UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: September 30, 2008
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _________
Commission file number: 000-53124
COLONY ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0662309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2100 West Loop South, Suite 900, Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
713/590-5060
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. 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
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No [X]
The number of shares of common stock, $.001 par value, outstanding as of
November 18, 2008: 6,375,000 shares
COLONY ENERGY, INC.
PERIOD ENDED SEPTEMBER 30, 2008
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS 1
Financial statements of Colony Energy, Inc. (unaudited):
Balance sheets as of September 30, 2008 and December 31, 2007 1
Statements of expenses for the three and nine months
ended September 30, 2008 and 2007 and period from July 20,
2000 (inception) through September 30, 2008 2
Statements of cash flows for the nine months ended
September 30, 2008 and 2007 and period from July 20,
2000 (inception) through September 30, 2008 3
Notes to financial statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 6
ITEM 4T. CONTROLS AND PROCEDURES 10
PART II. OTHER INFORMATION 11
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS 11
SIGNATURES 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLONY ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2008 2007
ASSETS
Current Assets
Cash $ 98,289 $ 136,168
Prepaid expenses 6,464 1,470
------------ -------------
Total Current Assets 104,753 137,638
OIL AND GAS PROPERTIES, full cost method
Unevaluated properties, Net of
Impairment Expense 277,711 277,383
----------- -------------
TOTAL ASSETS $ 382,464 $ 415,021
=========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 8,083 $ 6,532
Accrued interest payable 48,150 6,767
Notes payable - related parties 725,000 525,000
----------- -------------
Total Current Liabilities 781,233 538,299
STOCKHOLDERS' DEFICIT
Preferred stock, $0.01 par value, 10,000
shares authorized, none outstanding - -
Common stock, 50,000,000 common shares
authorized with a par value of $0.001,
6,375,000 common shares issued and
outstanding 6,375 6,375
Subscription receivable (9,000) (9,000)
Additional paid-in capital 5,693 5,693
Deficit accumulated during the
exploration stage (401,837) (126,346)
--------- ------------
Total Stockholders' Deficit (398,769) (123,278)
--------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 382,464 $ 415,021
========= ============
The accompanying notes are an integral part of these financial statements.
1
COLONY ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF EXPENSES
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
AND PERIOD FROM JULY 20, 2000 (INCEPTION)
THROUGH SEPTEMBER 30, 2008
(Unaudited)
Three Three Nine Nine For the period
months months months months July 20, 2000
ended ended ended ended (Inception)
September September September September through
30, 2008 30, 2007 30, 2008 30, 2007 September 30,
OPERATING EXPENSES:
General and
administrative $ 98,347 $ 11,482 $ 233,444 $ 11,482 $ 280,535
Impairment of
unevaluated oil
and gas properties - - - - 64,383
---------- --------- ---------- -------- -----------
Total Operating
Expenses 98,347 11,482 233,444 11,482 344,918
---------- --------- ---------- -------- -----------
LOSS FROM OPERATIONS (98,347) (11,482) (233,444) (11,482) (344,918)
---------- --------- ---------- ------- -----------
OTHER EXPENSES
Interest expense (15,837) (4,466) (42,047) (4,802) (56,919)
---------- --------- ---------- ------- -----------
Total Other Expenses (15,837) (4,466) (42,047) (4,802) (56,919)
---------- --------- ---------- ------- -----------
NET LOSS (114,184) (15,948) (275,491) (16,284) (401,837)
========== ========= ========== ======= ===========
Net basic and diluted
per common share $ (0.02) $ - $ (0.04) $ -
========== ========= ========== =======
Weighted average shares
outstanding - basic
and diluted 6,375,000 5,100,000 6,375,000 5,100,000
========== ========= ========== =========
2
The accompanying notes are an integral part of these financial statements.
