UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2009
Or
[ ] 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: 000-27485
SUN RIVER ENERGY, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1491159
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State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
7609 Ralston Road, Arvada, CO 80002
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(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class registered Name of each exchange
on which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer[___] Accelerated filer [___]
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Non-accelerated filer [___] Smaller reporting company [_X_]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of the
registrant does not have an aggregate market value, since the common stock of
the registrant does not trade on any market, at the time of this filing.
There were 17,321,141 shares outstanding of the registrant's Common Stock as of
August 10, 2009.
SUN RIVER ENERGY, INC.
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
ITEM 1 Business 1
ITEM 1 A. Risk Factors 12
ITEM 1 B. Unresolved Staff Comments 21
ITEM 2 Properties 21
ITEM 3 Legal Proceedings 22
ITEM 4 Submission of Matters to a Vote of Security Holders 23
PART II
ITEM 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchses of Equity Securities 23
ITEM 6 Selected Financial Data 26
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 26
ITEM 7 A. Quantitative and Qualitative Disclosures About Market Risk 30
ITEM 8 Financial Statements and Supplementary Data 31
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 31
ITEM 9 A. Controls and Procedures 31
ITEM 9 A(T). Controls and Procedures 31
ITEM 9B Other Information 33
PART III
ITEM 10 Directors, Executive Officers, and Corporate Governance 33
ITEM 11 Executive Compensation 36
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 38
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 39
ITEM 14 Principal Accounting Fees and Services 40
PART IV
ITEM 15 Exhibits, Financial Statement Schedules 40
SIGNATURES 42
This Amendment to the Annual Report on Form 10-K is filed to make revisions to
Part I, Item 1, Part II, Items 8 and 9 and to Exhibit 31.1.
Note about Forward-Looking Statements
This Form 10-K contains forward-looking statements, such as statements relating
to our financial condition, results of operations, plans, objectives, future
performance and business operations. These statements relate to expectations
concerning matters that are not historical facts. These forward-looking
statements reflect our current views and expectations based largely upon the
information currently available to us and are subject to inherent risks and
uncertainties. Although we believe our expectations are based on reasonable
assumptions, they are not guarantees of future performance and there are a
number of important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. By making
these forward-looking statements, we do not undertake to update them in any
manner except as may be required by our disclosure obligations in filings we
make with the Securities and Exchange Commission under the Federal securities
laws. Our actual results may differ materially from our forward-looking
statements.
ITEM 1. DESCRIPTION OF BUSINESS
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General
Sun River Energy, Inc. ("Sun River" or the "Company") was incorporated under the
laws of the State of Colorado on April 30, 1998 as Dynadapt System, Inc. to
raise capital for an Internet website related project. On August 18, 2006, the
Company changed its name to Sun River Energy, Inc. in connection with the
acquisition of its wholly-owned subsidiary Sun River Energy, Inc. on April 21,
2006.
On April 21, 2006, we acquired 100% of the issued and outstanding shares
(8,633,333) of Sun River Energy, Inc. in exchange for 8,633,333 shares of the
Company's common stock, as part of a Plan and Agreement of Reorganization, dated
April 21, 2006. As a result of the Plan and Agreement of Reorganization, we
changed our business operations to focus on the development of the Company as an
independent Energy Company engaged in the exploration of North American
unconventional natural gas properties and conventional oil and gas exploration.
As part of the acquisition, we acquired 120,000 acres of a mixture of fee oil
and gas mineral interest, some coal bed methane fee interest and approximately
30,000 acres, of other fee mineral rights and 4,000 gross acres of leases that
we have now begun to explore for methane.
In April 2006, we signed a $64,000 secured promissory note with Nova Leasing,
LLC (Nova Leasing). The $64,000 promissory note had a due date of April 2008 and
was secured by a lease for 640 acres in Natrona County, Wyoming. In November
2006, we entered into a purchase agreement with Nova Leasing to acquire an 85%
working interest and an 80% net revenue interest on leases in Natrona and
Converse County, Wyoming from Nova Leasing, LLC. The leases were acquired in
exchange for a $6,600,000 secured promissory note bearing 7.5% annual interest.
The promissory note was secured by the leases on 14,000 acres in Natrona and
Converse Counties in Wyoming. On April 21, 2008, the Company entered into a
Release of Claim with Nova Leasing and in return for being released from payment
of the outstanding balance of $6,162,564 owed in connection with the $6.6
Million Dollar Promissory note and the outstanding balance of $72,478 owed in
connection with the $64,000 Promissory Note, we returned the leases securing the
promissory notes to Nova Leasing.
In January 2009, Mr. Wesley Whiting, the President and a Director of the Company
resigned from both positions with the Company. Mr. Redgie Green, an existing
Director of the Company, was appointed President at that time.
1
Business Activities and Recent Developments
Our business operations are in the exploration and development of oil and gas in
the exploration of North America including unconventional natural gas in the
Rocky Mountain region. Specifically, in the area described below:
- Raton Basin, Colfax County New Mexico; and
- Natrona County, Wyoming.
At this time, the Company is in the exploration stage of its operational
activities and does not have production activities.
Raton Basin
Our recent field operations have been focused on exploring a coal bed methane
prospect located in the Raton Basin in Northern New Mexico.
We have approximately 11,000 gross acres of coal bed methane prospects in the
Raton Basin, of which 5,640 acres are fee (90% interest) and 4,730 acres of
which are a lease assignment. During the year ended April 30, 2008, we drilled 3
coal bed methane wells in the Raton Basin, Myers #1, #2, and #3. All three wells
have shown multiple coal zones, which will be completed to seek methane gas. We
intend to frac the Myers #1 and #2 in the near future to test production
thereafter. We have perforated multiple zones and intend to frac those zones.
We intend to operate all of our prospects in the Raton Basin and hold working
interests of 100% on a 80% NRI our leases, except that we have a 25% working
interest in the Sun River #1, LLC a drilling syndication for the Myers #1 and #2
wells which was assembled in early 2007.
The Raton Basin covers an area that is approximately 80 miles long, north to
south, and about 50 miles wide, east to west, encompassing southeastern Colorado
and northeastern New Mexico. The Raton Basin contains two coal-bearing
formations, the Vermejo formation coals located at depths of between 450 and
4,000 feet and the shallower Raton formation coals, located at the surface to
approximately 3,000 feet in depth. Production from the Vermejo coals represents
approximately 79% of the total production from the Raton Basin and approximately
78% of the total proved reserves in the Raton Basin. To date, the majority of
methane production has been from the Vermejo formation coals in Colorado and New
Mexico.
Exploration History
Exploration for coal bed methane in the Raton Basin began in the late 1970s and
continued through the late 1980s, with several companies drilling and testing
more than 100 wells during this period. The absence of a pipeline to transport
gas from the Raton Basin prevented full-scale development until January 1995,
when Colorado Interstate Gas Company completed the construction of the Picket
Wire Lateral.
Raton Basin Geology
We intend to explore for coal bed methane from the high quality bituminous coal
resource of the Raton Basin. The basin is a large asymmetric sedimentary trough
that developed along the western margin of an ancient Rocky Mountain seaway
during the Cretaceous and Tertiary period between 65 to 45 million years ago.
Today, the geologic history of what was once a lush tropical coastline and
alluvial plain cut by meandering rivers, which subsequently underwent deep
burial, tectonism, igneous intrusion, and uplift, is recorded in the rocks of
the region; the continued exploration of the basin by geologists is increasing
the understanding of the coal bed methane resource base and identifying new
hydrocarbon systems and additional unconventional reservoir types.
2
Our lease and fee mineral coal bed prospect acreage sits in the southerly half
of the basin. In the region, the coal-bearing strata are located primarily in
two major groups, the Vermejo and Raton formations, and represent coal
development in two slightly contrasting environments. The Vermejo coals
represent peat accumulation on an expansive flat-lying flood-plain which was
partially protected from erosion by sandy coastal barriers of the underlying
Trinidad Sandstone, while the Raton coals represent peat development on a broad,
open, humid alluvial fan. Collectively, both formations reflect the development
of substantial peat swamps and thick boggy mires, which covered most of the
region during Cretaceous and Tertiary times. Subsequent burial under high
pressures and temperatures has caused the original peat accumulation to convert
into coal, which has high rank and consequentially high gas storage capacity.
During burial, small fractured surfaces (cleats) developed throughout the coal,
which, coupled with the tectonic forces acting on the region during the building
of the Rocky Mountains, has provided significant permeability within the coals,
allowing for the extraction of coal bed methane gas and associated water.
We hope to produce methane from Vermejo coal beds. Total net Vermejo coal
thicknesses can locally approach up to 20 feet in various individual seams,
which seem may vary in thickness from one to 10 feet.
The shallower Raton formation coals are generally less continuous from well to
well, but increasingly represent a very significant resource throughout the
basin. Total net Raton coal thickness locally approaches 15 feet in the existing
wells in many individual seams, which may vary in thickness from one to 10 feet.
Occasionally interbedded with the Raton coals are large sandstone channel
complexes, which are increasingly identified as additional potential tight-gas
and unconventional sand reservoirs. We show to attempt completion in the Raton
Formation when we find it. We have it in our wells; Myers #1, #2 and #3.
Our acreage in New Mexico primarily appears to have, cetaceous-aged laminated
shale. It is to have depths of 1,300 to 1,700 feet deep with a gross overall
thickness of 5400 to 2,000 feet. We intend to test the Pierre shale and
Niobrara, if present in the area, and perhaps Dakota horizons.
The two major producing companies in the Raton Basin are Pioneer National
Resources (on the Colorado side) and El Paso Corporation (on the New Mexico
side). In the last tow years, Pioneer National Resources has announced trillions
of cubic feet of gas reserves, based on the 5 wells that they have sunk in the
Raton Basin.
The Company intends to perform vertical drilling in the shale perhaps up to
depths of 5,000 feet and then to instigate horizontal testing using, coiled
tubing technology to assess the upside. This procedure may allow the Company to
identify the productive shale. No funds have been raised or allocated for
drilling as of date hereof.
PRODUCT INFORMATION
Coal Bed Methane Versus Traditional Natural Gas
Methane is the primary commercial component of the natural gas stream produced
from traditional gas wells. Methane also exists in its natural state in coal
seams. Natural gas produced from traditional wells also contains, in varying
amounts, other hydrocarbons. However, the natural gas produced from coal beds
generally contains only methane and, after simple dehydration, becomes
pipeline-quality gas.
3
Coal bed methane production is similar to traditional natural gas production in
terms of the physical producing facilities and the product produced. However,
the subsurface mechanisms that allow the gas to move to the wellbore and the
producing characteristics of coal bed methane wells differ greatly from
traditional natural gas production. Unlike conventional gas wells, which require
a porous and permeable reservoir, hydrocarbon migration and a natural structural
and/or stratigraphic trap, coal bed methane gas is trapped in the molecular
structure of the coal itself until released by pressure changes resulting from
the removal of in situ water or natural gas in the micropore system.
Methane is created as part of the coalification process, though coals vary in
their methane content per ton. In addition to residing in open spaces in the
coal structure, methane is absorbed onto the inner coal surfaces. When the coal
is hydraulically fracture stimulated and exposed to lower pressures through the
de-watering process, the gas is released from (desorbs from) the coal. Whether a
coal bed will produce commercial quantities of methane gas depends on the coal
quality, its original content of gas per ton of coal, the thickness of the coal
beds, the reservoir pressure, the rate at which gas is released from the coal
(diffusivity) and the existence of natural fractures and cleating (permeability)
through which the released gas can flow to the wellbore. Frequently, coal beds
are partly or completely saturated with water. As the water is produced,
internal pressures on the coal are decreased, allowing the gas to desorb from
the coal and flow to the wellbore. Unlike traditional gas wells, new coal bed
methane wells often produce water for several months and then, as the water
production decreases, natural gas production increases as the coal seams
de-water.
In order to establish commercial gas production rates, a permanent conduit
between the individual coal seams and the wellbore must be created. This is
accomplished by hydraulically creating, and propping open with special quality
sand, artificial fractures within the coal seams (known as "fracing" in the
industry) so the pathway for water and gas migration to the wellbore is
enhanced. These fractures are filled (propped) with uniform sized sand and
become the enhanced conduits for water and methane to reach the well. The rate
at which the gas is released from the coal and the ability of gas to move
through the coal to the wellbore are the key determinants of the rate at which a
well will produce.
Deep Fractured Shales, Raton Conglomerate and Sandstone Reservoirs
There are possible additional unconventional reservoir systems throughout the
Raton Basin. The Company intends to study gas-charged sandstones and
conglomerates interbedded within the currently producing Vermejo and Raton
formation coals and deeper gas-bearing shale, which underlie the entire region.
The conglomerate and sandstones sought reflect stacked large scale meandering
river channel complexes and regional sandy braided alluvial fans that at one
time crosscut the Cretaceous-Tertiary peat swamps. During burial, excess gas
generated during the coalification process locally became trapped within the
pore spaces of these sandstones and now form "Tight-Gas Sand" reservoirs. The
increasing recognition of the orientation in the subsurface of such ancient
drainage system is allowing the strategic sighting of wells in specific sand
prone areas, which may ultimately increase the region's total resource base.
The Raton Basin shales, termed the Niobrara and Pierre Shale formations, are
approximately 1,000 to 3,000-feet thick and underlie the currently producing
intervals. The shales collectively reflect deposits of blanket-like organic rich
mudstones, which accumulated in quiet water condition on the sea floor. Deeper
exploratory test wells (2,000 to 6,000 feet) may identify areas of enhanced
fracture permeability and could open a significant "Shale Gas" resource.
Recently, other companies have started focusing on these shales to produce,
using modern technology.
4
Coal Bed Methane Technology
Thin multi-layer coal bed methane and unconventional tight-gas reservoirs create
a multitude of challenges for drilling, reservoir and production engineers,
including the challenge of minimizing formation damage and then isolating and
completing individual zones in order to maximize recovery of the resource in
place.
Damage to the Raton Basin coals from conventional drilling mud systems invading
the cleat fracture surfaces and reducing their permeability has been mitigated
by utilizing specialized air-drilling techniques using percussion air-hammers.
All coals in the Raton Basin require hydraulic fracture stimulation to attain
economic production rates. New techniques uses high quality nitrogen foamed
fluids as the fracturing media and combined with coiled tubing fracturing units
to selectively place proppant in individual seams. The Company believes that
this fracturing technique will assist developing some of the region's resources.
Water Production and Disposal
Based on industry practice, management believes that the groundwater produced
from the Raton Basin coal seams will not exceed permit levels and will be
suitable for discharge into arroyos, surface water, well-site pits or
evaporation ponds pursuant to permits obtained from the State laws. Recent gas
analyses confirm that the gas stream is 99% pure methane and lacks other
hydrocarbon sources of contamination. In some cases the water is of such quality
that it can be discharged to arroyos and surface water under general water
discharge permits. These permits may give the Company the flexibility to add
water discharge points on an as-needed basis. The Company contract with an
independent water sampling company that collects the water samples and
monitorsall the Company's water management program. These monitoring costs are
directly related to the number of well-site pits, evaporation ponds and
discharge points. Because water originates in a natural groundwater system,
there is some uncertainty whether water currently being discharged to streams
and arroyos will continue to meet permit standards for total iron and suspended
solids. Water not meeting these discharge standards can be disposed of in
well-site pits and evaporation ponds. When water of lesser quality is discovered
or Company wells produce water in excess of the applicable permit limits, the
Company may have to drill additional disposal wells to re-inject the produced
water into deeper sandstone horizons. Such drilling and disposal would require
the Company to obtain permits, similar to those obtained in the past.
