UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): May 24, 2011
SYNERGY RESOURCES CORPORATION
-----------------------------
(Exact name of Registrant as specified in its charter)
Colorado 001-35245 20-2835920
---------------------------- --------------------- --------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
20203 Highway 60
Platteville, Colorado 80651
--------------------------------------------------
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (970) 737-1073
--------------
N/A
-----------------------------------
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Securities Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Explanatory Note
This amendment is being filed to amend and supplement the Current Report on Form
8-K filed by Synergy Resources Corporation on May 24, 2011, related to the
acquisition of assets from Petroleum Exploration & Management, LLC (PEM). This
amendment includes the historical financial statements of PEM and the unaudited
pro-forma financial information that are required pursuant to Item 9.01 (a) and
Item 9.01 (b).
Item 9.01 Financial Statement and Exhibits.
(a) Financial Statements of Business Acquired
The audited financial statements of PEM for the years ended December 31,
2010 and 2009, and the unaudited interim financial statements of PEM for
the three months ended March 31, 2011 and 2010.
(b) Pro-forma Financial Information
The unaudited pro-forma financial information giving effect to the
acquisition of certain assets from PEM for the year ended August 31,
2010, and for nine months ended May 31, 2011.
(d) Exhibits
10.12 Purchase and Sale Agreement with Petroleum Exploration and
Management, LLC
2
Petroleum Exploration & Management, LLC
Annual Financial Statements
And
Report of Independent Auditors
For the Years Ended
December 31, 2010 and 2009
Interim Financial Statements
For the Three Months Ended
March 31, 2011 and 2010
F-1
Petroleum Exploration & Management, LLC
Table of Contents
Page
For the Years Ended December 31, 2010 and 2009:
Report of Independent Auditors F-3
Balance Sheets F-4
Statements of Operations and Members' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
For the Three Months Ended March 31, 2011 and 2010:
Balance Sheets F-17
Statements of Operations and Members' Equity F-18
Statements of Cash Flows F-19
Notes to Financial Statements F-20
F-2
INDEPENDENT AUDITORS' REPORT
To the Members of
Petroleum Exploration & Management, LLC
Platteville, Colorado
We have audited the accompanying balance sheets of Petroleum Exploration &
Management, LLC as of December 31, 2010 and 2009, and the related statements of
operations and members' equity and cash flows for each of the years in the two
year period ended December 31, 2010. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Petroleum Exploration &
Management, LLC as of December 31, 2010 and 2009, and the results of its
operations and its cash flows for the years ended December 31, 2010 and 2009 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
May 12, 2011
Denver, Colorado
F-3
PETROLEUM EXPLORATION & MANAGEMENT, LLC
BALANCE SHEETS
As of December 31,
2010 2009
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,599 $ 248,294
Accounts receivable:
Oil and gas sales 377,857 131,159
Related party receivable 17,139 22,541
---------------- --------------
Total current assets 414,595 401,994
---------------- --------------
Oil and gas properties, full cost method, at cost:
Proved properties, net of
accumulated depletion of
$3,341,898 and $2,608,478,
respectively 6,612,692 5,486,104
Unproved properties 177,007 953,478
---------------- --------------
Total oil and gas properties
6,789,699 6,439,582
---------------- --------------
Total assets $ 7,204,294 $ 6,841,576
================ ==============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 602,838 $ 923,351
Related party payable 574,452 235,784
Accrued expenses 34,444 8,061
Bank loan payable 2,514,702 3,344,795
---------------- --------------
Total current liabilities 3,726,436 4,511,991
Non-current liabilities:
Asset retirement obligations 1,206,802 1,085,380
---------------- --------------
Total liabilities 4,933,238 5,597,371
---------------- --------------
Commitments and contingencies
Members' equity:
Members' equity 2,932,076 1,867,809
Advances due from affiliate (661,020) (623,604)
---------------- --------------
Total members' equity 2,271,056 1,244,205
---------------- --------------
Total liabilities and
members' equity $ 7,204,294 $ 6,841,576
================ ==============
The accompanying notes are an integral part of these financial statements.
F-4
PETROLEUM EXPLORATION & MANAGEMENT, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
For the years ended December 31,
2010 2009
-------------- --------------
Oil and gas revenues $ 3,286,103 $ 1,572,704
-------------- --------------
Operating expenses:
Lease operating expenses 694,880 523,430
Well workover expenses 226,138 139,090
Production and property
taxes 268,555 153,662
Depreciation, depletion, and
amortization 733,419 484,811
General and administrative 125,730 109,756
Accretion of discount
on asset retirement
obligation 90,660 71,267
-------------- --------------
Total expenses 2,139,382 1,482,016
-------------- --------------
Operating income 1,146,721 90,688
-------------- --------------
Other income (expense):
Interest expense (119,870) (224,223)
Interest income 37,416 44,724
-------------- --------------
Total other expense (82,454) (179,499)
-------------- --------------
Net income (loss) $ 1,064,267 $ (88,811)
============== ==============
MEMBERS' EQUITY
Beginning of year 1,867,809 1,956,620
Net income (loss) 1,064,267 (88,811)
-------------- --------------
End of year $ 2,932,076 $ 1,867,809
============== ==============
The accompanying notes are an integral part of these financial statements.
F-5
PETROLEUM EXPLORATION & MANAGEMENT, LLC
STATEMENTS OF CASH FLOWS
- ------------------------
For the years ended December 31,
2010 2009
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 1,064,267 $ (88,811)
--------------- ---------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion, and
amortization 733,419 484,811
Accretion of discount on asset
retirement obligations 90,660 71,267
Interest income accrued on advances
due from affiliate (37,416) (35,304)
Changes in operating assets and
liabilities:
Accounts receivable (241,296) 19,560
Accounts payable 18,155 511,553
Accrued expenses 26,383 8,061
--------------- ---------------
Total adjustments 589,905 1,059,948
--------------- ---------------
Net cash provided by operating
activities 1,654,172 971,137
--------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment (1,052,774) (1,787,339)
--------------- ---------------
Net cash used in investing activities (1,052,774) (1,787,339)
--------------- ---------------
Cash flows from financing activities:
Cash proceeds from bank loan payable - 414,683
Cash payments on bank loan payable (830,093) -
--------------- ---------------
Net cash provided by (used in)
financing activities (830,093) 414,683
--------------- ---------------
Net decrease in cash and equivalents (228,695) (401,519)
Cash and equivalents at beginning of period 248,294 649,813
--------------- ---------------
Cash and equivalents at end of period $ 19,599 $ 248,294
=============== ===============
Supplemental Cash Flow Information:
Interest paid $ 145,992 $ 211,406
Non-cash investing and financing activities:
Asset retirement costs and obligations $ 30,762 $ 149,324
The accompanying notes are an integral part of these financial
statements.
F-6
PETROLEUM EXPLORATION & MANAGEMENT, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
1. Summary of Significant Accounting Policies
Organization: Petroleum Exploration & Management, LLC (the "Company") was
organized under the laws of the State of Colorado on April 9, 2003. The Company
is primarily engaged in oil and gas acquisitions, exploration, development and
production activities, with an emphasis in the area known as the
Denver-Julesburg TypeBasin.
Basis of Presentation: The Company prepares its financial statements in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). The Company proportionately consolidates its undivided
interests in oil and gas properties.