COLONY ENERGY, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 AND
PERIOD FROM JULY 20, 2000 (INCEPTION) THROUGH SEPTEMBER 30, 2008
(Unaudited)
For the period July
Nine Months 20, 2000
Nine Months Ended (Inception) through
Ended September September September 30,
30, 2008 30, 2007 2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (275,491) $ (16,284) $ (401,837)
Adjustments to reconcile
net loss to cash used
in operating activities:
Change in:
Stock Warrants
accretion - - 593
Impairment of unevaluated
oil and gas properties - - 64,383
Changes in assets and
liabilities:
Prepaid expenses (4,994) - (6,464)
Accounts payable and
accrued liabilities 42,934 4,801 49,901
----------- ---------- ------------
Net Cash Used in Operating
Activities (237,551) (11,483) (293,424)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of oil and gas
property (328) (226,757) (335,562)
---------- --------- -----------
Net Cash Used in Investing
Activities (328) (226,757) (335,562)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of
common stock - 371 2,275
Proceeds of note payable
- related party 250,000 357,500 1,237,500
Repayment of note payable
- related party (50,000) (50,000) (512,500)
------------- ---------- ------------
Net cash Provided by
Financing Activities 200,000 307,871 727,275
------------- ---------- ------------
NET INCREASE (DECREASE)
IN CASH (37,879) 69,631 98,289
CASH AT BEGINNING OF PERIOD 136,168 972 -
-------------- ---------- -------------
CASH AT END OF PERIOD $ 98,289 $ 70,603 $ 98,289
============== =========== =============
Supplemental cash flow Disclosures
Interest Paid $ 664 $ - $ 8,768
Income taxes Paid - - -
The accompanying notes are an integral part of these financial statements.
3
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Colony Energy, Inc. ("Colony" or the "Company") was originally incorporated in
the State of Delaware on July 20, 2000 as "DirectMoviesOnline.Com Inc" but
changed its name to Colony Energy, Inc. on September 12, 2006. The Company
engages primarily in the exploration and development of oil and gas properties
in the United States. The Company currently participates in the exploration of
several unevaluated oil and gas properties.
Basis of Presentation
The accompanying unaudited interim financial statements of Colony have been
prepared in accordance with accounting principles generally accepted in the
PlaceNameplacecountry-regionUnited States of America and the rules of the
Securities and Exchange Commission, and should be read in conjunction with the
audited financial statements and notes thereto contained in Colony's Form S-1/A.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements that would substantially duplicate the disclosures
contained in the audited financial statements for fiscal 2007 as reported in the
Form S-1/A, have been omitted.
NOTE 2 - GOING CONCERN
Colony has been in the exploration stage since its formation and has not yet
realized any revenues from its planned operations. It is primarily engaged in
the acquisition, exploration and development of oil and gas properties. The
ability of the Company to emerge from the exploration stage with respect to its
principal business activity is dependent upon its successful efforts to raise
additional debt and/or equity financing and generate significant revenue. Colony
has incurred losses of $401,837 since inception. These factors raise substantial
doubt regarding Colony's ability to continue as a going concern.
Management plans to raise additional capital through equity and/or debt
financings. Colony cannot offer any assurances that it will be successful in
executing its plans to continue as a going concern. Colony's financial
statements for the nine-month ended September 30, 2008 do not include any
adjustments that might result from the inability to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the PlaceNameplacecountry-regionUnited States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Fair Value of Financial Instruments
The amounts of financial instruments including cash and cash equivalents,
prepaid expenses, accounts payable and notes payable, approximated their fair
values as of September 30, 2008 and December 31, 2007.
4
Oil and Gas Properties
The Company accounts for its oil and natural gas producing activities using the
full cost method of accounting as prescribed by the United States Securities and
Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition,
exploration, and development of proved oil and natural gas properties, including
the costs of abandoned properties, dry holes, geophysical costs, and annual
lease rentals are capitalized. All general and administrative corporate costs
unrelated to drilling activities are expensed as incurred. Sales or other
dispositions of oil and natural gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recorded unless the ratio of cost to
proved reserves would significantly change. Depletion of evaluated oil and
natural gas properties is computed on the units of production method based on
proved reserves. The net capitalized costs of proved oil and natural gas
properties are subject to a full cost ceiling limitation in which the costs are
not allowed to exceed their related estimated future net revenues discounted at
10%, net of tax considerations.
Costs associated with unevaluated properties are excluded from the full cost
pool until Colony has made a determination as to the existence of proved
reserves. Colony reviews its unevaluated properties at the end of each quarter
to determine whether the costs incurred should be transferred to the full cost
pool and thereby subject to amortization and ceiling test.
At September 30, 2008 and December 31, 2007, Colony had no proved properties.