Raton Basin Production Characteristics
Because of the importance of removing water from the coal seams to enhance gas
production, the Company expects that production from meagre wells may increase
because of the beneficial ambient effect of pressure reduction in adjacent, more
productive wells. Each well creates its own "cone of depression" around the
wellbore. The Company believes that Raton Basin wells on adjacent 160-acre sites
will create overlapping cones of depression, enhancing gas production in each
well within this pattern. In some cases this pattern of interference can be
enhanced by drilling a fifth and sixth well in the 640-acre section.
Raton Basin gas contains insignificant amounts of contaminants, such as hydrogen
sulfide, carbon dioxide or nitrogen that are sometimes present in conventional
natural gas production. Therefore, the properties of Raton Basin gas, such as
heat content per unit volume (British Thermal units, or "Btu"), are close to the
average properties of pipeline gas from conventional gas wells.
5
The Company has no proven oil or gas or coal bed methane reserves, nor any
production. The Company intends to explore its Wyoming Acreage for conventional
Oil & Gas.
MARKET INFO
Gas Marketing and Transportation
We intend to sell any produced gas on an index basis to credit worthy companies
including utilities, other end users and possibly energy marketing companies.
Natural gas production from the Raton Basin may be sold into the Mid-Continent
through Colorado Interstate Gas Company to the North or to Zia Natural Gas to
the South.
In the United States, oil and natural gas liquids are sold under contracts
extending up to a year based upon monthly refiner price postings, which
generally approximate the price of West Texas Intermediate for crude oil and
Applicable Conway, Kansas posting for natural gas liquids, adjusted to reflect
transportation costs and quality. In Canada, oil and natural gas liquids are
sold under short-term contracts at refiner posted prices for Alberta and
Saskatchewan, adjusted to reflect transportation costs and quality. Our intent
is to sell our oil and natural gas liquids are sold at spot market prices or
under short-term contracts.
At this time, we do not have any transportation commitments in place.
Major Customers
At this time, since the Company is not in production, it does not have any
customers..
Competition
We intend to compete in virtually all facets of oil and gas business with
numerous other companies, including many that have significantly greater
resources. Such competitors may be able to pay more for desirable leases and to
evaluate, bid for, and purchase a greater number of properties than the
financial or personnel resources of the Company will permit. Our ability to
increase reserves in the future will be dependent on our ability to select and
acquire suitable producing properties and prospects for future exploration and
development. The availability of a market for oil and natural gas production
depends upon numerous factors beyond the control of producers, including but not
limited to the availability of other domestic or imported production, the
locations and capacity of pipelines and the effect of federal, state, provincial
and local regulation on such production.
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY
General
Our business is affected by numerous laws and regulations, including, among
others, laws and regulations relating to energy, environment, conservation and
tax. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil and/or criminal penalties, the imposition of
injunctive relief or both. Moreover, changes in any of these laws and
regulations could have a material adverse effect on our business. In view of the
many uncertainties with respect to current and future laws and regulations,
including their applicability to the Company, we cannot predict the overall
effect of such laws and regulations on its future operations.
6
We believe that our operations comply in all material respects with applicable
laws and regulations and that the existence and enforcement of such laws and
regulations have no more restrictive effect on our method of operations than on
other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations and
is qualified in its entirety by the foregoing.
Federal Regulation of the Sale and Transportation of Oil and Gas
Various aspects of our oil and natural gas operations are regulated by agencies
of the federal government. The Federal Energy Regulatory Commission ("FERC")
regulates the transportation and sale for resale of natural gas in interstate
commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas
Policy Act of 1978 ("NGPA"). In the past, the federal government has regulated
the prices at which oil and gas could be sold. While "first sales" by producers
of natural gas and all sales of crude oil, condensate and natural gas liquids
can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted
the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act
removed all NGA and NGPA price and non-price controls affecting wellhead sales
of natural gas effective January 1, 1993.
Commencing in April 1992, the FERC issued Orders Nos. 636, 636-A, 636-B, 636-C
and 636-D ("Order No. 636"), which require interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
gas. Also, Order No. 636 require pipelines to provide open access transportation
on a nondiscriminatory basis that is equal for all natural gas shippers.
Although Order No. 636 does not directly regulate the Company's production
activities, the FERC has stated that it intends for Order No. 636 to foster
increased competition within all phases of the natural gas industry. It is
unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company's activities.
The courts have largely affirmed the significant features of Order No. 636 and
numerous related orders pertaining to the individual pipelines, although certain
appeals remain pending and the FERC continues to review and modify its open
access regulations. In particular, the FERC is conducting a broad review of its
transportation regulations, including how they operate in conjunction with state
proposals for retail gas marketing restructuring, whether to eliminate
cost-of-service rates for short-term transportation, whether to allocate all
short-term capacity on the basis of competitive auctions, and whether changes to
long-term transportation policies may also be appropriate to avoid a market bias
toward short-term contracts. In February 2000, the FERC issued Order No. 637
amending certain regulations governing interstate natural gas pipeline companies
in response to the development of more competitive markets for natural gas and
natural gas transportation. The goal of Order No. 637 is to "fine tune" the open
access regulations implemented by Order No. 636 and to accommodate subsequent
changes in the market. Key provisions of Order No. 637 include: (1) permitting
value-oriented peak/off peak rates to better allocate revenue responsibility
between short-term and long-term markets; (2) permitting term-differentiated
rates, in order to better allocate risks between shippers and the pipeline; (3)
revising the regulations related to scheduling procedures, capacity,
segmentation, imbalance management, and penalties; (4) retaining the right of
first refusal ("ROFR") and the five-year matching cap for long-term shippers at
maximum rates, but significantly narrowing the ROFR for customers that the FERC
does not seem to be captive; and (5) adopting new website reporting requirements
that include daily transactional data on all firm and interruptible contracts
and daily reporting of scheduled quantities at points or segments. Most major
aspects of Order No. 637 were upheld on judicial review, though certain issues,
such as capacity segmentation and rights of first refusal, were remanded to the
FERC, which issued a remand order in October of 2002. In January of 2004, the
FERC denied rehearing of its October 2002 remand order. The Company cannot
predict whether judicial review will be sought of the FERC's remand order and,
if so, whether and to what extent FERC's market reforms will survive such review
and, if they do, whether the FERC's actions will achieve the goal of increasing
competition in markets in which the Company's natural gas is sold. However, the
Company does not believe that it will be affected by any action taken materially
differently than other natural gas producers and marketers with which it
competes.
7
Commencing in October 1993, the FERC issued a series of rules (Order Nos. 561
and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows pipelines to make rate changes to track
changes in the Producer Price Index for Finished Goods, minus one percent,
became effective January 1, 1995. The Company does not believe that these rules
affect the Company any differently than other oil producers and marketers with
which it competes.
The FERC has also issued numerous orders confirming the sale and abandonment of
natural gas gathering facilities previously owned by interstate pipelines and
acknowledging that if the FERC does not have jurisdiction over services provided
thereon, then such facilities and services may be subject to regulation by state
authorities in accordance with state law. A number of states have either enacted
new laws or are considering the adequacy of existing laws affecting gathering
rates and/or services.
Other state regulation of gathering facilities generally includes various
safety, environmental, and in some circumstances, nondiscriminatory take
requirements, but does not generally entail rate regulation. Thus, natural gas
gathering may receive greater regulatory scrutiny of state agencies in the
future. The Company's gathering operations could be adversely affected should
they be subject in the future to increased state regulation of rates or
services, although the Company does not believe that it would be affected by
such regulation any differently than other natural gas producers or gatherers.
In addition, the FERC's approval of transfers of previously regulated gathering
systems to independent or pipeline affiliated gathering companies that are not
subject to FERC regulation may affect competition for gathering or natural gas
marketing services in areas served by those systems and thus may affect both the
costs and the nature of gathering services that may be available to interested
producers or shippers in the future.
We own certain natural gas pipeline facilities that we believes meet the
traditional tests the FERC has used to establish a pipeline's status as a
gatherer not subject to the FERC's jurisdiction. Whether on state or federal
land, natural gas gathering may receive greater regulatory scrutiny in the
post-Order No. 636 environment.
We may conduct certain operations on federal oil and gas leases, which are
administered by the Minerals Management Service ("MMS"). Federal leases contain
relatively standard terms and require compliance with detailed MMS regulations
and orders, which are subject to change. Among other restrictions, the MMS has
regulations restricting the flaring or venting of natural gas, and the MMS has
proposed to amend such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Under certain circumstances,
the MMS may require any company operations on federal leases to be suspended or
terminated. Any such suspension or termination could materially and adversely
affect the Company's financial condition, cash flows and operations. The MMS
issued a final rule that amended its regulations governing the valuation of
crude oil produced from federal leases. This rule, which became effective June
1, 2000, provides that the MMS will collect royalties based on the market value
of oil produced from federal leases. On August 20, 2003, the MMS issued a
proposed rule that would change certain components of its valuation procedures
for the calculation of royalties owed for crude oil sales. The proposed changes
included changing the valuation basis for transactions not at arm's-length from
spot to NYMEX prices adjusted for locality and quality differentials, and
clarifying the treatment of transactions under a joint operating agreement.
Final comments on the proposed rule were due on November 10, 2003. We has no way
of knowing whether the MMS will implement the proposed changes in a final rule
or what effect such changes, if implemented, will have on the Company's results
of operations, However, the Company does not believe that this proposed rule
would affect it any differently than other producers and marketers of crude oil.
We have no federal leases as of date hereof.
8
Additional proposals and proceedings that might affect the oil and gas industry
are pending before Congress, the FERC, the MMS, state commissions and the
courts. Our cannot predict when or whether any such proposals and proceedings
may become effective. In the past, the natural gas industry has been heavily
regulated. There is no assurance that the regulatory approach currently pursued
by various agencies will continue indefinitely. Notwithstanding the foregoing,
we do not anticipate that compliance with existing federal, state and local
laws, rules and regulations will have a material or significantly adverse effect
upon the capital expenditures, earnings or competitive position of the Company
or its subsidiaries. No material portion of our business is subject to
re-negotiation of profits or termination of contracts or subcontracts at the
election of the federal government.
The BLM controls isolated parcels of federally owned surface and/or minerals in
the areas of interests. Drilling and development of federal minerals and
construction activities on federal surface are subject to the National
Environmental Policy Act ("NEPA"). BLM has not completed an environmental
assessment under NEPA. To date, no wells have been drilled on BLM minerals in
the Raton Basin. In the Raton Basin, the BLM must complete an environmental
assessment, and any future wells would need to be approved based on the results
of the environmental assessment. Development of adjacent fee lands and minerals
within the Raton Basin may proceed unhindered and access to fee lands is not
expected to hinder by the presence of isolated parcels of federal surface.
Future activities within the Piceance and Uintah Basins will be subject to NEPA.
The scope and effect are not known at the present time. We do not have any BLM
leases as of this date.
State Regulations
Our operations are also subject to regulation at the state level and, in some
cases, county, municipal and local governmental levels. Such regulation includes
(1) requiring permits for the drilling of wells, (2) maintaining bonding
requirements in order to drill or operate wells and (3) regulating the location
of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, the plugging and
abandoning of wells and the disposal of fluids used and produced in connection
with operations. Our operations are also subject to various conservation laws
and regulations. These include (1) proration units, (2) the density of wells
that may be drilled, and (3) the unitization or pooling of oil and gas
properties. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, which generally limit the venting or flaring
of gas and impose certain requirements regarding the ratability of production.
State regulation of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take requirements,
but (except as noted above) does not generally entail rate regulation. These
regulatory burdens may affect profitability, and the Company is unable to
predict the future cost or impact of complying with such regulations.
9
Environmental Regulations
We are subject to extensive federal, state, and local environmental laws and
regulations that, among other things, regulate the discharge or disposal of
substances into the environment and otherwise are intended to protect the
environment. Numerous governmental agencies issue rules and regulations to
implement and enforce such laws, which are often difficult and costly to comply
with and which carry substantial administrative, civil and/or criminal penalties
and, in some cases, injunctive relief for failure to comply. Some laws and
regulations relating to the protection of the environment may, in certain
circumstances, impose "strict liability" for environmental contamination. Such
laws and regulations render a person or company liable for environmental and
natural resource damages, cleanup costs and, in the case of oil spills in
certain states, consequential damages without regard to negligence or fault.
Other laws and regulations may require the rate of oil and natural gas
production to be below the economically optimal rate or may even restrict or
prohibit exploration or production activities in environmentally sensitive
areas. In addition, state laws often require some form of remedial action such
as closure of inactive pits and plugging of abandoned wells to prevent pollution
from former or suspended operations. Moreover, from time to time, legislation or
other initiatives are proposed to Congress or to state and local governments
that would place more onerous conditions on the treatment, storage, disposal or
clean-up of certain oil and gas exploration and production wastes. If such
legislation or other initiatives were to be enacted or adopted, it could have an
adverse impact on the operating costs of the Company, as well as the oil and gas
industry in general. The regulatory burden on the oil and natural gas industry
increases our cost and risk of doing business and consequently affects its
profitability.
Compliance with these environmental requirements, including financial assurance
requirements and the costs associated with the cleanup of any spill, could have
a material adverse effect upon our capital expenditures, earnings or competitive
position. We believe that it is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on it.
Nevertheless, changes in environmental laws and regulations have the potential
to adversely affect our operations. For example, the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), also known as the "Superfund" law, and analogous state laws impose
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons with respect to the release of a "hazardous
substance" into the environment. These persons include the current or prior
owner or operator of the disposal site or sites where the release occurred and
companies that transported disposed or arranged for the transport or disposal of
the hazardous substances found at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to strict and
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for the federal or state government to
pursue such claims. It is also not uncommon for neighboring landowners and other
third parties to file claims for personal injury or property or natural resource
damages allegedly caused by the hazardous substances released into the
environment. Under CERCLA, certain oil and gas materials and products are, by
definition, excluded from the term "hazardous substances."
10
We may own or lease numerous properties that have long been used for oil and gas
exploration and production. Although the predecessor owners utilized operating
and disposal practices that were standard for the industry at the time,
hazardous substances in the past may have been disposed of or released on or
under the properties owned or leased by the Company or on or under other
locations where such substances have been taken or placed for disposal. In
addition, many of these properties have from time to time been operated by third
parties whose management of substances was not under our control. These
properties and the substances disposed thereon may be subject to CERCLA, the
Resource Conservation and Recovery Act, as amended and analogous state laws and
regulations. Under such laws and regulations, we could be required to remove or
remediate previously disposed wastes (including wastes disposed of or released
by prior owners or operators) or property contamination (including groundwater
contamination by prior owners or operators), or to perform remedial plugging or
pit closure operations to prevent future contamination. We have no knowledge of
any environmental hazards as of date hereof.
