furthermore, since Predecessor Brishlin had ceased most of
its activities as of the merger date, the transaction was not treated as a
business combination pursuant to Statement of Financial Accounting Standards No.
141, but as a capital transaction whereby common stock was issued for the net
assets of Predecessor Brishlin accompanied by a simultaneous recapitalization of
Predecessor Synergy. No goodwill or other intangible assets were recorded in the
transaction.
19
Financial information for all periods subsequent to September 10, 2008
includes the combined assets, liabilities and activities of both companies.
Historical financial information for periods prior to September 10, 2008,
presented for comparative purposes, includes only Predecessor Synergy.
At the date of the Exchange Agreement, Predecessor Synergy's primary asset
was approximately $2,200,000 in cash that it had raised from sales of its common
stock to private investors. Predecessor Brishlin's primary asset was an interest
in one shut-in well located in northeastern Colorado.
Plan of Operation
We plan to become an independent oil and gas exploration and production
company, engaged in the acquisition of mineral interests and the exploration and
development of crude oil and natural gas reserves and production. Our executive
officers have extensive experience in drilling wells and producing oil and gas
in the Denver-Julesburg Basin (D-J Basin) located in northeastern Colorado and
neighboring states. The D-J Basin has many positive attributes that we intend to
exploit. The area has a long history of successful oil and gas operations, and
features low drilling and completion costs, high level of predictability, rapid
return on investment, and numerous drilling opportunities. New drilling and
completion technology has greatly improved the ability to extract hydrocarbons
from mineral rich formations. We have developed a plan to utilize a drilling
program in proven areas with a relatively predictable return and a low risk
history.
As an oil and gas company, our strategy will be to identify and exploit
mineral interests in areas that are proximate to existing or indicated producing
areas based on the results of other drilling activity in the area. These targets
can be quickly developed and put into production as low cost and low risk. We
believe that the experience of our executive officers will provide us with an
advantage in quickly acquiring prospects in promising areas in an efficient and
cost effective manner.
To fund our operations, we plan to sell additional shares of our common
stock and warrants.
We have an option to acquire interests in mineral properties currently
owned by Petroleum Management, LLC ("PM") and Petroleum Exploration and
Management, LLC ("PEM"), companies controlled by our executive officers. The two
entities have acquired the rights to several mineral interests and have agreed
to assign certain interests to us for payment of $1,000 per mineral acre. The
option required an initial payment of $100,000 which will be applied against the
mineral interests as they are assigned to us. As of May 31, 2009, $40,000 had
been applied to mineral interests acquired from PM and PEM.
Pursuant to the option agreement with PM and PEM described above, we
recently participated in two wells drilled by Kerr-McGee Oil & Gas Onshore LP
("KM"). Both the Gray #25-16 well and the Zabka State #33-15 well hit productive
formations at a depth of approximately 7,500 feet. As of May 31, 2009 one well
20
was operating and one well was in the completion stage. We have a 37.5% working
interest (28.125% net revenue interest) in each well.
In November, 2008, we participated in an auction of oil and gas leases
conducted by the State of Colorado. We were awarded leases to 1,600 acres for
total consideration of $113,600. The leases have a term of five years. In
February, 2009, we participated in an auction of leases conducted by the Bureau
of Land Management. We were awarded leases to 2,000 acres for total
consideration of $45,000. The leases have a term of ten years. In addition, we
acquired several leases in private transactions. The leases cover approximately
3,000 acres for total consideration approximating $136,000. The leases have
terms ranging from two to five years. As of May 31, 2009, these leases covered
approximately 6,700 net acres, and none of them were included in the full cost
pool subject to amortization.
Future Capital Expenditures. Our capital expenditure plans for the next
twelve months include participation in 23 gross wells (in which our interest
will approximate 14 net wells) and various other projects for total costs of
$8,000,000 to $9,000,000. As total capital expenditure plans exceed our capital
resources, we plan to seek additional funding sources. Capital expenditure plans
are subject to periodic revision based upon availability of funds and expected
return on investment.
Exploration Stage Company. We are considered an exploration stage company
for accounting purposes. We are unable to predict with any degree of accuracy
when that classification will change. We expect to incur losses until such time,
if ever, we begin generating significant revenue from operations.
