UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10Q
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(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended January 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 of Incorporation) (IRS Employer ID Number)
1410 High Street, Denver, CO 80218
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(Address of principal executive offices)
(800)-669-6511
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(Registrant's Telephone number)
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 past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No []
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 19, 2010, there were 19,049,995 shares of the registrant's common
stock issued and outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
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Balance Sheets -January 31, 2010 and April 30, 2009 (Audited) F-1
Statements of Operations -
Three and Nine months ended January 31, 2010 and 2009 and From
October 22, 2002 (Inception) to January 31, 2010 F-2
Statements of Changes in Shareholders' Deficit -
From October 22, 2002 (Inception) to January 31, 2010 F-3
Statements of Cash Flows -
Nine months ended January 31, 2010 and 2009 and
From October 22, 2002 (Inception) to January 31, 2010 F-4
Notes to the Financial Statements F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable
Item 4. Controls and Procedures 4
Item 4T. Controls and Procedures 4
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 5
Item 1A. Risk Factors - Not Applicable 5
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 5
Item 3. Defaults Upon Senior Securities - Not Applicable 6
Item 4. (Removed and Reserved) 6
Item 5. Other Information - Not Applicable 6
Item 6. Exhibits 6
SIGNATURES 7
PART I
ITEM 1. FINANCIAL STATEMENTS
SUN RIVER ENERGY, INC.
(A Development Stage Company)
BALANCE SHEETS
January 31, April 30,
2010 2009
--------------- ---------------
(Unaudited) (Audited)
Assets
Current Assets:
Cash and cash equivalents $ 39,817 $ 38,851
Deposit 50,000 -
--------------- ---------------
Total Current Assets 89,817 38,851
--------------- ---------------
Fixed Assets, net of depreciation $1,740 and $1,200, respectively - 540
Other assets:
Leases 220,000 220,000
Mineral rights 100,000 100,000
Wells in process and advances 678,781 675,310
--------------- ---------------
Total Other Assets 998,781 995,310
--------------- ---------------
Total Assets $ 1,088,598 $ 1,034,701
=============== ===============
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 765,392 $ 320,589
Accrued interest payable 149,360 168,866
Accrued litigation expense 550,000 400,000
Drilling bonds payable 37,508 37,508
Notes payable 466,939 1,350,780
--------------- ---------------
Total Current Liabilities 1,969,199 2,277,743
Stockholders' Deficit
Common stock, $0.0001 par value; 100,000,000 shares
authorized, 18,959,995 and 16,317,423 shares issued and
outstanding at January 31, 2010 and April 31, 2009, respectively 1,896 1,632
Additional paid-in capital 4,913,606 3,135,132
APIC unexercised warrants 2,191,300 1,996,060
Deficit accumulated during the development stage (7,987,403) (6,375,866)
--------------- ---------------
Total Stockholders' Deficit (880,601) (1,243,042)
--------------- ---------------
Total Liabilities and Stockholders' Deficit $ 1,088,598 $ 1,034,701
=============== ===============
See the notes to these financial statements.
F-1
SUN RIVER ENERGY, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
January 31, January 31,
2010 2009 2010 2009
----------------- ----------------- ----------------- -----------------
Revenue: $ - $ - $ - $ -
----------------- ----------------- ----------------- -----------------
Operational expenses:
Consulting expenses 155,487 - 1,035,434 7,880
Director fees - - - -
Depreciation - 60 540 180
Lease expenses - - - 4,158
Litigation expense 150,000 400,000 150,000 400,000
General and administrative expenses 105,055 4,361 413,012 12,682
----------------- ----------------- ----------------- -----------------
Total operational expenses 410,542 404,421 1,598,986 424,900
----------------- ----------------- ----------------- -----------------
Net loss from operations (410,542) (404,421) (1,598,986) (424,900)
----------------- ----------------- ----------------- -----------------
Other Income (Expenses)
Interest income 920 1,344 920 1,347
Interest expense (28,785) (79,936) (89,244) (110,011)
Debt relief - - 75,773 -
Loss on claim release - - - -
Realized loss on sale of assets - - - (44,034)
Unrealized gain (loss) on investments - - - 40,765
----------------- ----------------- ----------------- -----------------
(27,865) (78,592) (12,551) (111,933)
----------------- ----------------- ----------------- -----------------
Net loss $ (438,407) $ (483,013) $(1,611,537) $ (536,833)
================= ================= ================= =================
Per share information
Net loss per common share
Basic $ (0.02) $ (0.03) $ (0.09) $ (0.04)
Fully diluted (0.02) $ (0.03) (0.09) $ (0.04)
================= ================= ================= =================
Weighted average number of common
stock outstanding 18,311,778 15,232,421 17,479,385 15,232,421
================= ================= ================= =================
See the notes to these financial statements.