In connection with our coal bed methane gas exploration we may from time to time
may conduct production enhancement techniques, including various activities
designed to induce hydraulic fracturing of the coal bed. While we may perform
its production enhancement techniques in substantial compliance with the
requirements set forth by the State laws, neither State nor the federal
Environmental Protection Agency ("EPA") regulates this coal bed formation
hydraulic fracturing as a form of underground injection. It is possible that
hydraulic fracturing of coal beds for methane gas production will become
regulated within the United States as a form of underground injection, resulting
in the imposition of stricter performance standards (which, if not met, could
result in diminished opportunities for methane gas production enhancement) and
increased administrative and operating costs for the Company.
Management cannot predict whether potential future regulation of hydraulic
fracturing as a form of underground injection would have an adverse material
effect on our operations or financial position. However, such regulation is not
expected to be any more burdensome to the Company than it would be to other
similarly situated companies involved in coal bed methane gas production or
tight gas sands production within the United States.
In our coal bed methane gas exploration the Company typically may bring
naturally occurring groundwater to the surface as a by-product of the production
of methane gas. This "produced water" is either re-injected into the subsurface
or stored or disposed of in evaporation ponds or permitted natural collection
features located on the surface at or near the well-site in compliance with
federal and state statutes and regulations. In some cases, the produced water is
used for stock watering, agricultural or dust suppression purposes, also in
substantial compliance with federal, state and local laws and regulations. Under
the Federal Water Pollution Control Act (also referred to as the "Clean Water
Act") and various other state requirements and regulations, the EPA and the
State of Colorado's Department of Public Health and the Environment assert
administrative and regulatory enforcement authority over the discharge of
produced water. Where we can meet federal and state regulatory requirements and
applicable water quality standards, disposal of produced water by discharge to
surface water is an option.
The Clean Water Act imposes restrictions and strict controls regarding the
discharge of produced waters and other oil and gas wastes into navigable waters.
Permits must be obtained to discharge pollutants into state and federal waters.
The Clean Water Act and analogous state laws provide for civil, criminal and
administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and may impose substantial
potential liability for the costs of removal, remediation and damages. State
water discharge regulations and the federal National Pollutant Discharge
Elimination System permits applicable to the oil and gas industry generally
prohibit the discharge of produced water, sand and some other substances into
coastal waters. The cost to comply with zero discharges mandated under federal
and state law is not expected to have a material adverse impact on the Company's
financial condition and results of operations. Some oil and gas exploration and
production facilities are required to obtain permits for their storm water
discharges. Costs may be incurred in connection with treatment of wastewater or
developing storm water pollution prevention plans.
11
Our operations may involve the use of gas-fired compressors to transport
collected gas; these compressors are subject to federal and state regulations
for the control of air emissions. We will obtain construction permits for
compression it enjoys production from any coal bed methane. However, in the
future, additional facilities could become subject to additional monitoring and
pollution control requirements as compressor facilities are expanded.
The Oil Pollution Act of 1990 ("OPA") imposes regulations on "responsible
parties" related to the prevention of oil spills and liability for damages
resulting from spills in waters of the United States. A "responsible party"
includes the owner or operator of an onshore facility, vessel or pipeline, or
the lessee or permittee of the area in which an offshore facility is located.
OPA assigns strict, joint and several liabilities to each responsible party for
oil removal costs and a variety of public and private damages, including natural
resource damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation, or if the party fails to report a spill or
to cooperate fully in the cleanup. Even if applicable, the liability limits for
onshore facilities require the responsible party to pay all removal costs, plus
up to $350 million in other damages. Few defenses exist to the liability imposed
by OPA. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to administrative, civil or
criminal enforcement.
At this time, we are not required and otherwise have no plans to make any
material capital expenditures to install pollution control devices at any
facilities.
Title to Properties
As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time the Company acquires leases of properties
believed to be suitable for drilling operations. Prior to the commencement of
drilling operations, a thorough title examination of the drill site tract is
conducted by independent attorneys. Once production from a given well is
established, the Company prepares a division order title report indicating the
proper parties and percentages for payment of production proceeds, including
royalties. The Company believes that the titles to its leasehold properties are
good and defensible in accordance with standards generally acceptable in the oil
and gas industry.
ITEM 1 A. RISK FACTORS
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Oil and gas prices are volatile, and an extended decline in prices would hurt
the Company's profitability and financial condition.
We believe that the markets for oil and gas will continue to be volatile. Any
substantial or extended decline in the price of oil or gas would negatively
affect the Company's financial condition and results of operations. Revenues,
operating results, profitability, future rate of growth and the carrying value
of oil and gas properties depend heavily on prevailing market prices for oil and
gas. A material decline could reduce tour cash flow and borrowing capacity, as
well as the value and the amount of its oil and gas reserves. Various factors
beyond our control can affect prices of oil and gas. These factors include:
12
o worldwide and domestic supplies of oil and gas;
o the ability of the members of the Organization of Petroleum Exporting
Countries (OPEC) to agree to and maintain oil price and production
controls;
o political instability or armed conflict in oil or gas producing
regions;
o the price and level of foreign imports;
o worldwide economic conditions;
o marketability of production;
o the level of consumer demands;
o the price, availability and acceptance of alternative fuels;
o the availability of pipeline capacity;
o weather conditions; and
o actions of federal, state, and local authorities.
These external factors and the volatile nature of the energy markets make it
difficult to estimate future commodity prices.
In addition, we may be required to write down or impair the carrying value of
the Company's oil and gas properties when oil and gas prices are depressed or
unusually volatile. If a write-down is required, it would result in a charge to
earnings and book value. Once incurred, a write-down of oil and gas properties
is not reversible at a later date. We reviews, on a quarterly basis, the
carrying value of its oil and gas properties under the full cost accounting
rules of the SEC. Under these rules, capitalized costs of proved oil and gas
properties, as adjusted for estimated asset retirement obligations, may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of the ceiling test generally requires pricing
future revenue at the unescalated prices in effect as of the end of each fiscal
quarter, after giving effect to our cash flow hedge positions, if any and
requires a write-down for accounting purposes if the ceiling is exceeded, even
if prices were depressed for only a short period of time.
Our intended operations will require large amounts of capital that may not be
recovered.
If the Company's future revenues were to decrease due to lower oil and natural
gas prices, decreased production or other reasons, and if it could not obtain
capital through its credit facilities or otherwise, our ability to execute its
development plans, replace its reserves or maintain its production levels could
be greatly limited. Our current development plans will require us to make large
capital expenditures for the exploration and development of its oil and natural
gas properties.
13
Historically, the Company has funded its capital expenditures through a
combination of funds generated the issuance of equity, and short-term financing
arrangements. Additional financing may not be available to the Company on
acceptable terms. Future cash flows and the availability of financing will be
subject to a number of variables, such as:
o the success of the Company's prospects in the Raton Basin;
o the Company's success in locating and producing reserves;
o the prices of oil and natural gas.
Issuing equity securities to satisfy the Company's financing requirements could
cause substantial dilution to existing stockholders. In addition, debt financing
could lead to a diversion of cash flow to satisfy debt servicing obligations and
restrictions on the Company's operations.
Our exploratory and development drilling activities may not be successful.
The Company's future exploration and drilling activities may not be successful,
and our management cannot be sure that our overall drilling success rate or the
Company's drilling success rate for activity within a particular area will not
decline. In addition, the wells that we drill may not recover all or any portion
of the Company's capital investment in the wells, infrastructure or the
underlying leaseholds. We are currently in the early stages of evaluating our
acreage in northern New Mexico for development and we can offer no assurance
that the development of any projects will occur as scheduled or that actual
results will be in line with any initial estimates. Unsuccessful drilling
activities could negatively affect our results of operations and financial
condition. The cost of drilling, completing and operating wells is often
uncertain, and a number of factors can delay or prevent drilling operations,
including: o unexpected drilling conditions;
o pressure or irregularities in formations;
o equipment failures or accidents;
o ability to hire and train personnel for drilling and
completion services;
o adverse weather conditions;
o compliance with governmental requirements; and
o shortages or delays in the availability of drilling rigs
and the delivery of equipment.
In addition, we may not be able to obtain any options or lease rights in
potential drilling locations that it identifies. There is no guarantee that the
potential drilling locations that we have identified will ever produce oil or
natural gas.
14
Our Acquisition Activities may not be successful.
As part of our growth strategy, we may make additional acquisitions of
businesses and properties. However, suitable acquisition candidates may not be
available on terms and conditions we find acceptable, and acquisitions pose
substantial risks to our business, financial condition and results of
operations. In pursuing acquisitions, we compete with other companies, many of
which have greater financial and other resources to acquire attractive companies
and properties. Even if future acquisitions are completed, the following are
some of the risks associated with acquisitions:
o the acquired businesses or properties may not produce revenues,
earnings or cash flow at anticipated levels;
o the Company may assume liabilities that were not disclosed or
that exceed
our estimates;
o We may be unable to integrate acquired businesses successfully
and realize anticipated economic, operational and other benefits
in a timely manner, which could result in substantial costs and
delays or other operational, technical or financial problems;
o acquisitions could disrupt our ongoing business, distract
management, divert resources and make it difficult to maintain
our current business standards, controls and procedures;
o We may finance future acquisitions by issuing common stock for
some or all of the purchase price, which could dilute the
ownership interests of the Company's stockholders; and
o We may incur additional debt related to future acquisitions.
We may be affected by the gas prices in the Rocky Mountain region.
Oversupply of gas and pipeline capacity issues, as well as spot market prices
may affect prices achievable for any gas sales.
We face strong competition in the oil and gas industry, and many of its
competitors have greater resources than the Company.
We operate in a highly competitive industry. We will competes with major oil
companies, independent producers and institutional and individual investors,
which are actively seeking oil and gas properties throughout the world, along
with the equipment, labor and materials required to operate properties. Many of
our competitors have financial and technological resources vastly exceeding
those available to us Many oil and gas properties are sold in a competitive
bidding process in which we may lack the technological information or expertise
available to other bidders. We can offer no assurance that it will be successful
in acquiring and developing profitable properties in the face of this
competition.
15
Our operations are subject to the business and financial risk of oil and gas
exploration.
The business of exploring for and, to a lesser extent, developing oil and gas
properties is an activity that involves a high degree of business and financial
risk. Property acquisition decisions generally are based on various assumptions
and subjective judgments that are speculative. It is impossible to predict
accurately the ultimate production potential, if any, of a particular property
or well. Moreover, the successful completion of an oil or gas well does not
ensure a profit on investment. A variety of factors, both geological and
market-related, can cause a well to become uneconomic or marginally economic.
Our business is subject to operating hazards that could result in substantial
losses.
The oil and natural gas business involves operating hazards such as well
blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline ruptures or
spills, pollution, releases of toxic gas and other environmental hazards and
risks, any of which could cause the Company a substantial loss. In addition, we
may be held liable for environmental damage caused by previous owners of
property it owns or leases. As a result, the Company may face substantial
liabilities to third parties or governmental entities, which could reduce or
eliminate funds available for exploration, development or acquisitions or cause
the Company to incur losses. An event that is not fully covered by
insurance--for example, losses resulting from pollution and environmental risks,
which are not fully insurable--could have a material adverse effect on the
Company's financial condition and results of operations.
The Company may face unanticipated water disposal costs.
Where groundwater produced from coal bed methane projects fails to meet the
quality requirements of applicable regulatory agencies or methane wells produce
water in excess of the applicable volumetric permit limit, we may have to drill
additional disposal wells to re-inject the produced water back into deep
underground rock formations. The costs to dispose of this produced water may
increase if any of the following occur:
o We cannot obtain future permits from applicable regulatory
agencies;
o water of lesser quality is produced;
o Methane wells produce excess water; or
o new laws or regulations require water to be disposed of in a
different manner.
We have limited protection for its technology and depend on technology owned by
others.
We intend to use operating practices that management believes are of value in
developing coal bed methane resources. In most cases, patent or other
intellectual property protection is unavailable for this technology. Our use of
independent contractors in most aspects of its drilling and some completion
operations makes the protection of such technology more difficult. Moreover, we
rely on the technological expertise of the independent contractors that it
retains for its oil and gas operations. We do not have any long-term agreements
with these contractors, and management cannot be sure that we will continue to
have access to this expertise.
16
We must comply with complex federal, state, and local laws and regulations.
Federal, state, and local authorities extensively regulate the oil and gas
industry. Noncompliance with these statutes and regulations may lead to
substantial penalties, and the overall regulatory burden on the industry
increases the cost of doing business and, in turn, decreases profitability.
Regulations affect various aspects of oil and gas drilling and production
activities, including the pricing and marketing of oil and gas production, the
drilling of wells (through permit and bonding requirements), the positioning of
wells, the unitization or pooling of oil and gas properties, environmental
matters, safety standards, the sharing of markets, production limitations,
plugging and abandonment and restoration. These laws and regulations are under
constant review for amendment or expansion.
We may incur substantial costs to comply with stringent environmental
regulations.
Our operations are subject to stringent and constantly changing environmental
laws and regulations adopted by federal, state, and local governmental
authorities. We could be forced to expend significant resources to comply with
new laws or regulations, or changes to current requirements. Governmental
environmental agencies have relatively little experience with the regulation of
coal bed methane operations, which are technologically different from
conventional oil and gas operations. This inexperience has created uncertainty
regarding how these agencies will interpret air, water and waste laws and
regulations and other requirements to coal bed methane drilling, fracture
stimulation methods, production and water disposal operations. We will continue
to be subject to uncertainty associated with new regulatory interpretations and
inconsistent interpretations between governmental environmental agencies. We
could face significant liabilities to the government and third parties for
discharges of oil, natural gas or other pollutants into the air, soil or water,
and we could have to spend substantial amounts on investigations, litigation and
remediation. Moreover, failure by the Company to comply with these laws and
regulations may result in the assessment of administrative, civil and criminal
penalties, the imposition of investigatory and remedial obligations and the
issuance of injunctions that restrict or prohibit the performance of operations.
See "--Government Regulation of the Oil and Gas Industry--Environmental
Matters."
Our business will depend on transportation facilities owned by others.
The marketability of our gas production depends in part on the availability,
proximity and capacity of pipeline systems owned by third parties, and changes
in our contracts with these third parties could materially affect the Company's
operations. The Company, through its subsidiaries, has entered into a series of
firm transportation service agreements with pipeline companies providing for the
transportation of our natural gas production from the Raton Basin to the
Mid-Continent markets. See "--Customers and Markets--Gas Marketing and
Transportation."
In addition, federal, state, and local regulation of gas and oil production and
transportation, tax and energy policies, changes in supply and demand, pipeline
pressures, and general economic conditions could adversely affect our ability to
transport its natural gas.
Market conditions could cause us to incur losses on any transportation
contracts.
17
General Risk Factors
Conflicts of Interest.
Certain conflicts of interest may exist between the Company and its officers and
directors. They have other business interests to which they devote their
attention, and may be expected to continue to do so although management time
should be devoted to the business of the Company. As a result, conflicts of
interest may arise that can be resolved only through exercise of such judgment
as is consistent with fiduciary duties to the Company. See "Management," and
"Conflicts of Interest."
Need For Additional Financing.
For its business plan to exploit oil, gas, and coal bed methane opportunities we
must seek additional financing, which may or may not be available. The Company
is investigating the availability, source, or terms that might govern the
acquisition of additional capital and will not do so until it determines a need
for additional financing. If not available, our operations will be limited to
those that can be financed with its available capital.
Regulation of Penny Stocks.