Going Concern. The report of our independent registered public accounting
firm on our audited financial statements as of August 31, 2008 contained an
explanatory paragraph expressing significant uncertainty about our ability to
continue as a going concern. The factors that contribute to this uncertainty
include our status as an exploration stage company, our need to raise
significant additional capital to fund our business plan, and the operating
losses that we have incurred since inception.
Liquidity and Capital Resources
Our business will be capital intensive. Our primary cash needs will be to
fund operating expenses and capital expenditures related to the acquisition,
exploration and development of crude oil and natural gas properties. Our ability
to execute our plan is dependent upon a number of factors, including the amount
of capital that is raised in the coming months.
We plan to obtain more funding in the next 12 months to continue our
business operations.
We recently entered into a credit arrangement with a commercial bank. The
borrowing arrangement provides for maximum borrowings up to $1,161,811 and is
collateralized by tubular goods and certain other assets. The maximum allowable
borrowing amount is reduced by usage or sale of the tubular goods. The loan
bears interest at the prime rate plus 1/2%, payable quarterly, and was 5.5% as
21
of May 31, 2009. The loan maturity date is May 8, 2010.
We may try to obtain additional credit facilities in the future. During the
last several months, the credit markets have undergone significant volatility.
Many financial institutions have liquidity concerns, prompting government
intervention to mitigate pressure on the credit markets. These disruptions may
affect our ability to obtain capital resources and to finance our operations.
Due to the uncertainty in the credits, we are unable to predict if we will be
able to obtain additional financing on terms and conditions that are acceptable
to us.
The most significant of our future expenditures include (i) capital
expenditures described above for exploration and development; and (ii)
approximately $100,000 per month for operating expenses, including salaries and
other corporate overhead.
Capital resources to date have been provided primarily through the sale of
equity securities. From inception through May 31, 2009, we received cash
proceeds of $3,502,900 from the sale of our common stock, offset by the payment
of offering costs of $389,400 and the repurchase of 1,000,000 shares of common
stock from the original shareholder for $1,000.
On June 29, 2009, we completed the private sale of 1,000,000 units at a
price of $3.00 per unit. Each unit consisted of two shares of common, one Series
A warrant and one Series B warrant.
Cash and cash equivalents. As of May 31, 2009, we had cash and cash
equivalents on hand of $1,052,985. From time to time, our cash balances may
exceed the limits of federal deposit insurance. We attempt to limit this risk by
maintaining our cash deposits in a financial institution which we believe to be
financially strong.
Working capital. As of May 31, 2009, we had a working capital deficit of
$(675,733), comprised of current assets of $1,111,738 and current liabilities of
$1,787,471. Our working capital declined by $2,942,160 from the working capital
balance of $2,266,427 as of August 31, 2008. Consistent with our plan, we
utilized working capital in our operations and for the acquisition of oil and
gas properties.
Operating activities. Net cash used in operating activities during the nine
months ended May 31, 2009 was $291,570. We expect to continuing consuming cash
in operations until such time, if ever, that we are able to generate significant
revenue from the sale of oil and gas.
Investing activities. During the nine months ended May 31, 2009, we used
$2,790,492 in investing activities, primarily consisting of expenditures for the
acquisition of oil and gas properties, including the acquisition of tubular
goods of $1,718,968.
Financing activities. Cash provided by financing activities during the nine
months ended May 31, 2009 was $1,842,706, consisting of proceeds from the sale
of common stock of $957,295, offset by offering costs of $275,400 and repurchase
of shares for $1,000. In addition, we received proceeds from a bank loan of
$1,161,811.
22
Off Balance Sheet Financing. As of and subsequent to May 31, 2009, we had
no off balance sheet arrangements.
It is expected that the principal source of future cash flow will be from
the production and sale of crude oil and natural gas from reserves which are
depleting assets. Cash flow from the sale of oil and gas production depends upon
the quantity of production and the price obtained for the production. An
increase in prices will permit us to finance operations to a greater extent with
internally generated funds, may allow us to obtain equity financing more easily
or on better terms, and lessens the difficulty of obtaining debt financing.
However, price increases heighten the competition for oil and gas prospects,
increase the costs of exploration and development, and, because of potential
price declines, increase the risks associated with the purchase of producing
properties during times that prices are at higher levels.