Oil and gas properties consisted solely of unevaluated properties.
Asset Retirement Obligations
In August 2001, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). SFAS 143 requires that the fair value of an
asset retirement cost, and corresponding liability, should be recorded as part
of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. Because the Company has no
proved oil and gas properties, no asset retirement obligation was deemed
necessary as of September 30, 2008 and December 31, 2007.
Revenue Recognition
Colony recognizes oil and natural gas revenue under the sales method of
accounting for its interests in producing wells as oil and natural gas is
produced and sold from those wells.
Provision for Taxes
Colony has adopted SFAS No. 109 "Accounting for Income Taxes". Pursuant to this
pronouncement, income taxes are accounted for using an asset and liability
approach. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at the
applicable tax rates. A valuation allowance is utilized when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Loss per Share of Common Stock
Basic net loss per share of common stock is calculated by dividing net loss
available to common stockholders by the weighted average number of common shares
issued and outstanding during the year. Diluted net loss per common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding adjusted for potential dilutive securities on an "if
converted" basis. Common stock equivalents are excluded from the calculations
when their effect is anti-dilutive. which is the case for all periods presented.
5
NOTE 4. RELATED PARTY TRANSACTIONS
Notes payable to related parties of $725,000 at September 30, 2008, represent
funds advanced from CEI Ventures, LLC. The note is due on demand and bears
interest at the rate of ten percent (10%) per annum. In consideration for
$200,000 of the funds advanced, warrants to purchase 400,000 shares of the
Company's stock were issued to an equity owner of CEI Ventures, LLC. The
exercise price of the warrants is $0.50 per share and expire August 31, 2013 and
the warrants are vested immediately The fair value of the warrants is less than
$100, which is immaterial.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Colony Energy, Inc. is an early-stage, independent oil and gas exploration
and production company based in Houston, Texas. Our company was formed for the
purpose of providing video-on-demand service to consumers by means of broadband
or high-speed Internet connections. This business did not succeed, and our
company had been inactive from a business perspective since early 2001. During
the summer of 2006, we began considering the possible re-activation of
operations with a focus on the acquisition of attractive crude oil and natural
gas prospects, and the exploration, development and production of oil and gas on
these prospects. We entered into our first project related to oil and gas in
August 2007.
On August 29, 2007, we entered into an agreement (the "Enexco Agreement")
with Enexco, Inc. ("Enexco"), a privately held entity engaged in the drilling
and completion of wells on oil and gas leases covering lands located in Oklahoma
and Texas. Under the terms of the Enexco Agreement, we will make available, at
our discretion, to Enexco funds to cover 65% of the costs incurred by Enexco in
connection with its acquisition of three certain oil and gas leases, two in
Oklahoma and one in Texas. In consideration of our providing this financing, we
received an interest in each of the three leases, and an option to participate
in the drilling of each well on any of these leases. Before any well can be
drilled on any of these leases, Enexco must repay the amount loaned by us to
acquire the lease. Enexco has subsequently paid off all amounts advanced
pursuant to the Enexco Agreement.
We have acquired our only oil and gas assets thus far pursuant to the Enexco
Agreement, although we are currently considering other assets to acquire. The
first well in which we participated pursuant to the Enexco Agreement was drilled
to its target depth and encountered the target sand. However, the sand was
"tight," and this well on the lease in Okfuskee County, Oklahoma was plugged and
abandoned. Production has begun on our second well, located in Seminole County,
Oklahoma and in which we are participating pursuant to the Enexco Agreement.
However, no distributions have been made with respect to such production pending
the outcome of unitization hearings and calculations of the final revenue
distributions. Due to the uncertainty of the amount of revenue and the timing
of the revenue distribution, no revenues from this production have been recorded
for this production.
On July 31, 2008, the Company entered into contribution agreements with a total
of six parties, whereby these parties would contribute and assign to the Company
certain assets separately owned by them in exchange for shares of a new class of
preferred stock and for the assumption of aggregate of $890,000 in indebtedness.