Our securities are subject to a Securities and Exchange Commission rule that
imposes special sales practice requirements upon broker-dealers who sell such
securities to persons other than established customers or accredited investors.
For purposes of the rule, the phrase "accredited investors" means, in general
terms, institutions with assets in excess of $5,000,000, or individuals having a
net worth in excess of $1,000,000 or having an annual income that exceeds
$200,000 (or that, when combined with a spouse's income, exceeds $300,000). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell our securities and also may affect
the ability of purchasers in this offering to sell their securities in any
market that might develop therefore.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act
of 1934, as amended. Because the securities of the Company may constitute "penny
stocks" within the meaning of the rules, the rules would apply to the Company
and to its securities. The rules may further affect the ability of owners of
Shares to sell the securities of the Company in any market that might develop
for them.
Shareholders should be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differentials and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. The
Company's management is aware of the abuses that have occurred historically in
the penny stock market. Although the Company does not expect to be in a position
to dictate the behavior of the market or of broker-dealers who participate in
the market, management will strive within the confines of practical limitations
to prevent the described patterns from being established with respect to the
Company's securities.
18
Lack of Operating History.
The Company was organized in April 1998 and remained dormant until Spring 1999
when it raised money to explore a business plan involving internet websites. The
Company is not profitable. We have not had successful operating history. We face
all of the risks of a new business and the special risks inherent in the
investigation, acquisition, or involvement in a new business opportunity. The
Company must be regarded as a new or "start-up" venture with all of the
unforeseen costs, expenses, problems, and difficulties to which such ventures
are subject.
Lack of Diversification.
Because of the limited financial-resources that we have, it is unlikely that we
will be able to diversify its acquisitions or operations. The Company's probable
inability to diversify its activities into more than one area will subject us to
economic fluctuations within a particular business or industry and therefore
increase the risks associated with our operations.
Dependence upon Management; Limited Participation of Management.
The Company currently has only four individuals who are serving as its officer
and directors. We will be heavily dependent upon their skills, talents, and
abilities to implement its business plan, and may, from time to time, find that
the inability of the officers and directors to devote their full time attention
to the business of the Company results in a delay in progress toward
implementing its business plan. See "Management." Because investors will not be
able to evaluate the merits of possible business decisions by us, they should
critically assess the information concerning our officers and directors.
Lack of Continuity in Management.
The Company does not have an employment agreement with its officer and
directors, and as a result, there is no assurance they will continue to manage
the Company in the future. In connection with acquisition of a business
opportunity, it is likely the current officers and directors of the Company may
resign subject to compliance with Section 14f of the Securities Exchange Act of
1934. A decision to resign will be based upon the identity of the business
opportunity and the nature of the transaction, and is likely to occur without
the vote or consent of the stockholders of the Company.
Indemnification of Officers and Directors.
Colorado Revised Statutes provide for the indemnification of its directors,
officers, employees, and agents, under certain circumstances, against attorney's
fees and other expenses incurred by them in any litigation to which they become
a party arising from their association with or activities on our behalf. We will
also bear the expenses of such litigation for any directors, officers,
employees, or agents, upon such person's promise to repay the Company therefore
if it is ultimately determined that any such person shall not have been entitled
to indemnification. This indemnification policy could result in substantial
expenditures by us, which we will be unable to recoup.
19
Director's Liability Limited.
Colorado Revised Statutes exclude personal liability of its directors to the
Company and its stockholders for monetary damages for breach of fiduciary duty
except in certain specified circumstances. Accordingly, we will have a much more
limited right of action against its directors than otherwise would be the case.
This provision does not affect the liability of any director under federal or
applicable state securities laws.
Dependence upon Outside Advisors.
To supplement the business experience of its officers and directors, we may be
required to employ accountants, technical experts, appraisers, attorneys, or
other consultants or advisors. The Company's President, without any input from
stockholders, will make the selection of any such advisors. Furthermore, it is
anticipated that such persons may be engaged on an "as needed" basis without a
continuing fiduciary or other obligation to the Company. In the event the
President of the Company considers it necessary to hire outside advisors, he may
elect to hire persons who are affiliates, if they are able to provide the
required services.
Leveraged Transactions.
Acquisitions of assets by the Company maybe leveraged, i.e., we may finance the
acquisition of the assets by borrowing against the assets of the business, or
against the projected future revenues or profits of the assets. If done, this
could increase our exposure to larger losses. Assets acquired through a
leveraged transaction are profitable only if it generates enough revenues to
cover the related debt and expenses. Failure to make payments on the debt
incurred to purchase the business opportunity could result in the loss of a
portion or all of the assets acquired. There is no assurance that any assets
acquired through a leveraged transaction will generate sufficient revenues to
cover the related debt and expenses.
Loss of Control by Present Management and Stockholders.
We may consider an acquisition in which we would issue, as consideration for the
business opportunity to be acquired, an amount of the Company's authorized but
unissued common stock that could, upon issuance, represent the great majority of
the voting power and equity of the Company. The result of such an acquisition
would be that the acquired company's stockholders and management would control
the Company, and persons unknown could replace our management at this time. Such
a merger would result in a greatly reduced percentage of ownership of the
Company by its current shareholders.
Volatility of Stock Price.
There is a limited recent history relating to the market price of our stock, but
what exists indicates the market price is highly volatile and it is very thinly
traded. Factors such as those discussed in this "Risk Factors" section may have
a significant impact upon the market price of the securities. Due to the low
price of the securities, many brokerage firms may not be willing to effect
transactions in the securities. Further, many lending institutions will not
permit the use of such securities as collateral for any loans.
20
We depend on key personnel and do not have employment agreements with our
executive officers.
Our success depends on the continued services of our executive officers and a
limited number of other senior management and technical personnel, and we do not
have employment agreements with these employees. Loss of the services of any of
these people could result in financial losses and interruptions in operations.
We do not pay dividends.
We have never declared nor paid any cash dividends on our common stock and
management has no intention to do so in the near future.
RESERVES
The Company has no proven oil or gas or coalbed methane reserves, nor any
production.
Employees
The Company is a development stage company and currently has no fulltime
employees. Management of the Company expects to use consultants, attorneys and
accountants as necessary, and anticipates a need to engage at least 3 full-time
employees as it expands its oil and gas operations.
Office and Operations Facilities
The Company leases no corporate office space at this time, using offices of its
consultants as needed.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------
Not Applicable.
ITEM 2. DESCRIPTION OF PROPERTIES/ASSETS/OIL AND GAS PROSPECTS
(a) Real Estate. None.
(b) Title to properties.
The Company owns fee title to various minerals on 150,000 gross acres
approximately in Colfax County, New Mexico subject to a 10% royalty
interest. These interests constitute oil, gas and coalbed methane on
120,000 acres, approximately, and 50% of oil and gas rights on
approximately 22,000 acres and 20,000 acres approximately of other
miscellaneous mineral rights.
(c) Oil and Gas Leases and Interests
21
At April 30, 2009, the Company held undeveloped acreage as set forth below:
Developed Acres Undeveloped Acres Total Acres
Location Gross Net Gross Net Gross Net
-------- ----- --- ----- --- ----- ---
Colfax Co.
New Mexico 0 0 4,400 3,280 4,400 3,280
Colfax Co.
New Mexico 0 0 120,000 108,000 120,000 108,000
Colfax Co.
New Mexico 0 0 22,000 11,000 22,000 10,000
Colfax Co. 0 0 10,000 9,000 10,000 9,000
New Mexico
Wyoming 0 0 2,560 2,137 2,560 2,137
--------------- --------------- ---------------- ---------------- --------------- ----------------
Total 0 0 158,960 132,417 158,960 132,417
Historical Oil or Gas Production for Company
2009 2008 2007
---- ---- ----
Natural Gas Oil Natural Gas Oil Natural Gas Oil
Location (MMcf) (Mbbl) (MMcf) (Mbbl) (MMcf) (Mbbl)
- -------- ------ ------ ------ ------ ------ ------
New Mexico 0 0 0 0 0 0
Wyoming 0 0 0 0 0 0
--------------- ---------------- ---------------- --------------- ---------------- ---------------
Total 0 0 0 0 0 0
Productive Wells
During the year ended April 30, 2009, the Company did not have any gross or net
producing wells.
(d) Patents. None
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
On October 24, 2008, the Company received notice from LPC Investment, LLC
("LPC") of a demand of payment in connection with $74,600 in an unsecured
promissory notes held by LPC. LPC is demanding payment of the outstanding
principal and accrued interest. The promissory note had a due date of September
30, 2008. LPC filed a lawsuit against the Company in December 2008, seeking
payment and alleging he was entitled to damages in excess of$1,400,000. LPC has
moved to dismiss its lawsuit in July 2009, and it is expected to be dismissed
about mid to late August 2009
22
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the year end April 30, 2009, the Company did not submit any matters for
approval to its shareholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES.
- -----------------------------------------
The Common Stock is presently traded on the over-the-counter market on the OTC
Bulletin Board maintained by the Financial Industry Regulatory Authority (the
"FINRA"). The OTCBB symbol for the Common Stock is "SNRV". The following table
sets forth the range of high and low bid quotations for the Common Stock of each
full quarterly period during the fiscal year or equivalent period for the fiscal
periods indicated below. The quotations were obtained from information published
by the FINRA and reflect interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
2009 HIGH LOW
---- ---- ---
April 30, 2009 $1.65 $1.58
January 31, 2009 0.65 0.65
October 31, 2008 0.495 0.495
July 31, 2008 0.20 0.20
2008 HIGH LOW
---- ---- ---
April 30, 2008 $0.30 $0.29
January 31, 2008 0.39 0.39
October 31, 2007 0.60 0.60
July 31, 2007 1.59 1.59
At April 30, 2009, there were 88 holders of record of the Company's common
stock. A significant number of the shares are held in street name and, as such,
the Company believes that the actual number of beneficial owners is higher.
Dividends
The Company has not established a policy concerning payment of regular dividends
nor has it paid any dividends on its common stock to date. Any payment of
dividends in the future will be determined by the Board of Directors in light of
conditions then existing, including restrictions imposed by the Company's
preferred stock then outstanding, the Company's earnings, financial condition,
capital requirements and debt covenants, if any, and the tax treatment
consequences of paying dividends.
23
Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the
definition of a "penny stock," for purposes relevant to the Company, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require: (i)
that a broker or dealer approve a person's account for transactions in penny
stocks; and (ii) that the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's account for
transactions in penny stocks, the broker or dealer must (i) obtain financial
information and investment experience and objectives of the person; and (ii)
make a reasonable determination that the transactions in penny stocks are
suitable for that person and that person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) states
that the broker or dealer received a signed, written agreement from the investor
prior to the transaction. Disclosure also has to be made about the risks of
investing in penny stock in both public offerings and in secondary trading, and
about commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions.
Finally, monthly statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
24
UNREGISTERED SALES OF EQUITY
The Company made the following unregistered sales of its securities from May 1,
2008 to April 30, 2009
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ------------------- ------------- ------------- ------------------
4/30/09 Warrants 350,000 Services Director
2/28/09 Warrants 20,000 Consulting Agreement Business Associate
3/31/09 Warrants 20,000 Consulting Agreement Business Associate
4/30/09 Warrants 20,000 Consulting Agreement Business Associate
4/30/09 Warrants 350,000 Services Director
4/30/09 Warrants 350,000 Services Director
4/30/09 Warrants 350,000 Services Director
8/6/08 Common Stock 50,000 Services Director
8/6/08 Common Stock 50,000 Services Director
8/6/08 Common Stock 50,000 Services Director
8/6/08 Common Stock 50,000 Services Director
8/6/08 Common Stock 50,000 Services Director
8/6/08 Common Stock 25,000 Services Business Associate
8/15/08 Common Stock 75,000 Services Business Associate
8/15/08 Common Stock 75,000 Services Business Associate
8/15/08 Common Stock 33,330 Settlement of Warrants Business Associate
8/15/08 Common Stock 9,997 Settlement of Warrants Business Associate
8/15/09 Common Stock 19,998 Settlement of Options Business Associate
8/15/08 Common Stock 1,667 Settlement of Warrant Business Associate
8/15/08 Common Stock 6,666 Settlement of Warrant Business Associate
8/15/08 Common Stock 1,667 Settlement of Warrant Business Associate
8/15/08 Common Stock 18,750 Settlement of Warrant Business Associate
8/15/08 Common Stock 2,500 Settlement of Warrant Business Associate
8/15/08 Common Stock 24,998 Settlement of Warrant Business Associate
8/15/08 Common Stock 8,333 Settlement of Warrant Business Associate
8/15/08 Common Stock 18,750 Settlement of Warrant Business Associate
8/15/08 Common Stock 6,666 Settlement of Warrant Business Associate
8/15/08 Common Stock 3,333 Settlement of Warrant Business Associate
9/25/08 Common Stock 100,000 Extension/Forebearance of Promissory Note Creditor
2/12/09 Common Stock 400,000 Conversion of $100K Note Business Associate
4/8/09 Common Stock 100,000 Conversion of $25K Note Business Associate
4/22/09 Common Stock 20,000 Consulting Fee Business Associate
4/22/09 Common Stock 20,000 Consulting Fee Business Associate
4/22/09 Common Stock 20,000 Consulting Fee Business Associate
25
Exemption from Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Act. All of the individuals and/or
entities listed above that purchased the unregistered securities were all known
to the Company and its management, through pre-existing business relationships,
as long standing business associates, friends, and employees. All purchasers
were provided access to all material information, which they requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with their purchases. All purchasers of
the unregistered securities acquired such securities for investment and not with
a view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
Not Applicable
ITEM 7. FINANCIAL STATEMENTS.
- -------------------------------
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Annual Report on Form 10-K
for the year ended April 30, 2009 contains forward-looking statements. The
presentation of future aspects of Sun River Energy, Inc. ("Sun River," the
"Company" or "issuer") found in these statements is subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those reflected in such statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," or "could" or the negative variations thereof or comparable
terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause the Company's actual results to be materially
different from any future results expressed or implied by the Company in those
statements. Important facts that could prevent the Company from achieving any
stated goals include, but are not limited to, the following:
Some of these risks might include, but are not limited to, the following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability
to raise additional capital or financing to implement business
plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside
parties; and
(h) insufficient revenues to cover operating costs.
26
There is no assurance that the Company will be profitable, the Company may not
be able to successfully develop, manage or market its products and services, the
Company may not be able to attract or retain qualified executives and technology
personnel, the Company's products and services may become obsolete, government
regulation may hinder the Company's business, additional dilution in outstanding
stock ownership may be incurred due to the issuance of more shares, warrants and
stock options, or the exercise of warrants and stock options, and other risks
inherent in the Company's businesses.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the factors described in other documents the
Company files, from time to time, with the SEC, including the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K filed by the Company.
Plan Of Operations
- ------------------
We had no revenues during the years ended April 30, 2009 and 2008. We have
minimal capital and minimal cash.
During the years ended April 30 2009 and, 2008, our operations were focused
exploring a coal bed methane prospect located in the Raton Basin in Northern New
Mexico. During the year ended April 30, 2008, we drilled 3 coal bed methane
wells in the Raton Basin, Myers #1, #2 and #3. All three wells have shown
multiple coal zones, which will be completed to seek methane gas.
Over the next twelve months, we intend to frac the Myers #1 and #2 in order to
test production thereafter. We have perforated multiple zones and intend to frac
these zones.