A decline in oil and gas prices (i) will reduce the cash flow internally
generated, which in turn will reduce the funds available for exploring for and
replacing oil and gas reserves, (ii) will increase the difficulty of obtaining
equity and debt financing and worsen the terms on which such financing may be
obtained, (iii) will reduce the number of oil and gas prospects which have
reasonable economic terms, (iv) may cause us to permit leases to expire based
upon the value of potential oil and gas reserves in relation to the costs of
exploration, (v) may result in marginally productive oil and gas wells being
abandoned as non-commercial, and (vi) may increase the difficulty of obtaining
financing. However, price declines reduce the competition for oil and gas
properties and correspondingly reduce the prices paid for leases and prospects.
It is our plan to generate profits by drilling productive oil or gas wells.
However, we will need to raise the funds required to drill new wells through the
sale of equity securities, from loans from third parties, or from third parties
willing to pay our share of drilling and well completion costs. We do not have
any commitments or arrangements from any person to provide us with any
additional capital. If additional financing is not available when needed, we may
need to curtail or cease operations. We may not be successful in raising the
capital needed to drill oil or gas wells. Any wells which may be drilled may not
be productive of oil or gas.
Results of Operations
We are in the early stages of implementing our business plan. For financial
reporting purposes, our inception date was December 28, 2007, the day that
Predecessor Synergy was incorporated in the State of Colorado. Although we
incorporated in 2007, we did not commence business activities until June 2008.
Accordingly, this discussion does not address historical comparative amounts for
periods prior to June 2008.
Three Months Ended May 31, 2009
For the three months ended May 31, 2009, we recorded a net loss of
$(3,672,130), or $(0.35) per share.
Revenues for the three months ended May 31, 2009 were $28,832, representing
oil sales of $22,214 (619 bbls at an average price of $35.89) and gas sales of
23
$6,618 (1,855 mcf at an average price of $3.57). During the period, we began to
accrue revenue for production from one well.
Operating expenses for the three months ended May 31, 2009 were $3,702,886,
most of which was share based compensation ($3,429,396). Excluding share based
compensation, operating expenses for the quarter were $273,490, consisting
primarily of salaries and benefits, amounts paid under the administrative
services arrangement with PM, consulting and professional fees. These costs may
increase in future periods as we implement our business plan and expand our
business activities.
Operating expenses include $3,429,396 of share based compensation related
to the issuance of stock options. When stock options are issued, we estimate
their fair value using the Black-Scholes-Merton option-pricing model. The
estimated fair value is recorded as an expense on a pro-rata basis over the
vesting period. In connection with the merger, we agreed to issue options
covering 4,000,000 shares to replace similar options that had previously been
issued. We estimate that the fair value of the replacement options exceeded the
fair value of the surrendered options by $10,185,345 and the relevant vesting
period is nine months. The pro-rata expense amount allocated to this quarter was
$3,395,115 and there is no remaining amount to recognize in future periods.
Other options have been issued which increased total expense for the quarter to
$3,429,396.
Nine Months Ended May 31, 2009
For the nine months ended May 31, 2009, we recorded a net loss of
$(11,105,098), or $(1.05) per share.
Revenues for the nine months ended May 31, 2009 were $28,832, representing
oil sales of $22,214 (619 bbls at an average price of $35.89) and gas sales of
$6,618 (1,855 mcf at an average price of $3.57). During the period, we began to
accrue revenue for production from one well.
Operating expenses for the nine months ended May 31, 2009 were $11,147,496,
most of which was share based compensation ($10,282,000). Excluding share based
compensation, operating expenses for the nine months were $865,496, consisting
primarily of salaries and benefits, amounts paid under the administrative
services arrangement with PM, consulting and professional fees. These costs may
increase in future periods as we implement our business plan and expand our
business activities.
Operating expenses include $10,282,000 of share based compensation related
to the issuance of stock options. When stock options are issued, we estimate
their fair value using the Black-Scholes-Merton option-pricing model. The
estimated fair value is recorded as an expense on a pro-rata basis over the
vesting period. In connection with the merger, we agreed to issue options
covering 4,000,000 shares to replace similar options that had previously been
issued. We estimate that the fair value of the replacement options exceeded the
fair value of the surrendered options by $10,185,345 and the relevant vesting
24
period is nine months. The pro-rata expense amount allocated to this nine month
period was the entire amount of $10,185,345 and there is no remaining amount to
recognized in future periods. Other options have been issued which increased
total expense for the quarter to $10,282,000.