F-2
SUN RIVER ENERGY, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
October 22, 2002
(inception) to
January 31, 2010
----------------------
Revenue: $ -
----------------------
Operational expenses:
Consulting expenses 3,974,260
Director fees 112,500
Depreciation 1,200
Lease expenses 689,521
Litigation expense 550,000
General and administrative expenses 572,610
----------------------
Total operational expenses 5,900,091
----------------------
Net loss from operations (5,900,091)
----------------------
Other Income (Expenses)
Interest income 3,032
Interest expense (1,051,420)
Debt relief 505,418
Loss on claim release (1,298,603)
Realized loss on sale of assets (245,739)
Unrealized gain (loss) on investments -
----------------------
(2,087,312)
----------------------
Net loss $ (7,987,403)
======================
Per share information
Net loss per common share
Basic
Fully diluted
Weighted average number of common
stock outstanding
* Less than $(0.01) per share.
See the notes to these financial statements.
F-3
SUN RIVER ENERGY, INC.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
From October 22, 2002 (Inception) through January 31, 2010
(Unaudited)
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
at $0.50 per share plus
warrant at $0.75 795,000 80 397,420 - - 397,500
Issuance of Stock for Debt
at $0.62 per share 242,935 24 149,976 - - 150,000
Issuance of Stock for Marketable
Securities at $0.50 per share 800,000 80 399,920 - - 400,000
Issuance of Stock for Services
at $0.50 per share 309,000 31 154,469 - - 154,500
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
at $1.51 per share 310,000 31 468,969 - - 469,000
Issuance of Stock for Interest
at $2.55 per share 20,000 2 50,998 - - 51,000
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)
---------- --------- ---------- ---------- ---------- -----------
Issuance of stock for conversion
of promissory notes 1,986,036 199 496,311 - - 496,510
Issuance of stock for debt payment 287,545 29 572,250 - - 572,279
Issuance of stock for services 339,500 33 709,916 - - 709,949
Issuance of stock for cashless -
warrant exercise 29,491 3 (3) - - -
Issuance of warrants for services - - - 195,240 - 195,240
Net loss for period - - - - (1,611,537) (1,611,537)
---------- --------- ---------- ---------- ---------- -----------
Balance - January 31, 2010 18,959,995 $ 1,896 $4,913,606 $2,191,300 $(7,987,403) $ (880,601)
========== ========= ========== ========== ========== ===========
See the notes to these financial statements.
F-4
SUN RIVER ENERGY, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(Unaudited)
October 22, 2002
For the Nine Months Ended (Inception) to
January 31, January 31,
2010 2009 2010
-------------- -------------- ------------------
Cash Flows from Operating Activities:
Net Loss $ (1,611,537) $ (536,833) $ (7,987,403)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 540 180 1,200
Unrealized gain on marketable securities - (40,765) -
Equity issued for services and interest 905,189 - 3,760,339
Amortization of consulting stock - 7,880 115,000
Litigation expense 150,000 550,000
Gain on debt (75,773) - (75,773)
Changes in current assets and liabilities:
Increase in deposits (50,000) - (50,000)
Increase in accounts payable and accrued liabilities 659,485 523,168 1,186,649
-------------- -------------- ------------------
Net Cash (Used) Received by Operating Activities (22,096) (46,370) (2,499,988)
-------------- -------------- ------------------
Cash Flows from Investing Activities:
Increase in fixed assets - - (1,200)
Increase in other assets - (398,037) (611,311)
Sale of marketable securities - 52,600 52,600
Acquisition - net of cash acquired - - (813,001)
-------------- -------------- ------------------
Net Cash used in investing activities - (345,437) (1,372,912)
Cash Flows from Financing Activities:
Common stock issued for cash - - 1,444,750
Common stock issued for debt/assets - - 1,115,000
Proceeds (Payments) from advances 43,062 - 43,062
Proceeds (Payments) from notes payable (20,000) 418,768 1,330,780
Merger accounting - - (20,875)
-------------- -------------- ------------------
Net Cash Provided by Financing Activities 23,062 418,768 3,912,717
-------------- -------------- ------------------
Net increase (decrease) in Cash 966 26,961 39,817
Cash and Cash Equivalents - Beginning of Period 38,851 12,038 -
-------------- -------------- ------------------
Cash and Cash Equivalents - End of Period $ 39,817 $ 38,999 $ 39,817
============== ============== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ - $ - $ -
============== ============== ==================
Cash paid for income taxes $ - $ - $ -
============== ============== ==================
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of common stock for payment of
debt $ 572,284 $ - $ 847,284
============== ============== ==================
Issuance of common stock for marketable
securities $ - $ - $ 400,000
============== ============== ==================
Issuance of common stock for other assets $ - $ - $ 440,000
============== ============== ==================
Issuance of equity for services $ 905,189 $ - $ 1,287,939
============== ============== ==================
See the notes to these financial statements.