We intend to operate all of our prospects in the Raton Basin and hold working
interest of 100% on an 80% NRI on our leases, except that we have a 25% working
interest in the Sun River #1, LLC, a drilling syndication for the Myers #1 and
#2 wells, which was assembled in early 2007.
On April 21, 2008, the Company entered into a Release of Claims, with Nova
Leasing, LLC, the holder of a $6.6 Million Promissory Note and a $64,000
Promissory Note. In return for the releasement of the Company from any further
payment obligations under the promissory notes, the Company returned to Nova
Leasing, LLC, all rights and interests into and/or entitlements to the following
leases:
(a) the working interest in and the net revenue interest on the lease
totaling 640 acres in Natrona County, Wyoming; and
(b) the 85% working interest in and the 80% net revenue interest on
certain leases totaling approximately 14,000 acres (gross) in
Natrona and Converse County Wyoming, in the Powder River Basin.
In connection with the forgiveness of debt and the return of the releases, the
Company recorded a loss for the year ended April 30, 2008 of $1,298,603 and
income of $429,645 in connection with the release of the debt.
27
We will need substantial additional capital to support our proposed future
operations. We have no revenues. We have no committed source for any funds as of
date here. No representation is made that any funds will be available when
needed. In the event funds cannot be raised when needed, we may not be able to
carry out our business plan, may never achieve sales or royalty income, and
could fail in business as a result of these uncertainties.
The independent registered public accounting firm's report on the Company's
financial statements as of April 30, 2009, and for each of the years in the
two-year period then ended, includes a "going concern" explanatory paragraph,
that describes substantial doubt about the Company's ability to continue as a
going concern.
Results Of Operations - Year Ended April 30, 2009 Compared To Year Ended April
- --------------------------------------------------------------------------------
30, 2009
- --------
During the year ended April 30, 2009 and 2008, the Company did not recognize any
revenues from its operating activities.
During the year ended April 30, 2009, operating losses were $2,655,423 compared
to $975,667 during the year ended April 30, 2007. The $1,679,756 increase is due
to a $1,822,330 increase in consulting expenses, an $112,500 increase in
director fees and a $400,000 increase in litigations expenses offset by a
$632,230 decrease in lease expenses.
The Company recognized interest expense of $170,030 during the year ended April
30, 2009 compared to $512,874 during the year ended April 30, 2008. Interest
expenses decreased by $342,844 due to settlement of outstanding debt during the
year ended April 30, 2009.
During the year ended April 30, 2009, the Company recognized a net loss of
$2,827,376, compared to a net loss of $2,537,051 for the year ended April 30,
2008. The increase of $290,325 was due the $1,679,756 increase in operational
expenses offset by the $342,844 decrease in interest expense combined with the
recorded a loss for the year ended April 30, 2008 of $1,298,603 and income of
$429,645 in connection with the release of the debt, as discussed above.
Liquidity and Capital Resources
- -------------------------------
At April 30, 2009, the Company had cash of $38,851, total current assets of
$38,851 consisting solely of cash on hand. At April 30, 2009, the Company had
current liabilities of $2,277,743, consisting of accounts payable of $320,859,
accrued interest payable of $168,866, accrued litigation expense of $400,000,
drilling bonds payable of $37,508 and notes payable of $1,350,780. At April 30,
2009, the Company has a working capital deficit of $2,238,892.
During the year ended April 30, 2009, the Company used cash of $205,580 in its
operating activities. During the year end April 30, 2009, net losses of
$2,827,376 were adjusted for $420 in depreciation, $40,756 in unrealized losses
on marketable securities, $2,252,310 in expenses for stock and warrants issued
for services.
During the year ended April 30, 2008, the Company used cash of $347,287 in its
operating activities. During the year ended April 30, 2008, net losses of
$2,537,051 were adjusted for $240 in depreciation, $429,645 in debt relief,
$1,298,603 in losses on a claim release, $12,035 in unrealized losses on
marketable securities, $448,340 in consulting expense for stock and options
issued and $107,120 in amortization of stock issued for consulting services.
28
The Company used funds of $423,833 in its investment activities. We expended
$423,833 in connection with wells in process. The Company was used funds of
$188,678 from investing activities during the year ended April 30, 2008. We
expended $188,678 on assets.
During the year ended April 30, 2009, the Company received $656,226 from its
financing activities. The Company used $6,335,185 in its financing activities
during the year ended April 30, 2008.
The Company during the year ended April 30, 2008, received $1,100,000 from the
payment of a subscription receivable. In exchange for the receivable, the
Company issued 2,200,000 of its common shares at the time of the issuance of the
receivable in April 2007. The Company used these funds to make a payment on
$6,600,000 note payable owed to Nova Leasing, LLC.
During the year ended April 30, 2009, the Company entered into a Consulting
Services Agreement with a third party for services. Payment for such services
includes a monthly payment of 20,000 shares of the Company's common stock and a
warrant exercisable for 20,000 shares of the Company's common stock. During the
year ended April 30, 2009, the Company issued 60,000 shares of the Company's
common stock to such consultant. The Company recognized an expense of $57,000.
During the year ended April 30, 2009, the Company issued 500,000 shares of the
Company's common stock in connection with the conversion of $125,000 of the
principal of a $125,000 unsecured corporate promissory note.
During the year ended April 30, 2009, the Company issued 100,000 shares of its
common stock as forbearance on a $373,540 unsecured corporate promissory note
held by a vendor.
During the year ended April 30, 2009, the Company issued 156,563 shares of
common stock in exchange for 507,500 warrants and options that were outstanding.
This was accounted for as solely a capital transaction between common stock and
additional paid-in capital.
During the year ended April 30, 2009, the Company issued a total of 250,000
shares of its common stock to its directors for services. The Company recognized
an $112,500 expense in relation to the issuance.
During the year ended April 30, 2009, the Company issued 150,000 shares of its
common stock to a third party for consulting services of $52,500. The value of
the shares was based on a closing market price of $0.35 per share.
During the year ended April 30, 2009, officers and directors of the Company were
issued warrants exercisable for 1,400,000 shares of the Company's restricted
common stock. The warrants have a term of 3 years, an exercise price of $1.65
and provide for a cashless exercise. Using the Black-Scholes valuation method,
the Company recognized an expense of $1,960,000 in connection with the warrants.
29
During the year ended April 30, 2009, the Company entered into a Consulting
Services Agreement with a third party for services. Payment for such services
includes a monthly payment of 20,000 shares of the Company's common stock and a
warrant exercisable for 20,000 shares of the Company's common stock. During the
year ended April 30, 2009, the Company issued 60,000 shares of the Company's
common stock to such consultant. The Company recognized an expense of $57,000 in
connection with the issuance of the common stock. During the year ended April
30, 2009, warrants exercisable for 60,000 shares were issued by the Company. The
warrants have a term of 2 years, exercises prices based on closing market price
on the last day of the month of issuance and provide for a cashless exercise.
During the year ended April 30, 2009, the warrants exercisable for 60,000 shares
had exercise prices ranging from $0.54 to $1.65 per share. The fair value of the
options at the date of grant was $36,060 and was recorded as compensation
expense.
The Company will need to either borrow or make private placements of stock in
order to fund operations. No assurance exists as to the ability to achieve loans
or make private placements of stock.
Capital Resources
The Company has only common stock as its capital resource.
Garner Investments has no material commitments for capital expenditures within
the next year, however if operations are commenced, substantial capital will be
needed to pay for participation, investigation, exploration, acquisition and
working capital.
Need for Additional Financing
The Company does not have capital sufficient to meet its cash needs. The Company
will have to seek loans or equity placements to cover such cash needs. Once
exploration commences, its needs for additional financing is likely to increase
substantially.
No commitments to provide additional funds have been made by the Company's
management or other stockholders. Accordingly, there can be no assurance that
any additional funds will be available to the Company to allow it to cover the
Company's expenses as they may be incurred.
In addition, the United States and the global business community has experienced
severe instability in the commercial and investment banking systems which is
likely to continue to have far-reaching effects on the economic activity in the
country for an indeterminable period. The long-term impact on the United States
economy and the Company's operating activities and ability to raise capital
cannot be predicted at this time, but may be substantial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Sun River Energy operations do not employ financial instruments or derivatives
which are market sensitive. Short term funds are held in non-interest bearing
accounts and funds held for longer periods are placed in interest bearing
accounts. Large amounts of funds, if available, will be distributed among
multiple financial institutions to reduce risk of loss. The Company's cash
holdings do not generate interest income.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The audited consolidated financial statements and the related notes are set
forth at pages F-1 through F-17 attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- --------------------------------------------------------------------------------
DISCLOSURE
- ----------
During the year ended April 30, 2008 and the period of May 1, 2008 through
October 27, 2008, we had no disagreements with our Independent Registered Public
Accounting Firm, Jaspers + Hall, P.C.
However, on October 28, 2008, the Company was notified that Jaspers + Hall, P.C.
ability to audit registered companies was revoked by the Public Company
Accounting Oversight Board ("PCAOB"). Therefore, on October 28, 2008, the
Jaspers + Hall, P.C. were dismissed as the Company's Independent Registered
Public Accounting Firm.
On November 13, 2008, the Board of the Company approved the engagement of new
auditors, Larry O'Donnell, CPA, PC, of Denver, Colorado to be the Company's
independent registered public accountant. No audit committee exists, other than
the members of the Board of Directors.
ITEM 9 A. CONTROLS AND PROCEDURES
- ---------------------------------
The Company maintains a system of disclosure controls and procedures that are
designed for the purposes of ensuring that information required to be disclosed
in the Company's SEC reports is recorded, processed, summarized, and reported
within the time periods specified in the SEC rules and forms, and that such
information is accumulated and communicated to the Company's management,
including the Chief Executive Officer as appropriate to allow timely decisions
regarding required disclosure.
Management, after evaluating the effectiveness of the Company's disclosure
controls and procedures as defined in Exchange Act Rules 13a-14(c) as of April
30, 2009 (the "Evaluation Date") concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were not effective to ensure that
material information relating to the Company would be made known to them by
individuals within those entities, particularly during the period in which this
annual report was being prepared and that information required to be disclosed
in the Company's SEC reports is recorded, processed, summarized, and reported
within the time periods specified in the SEC's rules and forms.
Based on that evaluation, the Chief Executive Officer concluded that, because of
the material weakness in internal control over financial reporting described
below, the Company's disclosure controls and procedures were not effective as of
April 30, 2009.
ITEM 9A(T). CONTROLS AND PROCEDURES
- -----------------------------------
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the company in accordance
with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's internal control over
financial reporting includes those policies and procedures that:
31
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
Company's assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that the Company's
receipts and expenditures are being made only in accordance with
authorizations of Garner Investment's management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the Company's financial
statements.
Management's assessment of the effectiveness of the small business issuer's
internal control over financial reporting is as of the year ended April 30,
2009. We believe that internal control over financial reporting is not
effective. While we have not identified any, current material weaknesses
considering the nature and extent of our current operations and any risks or
errors in financial reporting under current operations, the fact that we are a
small business with limited employees causes a weakness in internal controls
over the segregation of duties.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
There was no change in the Company's internal control over financial reporting
that occurred during the fiscal quarter ended April 30, 2009 that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.
32
ITEM 9B. OTHER INFORMATION
- ---------------------------
Not applicable.
PART II
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
- --------------------------------------------------------------------------------
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- -------------------------------------------------------------
All directors of the Company hold office until the next annual meeting of the
security holders or until their successors have been elected and qualified. The
officers of the Company are appointed by the board of directors and hold office
until their death, resignation or removal from office. The Company's directors
and executive officers, their ages, positions held, and the duration of their
office are as follows:
Name Position Term
- ------ -------- ----
Redgie T. Green President and Director Annual
Stephen W. Weathers Director Annual
Thomas Anderson Director Annual
David Surgnier Director Annual
* Wesley Whiting resigned as President and Director of the Company on January 8,
2009. At that time, Mr. Redgie T. Green was appointed as the President of the
Company.
The directors named above will serve until the next annual meeting of the
Company's stockholders. Directors will be elected for one-year terms at the
annual stockholders' meeting. Officers will hold their positions at the pleasure
of the board of directors, absent any employment agreement, of which none
currently exists or is contemplated. There is no arrangement or understanding
between the directors and officers of the Company and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer.
Our directors and officers will devote such time to the Company's affairs on an
"as needed" basis. As a result, the actual amount of time, which they will
devote to the Company's affairs, is unknown and is likely to vary substantially
from month to month.
DIRECTORS AND EXECUTIVE OFFICERS
REDGIE T. GREEN, age 56, Mr. Green has served as the President and Director of
the Company, since January of 2009. He has served as a director of the Company
since 1998. Mr. Green was co-owner and operator of Green's B&R Enterprises, a
wholesale donut baker since 1983. He has been an active investor in small
capital and high-tech adventures since 1987. Mr. Green was a director of
Colorado Gold & Silver, Inc. in 2000. He was a director for Houston Operating
Company in late 2004 until December 2004. He recently served as a director for
Mountains West Exploration, Inc. in 2005. He is a Director of Concord Ventures,
Inc. (2006) and Aspeon, Inc. (2006) and has been appointed as an officer and
director of Captech Financial, Inc. in May 2006. He served as a director of
Baymark Technologies, Inc. 2005-2006.
STEPHEN W. WEATHERS, age 47, Director, earned his B. S. in Geology from Boise
State University. He has worked as an environmental geologist both in the mining
industry and oil and gas industry. His duties included permitting, environmental
compliance, environmental remediation/reclamation and natural gas asset
acquisitions both in the United States and Canada. Mr. Weathers worked for
Maxxim Environmental/Terracon from 1997 through 1999 and presently works in the
environmental remediation division for a Duke Energy Field Services which is a
natural gas processing company (1999-2002). Mr. Weathers also serves as a
director of Sun River Mining, Inc.. Mr. Weathers has served as director of the
Company since 2002.
33
THOMAS ANDERSON, age 41, Director, presently works as a Senior Environmental
Scientist for the Energy and Environmental Engineering Division of Apogen
Technologies in Los Alamos, New Mexico. He earned his B.S. in Geology from
Denison University and his M.S. in Environmental Science and Engineering from
Colorado School of Mines. Mr. Anderson has worked for past 16 years in the
environmental consulting field, providing environmental compliance,
characterization and remediation services to Department of Energy, Department of
Defense, and industrial clients. He formerly worked as a Senior Environmental
Scientist at Concurrent Technologies Corp. from November 2000 to December 2004.
From March 2000 to November 2000, he was employed as a hydrologist at Stone &
Webster Engineering, Inc. From July 1998 to March 2000, he was employed by
advanced Integrated Management Services as an Environmental Scientist/Engineer.
From 1997 to 1998, he was a graduate research assistant at Colorado School of
Mines in the Environmental Science and Engineering Program. Mr. Anderson has
served as a director of the Company since 2002.