Cash and Cash Equivalents: The Company considers cash in banks, deposits in
transit, and highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Oil and Gas Properties: The Company uses the full cost method of accounting
for costs related to its oil and gas properties. Accordingly, all costs
associated with acquisition, exploration, and development of oil and gas
reserves (including the costs of unsuccessful efforts) are capitalized into a
single full cost pool. These costs include land acquisition costs, geological
and geophysical expense, carrying charges on non-producing properties, and costs
of drilling. Under the full cost method, no gain or loss is recognized upon the
sale or abandonment of oil and gas properties unless non-recognition of such
gain or loss would significantly alter the relationship between capitalized
costs and proved oil and gas reserves.
Capitalized costs of oil and gas properties are amortized on an aggregate
basis using the unit-of-production method based upon estimates of petroleum
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 transferred to
the capitalized costs to be amortized.
In applying the full cost method, the capitalized costs of oil and gas
properties are subject to a ceiling test. The ceiling test determines a limit on
the book value of oil and gas properties. If capitalized costs, adjusted for
related accumulated depreciation, depletion, and amortization, exceed the
ceiling limitation, the excess is charged to earnings as an impairment expense.
The ceiling limitation is calculated as the present value, discounted at 10%, of
the future net cash flows from proved oil and gas reserves plus the cost of
properties not subject to amortization, plus the lower of cost or net realizable
value of unproved properties included in the amortization pool. The calculation
of future net cash flows assumes continuation of current economic conditions,
including current prices and costs. The ceiling limitation 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. Using these guidelines, for the years ended December 31, 2010
and 2009, the Company was not required to record a provision for impairment of
oil and gas properties.
For the years ended December 31, 2010 and 2009, the oil and natural gas
prices used to calculate the full cost ceiling limitation are the average
prices, calculated as the un-weighted arithmetic average of the first day of the
month price for each month within the 12 month period prior to the end of the
reporting period, unless prices are defined by contractual arrangements. Prices
are adjusted for basis or location differentials.
Oil and Gas Reserves: The determination of depreciation, depletion and
amortization expense, as well as the ceiling test limitation related to the
recorded value of the Company's oil and natural gas properties, is highly
dependent on the estimates of the proved oil and natural gas reserves. Oil and
F-7
natural gas reserves include proved reserves that represent estimated quantities
of crude oil and natural gas which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
values, including many factors beyond the Company's control. Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
ultimately recovered.
In January 2010 a new standard was issued to revise accounting and
disclosure requirements in accordance with current industry practice and changes
in technology. Among other things, the revisions include a replacement of the
single day pricing convention with a twelve month average pricing convention,
permit the disclosure of probable and possible reserves, allow the use of
certain technologies to establish reserves, require the disclosure of the
qualifications of the technical person primarily responsible for preparing the
reserve estimates or conducting a reserves audit, require the filing of the
independent reserve engineer's summary report, and permit the disclosure of a
reserves sensitivity analysis table to illustrate the impact of different price
and cost assumptions on reserves.
Capitalized Interest: The Company capitalizes interest on expenditures made
in connection with exploration and development projects that are not subject to
current amortization, when such amounts are significant. Interest is capitalized
during the period that activities are in progress to bring the projects to their
intended use. During the years ended December 31, 2010 and 2009, qualifying
expenditures on projects in progress were not sufficient to require the
capitalization of interest.
Operating Region and Industry: The Company operates exclusively within the
United States. Except for cash investments, all of the Company's assets are
employed in, and all of its revenues are derived from, the oil and gas industry.
Revenue Recognition: The Company records revenues from the sales of crude
oil, natural gas, and natural gas liquids when delivery to the purchaser has
occurred and title has transferred. Revenues are recognized only for the
proportionate ownership interest in each well, net of any royalty interest or
other profits interest. Revenues for royalty interests owned by the Company are
generally recognized one or two months after a sale has occurred, based upon the
earliest date that information is received from the well operator. Revenue
estimates are prepared for the quantity of petroleum product delivered to the
purchaser 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.
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.
Asset Retirement Obligation: The Company's activities are subject to
various laws and regulations, including legal and contractual obligations to
reclaim, remediate, or otherwise restore properties at the time the asset is
permanently removed from service. The obligations include removal and disposal
of surface equipment, and plugging and abandoning the wells. The fair value of a
liability for the asset retirement obligation ("ARO") is initially recorded when
it is incurred if a reasonable estimate of fair value can be made. This is
typically when a well is completed or an asset is placed in service. When the
ARO is initially recorded, the Company capitalizes the cost (asset retirement
cost or "ARC") by increasing the carrying value of the related asset. Over time,
the liability increases for the change in its present value (accretion of ARO),
while the capitalized cost is depreciated over the useful life of the asset. The
capitalized ARCs are included in the full cost pool and subject to depletion,
depreciation and amortization. In addition, the ARCs are included in the ceiling
test calculation. Calculation of an ARO requires estimates about several future
events, including the life of the asset, the costs to remove the asset from
service, and inflation factors. The ARO is initially estimated based upon
discounted cash flows over the life of the asset and is accreted to full value
over time using the Company's credit adjusted risk free interest rate. Estimates
are periodically reviewed and adjusted to reflect changes.
Income Taxes: For income tax purposes, the Company is treated as a
partnership and taxable income or loss of the Company is included in the income
tax returns of the individual members. Accordingly, these financial statements
do not include expense provisions or liabilities related to income taxes.
F-8
The Company adopted the authoritative guidance that pertains to uncertain
tax positions which requires that it recognize the financial statement benefit
of a tax position attributed to the entity only after determining that the
relevant tax authority would more likely than not sustain the position following
an audit. The Company did not have any unrecognized tax benefits attributed to
the entity and, accordingly, there was no effect on its financial condition or
results of operations as a result of the adoption.
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, including oil and gas reserves,
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. In addition to oil and gas
reserves, significant estimates include the present value of estimated future
net cash flows and the present value of asset retirement costs and obligations.
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.
Fair Value of Financial Instruments: The carrying value of financial
instruments including cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value as of December 31, 2010 and 2009, due to their
short term nature. The carrying value of bank loan payable approximates fair
value because it is based on variable interest rates and has a short term
maturity date.
Concentration of Credit Risk: The Company joins with certain affiliated
entities to maximize its cash management strategies. Certain cash balances are
combined with cash balances from other entities to achieve economies of scale.
The Company's cash position includes its interest in the shared account.
Balances may exceed federally insured limits.
The Company's oil and gas production is purchased by a few customers. The
table below presents the percentage of oil and gas revenue that was purchased by
major customers:
Years Ended
December 31,
---------------------
2010 2009
--------- ----------
Company A 58 % 58%
Company B 15 % 25%
Company C 15 % * %
* less than 10%
The table below presents the percentage of accounts receivable due from
major customers:
At December 31,
----------------------
2010 2009
---------- ----------
Company A 47% 40%
Company B 20% 24%
Company C 15% 20%
Company D 11% * %
* less than 10%
Recent Accounting Pronouncements: The Company evaluates the pronouncements
of various authoritative accounting organizations, primarily the Financial
F-9
Accounting Standards Board ("FASB") and the Emerging Issues Task Force to
determine the impact of new pronouncements on US GAAP and the impact on the
Company.