F-5
SUN RIVER ENERGY, INC.
(A Development Stage Company)
Notes to Financial Statements
For the Nine Months Ended January 31, 2010
(Unaudited)
Note 1 - Organization, Basis of Presentation and Summary of Significant
Accounting Policies:
Organization:
Sun River Energy, Inc. (the Company) was incorporated on October 22, 2002, under
the laws of the State of Colorado.
The Company is 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 December 17, 2010, the Company entered into a Share Purchase Agreement with
Skana Capital Corp. (Skana) and Skana's wholly-owned subsidiary, Raven Wing
Resources, Inc. (Raven Wing) to purchase 100% of the outstanding equity of Raven
Wing in exchange for cash $3,500,000. The Company has paid a $50,000 option
deposit as part of the transaction. The acquisition was contingent upon the
deliverance of audited financial statements of Raven Wing, which were unable to
be completed by a scheduled end date of the agreement. At the time of this
filing, the transaction has not closed, although the Company remains interested.
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". Among the disclosures required 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.
Interim Presentation
In the opinion of the management of the Company, the accompanying unaudited
financial statements include all material adjustments, including all normal and
recurring adjustments, considered necessary to present fairly the financial
position and operating results of the Company for the periods presented. The
unaudited financial statements and notes do not contain certain information
included in the Company's financial statements for the year ended April 30,
2009. It is the Company's opinion that when the interim financial statements are
read in conjunction with the April 30, 2009 Audited Financial Statements, the
disclosures are adequate to make the information presented not misleading.
Interim results are not necessarily indicative of results for a full year or any
future period.
Going Concern
The Company's financial statements for the nine months ended January 31, 2010
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 $1,611,537 for the nine months
ended January 31, 2010 ($438,407 for the three months ended January 31, 2010)
and an accumulated deficit during the development stage of $7,987,403 as of
January 31, 2010. At January 31, 2010, the Company's total current liabilities
exceed total current assets by $1,929,382.
F-6
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. Management is seeking new capital to revitalize
the Company.
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
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).
During the six months ended October 31, 2008, the Company had liquidated all of
the 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 nine months ended
January 31, 2010.
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 nine months
ended January 31, 2010.
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.
F-7
Stock-Based Compensation
Under the fair value recognition provisions, 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.
Prior to May 1, 2009, the Company entered into a Consulting 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 nine months
ended January 31, 2010, the Company issued 180,000 shares of the Company's
common stock to such consultant. The Company recognized an expense of $354,200
(a range of $1.60 to $2.73 per share, based on closing market prices on the date
of issuance.) During the nine months ended January 31, 2010, warrants
exercisable for 180,000 shares were issued by the Company. During the nine
months ended January 31, 2010, the warrants exercisable for 180,000 shares had
exercise prices ranging from $1.60 to $2.73 per share. The total fair value of
the options at the date of grant was $195,240 and was recorded as consulting
expense. The warrants have a term of two years. The warrants were valued using
the Black-Scholes model.
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
The Company provides a 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.
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 June 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Codification ("ASC") 105, "Generally Accepted Accounting
Principals" (formerly Statement of Financial Accounting Standards ("SFAS") No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles"). ASC 105 establishes the FASB ASC as the single
source of authoritative nongovernmental U.S. GAAP. The standard is effective for
interim and annual periods ending after September 15, 2009. We adopted the
provisions of the standard on September 15, 2009, which did not have a material
impact on our financial statements.