DAVID SURGNIER, age 58, Director, earned his B.S. in Mathematics in 1971 from
the University of Oklahoma, his B.S. in Petroleum Engineering in 1972 from the
University of Oklahoma, and his M.S. in Petroleum Engineering in 1984 from the
University of Texas. Mr. Surgnier currently serves as President/Engineer for
Delta Gas Corporation and Delta Environmental since 1992. From 1986 to 1992 he
was the Rocky Mountain Regional Manager for Completion Technology International
of Denver, Colorado. Mr. Surgnier was the Manager of Special Projects for Texas
Iron Works of Houston, Texas from 1980-1986. Mr. Surgnier was the Drilling and
Production Engineer from 1972-1980 for Atlantic Richfield Oil Company located in
Houston, Texas and ARCO Alaska. Mr. Surgnier has 33 years experience as a
Petroleum Engineer, Project and Regional Manager, Technical writer and
presenter. Developer, Inventor and co-Inventor of Patented and Proprietary
equipment and products, for the Petroleum and Environmental Industry. He has
operated and managed projects onshore and offshore in North & South America,
North Slope of Alaska, Cook Inlet of Alaska and the Middle East. He has also
drilled and completed domestic water supply wells for individuals, the
Chickasaw, Choctaw and Seminole Nations, and U.S. Public Health Services.
Oilfield water supply wells for Cities Service Co., Framers Energy Corporation,
Botcher Gas Company, Cameron Oil Company and Phillips Petroleum Corporation.
Municipal Water Supply Wells for the Cities of Stewart, McAlister, Stonewall Ada
and Tribbey, Oklahoma. He has been Environmental Consultant to Environmental
Resource Management, Biotreatment, Inc., Aarow Environmental, Inc., Argonne
National Laboratory and the University of Chicago. Mr. Surgnier has served as a
director of the Company since 2002.
Indemnification of Officers and Directors
As permitted by Colorado Revised Statutes, we may indemnify its directors and
officers against expenses and liabilities they incur to defend, settle, or
satisfy any civil or criminal action brought against them on account of their
being or having been Company's directors or officers unless, in any such action,
they are adjudged to have acted with gross negligence or willful misconduct.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in that Act and is, therefore, unenforceable.
Exclusion of Liability
The Colorado Corporation Code excludes personal liability for its directors for
monetary damages based upon any violation of their fiduciary duties as
directors, except as to liability for any breach of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, acts in violation of the Colorado Corporation Act, or any
transaction from which a director receives an improper personal benefit. This
exclusion of liability does not limit any right, which a director may have to be
indemnified, and does not affect any director's liability under federal or
applicable state securities laws.
34
Conflicts of Interest
Our officers and directors will not devote more than a portion of their time to
the affairs of the Company. There will be occasions when the time requirements
of our business conflict with the demands of their other business and investment
activities. Such conflicts may require that we attempt to employ additional
personnel. There is no assurance that the services of such persons will be
available or that they can be obtained upon terms favorable to the Company.
Officers and directors of the Company may participate in business ventures,
which could be deemed to compete directly with the Company. Additional conflicts
of interest and non-arms length transactions may also arise in the future in the
event our officers or directors are involved in the management of any firm with
which we transact business. Our Board of Directors has adopted a policy that the
Company will not seek a merger with, or acquisition of, any entity in which
management serve as officers or directors, or in which they or their family
members own or hold a controlling ownership interest. Although the Board of
Directors could elect to change this policy, the Board of Directors has no
present intention to do so.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934, as amended, requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the SEC
reports of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Such reporting persons are required to furnish the
Company with copies of all Section 16(a) forms they file.
35
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Summary Compensation Table
The following table sets forth the cash and non-cash compensation paid by or
incurred on behalf of the Company to its Chief Executive Officer and certain
other executive officers for the years ended April 30, 2009, 2008 and 2007.
SUMMARY EXECUTIVES COMPENSATION TABLE
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
Non-equity Non-qualified
incentive deferred
Stock Option plan compensation All other
Salary Bonus awards awards compensation earnings compensation Total
Name & Position Year ($) ($) ($) ($) ($) ($) ($) ($)
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
Wesley F. Whiting, 2009 0 0 0 0 0 0 11,250 (3) 11,250
President & Director 2008 0 0 0 0 0 0 0 0
(1) 2007 0 0 0 0 0 0 0 0
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
Redgie T. Green, 2009 0 0 0 0 0 0 501,250 (4) 501,250
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
- ---------------------- ------- ---------- -------- ---------- ---------- -------------- ----------------- -------------- ----------
(1) Mr. Whiting resigned as the President of the Company in January
2009.
(2) Mr. Green was appointed the President of the Company in
January 2009.
(3) During the year ended April 30, 2009, Mr. Whiting was issued
25,000 shares of the Company's restricted common stock valued at
$11,250 based on a closing market price of $0.45 per share on the
date of issuance. The shares were issued for services as a
director.
(4) During the year ended April 30, 2009, Mr. Green was issued 25,000
shares of the Company's restricted common stock valued at $11,250
based on a closing market price of $0.45 per share on the date of
the issuance. The shares were issued for services as a director.
During the year ended April 30, 21009, the Company issued Mr.
Green a warrant exercisable for 350,000 shares of the Company's
restricted common stock. The Warrant has a term 3 years and on
exercise price of $1.65 per share and provides for a cashless
exercise. Using the Black-Scholes method of valuation the warrant
has a value of $490,000.
36
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth certain information concerning outstanding equity
awards held by the President for the fiscal year ended April 30, 2009 (the
"Named Executive Officers"):
- ------------ ------------------------------------------------------------ --------------------------------------------
Warrant Awards Stock awards
- ------------ ------------------------------------------------------------ --------------------------------------------
Equity
incentive
Equity plan
incentive Equity awards:
plan incentive Market
awards: plan or
Number of Number of Number of Number Market awards: payout
securities securities securities of value of Number of value of
underlying underlying underlying shares shares unearned unearned
unexercised unexercised unexercised Warrant Warrant or units of units shares, shares,
warrants warrants unearned exercise expiration of stock of stock units or units or
Name (#) (#) warrants price date that that other others
exercisable unexercisable (#) ($) have not have not rights rights
vested vested that have that
(#) ($) not have not
vested (#) vested
($)
- ------------ ------------ ------------ ----------- ---------- ----------- ---------- ---------- ----------- ----------
- ------------ ------------ ------------ ----------- ---------- ----------- ---------- ---------- ----------- ----------
Redgie Green 350,000 -0- -0- $ 1.65 4/30/2012 -0- $ -0- -0- -0-
- ------------ ------------ ------------ ----------- ---------- ----------- ---------- ---------- ----------- ----------
- ------------ ------------ ------------ ----------- ---------- ----------- ---------- ---------- ----------- ----------
(1) During the year ended April 30, 2009, the Company granted to Mr. Green,
a warrant exercisable for 350,000 shares of the Company's restricted
common stock. The warrant has a term of 3 years, an exercise price of
$1.65 per share and provides for a cashless exercise. The warrant was
valued using the Black-Scholes Valuation Method and was determined to
have a value of $490,000.
Option/SAR Grants Table
No options were granted during the fiscal years ended April 30, 2009 and 2008 to
our officers and/or directors.
37
Directors Compensation Table
The following table sets forth certain information concerning compensation paid
to our directors for services as directors, but not including compensation for
services as officers reported in the "Summary Executives Compensation Table"
during the year ended April 30, 2009:
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
Non-qualified
Non-equity deferred
Fees earned (3) (4) incentive compensation All other
or paid in Stock Option plan earnings compensation Total
Name cash awards ($) awards ($) compensation ($) ($) ($)
($) ($)
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
Wesley F. $ -0- $11,250 $ -0- $ -0- $ -0- $ -0- $ 11,250
Whiting (1)
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
Redgie T. Green $ -0- $11,250 $ 490,000 $ -0- $ -0- $ -0- $ 501,250
(2)
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
Thomas Anderson $ -0- $11,250 $490,000 $ -0- $-0- $ -0- $ 501,250
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
Stephen W. Weathers $ -0- $11,250 $490,000 $ -0- $-0- $-0- $501,250
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
David Surgnier $ -0- $11,250 $490,000 $ -0- $-0- $-0- $501,250
- ---------------- ------------- ------------- ------------- -------------- --------------- -------------- -------------
37
(1) Mr. Whiting resigned as the president of the Company in January 2009.
(2) Mr. Green was appointed the President of the Company in January 2009.
(3) During the year ended April 30, 2009, each director was issued 25,000
shares of the Company's restricted common stock valued at $11,250 based
on a closing market price of $0.45 per share on the date of issuance.
The shares were issued for services as a director.
(4) During the year ended April 30, 2009, the Company issued each director
a warrant exercisable for 350,000 shares of the Company's restricted
common stock. The warrant has a term of 3 years and an exercise price
of $1.65 per share and provides for a cashless exercise. Using the
Black-Scholes method of valuation that each warrant has a value of
$490,000.
The Company does not currently pay any cash fees to its directors, nor does the
Company pay directors' expenses in attending board meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- --------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
- ---------------------------
Beneficial Ownership
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of Common Stock as of April 30, 2009, by (a)
each person known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (b) the Company's directors, Chief Executive
Officer and executive officers whose total compensation exceeded $100,000 for
the last fiscal year, and (c) all directors and executive officers of the
Company as a group.
Name And Address* of Class of Equity Amount and Nature of Percent of Class(1)
Beneficial Ownership Beneficial Owner
- ----------------------------- -------------------------- -------------------------- -------------------------
Redgie T. Green, Common Shares 463,500 2.66%
Director/President (2)
Stephen W. Weathers, Common Shares 450,000 2.58%
Director (3)
David Surgnier, Common Shares 450,000 2.58%
Director (4)
Thomas Anderson, Director Common Shares 450,000 2.58%
Director (5)
LPC Investments, LLC. Common Shares 2,239,000 12.84%
Nova Leasing, LLC Common Shares 1,200,000 6.89%
Robert Doak (6) Common Shares 6,123,733 35.14%
-------------------------- -------------------------
All Directors and Executive Officers as a Group (4 1,813,500 10.41%
persons)
*Address for the above is the Company's address at 7609 Ralston Road, Arvada,
CO 80002.
38
(1) Based upon 16,317,423 shares of common stock issued and outstanding on April
30, 2009, warrants exercisable for 1,110,000 shares of common stock for a total
of 17,427,423 shares of common stock.
(2) Mr. Green holds 113,500 shares of the Company's common stock and a warrant
exercisable for 450,000 shares of common stock. The warrant has a term of 3
years, an exercise price of $1.65 per share and provides for a cashless
exercise.
(3) Mr. Weathers holds 100,000 shares of the Company's common stock and a
warrant exercisable for 450,000 shares of common stock. The warrant has a term
of 3 years, an exercise price of $1.65 per share and provides for a cashless
exercise.
(4) Mr. Surgnier holds 100,000 shares of the Company's common stock and a
warrant exercisable for 450,000 shares of common stock. The warrant has a term
of 3 years, an exercise price of $1.65 per share and provides for a cashless
exercise.
(5) Mr. Anderson holds 100,000 shares of the Company's common stock and a
warrant exercisable for 450,000 shares of common stock. The warrant has a term
of 3 years, an exercise price of $1.65 per share and provides for a cashless
exercise.
(6) Mr. Doak directly owns 3,182,067 shares of the Company's common stock. He
indirectly owns 2,941,666 shares of the Company's common stock through New
Mexico Energy, LLC which is a member.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR
- --------------------------------------------------------------------------------
INDEPENDENCE.
- ------------
Fiscal Year Ended April 30, 2009
During the year ended April 30, 2009, officers and directors of the Company were
issued a total of 250,000 shares of the Company's restricted common stock for
their services. The shares were issued at an average price of $0.45 per share
for a total expense of $112,500. The shares were issued to the individuals in
the amounts set forth below:
Redgie Green, President & Director 25,000 shares
Wesley Whiting** 25,000 shares
Stephen Weathers, Director 25,000 shares
Thomas Anderson, Director 25,000 shares
David Surgnier, Director 25,000 shares
** Mr. Whiting resigned as an officer and director of the Company in
January 2009.
During the year ended April 30, 2009, officers and directors of the Company were
issued warrants exercisable for 1,400,000 shares of the Company's restricted
common stock. The warrants have a term of 3 years, an exercise price of $1.65
and provide for a cashless exercise. Using the Black-Scholes valuation method,
the Company recognized an expense of $1,960,000 in connection with the warrants.
The warrants were issued in the amounts and to the individuals set forth below:
Redgie Green, President & Director 450,000 shares
Stephen Weathers, Director 450,000 shares
Thomas Anderson, Director 450,000 shares
David Surgnier, Director 450,000 shares
Note Payable - LPC Investments, LLC
39
On October 24, 2008, the Company received notice from LPC Investment, LLC
("LPC"), a greater than 10% shareholder of the Company, of a demand of payment
in connection with $74,600 in unsecured promissory notes held by LPC. LPC is
demanding payment of the outstanding principal and accrued interest. The
promissory note had a due date of September 30, 2008. At this time, the Company
has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in
the Jefferson County District Court, against the Company. The lawsuit alleges a
breach of contract against the Company in connection with the payment of an
unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the
Company's common stock into a preferred note. LPC Investments is seeking not
only payment of the unsecured, 8.75% promissory note and accrued interest but
also attorney fees. At this time, the Company has filed a response to the
complaint, and intends to defend itself against the claims. LPC Investments has
filed a motion for dismissal (See Item 3).
Fiscal Year Ended April 30, 2008
During the year ended April 30, 2008, we entered into a Release of Claims, with
Nova Leasing, a greater than 5% shareholder of the Company. The Release of Claim
provided that in return for being released form payment of the outstanding
balance f $6,162,564 owed in connection with the %6.6 Million Dollar Promissory
Note held by Nova Leasing and the outstanding balance of $72,478 owed in
connection with the $64,000 Promissory Note also held by Nova Leasing, we
returned the leases securing the promissory notes to Nova Leasing.
In the year ended April 30, 2008, LPC Investments, LLC, a greater than 10%
shareholder of the Company, provided us with funds of $74,600 in the form of an
8.75% Promissory Note. The note has a due date of September 30, 2008 and is
unsecured.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------------------------------------------------
GENERAL. Larry O' Donnell, CPA, PC (O'Donnell) has been engaged as the Company's
principal audit accounting firm from November 13, 2008 to date. Prior to
November 13, 2008, Jaspers + Hall, P.C. was engaged as the Company's principal
accounting firm for the year ended April 30, 2008 and the period of May 1, 2008
through October 28, 2008. The Company's Board of Directors has considered
whether the provisions of audit services are compatible with maintaining
O'Donnell's independence.
The following table represents aggregate fees billed to the Company during the
year ended April 30, 2009 by both O'Donnell ($1,100) and by Jaspers ($0) and for
the year ended April 30, 2008 by Jaspers ($7,500).
Year Ended April 30,
2009 2008
----------------------------- ----------------------------
Audit Fees $1,100 $7,500
Audit-related Fees 0 0
Tax Fees 0 0
All Other Fees 0 0
----------------------------- ----------------------------
Total Fees $1,100 $7,500
40
All audit work was performed by the auditors' full time employees.
The Company uses a different CPA/Attorney firm for the preparation of income tax
reporting.
ITEM 15. INDEX TO EXHIBITS.
The following is a complete list of exhibits filed as part of this Form 10K.
Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of
Regulation S-K.
Exhibit Description of Document
------ ------------------------
31.1 Certification by Chief Executive Officer. *
32.1 Section 906 Certification by Chief Executive Officer*
- ---------------
* Filed herewith.