In January 2010, a new standard was issued to modernize the oil and gas
reserve estimation and disclosure requirements for all financial statements
issued on or after January 1, 2010. The Company adopted this guidance effective
December 31, 2009. The new accounting and disclosure requirements are aligned
with current industry practice and allow the adaptation of changes in
technology. The new rules permit the use of new technologies to determine proved
reserves, allow companies to disclose their probable and possible reserves, and
allow proved undeveloped reserves to be maintained beyond a five year period
only if justified by specific circumstances. The new rules require companies to
report the independence and qualification of the person primarily responsible
for the preparation or audit of its reserve estimates, and to file reports when
a third party is relied upon to prepare or audit its reserve estimates. The new
rules also require that the net present value of oil and gas reserves reported
and used in the full cost ceiling test calculation be based upon average market
prices for sales of oil and gas on the first calendar day of each month during
the preceding 12 month period prior to the end of the current reporting period.
A standard to improve disclosures about fair value measurements was issued
in January 2010. The additional disclosures include a discussion about the
different classes of assets and liabilities at fair value, the significant
inputs and techniques used to measure Level 2 and Level 3 assets and
liabilities, the gross presentation of purchases, sales, issuances and
settlements for the reconciliation of Level 3 activity, and the transfers in and
out of Levels 2 and 3 and the reasons for such transfers. Adoption of the new
standard did not materially affect the Company's disclosure.
There were various other accounting standard updates recently issued, most
of which represented technical corrections to the accounting literature or were
applicable to specific industries, and either were not or are not expected to
have a material impact on the Company's financial position, results of
operations or cash flows.
2. Oil and Gas Properties
Oil and gas property primarily consists of various interests in oil and gas
leases and producing wells, as follows:
At December 31,
--------------------------------
2010 2009
--------------- ---------------
Oil and Gas Properties, full cost
method:
Unevaluated costs, not subject to
amortization:
Leasehold acquisition costs $ 103,626 $ 103,626
Wells in progress 73,381 849,852
Evaluated costs:
Producing and non-producing 9,954,590 8,094,582
--------------- ---------------
Total capitalized costs 10,131,597 9,048,060
Less, accumulated depreciation,
depletion, and amortization (3,341,898) (2,608,478)
--------------- ---------------
Oil and gas properties, net $ 6,789,699 $ 6,439,582
=============== ===============
Costs of oil and gas properties are depleted on an aggregate basis using
the unit of production method. Production volumes are compared to estimated
total reserve volumes to calculate a depletion rate. For the years ended
December 31, 2010 and 2009, depletion of oil and gas properties was $733,419 and
$484,811, respectively, which is equivalent to $11.69 and $11.25 per barrel of
oil equivalent, respectively.
F-10
3. Purchase and Sale of Producing Properties
In 2009 the Company acquired certain oil and gas properties for $745,000.
The oil and gas properties include:
o 6 Producing oil and gas wells (100% working interest / 80% net revenue
interest)
o 2 Shut in oil wells (100% working interest / 80% net revenue interest)
o 15 Potential drill sites (net 6.25 wells)
o Miscellaneous equipment
The oil and gas properties are located in the Wattenberg field, which is
part of the Denver-Julesburg Basin. Although no proved reserves are associated
with the properties, they are considered good candidates for enhanced well
stimulation techniques.
In 2009 and 2010 the Company spent approximately $85,000 to upgrade and
maintain the properties. On October 1, 2010, the properties were sold to Synergy
for $830,093. (See Note 6). No gain or loss was recognized on the sale and the
sales proceeds were credited to the full cost pool.
4. Bank Loan Payable
The Company maintains a credit facility with a commercial bank. The credit
facility is collateralized by certain oil and gas properties and was amended on
October 6, 2010 to extend the maturity date to October 19, 2011. Our members
have provided the bank with personal repayment guarantees. The borrowing
arrangement bears interest at a variable rate, defined as the WSJ prime rate
less 0.25%, with a minimum interest rate of 5.5%. Interest is payable quarterly.
As of December 31, 2010, the borrowing arrangement provided for maximum
borrowings up to $5,000,000 and the unused borrowing capacity was $2,485,298.
Subsequent to December 31, 2010, the limit on maximum borrowings was reduced to
$4,000,000.
5. Asset Retirement Obligation
The following table summarizes the change in the asset retirement
obligation for the years ended December 31, 2010 and 2009:
Balance, December 31, 2008 $ 864,789
Liabilities incurred 149,324
Accretion of discount 71,267
-----------
Balance, December 31, 2009 1,085,380
Liabilities incurred 30,762
Accretion of discount 90,660
-----------
Balance, December 31, 2010 $1,206,802
===========
6. Related Party Transactions
The Company's two members control various other entities and serve as
executive officers of Synergy Resources Corporation ("Synergy"), a public
company. The Company participates in transactions with related entities, as
described below.
The Company has no employees and does not operate any of its wells. It
contracts with Petroleum Management, LLC ("PM") to provide various services. PM
is controlled by the Company's members. PM is the operator of several oil and
gas interests owned by the Company and charges the Company a pumper and
management fee. The pumper and management fees were $216,500 and $218,700 for
the years ended December 31, 2010 and 2009, respectively. In addition, the
Company purchases certain equipment, primarily tubular goods, from PM. Amounts
F-11
paid to PM for equipment purchases were $265,422 and $88,534 for the years ended
December 31, 2010 and 2009, respectively, and were capitalized into oil and gas
properties.
The Company is a joint working interest owner of certain wells operated by
Synergy. The Company is charged for its pro-rata share of costs and expenses
incurred on its behalf. Similarly, it receives its pro-rata share of revenue
from the sale of oil and natural gas. During the years ended December 31, 2010
and 2009, the Company was billed by Synergy for costs of $1,464,941 and
$394,456, respectively. The Company recorded revenues from Synergy of $372,626
and $nil for the years ended December 31, 2010 and 2009, respectively.
Between 2009 and 2010, the Company and PM sold partial interests in various
properties to Synergy. The properties covered 640 gross acres and aggregate
sales proceeds were $360,000.
On October 1, 2010, the Company sold certain oil and gas properties to
Synergy for $830,093. (See Note 3).
The Company joins with certain affiliated entities to maximize its cash
management strategies. Certain cash balances are combined with cash balances
from other entities to achieve economies of scale. The Company's cash position
includes its interest in the shared account.
In addition, the Company leases space from another entity that is
affiliated by common ownership interests. The Company pays monthly rent of
$6,500 and may cancel the arrangement at any time. Rent expense of $78,000 was
recorded for each of the years ended December 31, 2010 and 2009.
The Company has advanced funds to an affiliated entity for the acquisition
and improvement of real property. As the terms and conditions of the advance are
not formally defined with regard to either the time of repayment or collateral,
the advance has been presented as a reduction of members' equity. The advance
bears interest at 6.0%. Related party interest income of $37,416 and $35,304 was
recorded for the years ended December 31, 2010 and 2009, respectively.
The following table summarizes balances due from related parties and
balances due to related parties:
At December 31,
-----------------------
2010 2009
---------- -----------
Accounts receivable, related parties:
Petroleum Management, LLC 17,139 22,541
Synergy Resources
Corporation 237,067 -
---------- -----------
Total 254,206 22,541
========== ===========
Accounts payable, related parties:
Petroleum Management, LLC 574,452 235,784
Synergy Resources
Corporation 67,207 83,220
---------- -----------
Total 641,659 319,004
========== ===========
7. Commitments and Contingencies
On October 28, 2010, the Company agreed to sell certain oil and gas
properties located in Wyoming. The transaction closed on April 11, 2011. See
Note 9.