F-8
There were various other accounting standards and interpretations issued in 2009
and 2010, 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.
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 January 31, 2010, the note
has a principal balance of $68,230 and accrued interest of $2,521.
In February 2008, the Company issued an 18% unsecured corporate promissory note
to a vendor for outstanding amounts owed totaling $373,540. The note is due on
demand. At October 31, 2009, the note has a principal balance of $373,540 and
accrued interest of $96,895. On October 31, 2009, the Board of Directors
approved the issuance of 241,249 shares of the Company's restricted common stock
as payment of the principal and accrued interest.
In December 2007, the Company issued a 7.5% unsecured corporate promissory note
in exchange for $75,000 to support operations. In June 2009, the Company issued
100,000 shares of its common stock in payment of $25,000 of the outstanding
principal ($0.25 per share). The note is due on demand. At September 16, 2009,
the note has an outstanding principal balance of $50,000 and accrued interest of
$6,916. On September 16, 2009, the Company issued 200,000 shares its common
stock in payment of the remaining $50,000 in principal ($0.25 per share).
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
November 16, 2009, the note had an outstanding principal $40,627 and accrued
interest $1,696. On November 16, 2009, the Company issued 162,508 shares of
common stock in payment of the $40,627 in principal ($0.25 per share.) At
January 31, 2010, the accrued interest of $1,696.
In October 2007, the Company issued a 7.5% unsecured corporate promissory note
for $211,855. The note is due on demand. During the three months ended July 31,
2009, $69,154 in principal of the promissory note was converted into 324,036
shares of the Company's common stock ($0.25 per share). At January 31, 2010, the
note has an outstanding balance of $142,701 and accrued interest of $20,900.
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 January 31, 2010, the note has an outstanding principal balance of
$6,637 and accrued interest of $1,098.
F-9
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. The new unsecured promissory notes have an annual
interest rate of 7.5% and are due on demand. During the nine months ended
January 31, 2010, principal in the amount of $249,873 was converted into 999,492
shares of the Company's common stock ($0.25 per share). At January 31, 2010, the
notes have an unpaid principal balance of $188,327 and accrued interest of
$70,056.
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. A payment of $75,645 has been made on the 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 a
$74,600 unsecured, 8.75% promissory note and conversion of 2,200,000 shares of
the Company's common stock into a preferred note. LPC Investments sought not
only payment of the promissory note and accrued interest but also attorney fees.
LPC dismissed its lawsuit, but never withdrew its Notice and Demand for
conversion of promissory note into 2,200,000 shares of the Company. The Company
continues to record a $550,000 liability in connection with this event.
Note 4 -Stockholders' Deficit:
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. No shares have been issued at this time, nor have any classes been
established.
Common Stock
Prior to May 1, 2009, the Company entered into a Consulting 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 Warrants below). During the
nine months ended January 31, 2010, the Company issued 180,000 shares of the
Company's common stock to such consultant. The Company recognized an expense of
$354,200 (a range of $1.60 to $2.73 per share, based on closing market prices on
the date of issuance.) In addition, the Consulting Agreement provides for a
one-time payment of 50,000 shares of the Company's restricted common stock.
These shares were issued during the three months ended July 31, 2009 and the
Company recognized an expense of $110,000 ($2.20 per share based on closing
market prices on the date of issuance.)
During the nine months ended January 31, 2010, the Company issued 65,000 shares
of its restricted common stock to individuals in return for their services on
the Company's advisory board. The Company recognized an expense of $151,500 (at
prices ranging from $1.95 to $2.50 per share based on closing market prices at
the date of issuance.)
F-10
During the nine months ended January 31, 2010, the Company issued 40,000 shares
of its restricted common stock to Mr. Kelloff and Mr. Leaver for their services
as officers of the Company (30,000 and 10,000 shares, respectively). The Company
recognized an expense of $83,500 ($1.95 and $2.50 per share based on closing
market prices at the date of issuance.)
During the nine months ended January 31, 2010, the Company issued 4,500 shares
of its restricted common stock to an unrelated third party for services in the
maintenance of the Company's website. The Company has recognized an expense of
$11,250 ($2.50 per share based on closing market prices at the date of
issuance.)
During the nine months ended January 31, 2010, the Company issued 1,024,036
shares of its common stock to holders of promissory notes as payment of
principal of $244,154 and accrued interest of $11,855 ($0.25 per share.) (See
Note 3)
During the nine months ended January 31, 2010, the Company issued 287,545 shares
of its restricted common stock to vendors as payment for outstanding amounts
totaling $560,712 ($1.95 per share based on closing market price at the date of
issuance.)