The consummation of this transaction is subject to several closing conditions,
including, without limitation, that the Company complete (within 180 days of the
execution of the contribution agreements) a private placement of common stock
raising at least $15.0 million, and (in certain cases) the Company procure
releases of certain personal guaranties. If this transaction is completed, the
6
Company expects the Board of Directors of the Company will be reconstituted and
elected largely by the contributors of the assets, who would then own a
significant percentage of the Company's outstanding voting stock. In such
event, the reconstituted Board will control the Company. Notwithstanding the
preceding, management believes that the likelihood of consummating the
transactions described in this paragraph in the form in which they were
originally agreed upon has been substantially reduced. This belief is based on
the sudden and dramatic negative developments that took place in the third
quarter of 2008 and the following October with respect to the stock market, the
price of oil and gas, and the capital markets providing financing to oil and gas
exploration and production companies. Such developments have greatly reduced
the likelihood that the closing conditions to the transaction can be satisfied.
There can be no assurance that the transactions described in this paragraph will
be consummated.
Furthermore, there can be no assurance that we will be successful in our
exploration, development, and production activities. The oil and gas business
involves numerous risks, the principal ones of which are described in the
section captioned "Risk Factors" in our General Form for Registration of
Securities on Form 10.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this Report. In addition to
historical information, the discussion in this Report contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those anticipated by these forward-looking statements due to
factors including, but not limited to, those factors set forth elsewhere in this
Report and in the section captioned "RISK FACTORS" in our General Form for
Registration of Securities on Form 10.
RESULTS OF OPERATIONS
Quarter Ended September 30, 2008 Compared to the
Quarter Ended September 30, 2007
We had limited developmental activities in the third quarter of 2008 as we
continued our initial oil and gas exploration and production efforts. In third
quarter of 2008, we did consider and evaluate a number of acquisition prospects
(which did not result in much in the way of expenses), and we did complete the
negotiation and documentation of a proposed significant transaction (which did
result in comparably larger expenses). In third quarter of 2007, our activities
were more limited as we merely prepared to activate our exploration and
production activities. We had no revenues in the third quarter of 2007.
Production has begun on our second well, located in Seminole County, Oklahoma.
However, no distributions have been made with respect to such production pending
the outcome of unitization hearings and calculations of the final revenue
distributions. Due to the uncertainty of the amount of revenue and the timing
of the revenue distribution, no revenues from this production have been recorded
for the third quarter of 2008. In the third quarter of 2008, our largest
expense was $98,347 in general and administrative expenses, compared to $11,482
in the third quarter of 2007. The increase in these expenses was the result of
the due diligence pertaining to, and the negotiation and preparation of the
documentation governing, the proposed contribution transaction described above,
and (to a lesser extent) the more active operations that we were undertaking.
Our interest expense in the third quarter of 2008 increased to $15,837, compared
to $4,466 in the third quarter of 2007. This increase was due to a larger
outstanding balance of indebtedness. As a result of these third quarter 2008
expenses, we experienced a $114,184 net loss for the third quarter of 2008, or a
net loss of $0.02 per share.
7
Nine months Ended September 30, 2008 Compared to the
Nine months Ended September 30, 2007
We had limited developmental activities in the first nine months of 2008 as
we continued our initial oil and gas exploration and production efforts. In
first nine months of 2008, we did consider and evaluate a number of acquisition
prospects (which did not result in much in the way of expenses), and we did
complete the negotiation and documentation of a proposed significant transaction
(which did result in comparably larger expenses). In first nine months of 2007,
our activities were more limited as we merely prepared to activate our
exploration and production activities. We had no revenues in the first nine
months of 2007. Production has begun on our second well, located in Seminole
County, Oklahoma. However, no distributions have been made with respect to such
production pending the outcome of unitization hearings and calculations of the
final revenue distributions. Due to the uncertainty of the amount of revenue
and the timing of the revenue distribution, no revenues from this production has
been recorded for the first nine months of 2008. In the first nine months of
2008, our largest expense was $233,444 in general and administrative expenses,
compared to $11,482 in the first nine months of 2007. The increase in these
expenses was the result of the third quarter due diligence pertaining to, and
the negotiation and preparation of the documentation governing, the proposed
contribution transaction described above, and (to a lesser extent) the more
active operations that we were undertaking. Our interest expense in the first
nine months of 2008 increased to $42,047, compared to $4,802 in the first nine
months of 2007. This increase was due to a larger outstanding balance of
indebtedness. As a result, we experienced a $275,491 net loss for the first
nine months of 2008, or a net loss of $0.04 per share.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, we had cash of approximately $98,289, a decrease
of $37,879, versus cash of approximately $136,168 as of December 31, 2007.