On November 1, 2010, the Company entered into a non-binding letter of
intent to sell substantially all of its remaining oil and gas assets to Synergy.
F-12
8. Supplemental Oil and Gas Information (unaudited)
Costs Incurred: Costs incurred in oil and gas property acquisition,
exploration and development activities for the years ended December, 2010 and
2009, were:
Years Ended December 31,
---------------------------
2010 2009
------------- ------------
Acquisition of Property:
Unproved $ -- $ 843,625
Proved -- 345,031
Exploration costs -- --
Development costs 2,142,868 698,683
------------- ------------
Total Costs Incurred $ 2,142,868 $ 1,887,339
============= ============
Capitalized Costs Excluded from Amortization: The Company excludes unproved
leasehold acquisition costs and wells in progress from amounts subject to
depreciation, depletion, and amortization. For the years ended December 31, 2010
and 2009, unproved leasehold acquisition costs of $103,626 were excluded. The
Company regularly evaluates these costs to determine whether impairment has
occurred. Substantially all of these costs were incurred during 2009 and are
expected to be evaluated and included in the amortization within five years. The
Company also excluded wells in progress of $73,381 and $849,852 as of December
31, 2010 and 2009, respectively. Wells in progress are generally completed and
transferred to the amortization pool within one year and there are no properties
or projects which are expected to be excluded for more than five years.
Oil and Natural Gas Reserve Information: Proved reserves 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 (prices and costs held constant as of the date the estimate is made).
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Proved
undeveloped reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Proved oil and natural gas reserve information at December 31, 2010 and
2009, and the related discounted future net cash flows are based on estimates
prepared by petroleum engineers. Reserve information for the properties was
prepared in accordance with revised guidelines initially adopted for the year
ended December 31, 2009 and described in Note 1.
The un-weighted arithmetic average of the first day of the month price for
each month within each year is used in calculating proved oil and gas reserves
as well as the aggregate amount and changes in future cash inflows related to
the standardized measure of discounted future cash flows. Undrilled locations
can be classified as having proved undeveloped reserves only if a development
plan has been adopted indicating that they are scheduled to be drilled within
five years.
The following table sets forth information regarding the Company's net
ownership interests in estimated quantities of proved developed and undeveloped
oil and gas reserve quantities and changes therein for the years ended December
31, 2010 and 2009:
Oil (Bbl) Gas (Mcf)
-------------- --------------
Balance, December 31, 2008
201,009 1,301,365
Revision of previous estimates 36,953 40,690
Extensions, discoveries, and other
additions 19,412 296,918
Production (18,504) (147,439)
-------------- --------------
Balance, December 31, 2009 238,870 1,491,534
F-13
Revision of previous estimates 1,740 108,562
Extensions, discoveries, and other
additions 44,626 357,904
Production (28,261) (206,795)
-------------- --------------
Balance, December 31, 2010 256,975 1,751,205
============== ==============
All of the Company's reserves are classified as proved developed reserves.
Standardized Measure of Discounted Future Net Cash Flows: The following
analysis is a standardized measure of future net cash flows and changes therein
related to estimated proved reserves. Future oil and gas sales have been
computed by applying average prices of oil and gas for December 31, 2010 and
2009. Future production and development costs were computed by estimating the
expenditures to be incurred in developing and producing the proved oil and gas
reserves at the end of the year, based on year-end costs. The calculation
assumes the continuation of existing economic conditions, including the use of
constant prices and costs. All cash flow amounts are discounted at 10% annually
to derive the standardized measure of discounted future cash flows. Actual
future cash inflows may vary considerably, and the standardized measure does not
necessarily represent the fair value of the Company's oil and gas reserves.
Actual future net cash flows from oil and gas properties will also be affected
by factors such as actual prices the Company receives for oil and gas, the
amount and timing of actual production, supply of and demand for oil and gas,
and changes in governmental regulations or taxation.
The following table sets forth the Company's future net cash flows relating
to proved oil and gas reserves based on the standardized measure:
Years Ended December 31,
-----------------------------------
2010 2009
----------------- ----------------
uture cash inflows $27,097,635 $19,118,788
Future production costs (9,868,457) (7,373,637)
Future development costs -- --
----------------- ----------------
Future net cash flows 17,229,178 11,745,151
10% annual discount for
estimated timing of cash flows (8,108,711) (5,572,022)
----------------- ----------------
Standardized measure of
discounted future net cash flows $ 9,120,467 $ 6,173,129
================= ================
There have been significant fluctuations in the posted prices of oil and
natural gas during the last two years. Prices actually received for the
Company's oil and gas from purchasers are adjusted from posted prices for
location differentials, quality differentials, and BTU content. Estimates of the
Company's reserves are based on realized prices. The following table presents
the prices used to prepare the estimates, based upon average prices for the
years ended December 31, 2010 and 2009:
Natural
Gas Oil
(Mcf) (Bbl)
December 31, 2009 $ 4.54 $51.69
December 31, 2010 $ 5.13 $70.49
F-14
The principle sources of change in the standardized measure of discounted
future net cash flows are:
Years Ended December 31,
2010 2009
Standardized measure, beginning of $ 6,173,129 $ 4,827,948
year
Sale and transfers, net of production (2,096,530) (756,522)
costs
Net changes in prices and production 2,166,057 612,281
costs
Extensions, discoveries, and improved 1,632,881 699,321
recovery
Revision of quantity estimates 169,742 770,585
Accretion of discount 617,313 482,795
Other 457,875 (463,279)
------------------ -----------------
Standardized measure, end of year $ 9,120,467 $ 6,173,129
================== =================
9. Subsequent Events
On April 11, 2011, the Company sold producing oil and gas properties
located in Laramie County, Wyoming. Net proceeds from the sale were
approximately $3,153,000, and are subject to customary post-closing adjustments.
For accounting purposes, the proceeds will be credited to the full cost pool.
The properties that were sold provided revenues of $398,608 and $342,673 for the
years ended December 31, 2010 and 2009, respectively. The lease operating
expenses associated with the properties were $348,511 and 298,597 for the years
ended December 31, 2010 and 2009, respectively.
F-15
Petroleum Exploration & Management, LLC
Interim Financial Statements
For the Three Months Ended
March 31, 2011 and 2010
(unaudited)
F-16
PETROLEUM EXPLORATION & MANAGEMENT, LLC
BALANCE SHEETS
March 31, December 31,
2011 2010
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 132,056 $ 19,599
Accounts receivable:
Oil and gas sales 246,221 140,790
Related parties 451,605 254,206
------------ ------------
Total current assets 829,882 414,595
------------ ------------
Oil and gas properties, full cost method:
Proved properties, net of accumulated
depreciation, depletion,
and amortization of $3,519,103 and
$3,341,898, as of
March 31, 2011 and December 31, 2010,
respectively 6,496,942 6,612,692
Unproved properties 177,007 177,007
------------ ------------
Total oil and gas properties 6,673,949 6,789,699
------------ ------------
Total assets $7,503,831 $7,204,294
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 507,502 $ 535,631
Related parties 684,854 641,659
Accrued expenses 25,808 34,444
Bank loan payable 2,514,702 2,514,702
------------ ------------
Total current liabilities 3,732,866 3,726,436
Non-current liabilities:
Asset retirement obligations 1,232,080 1,206,802
------------ ------------
Total liabilities 4,964,946 4,933,238
------------ ------------
Members' equity:
Members' equity 3,209,820 2,932,076
Advances due from affiliate (670,935) (661,020)
------------ ------------
Total members' equity 2,538,885 2,271,056
------------ ------------
Total liabilities and members' equity $7,503,831 $7,204,294
============ ============
The accompanying notes are an integral part of these financial
statements.