41
Telephone (303) 745-4545
2228 South Fraser Street
Fax (303)369-9384 Unit I
Email larryodonnellcpa@msn.com Aurora, Colorado 80014
www.larryodonnellcpa.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Sun River Energy, Inc.
I have audited the accompanying balance sheet of Sun River Energy, Inc. as of
April 30, 2009 and 2008 , and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended and for the period
October 22, 2002 (inception) to April 30, 2009. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audits.
I conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sun River Energy, Inc. as of April
30, 2009, and the results of its operations and its cash flows for the year then
ended and for the period April 30, 1998 (inception) to April 30, 2009, in
conformity with generally accepted accounting principles in the United States of
America.
The accompanying financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has an
accumulated deficit of $6,375,866 at April 30, 2009. Additionally, for the year
ended April 30, 2009, the Company incurred a net loss of $2,827,376. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Larry O'Donnell
- ------------------
Larry O'Donnell, CPA, PC
August 12, 2009
F-1
SUN RIVER ENERGY
(An Exploration Stage Company)
Balance Sheets
April 30,
2009 2008
-------------- --------------
ASSETS:
Current Assets:
Cash $ 38,851 $ 12,038
Marketable Securities - 11,835
- -
-------------- --------------
Total Current Assets 38,851 23,873
-------------- --------------
Fixed Assets net of depreciation $1,200 - $660 540 960
Other Assets:
Leases 220,000 220,000
Mineral Rights 100,000 100,000
Wells in process and advances 675,310 251,477
-------------- --------------
Total Other Assets 995,310 571,477
-------------- --------------
TOTAL ASSETS $1,034,701 $ 596,310
============== ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT):
Current Liabilities:
Accounts Payable $ 320,589 $ 551,299
Accrued Interest Payable 168,866 26,313
Accrued litigation expense 400,000 -
Drilling bonds payable 37,508 -
Notes Payable 1,350,780 819,554
- -
-------------- --------------
Total Current Liabilities 2,277,743 1,397,166
-------------- --------------
Stockholders' (Deficit):
Common stock, $0.0001 par value; 100,000,000 shares 1,632 1,508
authorized, 16,317,423 shares issued and outstanding
as of April 30, 2008 and 15,075,768 shares as of April 30, 2008
Additional paid-in capital 3,135,132 2,754,006
APIC - Unexercised warrants 1,996,060 -
Deferred consulting expense - (7,880)
Deficit accumulated during the development stage (6,375,866) (3,548,490)
-------------- --------------
Total Stockholders' (Deficit) (1,243,042) (800,856)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $1,034,701 $ 596,310
============== ==============
The accompanying notes are a integral part of these financial statements.
F-2
SUN RIVER ENERGY, INC.
(An Exploration Stage Company)
Statements of Operations
Year ended October 22, 2002
April 30, (Inception) to
-----------------------------------
2009 2008 April 30, 2009
---------------- --------------- -----------------
Revenue:
Miscellaneous Income $ - $ - $ -
---------------- --------------- -----------------
Total Income - - -
Costs and Expenses:
Consulting 2,119,690 297,360 2,938,826
Director's fees 112,500 - 112,500
Professional 6,415 12,632 113,663
Lease Expenses 7,998 640,228 689,521
Litigation expense 400,000 - 400,000
Office Expenses 8,400 25,207 45,935
Depreciation 420 240 660
---------------- --------------- -----------------
Total Expenses 2,655,423 975,667 4,301,105
---------------- --------------- -----------------
Net Loss From Operations (2,655,423) (975,667) (4,301,105)
---------------- --------------- -----------------
Other Income and (Expenses)
Interest expense (170,030) (512,874) (962,176)
Interest income 1,347 76 2,112
Debt Relief - 429,645 429,645
Loss on Claim Release - (1,298,603) (1,298,603)
Realized (Loss) on sale of investments (44,035) (191,663) (245,739)
Unrealized (Loss) on investments 40,765 12,035 -
---------------- --------------- -----------------
Total Other Income and (Expense) (171,953) (1,561,384) (2,074,761)
---------------- --------------- -----------------
Net Loss $(2,827,376) $(2,537,051) $ (6,375,866)
================ =============== =================
Per Share Information
Loss per common share $ (0.18) $ (0.17))
================ ===============
Weighted average number
of shares outstanding 15,555,940 14,997,685
---------------- ---------------
The accompanying notes are an integral part of these financial statements.
F-3
SUN RIVER ENERGY, INC.
(An Exploration Stage Company)
Statements of Stockholder's Equity (Deficit)
From October 22, 2002 (Inception) through April 30, 2009
Deficit
COMMON STOCK Additional APIC Accum. During Total
----------------------------
Paid-in Unexercised Development Stockholders'
# of Shares Amount Capital Warrants Stage Deficit
------------- ----------- ------------ ------------ ------------ -------------
Balance - October 22, 2002 - $ - $ - $ - $ -
Stock issued for cash 1,000 1 49 - 50
Net Loss for Period - - - (50) (50)
------------- ----------- ------------ ----------- ------------ -------------
Balance - December 31, 2002 1,000 1 49 - (50) -
------------- ----------- ------------ ----------- ------------ -------------
Net Loss for Year - - - - -
------------- ----------- ------------ ----------- ------------ -------------
Balance - December 31, 2003 1,000 1 49 - (50) -
------------- ----------- ------------ ----------- ------------ -------------
Net Loss for Year - - - - -
------------- ----------- ------------ ----------- ------------ -------------
Balance - December 31, 2004 1,000 1 49 - (50) -
------------- ----------- ------------ ----------- ------------ -------------
Issuance of shares for Merger 9,033,333 903 436,763 - 437,666
Merger accounting 484,500 48 (20,923) (20,875)
Value of subsidiary in excess
of related party's basis (866,667) (866,667)
Net Loss for Year - - - (350,050) (350,050)
------------- ----------- ------------ ----------- ------------ -------------
Balance - April 30, 2006 9,518,833 952 (450,778) - (350,100) (799,926)
------------- ----------- ------------ ----------- ------------ -------------
Issuance of Stock for Cash 795,000 80 397,420 397,500
at $0.50 per share plus warrant
at $0.75
Issuance of Stock for Debt 242,935 24 149,976 150,000
at $0.62 per share
Issuance of Stock for Marketable
Securities 800,000 80 399,920 400,000
at $0.50 per share
Issuance of Stock for Services 309,000 31 154,469 154,500
at $0.50 per share
Issuance of Stock for Lease
acquisition 880,000 88 439,912 440,000
Issuance of Stock for Cash 2,200,000 220 1,099,780 1,100,000
Net Loss for Year (661,339) (661,339)
------------- ----------- ------------ ----------- ------------ -------------
Balance - April 30, 2007 14,745,768 1,475 2,190,699 - (1,011,439) 1,180,735
------------- ----------- ------------ ----------- ------------ -------------
Issuance of Stock for Services 310,000 31 468,969 469,000
at $1.51 per share
Issuance of Stock for Interest 20,000 2 50,998 51,000
at $2.55 per share
Options issued 43,340 43,340
Net Loss for Year (2,537,051) (2,537,051)
------------- ----------- ------------ ----------- ------------ -------------
Balance - April 30, 2008 15,075,768 1,508 2,754,006 - (3,548,490) (792,976)
------------- ----------- ------------ ----------- ------------ -------------
Issuance of Stock for Services
at average price of $0.47 485,000 48 228,202 228,250
Issuance of Stock for Interest
at average price of $0.28 100,000 10 27,990 28,000
Issuance of Stock in exchange for
debt at an average price of $0.25 500,000 50 124,950 125,000
Exchange stock for cashless warrants 156,655 16 (16) -
Warrants issued for services 36,060 36,060
Warrants issued to directors 1,960,000 1,960,000
Net loss for year (2,827,376) (2,827,376)
------------- ----------- ------------ ----------- ------------ -------------
Balance - April 30, 2009 16,317,423 $ 1,632 $3,135,132 $1,996,060 $(6,375,866) $ (1,243,042)
============= =========== ============ =========== ============ =============
The accompanying notes are an integral part of these financial statements.
F-4
SUN RIVER ENERGY, INC.
(An Exploration Stage Company)
Statements of Cash Flows
Year ended October 22, 2002
April 30, (Inception) to
-------------------------------
2009 2008 April 30, 2009
-------------- ------------- -----------------
Cash Flows from Operating Activities
Net Loss $(2,827,376) $(2,537,051) $ (6,375,866)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 420 240 660
Debt relief - (429,645) (429,645)
Loss on claim release - 1,298,603 1,298,603
Unrealized loss on marketable securities (40,765) (12,035) -
Stock and warrants issued for services and interest 2,252,310 448,340 2,855,150
Amortization of consulting stock 7,880 107,120 115,000
Decrease in current assets 52,600 1,399,400 52,800
Increase in accounts payable and accrued expenses 349,351 72,315 926,964
-------------- ------------- -----------------
Net Cash Used by Operating Activities (205,580) (347,287) (1,556,334)
-------------- ------------- -----------------
Cash Flows from Investing Activities
Increase in fixed assets - (1,200) (1,200)
Increase in other assets (423,833) (187,478) (611,311)
Acquisition - net of cash acquired - - (813,001)
-------------- ------------- -----------------
Net Cash Used for Investing Activities (423,833) (188,678) (1,425,512)
-------------- ------------- -----------------
Cash Flows from Financing Activities
Stock issued for cash - - 1,444,750
Stock issued for debt/assets 125,000 - 1,115,000
Proceeds from/(Payments to) notes payable 531,226 243,959 481,822
Proceeds from/(Payments to) notes payable - related party - (408,102) -
Merger accounting - - (20,875)
-------------- ------------- -----------------
Net Cash Provided by Financing Activities 656,226 (164,143) 3,020,697
`
Net Increase in Cash & Cash Equivalents 26,813 (5,534) 38,851
Beginning Cash & Cash Equivalents 12,038 17,572 -
Ending Cash & Cash Equivalents $ 38,851 $ 12,038 $ 38,851
============== ============= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ - $ - $ 13,739
============== ============= =================
Cash paid for income taxes $ - $ - $ -
============== ============= =================
NON-CASH TRANSACTIONS
Stock issued for debt $ 125,000 $ - $ 275,000
Stock issued for marketable securities - - 400,000
Stock issued for other assets - - 440,000
Stock issued for services 228,250 - 382,750
Return of leases for cancellation of debt - 7,040,000 7,040,000
-------------- ------------- -----------------
Total non-cash transactions $ 353,250 $7,040,000 $8,537,750
============== ============= =================
The accompanying notes are an integral part of these financial statements.
F-5
SUN RIVER ENERGY, INC.
(An Exploration Stage Company)
Notes to Financial Statements
For the Year Ended April 30, 2009
Note 1 - Organization, Basis of Presentation and Summary of Significant
Accounting Policies:
Organization:
Sun River Energy, Inc. was incorporated on October 22, 2002,
under the laws of the State of Colorado.
The Company's is as an independent energy company engaged in the, exploration of
North American unconventional natural gas properties and conventional oil and
gas exploration. Its intended operations are principally energy prospects in the
Rocky Mountain region including a coal bed methane prospect located in the Raton
Basin in Northern New Mexico and the Company is seeking other opportunities.
On January 8, 2009, Mr. Wesley Whiting resigned as the Chief Executive Officer
and Director of the Company. On January 8, 2009, Mr. Redgie Green, a director of
the Company, was appointed the Chief Executive Officer of the Company.
Basis of Presentation:
Development Stage Company
The Company has not earned any significant revenues from its limited principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("SFAS 7"). Among the disclosures required by
SFAS 7 are that the Company's financial statements be identified as those of a
development stage company, and that the statements of operation, stockholders'
equity (deficit) and cash flows disclose activity since the date of the
Company's inception.
Going Concern
The Company's financial statements for the year ended April 30, 2009 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company reported a net loss of $2,827,376 for the year ended April
30, 2009 and an accumulated deficit during the development stage of $6,375,866
as of April 30, 2009. At April 30, 2009, the Company's total current liabilities
exceed total current assets by $2,238,893.
The Company is in the development stage and has not earned any revenue from
operations. The Company's ability to continue as a going concern is dependent
upon its ability to develop additional sources of capital or locate a merger
candidate and ultimately, achieve profitable operations. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
F-6
Significant Accounting Policies
Use of Estimates
The preparation of the 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 periods. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
Revenue Recognition
The Company recognizes revenue when it is earned and expenses are recognized
when they occur.
Marketable Securities
On August 17, 2006, in exchange for 800,000 shares of the Company's restricted
common stock, the Company acquired 200,000 shares of the common stock of Tonga
Capital Corporation, kna Momentum BioFuels, Inc. ("Momentum") from a
non-affiliate. At the time of the acquisition, the Momentum shares had a market
value of $400,000 ($0.50 per share). The 800,000 shares of the Company's stock
issued for the shares had a value of $400,000 ($0.50 per share).
At April 30, 2008, marketable securities consisted of 57,400 shares of common
stock of Momentum. These securities had an estimated fair value of $11,835 at
April 30, 2008, based upon quoted market prices, and were included in current
assets in the Company's April 30, 2008 balance sheet.
At October 31, 2008, the Company had liquidated all of the remaining 57,400
shares of common stock of Momentum. These securities are no longer carried on
the books of the Company.
Unrealized gains and losses are computed on the basis of specific identification
and are reported as a component of other income (loss), included as a separate
item on the Company's statement of operations. The Company reported an
unrealized gain on marketable securities of $40,765 during the year ended April
30, 2009 (an unrealized gain of $12,035 for the year ended April 30, 2008).
Realized gains, realized losses, and declines in value, judged to be
other-than-temporary, are included in other income (expense). The Company
recognized a loss on the sale of these shares of $44,035 during the year ended
April 30, 2009 (a realized loss of $191,663 for the year ended April 30, 2008).
F-7
Deferred Consulting Costs
In May 2007, the Company entered into a twelve-month consulting services
agreement with a third party, in which the party agreed to provide investment
banking services. Compensation consisted of 100,000 shares of the Company's
restricted common stock with a market value of approximately $115,000 (based on
a closing market price of $1.15 per share at the date the transaction was
entered into) The deferred cost is being amortized on a straight-line basis as
earned over the twelve-month period from the date of the agreement. During the
year ended April 30, 2009, $7,880 was expensed ($107,120 during the year ended
April 30, 2009).
Fair Value of Financial Instruments
The carrying amount of cash, accounts payable and notes payable is considered to
be representative of its fair value because of the short-term nature of this
financial instrument.
Stock-Based Compensation
The Company has adopted the provisions of and accounts for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123 - revised 2004 ("SFAS 123R"), "Share-Based Payment", which replaced
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-based Compensation", and supersedes APB Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees". Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expenses on
a straight-line basis over the requisite service period, which is the vesting
period. The Company elected the modified-prospective method, under which prior
periods are not revised for comparative purposes. The valuation provisions of
SFAS 123R apply to new grants and to grants that were outstanding as of the
effective date and are subsequently modified. All options granted prior to the
adoption of SFAS 123R and outstanding during the periods presented were
fully-vested.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss), and
accordingly, net loss is equal to comprehensive loss in all periods.