Outlook
The factors that will most significantly affect our results of operations
will be (i) the sale prices of crude oil and natural gas, (ii) the amount of
production from oil or gas wells in which we have an interest, and (iii) and
lease operating expenses. Our revenues will also be significantly impacted by
our ability to maintain or increase oil or gas production through exploration
and development activities.
Other than the foregoing, management does not know of any trends, events or
uncertainties that will have had or are reasonably expected to have a material
impact on sales, revenues or expenses.
Forward-Looking Statements
This Form 10-Q contains or incorporates by reference "forward-looking
statements," as that term is used in federal securities laws, about our
financial condition, results of operations and business. These statements
include, among others:
- statements concerning the benefits that we expect will result from our
business activities and results of exploration that we contemplate or
have completed, such as increased revenues; and
- statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical
facts.
These statements may be made expressly in this document or may be
incorporated by reference to other documents that we will file with the SEC. You
can find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates" or similar expressions used in this report
or incorporated by reference in this report.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties that may cause our actual results to be materially different
from any future results expressed or implied in those statements. Because the
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied. We caution you not to put undue
reliance on these statements, which speak only as of the date of this report.
Further, the information contained in this document or incorporated herein by
reference is a statement of our present intention and is based on present facts
and assumptions, and may change at any time and without notice, based on changes
in such facts or assumptions.
25
Risk Factors Impacting Forward-Looking Statements
The important factors that could prevent us from achieving our stated goals
and objectives include, but are not limited to, those set forth in our Form 10-K
filed with the SEC and the following:
o The worldwide economic situation;
o Volatility in the price of oil and gas;
o Any change in interest rates or inflation;
o The willingness and ability of third parties to honor their
contractual commitments;
o Our 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 Our capital costs, as they may be affected by delays or cost overruns;
o Our costs of production;
o Environmental and other regulations, as the same presently exist and
may hereafter be amended;
o Our ability to identify, finance and integrate other acquisitions; and
o Volatility of our stock price.
We undertake no responsibility or obligation to update publicly these
forward-looking statements, but may do so in the future in written or oral
statements. Investors should take note of any future statements made by or on
our behalf.
Item 4. Controls and Procedures.
(a) We maintain a system of controls and procedures designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended ("1934 Act"), is recorded,
processed, summarized and reported, within time periods specified in the SEC's
rules and forms and to ensure that information required to be disclosed by us in
the reports that we file or submit under the 1934 Act, is accumulated and
communicated to our management, including our Principal Executive Officer and
Principal Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. As of May 31, 2009, under the supervision and with the
participation of our Principal Executive Officer and Principal Financial
Officer, management has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, the
Principal Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures were effective.
(b) Changes in Internal Controls. There were changes in our internal
control over financial reporting during the quarter ended May 31, 2009 that
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting. Specifically, those changes included the
implementation of controls over the revenue recognition cycle and review of
26
joint interest billings from third party operators. Our evaluation of internal
controls discussed in the preceding paragraph was conducted after those changes
were implemented.
27
PART II
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended May 31, 2009, we sold 61,000 units at $3.00
per unit for gross cash proceeds of $183,000. Subsequent to May 31, 2009 we sold
698,333 additional units.
The units consist of two shares of our common stock, one Series A Warrant
and one Series B Warrant.
Each Series A Warrant entitles the holder to purchase one share of 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.
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 Series B 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 $12.00 for any ten of twenty consecutive trading days.
Neither the shares nor the warrants were registered under the Securities
Act of 1933, as amended (which we refer to as the "Act") and we relied on the
exemption from registration provided by Section 4(2) of the Act. Each
certificate representing the shares issued in the transaction was stamped with a
legend indicating that the shares represented by the certificate are restricted
securities, as that term is defined in Rule 144 of the Securities and Exchange
Commission.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
28
Item 6. Exhibits
a. Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Edward Holloway.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Frank L. Jennings.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 for Edward Holloway and Frank L. Jennings.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNERGY RESOURCES CORPORATION
Date: July 8, 2009
By: /s/ Edward Holloway
------------------------------------
Edward Holloway, President and Principal
Executive Officer
Date: July 8, 2009
By: /s/ Frank L. Jennings
-----------------------------------
Frank L. Jennings, Principal Financial
and Accounting Officer