F-17
PETROLEUM EXPLORATION & MANAGEMENT, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
(unaudited)
For the three months ended March 31,
2011 2010
--------------- ---------------
Oil and gas revenues $ 803,139 $ 762,868
--------------- ---------------
Operating expenses:
Lease operating expenses 171,644 146,766
Well workover expenses - 39,548
Production and property taxes 82,786 43,470
Depreciation, depletion, and
amortization 177,205 170,263
General and administrative 45,379 24,049
Accretion of discount
on asset retirement
obligation 25,278 22,665
--------------- ---------------
Total expenses 502,292 446,761
--------------- ---------------
Operating income 300,847 316,107
--------------- ---------------
Other income (expense):
Interest expense (33,018) (42,125)
Interest income 9,915 9,354
--------------- ---------------
Total other
(expense) (23,103) (32,771)
--------------- ---------------
Net income $ 277,744 $ 283,336
=============== ===============
MEMBERS' EQUITY
Beginning of period 2,932,076 1,867,809
Net income 277,744 283,336
--------------- ---------------
End of period $ 3,209,820 $ 2,151,145
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-18
PETROLEUM EXPLORATION & MANAGEMENT, LLC
STATEMENTS OF CASH FLOWS
(unaudited)
For the three months
ended March 31,
2011 2010
-------------- -----------
Cash flows from operating activities:
Net income $ 277,744 $ 283,336
-------------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion, and
amortization 177,206 170,263
Accretion of discount on asset
retirement obligations 25,278 22,665
Interest income accrued on advances due
from affiliate (9,915) (9,354)
Changes in operating assets and
liabilities:
Accounts receivable (302,830) (332,010)
Accounts payable 15,066 (3,594)
Accrued expenses (8,636) 2,684
-------------- -----------
Total adjustments (103,831) (149,346)
-------------- -----------
Net cash provided by operating activities 173,913 133,990
-------------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (61,456) (133,166)
Proceeds from sale of assets - 260,000
-------------- -----------
Net cash provided by (used in) investing
activities (61,456) 126,834
-------------- -----------
Cash flows from financing activities:
-------------- -----------
Net cash provided by financing activities - -
-------------- -----------
Net increase in cash and equivalents 112,457 260,824
Cash and equivalents at beginning of period 19,599 248,294
-------------- -----------
Cash and equivalents at end of period $ 132,056 $ 509,118
============== ===========
Supplemental Cash Flow Information:
Interest paid $ 41,653 $ 39,409
Non-cash investing and financing activities:
Asset retirement costs and obligations $ - $ -
The accompanying notes are an integral part of these financial
statements.
F-19
PETROLEUM EXPLORATION & MANAGEMENT, LLC
NOTES TO FINANCIAL STATEMENTS
March 31, 2011 and 2010
1. Summary of Significant Accounting Policies
Organization: Petroleum Exploration & Management, LLC (the "Company") was
organized under the laws of the State of Colorado on April 9, 2003. The Company
is primarily engaged in oil and gas acquisitions, exploration, development and
production activities, with an emphasis in the area known as the
Denver-Julesburg Basin.
Basis of Presentation: The Company prepares its financial statements in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). The Company proportionately consolidates its undivided
interests in oil and gas properties.
Cash and Cash Equivalents: The Company considers cash in banks, deposits in
transit, and highly liquid debt instruments purchased with original maturities
of three months or less to be cash and cash equivalents.
Oil and Gas Properties: The Company uses the full cost method of accounting
for costs related to its oil and gas properties. Accordingly, all costs
associated with acquisition, exploration, and development of oil and gas
reserves (including the costs of unsuccessful efforts) are capitalized into a
single full cost pool. These costs include land acquisition costs, geological
and geophysical expense, carrying charges on non-producing properties, and costs
of drilling. Under the full cost method, no gain or loss is recognized upon the
sale or abandonment of oil and gas properties unless non-recognition of such
gain or loss would significantly alter the relationship between capitalized
costs and proved oil and gas reserves.
Capitalized costs of oil and gas properties are amortized on an aggregate
basis using the unit-of-production method based upon estimates of petroleum
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 transferred to
the capitalized costs to be amortized.
In applying the full cost method, the capitalized costs of oil and gas
properties are subject to a ceiling test. The ceiling test determines a limit on
the book value of oil and gas properties. If capitalized costs, adjusted for
related accumulated depreciation, depletion, and amortization, exceed the
ceiling limitation, the excess is charged to earnings as an impairment expense.
The ceiling limitation is calculated as the present value, discounted at 10%, of
the future net cash flows from proved oil and gas reserves plus the cost of
properties not subject to amortization, plus the lower of cost or net realizable
value of unproved properties included in the amortization pool. The calculation
of future net cash flows assumes continuation of current economic conditions,
including current prices and costs. The ceiling limitation 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. Using these guidelines, for the three months ended March 31,
2011 and 2010, the Company was not required to record a provision for impairment
of oil and gas properties.
For the three months ended March 31, 2011 and 2010, the oil and natural gas
prices used to calculate the full cost ceiling limitation are the average
prices, calculated as the un-weighted arithmetic average of the first day of the
month price for each month within the 12 month period prior to the end of the
reporting period, unless prices are defined by contractual arrangements. Prices
are adjusted for basis or location differentials.
F-20
Oil and Gas Reserves: The determination of depreciation, depletion and
amortization expense, as well as the ceiling test limitation related to the
recorded value of the Company's oil and natural gas properties, is highly
dependent on the estimates of the proved oil and natural gas reserves. Oil and
natural gas reserves include proved reserves that represent estimated quantities
of crude oil and natural gas which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. There are numerous
uncertainties inherent in estimating oil and natural gas reserves and their
values, including many factors beyond the Company's control. Accordingly,
reserve estimates are often different from the quantities of oil and natural gas
ultimately recovered.
In January 2010, a new standard was issued to revise accounting and
disclosure requirements in accordance with current industry practice and changes
in technology. Among other things, the revisions include a replacement of the
single day pricing convention with a twelve month average pricing convention,
permit the disclosure of probable and possible reserves, allow the use of
certain technologies to establish reserves, require the disclosure of the
qualifications of the technical person primarily responsible for preparing the
reserve estimates or conducting a reserves audit, require the filing of the
independent reserve engineer's summary report, and permit the disclosure of a
reserves sensitivity analysis table to illustrate the impact of different price
and cost assumptions on reserves.
Capitalized Interest: The Company capitalizes interest on expenditures made
in connection with exploration and development projects that are not subject to
current amortization, when such amounts are significant. Interest is capitalized
during the period that activities are in progress to bring the projects to their
intended use. During three months ended March 31, 2011 and 2010, qualifying
expenditures on projects in progress were not sufficient to require the
capitalization of interest.