Loss Per Share
SFAS No. 128, Earnings per Share, requires dual presentation of basic and
diluted earnings or loss per share (EPS) with a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
F-8
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statements and tax basis of assets and liabilities that
will result in taxable of deductive amounts in the future based on enacted laws
and rates applicable to the periods in which the differences are expected to
affect taxable income (loss). Valuation allowance is established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be recorded and
disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R
will have an impact on accounting for business combinations once adopted but the
effect is dependent upon acquisitions at that time. We are still assessing the
impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160".
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material impact on
our financial position or results of operations.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
(SFAS 161). The Statement requires companies to provide enhanced disclosures
regarding derivative instruments and hedging activities. It requires companies
to better convey the purpose of derivative use in terms of the risks that such
company is intending to manage. Disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect a company's financial
position, financial performance, and cash flows are required. This Statement
retains the same scope as SFAS No. 133 and is effective for fiscal years and
interim periods beginning after November 15, 2008. The Company does not expect
the adoption of SFAS 161 to have a material effect on its results of operations
and financial condition.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,
"Determination of the Useful Life of Intangible Assets." This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, "Goodwill and Other Intangible Assets." The intent of this
FSP is to improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected cash flows used
to measure the fair value of the asset under FASB Statement No. 141 (Revised
2007), "Business Combinations," and other U.S. generally accepted accounting
principles (GAAP). This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The Company does not expect the
adoption of FAS 142-3 to have a material effect on its results of operations and
financial condition.
F-9
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis and will be adopted by the Company in the first quarter of fiscal 2009.
The Company does not expect the adoption of FSP APB 14-1 to have a material
effect on its results of operations and financial condition.
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities." This
FSP provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Upon adoption, companies are
required to retrospectively adjust earnings per share data (including any
amounts related to interim periods, summaries of earnings and selected financial
data) to conform to provisions of this FSP. The Company does not anticipate the
adoption of FSP EITF 03-6-1 will have a material impact on its results of
operations, cash flows or financial condition.
There were various other accounting standards and interpretations issued in 2009
and 2008, none of which are expected to have a material impact on the Company's
financial position, operations or cash flows.
Note 2 - Leases and Mineral Rights:
Mineral Rights - New Mexico
The Mineral rights in New Mexico are valued at $100,000, which is based on the
predecessor basis in mineral rights.
In February of 2007 the Company entered into an agreement with Sun River #1 LLC
to drill two wells on acreage controlled by the Company in the Raton Basin area
of New Mexico. Terms of the agreement provide for a carried 25% working interest
in the two of the three wells.
On September 5, 2008, the Company announced that it had executed a Farmout
Agreement with Myriad Resources, Inc. on approximately 17,000 acres of its
northern StateplaceNew Mexico property. The Farmout provided a checkerboard
pattern on about 11,000 acres and alternating half-mile wide strips on
approximately 3,000 acres. The Farmout contemplates testing through the Pierre
Shale and requires drilling on or before June 1, 2009 with additional wells each
120 days thereafter. The drilling was not started and the Agreement has expired.
F-10
Note 3 - Notes Payable:
In March 2009, the Company issued a 4.0% unsecured corporate promissory note to
a vendor for outstanding amounts owed totaling $88,230. The note is due on
demand and requires a monthly payment of $10,000. At April 30, 2009, the note
has a principal balance of $88,230 and accrued interest of $406.10.
In February 2008, the Company issued a 18% unsecured corporate promissory note
to a vendor for outstanding amounts owed totaling $373,540. The note is due on
demand. At April 30, 2009, the note has a principal balance of $373,540 and
accrued interest of $63,000.
In January 2008, the Company issued a 7.5% unsecured corporate promissory note
in exchange for $125,000 to support operations. The note is due on demand. In
February and April 2009, the principal of the note was converted into 500,000
shares of the Company's common stock ($0.25 per share). At April 30, 2009, the
note's principal balance was paid in full, though accrued interest of $10,428 is
still outstanding.
In December 2007, the Company issued a 7.5% unsecured corporate promissory note
in exchange for $75,000 to support operations. The note is due on demand. At
April 30, 2009, the note has an outstanding principal balance of $75,000 and
accrued interest of $5,610.
In October 2007, the Company issued a 7.5% unsecured corporate promissory note
in exchange for $40,627 to support operations. The note has a due on demand. At
April 30, 2009, the note has an outstanding principal balance of $40,627 and
accrued interest of $3,065.
In October 2007, the Company issued a 7.5% unsecured corporate promissory note
for $211,855. The note is due on demand. At April 30, 2009, the note has an
outstanding principal balance of $211,855 and accrued interest of $24,508.
Subsequent to year ended, $69,154 in principal of the promissory note was
converted into 324,036 shares of the Company's common stock ($0.25 per share).
In April 2006, in exchange for $150,000, the Company issued a 6% secured
corporate promissory note. The note is secured by certain leases held by the
Company. At April 30, 2009, the note has an outstanding principal balance of
$6,637 and accrued interest of $797.
On April 10, 2006, the Company issued a 6% secured corporate promissory note for
$600,000, to a shareholder of the Company, Mr. Robert A. Doak, Jr. The
promissory note had an original due date of March 31, 2007 and it has been
assigned to unrelated parties, the due date extended several times and now been
divided into several notes. At April 30, 2009, the notes has an unpaid
principal balance of $438,290. The new unsecured promissory notes have an
annual interest rate of 7.5% and are due on demand. At April 30, 2009, the notes
have an outstanding accrued interest of $51,334. Subsequent, to April 30, 2009,
principal in the amount of $100,000 was converted into 400,000 shares of the
Company's common stock ($0.25 per share).
F-11
Note Payable - LPC Investments, LLC
On October 24, 2008, the Company received notice from LPC Investment, LLC
("LPC") of a demand of payment in connection with $74,600 in unsecured
promissory notes held by LPC. LPC is demanding payment of the outstanding
principal and accrued interest. The promissory note had a due date of September
30, 2008. At this time, the Company has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in
the Jefferson County District Court, against the Company. The lawsuit alleges a
breach of contract against the Company in connection with the payment of an
unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the
Company's common stock into a preferred note. LPC Investments is seeking not
only payment of the unsecured, 8.75% promissory note and accrued interest but
also attorney fees. At this time, the Company has filed a response to the
complaint, and intends to defend itself against the claims.
Note 4 -Stockholders' (Deficit) Equity:
Preferred Stock
At a Special Meeting of the Shareholders of the Company on June 23, 2008, the
shareholders voted to authorized the creation of 25,000,000 shares of Preferred
Stock with a par value of $0.0001, to be issued in such classes or series and
with such rights, designations, privileges and preferences as to be determined
by the Company's Board of Directors at the time of the issuance of any preferred
shares.
Common Stock
Year Ended April 30, 2009
During the year ended April 30, 2009, the Company entered into a Consulting
Services Agreement with a third party for services. Payment for such services
includes a monthly payment of 20,000 shares of the Company's common stock and a
warrant exercisable for 20,000 shares of the Company's common stock (see below).
During the year ended April 30, 2009, the Company issued 60,000 shares of the
Company's common stock to such consultant. The Company recognized an expense of
$57,000.
During the year ended April 30, 2009, the Company issued 500,000 shares of the
Company's common stock in connection with the conversion of $125,000 of the
principal of a $125,000 unsecured corporate promissory note.
During the year ended April 30, 2009, the Company issued 100,000 shares of its
common stock as forbearance on a $373,540 unsecured corporate promissory note
held by a vendor.
During the year ended April 30, 2009, the Company issued 156,563 shares of
common stock in exchange for 507,500 warrants and options that were outstanding.
This was accounted for as solely a capital transaction between common stock and
additional paid-in capital.
During the year ended April 30, 2009, the Company issued a total of 250,000
shares of its common stock to its directors for services. The Company recognized
an $112,500 expense in relation to the issuance.
F-12
During the year ended April 30, 2009, the Company issued 150,000 shares of its
common stock to a third party for consulting services of $52,500. The value of
the shares was based on a closing market price of $0.35 per share.
Year Ended April 30, 2008
During the year ended April 30, 2008, the Company issued 20,000 shares of its
restricted common stock as payment for an extension on the due date of the
$64,000 promissory note due to Nova Leasing. The shares had a value of $51,000
based on a closing market price of $2.55 per share.
During the year ended April 30, 2008, the Company issued 100,000 shares of its
restricted common stock as payment for services in connection with drilling
activities. The shares had a value of $190,000, based on a closing market price
of $1.90 per share.
During the year ended April 30, 2008, the Company issued 60,000 shares to a
third party as payment for services in negotiating drilling contracts. The
shares had a value of $114,000, based on a closing market price of $1.90 per
share.
During the year ended April 30, 2008, the Company issued 50,000 shares to third
parties, as payment for services in connection with drilling activities. The
shares had a value of $163,967, based on an average closing market price of
$1.10 per share.
During the year ended April 30, 2008, the Company entered into a twelve-month
consulting services agreement with a third party, in which the party agreed to
provide investment banking services. Compensation consisted of 100,000 shares of
the Company's restricted common stock with a market value of approximately
$115,000 (based on a closing market price of $1.15 per share at the date the
transaction was entered into). The deferred cost is being amortized on a
straight-line basis as earned over the twelve-month period from the date of the
agreement. During the year ended April 30, 2008, $107,120 was expensed.
Options
During the year ended April 30, 2009, the Company did not grant any options.
On May 31, 2007, the Company entered into an agreement with a third party for
public relation services. Compensation consists of options of 10,000 shares of
the Company's restricted common stock per month, to be issued at the end of each
month of service. The options are to have a term of 2 years from the date of
issuance and an exercise price to be determined by the closing market price on
the last day of each month of service. The options are fully vested at issuance
and will provide for cashless exercise.
During the year ended April 30, 2008, the Company granted 60,000 stock options
to the third party at an exercise prices ranging from $0.70 to $2.25 per share.
The fair value of the options at the date of grant was $43,340 and was recorded
as compensation expense. The Company used the following assumptions to determine
the fair value of stock option grants during the year ended April 30, 2008:
F-13
2008
----
Expected life 1 year
Volatility 117% - 130%
Risk-free interest rate 4.85% - 4.91%
Dividend yield 0
During the nine months ended January 31, 2009, the Company cancelled options
exercisable for 60,000 shares.
The expected term of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected life of the related stock options.
The dividend yield represents our anticipated cash dividend over the expected
life of the stock options.
A summary of stock option activity for the year ended April 30, 2009 is
presented below:
Weighted Average
Shares Under Weighted Remaining
Option Average Contractual Life Aggregate
Exercise Price Intrinsic Value
Outstanding at May 1, 2008 60,000 $ 1.00 1.93 years $ -
Granted - - - -
Exercised - - - -
Cancelled (60,0000) 1.00 -
Expired
--------------- -------------- ----------- ----------------
Outstanding at April 30, 2009 - $ - - $ -
---------------- --------------- ------------ ----------------
Warrants
During the year ended April 30, 2009, the Company entered into a Consulting
Services Agreement with a third party for services. Payment for such services
includes a monthly payment of 20,000 shares of the Company's common stock and a
warrant exercisable for 20,000 shares of the Company's common stock. During the
year ended April 30, 2009, the Company issued 60,000 shares of the Company's
common stock to such consultant. The Company recognized an expense of $57,000 in
connection with the issuance of the common stock. During the year ended April
30, 2009, warrants exercisable for 60,000 shares were issued by the Company. The
warrants have a term of 2 years, exercises prices based on closing market price
on the last day of the month of issuance and provide for a cashless exercise.
During the year ended April 30, 2009, the warrants exercisable for 60,000 shares
had exercise prices ranging from $0.54 to $1.65 per share. The fair value of the
options at the date of grant was $36,060 and was recorded as compensation
expense. The Company used the following assumptions to determine the fair value
of warrant grants during the year ended April 30, 2009:
F-14
2009
----
Expected life 1 year
Volatility 162% - 179%
Risk-free interest rate 4.5% - 4.75%
Dividend yield 0
The expected term of the warrants represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected life of the related warrants.
The dividend yield represents our anticipated cash dividend over the expected
life of the warrants.
Director Warrants
During the year ended April 30, 2009, the Company issued warrants exercisable
for a total of 1,400,000 shares of the Company's stock to its directors. The
warrants have a term of 3 years, an exercise price of $1.65 and provide for a
cashless exercise.
The fair value of the options at the date of grant was $1,960,000 and was
recorded as compensation expense. The Company used the following assumptions to
determine the fair value of warrant grants during the year ended April 30, 2009:
2009
----
Expected life 1.5 year
Volatility 234%
Risk-free interest rate 4.5%
Dividend yield 0
The expected term of the warrants represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected life of the related warrants.
The dividend yield represents our anticipated cash dividend over the expected
life of the warrants.
At April 30, 2009, the following warrants were outstanding:
Number of Shares Exercise Price Expiration Date
---------------- -------------- ---------------
60,000 $0.54 2/28/2011
60,000 $0.70 3/31/2011
60,000 $1.65 4/30/2011
1,400,000 $1.65 4/30/2012
---------
1,580,000
F-15
During the year ended April 30, 2009, the Company issued 156,563 shares of
common stock in exchange for 507,500 warrants and options that were outstanding.
This was accounted for as solely a capital transaction between common stock and
additional paid-in capital.
During the year ended April 30, 2008, the Company did not issue, cancel or
expire any warrants.
Note 5 - Taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statements and tax basis of assets and liabilities that
will result in taxable of deductive amounts in the future based on enacted laws
and rates applicable to the periods in which the differences are expected to
affect taxable income (loss). Valuation allowance is established when necessary
to reduce deferred tax assets to the amount expected to be realized.
2009 2008
---- ----
Net Loss Carry Forwards $ 961,307 $ 862,598
Less Valuation Allowance $( 961,307) $(862,598)
---------- ---------
$ - $ -
========== =============
At April 30, 2009, the Company has financial reporting and net operating loss
carry forwards of approximately $1,909,854 for which the tax effect has not
been recognized for financial purposes. Such losses expire in 2014, if not
utilized earlier.
Note 6 - Litigation
Note Payable - LPC Investments, LLC
On October 24, 2008, the Company received notice from LPC Investment, LLC
("LPC") of a demand of payment in connection with $74,600 in unsecured
promissory notes held by LPC. LPC is demanding payment of the outstanding
principal and accrued interest. The promissory note had a due date of September
30, 2008. At this time, the Company has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in
the Jefferson County District Court, against the Company. The lawsuit alleges a
breach of contract against the Company in connection with the payment of an
unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the
Company's common stock into a preferred note. LPC Investments is seeking not
only payment of the unsecured, 8.75% promissory note and accrued interest but
also attorney fees. At this time, the Company has filed a response to the
complaint, and intends to defend itself against the claims. LPC has filed a
Motion to Dismiss with the Court, at this time.
F-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUN RIVER ENERGY, INC.
Date: December 2, 2009 By: /s/ Redgie T. Green
-------------------
Redgie T. Green,
President and Chief
Executive Officer
and Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: December 2, 2009 By: / s/Redgie T. Green
-------------------
Redgie T. Green,
Chief Executive
Office and Director
Date: December 2, 2009 By: /s/ Stephen W. Weathers
-----------------------
Stephen W. Weathers
Director
Date: December 2, 2009 By: /s/ Thomas Anderson
-------------------
Thomas Anderson,
Director
Date: December 2, 2009 By: /s/David Surgnier
-----------------------
David Surgnier,
Director
42