We have already raised "seed" capital in the form of loans. The party who
made some of these loans was CEI Ventures, LLC, an entity owned by Kent E.
Lovelace, Jr. (a director and an officer of ours), the F.E.I. Energy Trust (a
significant stockholder of ours), and Westside Resources, L.P. ("WRLP"), an
entity of which Jimmy D. Wright (a director of ours) is the sole owner, and a
private investor. The loans from CEI Ventures, LLC totaled approximately
$725,000, of which $200,000 was borrowed during the third quarter 2008. The
proceeds of this loan went to fund our obligations under the Enexco Agreement,
to pay general operating expenses and to retire a loan made to us by an
affiliate of ours. This loan is secured by all of our assets, including our oil
and gas interests heretofore received in connection with the Enexco Agreement,
as well as all future oil and gas interests. Interest accrues on this loan at a
rate of 10% per annum. This loan can become due and payable at any time upon
the demand of the lender. In consideration of making the loan, we granted
warrants to the owners of CEI Ventures, LLC to purchase up to an aggregate of
1,450,001 shares of our common stock for a per-share exercise price of $.50.
These warrants have a term of and are exercisable for five years. In connection
with this loan, we agreed to register all shares separately owned by the owners
of CEI Ventures, LLC or to be acquired pursuant to derivative securities,
including the shares to be acquired upon exercise of the warrants issued in
connection with the loans described above. In connection with this loan, we
executed "piggy back" registration rights agreement in favor of each of the
owners of CEI Ventures, LLC, whereby each of them will have the right to include
in any registration with the U.S. Securities and Exchange Commission any and all
shares owned by them or to be acquired pursuant to derivative securities,
including the shares to be acquired upon exercise of the warrants issued in
connection with the loan described above.
Currently, we have only limited capital to undertake any exploration and
production activities. We are not currently planning on undertaking any
exploration and production activities while the outcome of the proposed
contribution transaction described above is pending. Regardless of the outcome
of this transaction, we will most likely need to obtain additional financing to
pursue additional opportunities. The amount of capital that we will need will
8
depend on the outcome of the proposed contribution transaction described above
and the scope of the business activities that we ultimately decide to pursue,
which is uncertain at this time. We currently do not have any binding
commitments for, or readily available sources of, additional financing. We
cannot assure anyone that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonably
terms. If we do not obtain additional financing we will not be able to expand
the scope of our business or even stay in business for that matter. If we are
unable to obtain additional funds, we may have to reduce the scope our business
activities. If we do not obtain additional financing, we may be constrained to
attempt to sell our oil and gas interests that we have accumulated. However, we
cannot assure anyone that we will be able to find interested buyers or that the
funds received from any such sale would be adequate to fund our activities.
Under certain circumstances, we could be forced to cease our operations and
liquidate our remaining assets, if any.
To conserve on our capital requirements, we intend occasionally to seek
other industry investors who are willing to participate in our exploration and
production activities. We expect to retain a promotional interest in these
prospects, but generally we will have to finance a portion (and sometimes a
significant portion) of the acquisition and drilling costs. Also, we may
acquire interests in properties by issuing shares of our common stock.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion of our financial condition and results of operations is
based on the information reported in our financial statements. The preparation
of our financial statements requires us to make assumptions and estimates that
affect the reported amounts of assets, liabilities, revenues and expenses as
well as the disclosure of contingent assets and liabilities as of the date of
our financial statements. We base our assumptions and estimates on historical
experience and other sources that we believe to be reasonable at the time.
Actual results may vary from our estimates due to changes in circumstances,
weather, politics, global economics, mechanical problems, general business
conditions and other factors. Our significant accounting policies are detailed
in Note 3 to our financial statements included in this Quarterly Report. We
have outlined below certain of these policies that have particular importance to
the reporting of our financial condition and results of operations and that
require the application of significant judgment by our management.
KEY DEFINITIONS
- ----------------
Proved reserves, as defined by the SEC, are the estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty are recoverable in future
years from known reservoirs under existing economic and operating conditions.
Valuations include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Prices do not include the effect of derivative instruments, if any, entered into
by us.