Operating Region and Industry: The Company operates exclusively within the
United States. Except for cash investments, all of the Company's assets are
employed in, and all of its revenues are derived from, the oil and gas industry.
Revenue Recognition: The Company records revenues from the sales of crude
oil, natural gas, and natural gas liquids when delivery to the purchaser has
occurred and title has transferred. Revenues are recognized only for the
proportionate ownership interest in each well, net of any royalty interest or
other profits interest. Revenues for royalty interests owned by the Company are
generally recognized one or two months after a sale has occurred, based upon the
earliest date that information is received from the well operator. Revenue
estimates are prepared for the quantity of petroleum product delivered to the
purchaser 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.
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.
Asset Retirement Obligation: The Company's activities are subject to
various laws and regulations, including legal and contractual obligations to
reclaim, remediate, or otherwise restore properties at the time the asset is
permanently removed from service. The obligations include removal and disposal
of surface equipment, and plugging and abandoning the wells. The fair value of a
liability for the asset retirement obligation ("ARO") is initially recorded when
it is incurred if a reasonable estimate of fair value can be made. This is
typically when a well is completed or an asset is placed in service. When the
ARO is initially recorded, the Company capitalizes the cost (asset retirement
cost or "ARC") by increasing the carrying value of the related asset. Over time,
the liability increases for the change in its present value (accretion of ARO),
while the capitalized cost is depreciated over the useful life of the asset. The
capitalized ARCs are included in the full cost pool and subject to depletion,
depreciation and amortization. In addition, the ARCs are included in the ceiling
test calculation. Calculation of an ARO requires estimates about several future
events, including the life of the asset, the costs to remove the asset from
service, and inflation factors. The ARO is initially estimated based upon
discounted cash flows over the life of the asset and is accreted to full value
over time using the Company's credit adjusted risk free interest rate. Estimates
are periodically reviewed and adjusted to reflect changes. In addition,
revisions to the liability could occur due to changes in estimated abandonment
costs or well economic lives, or if federal or state regulators enact new
requirements regarding the abandonment of wells.
F-21
Income Taxes: For income tax purposes, the Company is treated as a
partnership and taxable income or loss of the Company is included in the income
tax returns of the individual members. Accordingly, these financial statements
do not include expense provisions or liabilities related to income taxes.
The Company adopted the authoritative guidance that pertains to uncertain
tax positions which requires that the Company recognize the financial statement
benefit of a tax position attributed to the entity only after determining that
the relevant tax authority would more likely than not sustain the position
following an audit. The Company did not have any unrecognized tax benefits
attributed to the entity and, accordingly, there was no effect on its financial
condition or results of operations as a result of the adoption.
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, including oil and gas reserves,
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. In addition to oil and gas
reserves, significant estimates include the present value of estimated future
net cash flows and the present value of asset retirement costs and obligations.
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.
Fair Value of Financial Instruments: The carrying value of financial
instruments, including cash, accounts receivable, accounts payable, and accrued
expenses, approximate fair value as of March 31, 2011 and 2010, due to their
short term nature. The carrying value of bank loan payable approximates fair
value because it is based on variable interest rates and has a short term
maturity date.
Concentration of Credit Risk: The Company joins with certain affiliated
entities to maximize its cash management strategies. Certain cash balances are
combined with cash balances from other entities to achieve economies of scale.
The Company's cash position includes its interest in the shared account.
Balances may exceed federally insured limits.
The Company's oil and gas production is purchased by a few customers. The
table below presents the percentage of oil and gas revenue that was purchased by
major third party customers:
Three Months Ended March 31,
---------------------------------
2011 2010
-------------- -----------------
Company A 38% 33%
Company B 18% 23%
Company C 14% 23%
Company D 10% * %
* less than 10%
F-22
The table below presents the percentage of accounts receivable due from
major third party customers:
As of
--------------------------------
March 31, December 31,
2011 2010
-------------- ----------------
Company A 43% 47%
Company B 21% 20%
Company C 12% 15%
Company D 12% 11%
Recent Accounting Pronouncements: The Company evaluates the pronouncements
of various authoritative accounting organizations, primarily the Financial
Accounting Standards Board ("FASB") and the Emerging Issues Task Force, to
determine the impact of new pronouncements on the Company. During the three
months ended March 31, 2011, there were no accounting standard updates that had
or are expected to have a material impact on the Company's financial position,
results of operations or cash flows.
2. Oil and Gas Properties
Oil and gas property primarily consists of various interests in oil and gas
leases and producing wells, as follows:
As of
--------------------------------
March 31, December, 31,
2011 2010
--------------- ---------------
Oil and Gas Properties, full cost
method:
Unevaluated costs, not subject to
amortization:
Leasehold acquisition costs $ 103,626 $ 103,626
Wells in progress 73,381 73,381
Evaluated costs:
Producing and non-producing 10,016,045 9,954,590
--------------- ---------------
Total capitalized costs 10,193,052 10,131,597
Less, accumulated depreciation,
depletion, and amortization (3,519,103) (3,341,898)
--------------- ---------------
Oil and gas properties, net $ 6,673,949 $ 6,789,699
=============== ===============
Costs of oil and gas properties are depleted on an aggregate basis using
the unit of production method. Production volumes are compared to estimated
total reserve volumes to calculate a depletion rate. For the three months ended
March 31, 2011, depletion of oil and gas properties was $177,205 which is
equivalent to $12.12 per barrel of oil equivalent. For the three months ended
March 31, 2010, depletion of oil and gas properties was $170,263 which is
equivalent to $11.69 per barrel of oil equivalent.
3. Bank Loan Payable
The Company maintains a credit facility with a commercial bank. The credit
facility is collateralized by certain oil and gas properties and was amended on
October 6, 2010 to extend the maturity date to October 19, 2011. Our members
have provided the bank with personal repayment guarantees. The borrowing
arrangement bears interest at a variable rate, defined as the WSJ prime rate
less 0.25%, with a minimum interest rate of 5.5%. Interest is payable quarterly.
As of March 31, 2011, the borrowing arrangement provided for maximum borrowings
up to $5,000,000. Pursuant to the closing of the sale of certain of the
Company's Laramie, Wyoming properties on April 11, 2011, the Company repaid
$1,000,000 of amounts then outstanding under this credit facility. Concurrent
with this repayment, the limit on maximum borrowings was reduced to $4,000,000.
F-23
4. Asset Retirement Obligation
The following table provides a reconciliation of the Company's asset
retirement obligations for the three months ended March 31, 2011 (in thousands):
Balance, December 31, 2010 $1,206,802
Liabilities incurred -
Accretion of discount 25,278
-----------
Balance, March 31, 2011 $1,232,080
===========
5. Related Party Transactions
The Company's two members control various other entities and serve as
executive officers of Synergy Resources Corporation ("Synergy"), a public
company. The Company participates in transactions with related entities, as
described below.
The Company has no employees and does not operate any of its wells. It
contracts with Petroleum Management, LLC ("PM") to provide various services. PM
is controlled by the Company's members. PM is the operator of several oil and
gas interests owned by the Company and charges the Company a pumper and
management fee. The pumper and management fees were $52,575, and $53,775 for the
three months ended March 31, 2011 and 2010, respectively.
The Company is a joint working interest owner of certain wells operated by
Synergy. The Company is charged for its pro-rata share of costs and expenses
incurred on its behalf. Similarly, it receives its pro-rata share of revenue
from the sale of oil and natural gas. During the three months ended March 31,
2011 and 2010, the Company was billed by Synergy for costs of $75,316 and
$105,527, respectively. The Company recorded net revenues from Synergy of
$292,498 and $nil for the three months ended March 31, 2011 and 2010,
respectively.
The Company joins with certain affiliated entities to maximize its cash
management strategies. Certain cash balances are combined with cash balances
from other entities to achieve economies of scale. The Company's cash position
includes its interest in the shared account.
In addition, the Company leases office space from another entity that is
affiliated by common ownership interests. The Company pays monthly rent of
$6,500 and may cancel the arrangement at any time. Rent expense of $19,500 was
recorded for each of the three months ended March 31, 2011 and 2010.
The Company has advanced funds to an affiliated entity for the acquisition
and improvement of real property. As the terms and conditions of the advance are
not formally defined with regard to either the time of repayment or collateral,
the advance has been presented as a reduction of members' equity. The advance
bears interest at 6.0%. Related party interest income of $9,915 and $9,354 was
recorded for the three months ended March 31, 2011 and 2010, respectively.
The following table summarizes balances due from related parties and
balances due to related parties:
As of
-----------------------------
March 31, December 31,
2011 2010
------------ ---------------
Accounts receivable, related parties:
Petroleum Management, LLC $ 18,167 $ 17,139
Synergy Resources Corporation 433,438 237,067
------------ ---------------
Total 451,605 254,206
============ ===============
Accounts payable, related parties:
F-24
Petroleum Management, LLC 677,817 574,452
Synergy Resources Corporation 7,037 67,207
------------ ---------------
Total $ 684,854 $ 641,659
============ ===============
6. Commitments and Contingencies
On October 28, 2010, the Company agreed to sell certain oil and gas
properties located in Wyoming. The transaction closed on April 11, 2011. See
Note 7.
On November 1, 2010, the Company entered into a non-binding letter of
intent to sell substantially all of its remaining oil and gas assets to Synergy.
The transaction closed on May 24, 2011. See Note 7.
7. Subsequent Events
On April 11, 2011, the Company closed on the sale of producing oil and gas
properties located in Laramie County, Wyoming. The transaction provided for net
proceeds of $3,159,821.
On May 24, 2011, the Company closed on the sale of substantially all of its
remaining oil and gas properties, consisting of 87 producing oil and gas wells,
one shut-in well, and oil and gas leases covering approximately 6,968 gross
acres, to Synergy in exchange for $10,000,000 in cash, 1,381,818 shares of
Synergy's common stock and a promissory note in the principal amount of
$5,200,000. The promissory note bears interest at 5.25% annual rate and is due
on January 2, 2012.
F-25
SYNERGY RESOURCES CORPORATION
AND
PETROLEUM EXPLORATION & MANAGEMENT, LLC
PRO-FORMA FINANCIAL INFORMATION
(unaudited)
On May 24, 2011, Synergy Resources Corporation ("Synergy") completed the
acquisition of certain oil and gas properties from Petroleum Exploration and
Management, LLC ("PEM"). The transaction had a purchase price of $19,000,000
consisting of a cash payment of $10,000,000, and 1,381,818 shares of Synergy's
restricted common stock, and a promissory note in the principal amount of
$5,200,000. The purchase price was based upon conditions and assumptions
effective as of January 1, 2011, and is subject to customary adjustments for
transactions that occurred between January 1, 2011, and May 24, 2011.
The following unaudited pro-forma information contains condensed combined
statements of operations for the twelve months ended August 31, 2010, and for
the nine months ended May 31, 2011, that give effect to the transaction as if it
had occurred as of the beginning of each period. The statement for the period
ended August 31, 2010, assumes that the transaction occurred on September 1,
2009. The statement for the period ended May 31, 2011, assumes that the
transaction occurred on September 1, 2010. The pro forma information does not
contain a pro-forma condensed combined balance sheet because the balance sheet
that includes the transaction was included in Synergy's Form 10-Q for the
interim period ended May 31, 2011.
The unaudited pro-forma condensed combined financial statements are
provided for illustrative purposes only and do not purport to present what the
actual results of operations would have been had the transactions actually
occurred on the date indicated, nor do they purport to represent results of
operations for any future period or financial position for any future date.
These statements do not assume any potential cost savings or other future
benefits that may be obtained through the combination of these two entities.
Synergy believes the assumptions used herein provide a reasonable basis for
presenting the significant effects directly attributable to the transaction
described above.
The pro-forma condensed combined financial statements have been derived
from, and should be read in conjunction with, historical financial statements
and notes thereto of Synergy and PEM. The audited financial statements of PEM as
of December 31, 2010 and 2009 as well as the unaudited financial statements for
the three months ended March 31, 2011 and 2010 appear elsewhere in this Form
8-K/A. The audited financial statements of Synergy as of August 31, 2010 and
2009 and for the two years then ended were previously filed on Form 10-K. The
unaudited financial statements of Synergy for the nine months ended May 31, 2011
were previously filed on Form 10-Q.
PF-1
SYNERGY RESOURCES CORPORATION AND PETROLEUM EXPLORATION & MANAGEMENT, LLC
PRO-FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
for the twelve months ended August 31, 2010
(Unaudited)
HISTORICAL
----------------------------- PRO-FORMA
Synergy PEM --------------
Synergy (Note 3-H) Adjustments Combined
------------- ----------- ------------- --------------
Revenues:
Oil and gas revenues $ 2,158,444 $ 2,227,861 $ (508,628) A $ 3,877,677
Expenses:
Lease operating expenses 323,520 971,549 (218,944) B 1,076,125
Depreciation, depletion, and
amortization 701,400 868,189 967,261 C 2,536,850
General and administrative 1,915,049 108,277 (78,000) D 1,945,326
------------- -------------- ------------- --------------
Total expenses 2,939,969 1,948,015 670,317 5,558,301
------------- -------------- ------------- --------------
Operating income (loss) (781,525) 279,846 (1,178,945) (1,680,624)
Other income (expense):
Accretion of debt discount (1,333,590) - - (1,333,590)
Amortization of debt
issuance costs (453,656) - - (453,656)
Change in fair value of
derivative conversion
liability (7,678,457) - - (7,678,457)
Interest expense, net (551,603) (196,848) (76,152) E (824,603)
Interest income 4,659 45,780 (45,780) F 4,659
------------- -------------- ------------- --------------
Total other income
(expense) (10,012,647) (151,068) (121,932) (10,285,647)
------------- -------------- ------------- --------------
Income (loss) before taxes (10,794,172) 128,778 (1,300,877) (11,966,271)
Provision for income taxes - - - -
------------- -------------- ------------- --------------
Net income (loss) $(10,794,172) $ 128,778 $(1,300,877) $ (11,966,271)
============= ============== ============= ==============
Net loss per common share:
Basic and Diluted $ (0.88) $ (0.88)
============= ==============
Weighted average shares
outstanding:
Basic and Diluted 12,213,999 1,381,818 G 13,595,817
============= ============= ==============
The accompanying notes are an integral part of these pro-forma condensed
combined financial statements.