Proved developed reserves are those reserves expected to be recovered
through existing equipment and operating methods. Additional oil and gas volumes
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery are included as proved developed reserves only after testing
of a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved undeveloped reserves are those reserves that are expected to be
recovered from new wells on non-drilled acreage, or from existing wells where a
relatively major expenditure is required for re-completion. Reserves on
non-drilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other non-drilled units are claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation.
9
USE OF ESTIMATES
- ------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
OIL AND GAS PROPERTIES
-------------------------
We account for our oil and natural gas producing activities using the full
cost method of accounting as prescribed by the United States Securities and
Exchange Commission (SEC). Accordingly, all costs incurred in the acquisition,
exploration, and development of proved oil and natural gas properties, including
the costs of abandoned properties, dry holes, geophysical costs, and annual
lease rentals are capitalized. All general and administrative corporate costs
unrelated to drilling activities are expensed as incurred. Sales or other
dispositions of oil and natural gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recorded unless the ratio of cost to
proved reserves would significantly change. Depletion of evaluated oil and
natural gas properties is computed on the units of production method based on
proved reserves. The net capitalized costs of proved oil and natural gas
properties are subject to a full cost ceiling limitation in which the costs are
not allowed to exceed their related estimated future net revenues discounted at
10%, net of tax considerations. Costs associated with unevaluated properties
are excluded from the full cost pool until we have made a determination as to
the existence of proved reserves. We review our unevaluated properties at the
end of each quarter to determine whether the costs incurred should be
transferred to the full cost pool and thereby subject to amortization and
ceiling test.
ASSET RETIREMENT OBLIGATIONS
- ------------------------------
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires that the fair value of an
asset retirement cost, and corresponding liability, should be recorded as part
of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method.
REVENUE RECOGNITION
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We recognize oil and natural gas revenue under the sales method of
accounting for our interests in producing wells as oil and natural gas is
produced and sold from those wells.
PROVISIONS FOR TAXES
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We have adopted SFAS No. 109 "Accounting for Income Taxes". Pursuant to
this pronouncement, income taxes are accounted for using an asset and liability
approach. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at the
applicable tax rates. A valuation allowance is utilized when it is more likely
than not, that some portion of, or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
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FORWARD-LOOKING STATEMENTS
Statements in the preceding discussion relating to future plans,
projections, events, or conditions are forward-looking statements. Actual
results, including production growth and capital spending, could differ
materially due to changes in long-term oil or gas prices or other changes in
market conditions affecting the oil and gas industry; political events or
disturbances; severe weather events; reservoir performance; changes in OPEC
quotas; timely completion of development projects; changes in technical or
operating conditions; and other factors including those discussed herein and in
the section captioned "RISK FACTORS" in our General Form for Registration of
Securities on Form 10.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Principal Executive Officer and Principal Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of
the period covered by this report, have concluded that, based on the evaluation
of these controls and procedures, that our disclosure controls and procedures
were not effective due to the lack of segregation of duties in financial
reporting, as our accounting functions are performed by one person with no
internal review, as our company does not have an audit committee. This is due to
the company's lack of working capital to hire additional staff. To remedy this,
we intend to engage another accountant to assist with financial reporting as
soon as our finances will allow.
CHANGE IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in our predecessors' internal controls over
financial reporting that occurred during the quarterly period ended September
30, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not now a party to any legal proceeding requiring disclosure in
accordance with the rules of the U.S. Securities and Exchange Commission. In
the future, we may become involved in various legal proceedings from time to
time, either as a plaintiff or as a defendant, and either in or outside the
normal course of business. We are not now in a position to determine when (if
ever) such a legal proceeding may arise. If we ever become involved in such a
legal proceeding, our financial condition, operations, or cash flows could be
materially and adversely affected, depending on the facts and circumstances
relating to such proceeding.
ITEM 6. EXHIBITS
(a) The following exhibits are filed with this Quarterly Report or are
incorporated herein by reference:
Exhibit
Number Description
31.01 Certification pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
31.02 Certification pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
32.01 Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COLONY ENERGY, INC.
(Registrant)
By: /s/ Kent E. Lovelace, Jr.
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Kent E. Lovelace, Jr.,
Chief Executive Officer
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
November 18, 2008
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