PF-2
SYNERGY RESOURCES CORPORATION AND PETROLEUM EXPLORATION & MANAGEMENT, LLC
PRO-FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
for the nine months ended May 31, 2011
(Unaudited)
HISTORICAL
----------------------------- PRO-FORMA
Synergy PEM --------------
Synergy (Note 3-H) Adjustments Combined
------------- ----------- ------------- --------------
Revenues:
Oil and gas revenues $ 6,610,908 $ 2,734,263 $ (375,750) A $ 8,969,421
Expenses:
Lease operating expenses 1,131,837 905,121 (198,477) B 1,838,481
Depreciation, depletion, and
amortization 2,062,825 678,817 871,568 C 3,613,210
General and administrative 2,171,721 126,794 (208,500) D 2,090,015
------------- -------------- ------------- --------------
Total expenses 5,366,383 1,710,732 464,591 7,541,706
------------- -------------- ------------- --------------
Operating income (loss) 1,244,525 1,023,531 (840,341) 1,427,715
Other income (expense):
Change in fair value of
derivative conversion
liability (10,229,229) - - (10,229,229)
Interest expense, net (4,246,945) (61,403) (143,346) E (4,451,694)
Interest income 41,675 28,623 (28,623) F 41,675
------------- -------------- ------------- --------------
Total other income
(expense) (14,434,499) (32,780) (171,969) (14,639,248)
------------- -------------- ------------- --------------
Income (loss) before taxes (13,189,974) 990,751 (1,012,310) (13,211,533)
Provision for income taxes - - - -
------------- -------------- ------------- --------------
Net income (loss) $(13,189,974) $ 990,751 $(1,012,310) $(13,211,533)
============= ============== ============= ==============
Net loss per common share:
Basic and Diluted $ (0.58) $ (0.55)
============= ==============
Weighted average shares
outstanding:
Basic and Diluted 22,713,785 1,381,818 G 24,095,603
============= ============= ==============
The accompanying notes are an integral part of these pro-forma condensed
combined financial statements.
PF-3
SYNERGY RESOURCES CORPORATION
AND
PETROLEUM EXPLORATION & MANAGEMENT, LLC
NOTES TO PRO-FORMA FINANCIAL INFORMATION
(unaudited)
1. Basis of Pro-Forma Presentation
On May 24, 2011, Synergy Resources Corporation ("Synergy") acquired certain
oil and gas properties from Petroleum Exploration and Management, LLC ("PEM")
for consideration of $19,000,000, subject to customary adjustments for the
impact of transactions that occurred between January 1, 2011 and May 24, 2011.
The acquisition had an effective date of January 1, 2011 and closed on May 24,
2011. PEM is controlled by Ed Holloway and William E. Scaff, Jr., both also
officers and directors of Synergy.
The oil and gas properties consist of:
o 87 producing oil and gas wells;
o one shut in oil well; and
o oil and gas leases covering 6,968 gross acres in the
Denver-Julesburg Basin.
PEM's working interest in the wells ranged between 3% and 100%. PEM's net
revenue interest in the wells ranged between 2.44% and 80%. Some of the
properties involved wells in which Synergy shared an ownership interest. The oil
and gas properties are primarily located in the Wattenberg field, which is part
of the D-J Basin, and further consolidates Synergy's interests in the region.
The aggregate consideration for the purchase of these oil and gas
properties consisted of $10,000,000 in cash; plus 1,381,818 restricted shares of
Synergy common stock; plus a promissory note in the principal amount of
$5,200,000, which bears interest at 5.25% and is due on January 2, 2012.
Synergy did not acquire any of PEM's equity interests or any related
corporate items such as office furniture and equipment. Likewise, Synergy did
not assume any debt, lease obligations or equity compensation agreements or
retain any of PEM's corporate management and staff. Transaction-related costs
totaled approximately $150,000, all of which were recognized in the nine months
ended May 31, 2011.
For accounting purposes, the value of the consideration as of the closing
date approximated $19.9 million, calculated as follows:
Number of Synergy shares to be issued 1,381,818
Closing price of Synergy common stock on
May 24, 2011 $ 3.40
------------
Equity value $ 4,698,181
Cash value $10,000,000
Promissory note value $ 5,200,000
------------
Aggregate value $19,898,181
============
PF-4
The preliminary allocation of value to the assets acquired indicates that
the proved and unproved properties had a fair value approximating $19,898,181,
and no gains, losses, or goodwill will be recorded in the transaction. The
allocation of value to the properties is preliminary and is subject to
adjustment. The approximate fair values of the properties are:
Proved properties $ 19,000,000
Unproved properties 898,181
Asset retirement costs 165,694
------------
20,063,875
Less, asset retirement
obligations (165,694)
------------
Net asset value $19,898,181
============
2. Pro-Forma Adjustments
The pro-forma condensed combined financial statements have been prepared to
reflect the transaction between Synergy and PEM. Pro-forma adjustments included
in the pro-forma condensed combined financial statements are as follows:
A. Eliminate the revenues associated with properties not acquired by
Synergy.
B. Eliminate the lease operating expenses associated with properties not
acquired by Synergy.
C. Adjust depreciation, depletion, amortization, and accretion expense
("DDA") associated with the acquired properties, as follows:
12 Months 9 Months
----------- ----------
Eliminate DDA recorded by PEM $ (868,189) $(678,817)
Calculate DDA using
acquisition values 1,835,450 1,550,385
----------- ----------
$ 967,261 $ 871,568
=========== ==========
D. Adjust general and administrative expenses, as follows:
12 Months 9 Months
---------- -----------
Eliminate rent expense on lease not $ (78,000) $ (58,500)
assumed by Synergy
Eliminate direct acquisition costs - (150,000)
---------- -----------
$ (78,000) $(208,500)
========== ===========
E. Eliminate interest expense on PEM obligations not assumed by Synergy
and recognize interest expense associated with the acquisition note
payable in the principal amount of $5,200,000, bearing interest at an
annual rate of 5.25%, as follows:
12 Months 9 Months
----------- ----------
Eliminate PEM interest $ 196,848 $ 61,404
expense
Calculate interest on
acquisition debt (273,000) (204,750)
----------- ----------
$ (76,152) $(143,346)
=========== ==========
F. Eliminate interest income recorded by PEM on notes receivable not
acquired by Synergy.
G. Reflect the issuance of 1,381,818 restricted common shares.
PF-5
3. Data Derivation for the Periods Presented
Synergy and PEM have different fiscal years. Accordingly, we have extracted
data from the historical records of PEM to more closely coincide with the fiscal
periods of Synergy.
H. Reference 3-H in the accompanying statements of operations for the
twelve months ended August 31, 2010, signifies that the data was
derived from the historical results of PEM for the twelve months ended
June 30, 2010, and combined with the historical results of Synergy for
the twelve months ended August 31, 2010.
I. Reference 3-I in the accompanying statements of operations for the
nine months ended May 31, 2011, signifies that the data was derived
from the historical results of PEM for the nine months ended March 31,
2011, and combined with the historical results of Synergy for the nine
months ended May 31, 2011.
PF-6
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 hereunto duly authorized.
Date: August 5, 2011
SYNERGY RESOURCES CORPORATION
By: /s/ Frank L. Jennings
-------------------------------------
Frank L. Jennings, Chief Financial
Officer
3