During the nine months ended January 31, 2010, the Company issued 29,491 shares
of its restricted common stock as a result of the cashless exercise of a warrant
for 40,000 shares of the Company's common stock.
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
nine months ended January 31, 2010, the Company issued 180,000 shares of the
Company's common stock to such consultant. The Company recognized an expense of
$354,200 in connection with the issuance of the common stock. During the nine
months ended January 31, 2010, warrants exercisable for 180,000 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 nine months ended January 31, 2010, the warrants exercisable for
180,000 shares had exercise prices ranging from $1.60 to $2.73 per share. The
total fair value of the options at the date of grant was $195,240 and was
recorded as consulting expense. The Company used the following assumptions to
determine the fair value of warrant grants during the nine months ended January
31 2010:
2009
----
Expected life 1 year
Volatility 109% - 151%
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.
F-11
A summary of warrant activity for the nine months ended January 31, 2010 is
presented below:
Weighted Average
Shares Under Weighted Remaining
Warrant Average Contractual Life Aggregate
Exercise Price Intrinsic Value
Outstanding at May 1, 2009 1,440,000 $ 2.00 1.93 years $ -
Granted 180,000 - 1.92 years -
Exercised (40,000) 0.54 - -
Expired
--------- -------- ---------- --------
Outstanding at January 31, 2010 1,580,000 $ 2.00 1.93 years $ -
========= ======== ========== ========
During the nine months ended January 31, 2010, the Company issued 29,491 shares
of its restricted common stock in connection with the cashless exercise of
warrants exercisable for 40,000 shares.
Note 6. Litigation
Litigation
Note Payable - LPC Investments, LLC
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 sought not only
payment of the unsecured, 8.75% promissory note and accrued interest but also
attorney fees. A payment of $75,645 has been made on the promissory note.
On August 18, 2009, the Court granted the Motion to Dismiss filed by LPC in July
2009. The case has been dismissed without prejudice and all claims against the
Company have been dropped, however LPC has not withdrawn its conversion notice
and demand. Therefore, the Company has recorded a $550,000 litigation liability
in connection with the conversion notice and demand.
On September 24, 2009, LPC Investments filed suit in the District Court of
Jefferson County, Colorado against the Company. Among other things, the suit
asks that the Court issue a declaratory judgment in requesting that 2.2 million
shares previously purchased by LPC Investments (the Disputed Shares) are indeed
owned by LPC Investments, and to direct the Company to co-operate with LPC
Investment's outstanding legend removal requests submitted to the Company's
transfer agent by LPC Investments. LPC Investments is also seeking payment of
attorney fees and costs. In that same litigation, on October 2, 2009, the
Company filed Counterclaims and Third Party Claims in the District Court of
Jefferson County, Colorado against LPC Investments and Kevin Paul. The claims
and the relief sought by the Company are substantially similar to the claims and
relief previously sought in the Douglas County litigation.
Following a hearing on October 9, 2009, the District Court denied the Company's
notion to compel LPC Investments to deliver the Disputed Shares to the Company,
and issued findings relating to an option contract that existed between the
Company and LPC Investments. Among other things, the Court found that the
Company was in material breach of the contract as March 1, 2009 and that a
material breach deprives the breaching part of the right to demand performance
from the other party.
F-12
Texas Litigation
On March 10, 2010, the Company filed an Original Petition and Application for
Temporary Injunction and Permanent Injunctive Relief in the County Court of
Dallas County, in the State of Texas against Spencer Edwards, Inc. Co-
Plaintiffs in the action are shareholders of the Company, J.H. Brech, LLC and
Richard L. Toupal.
The suit alleges, among other things, that Spencer Edwards, Inc. has violated
Rule 144 of the U.S. Securities Act of 1933 in the selling of common shares of
the Company on the open market.
Note 7. Subsequent Events.
The Company has evaluated it activities subsequent to the quarter ended January
31, 2010 through March 19, 2010 and found no other reportable subsequent events,
then those disclosed above.
F-13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward looking
statements.
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. Management's plans in regard to the factors prompting the
explanatory paragraph are discussed below and also in Note 1 to the unaudited
quarterly financial statements.
OVERVIEW
The Company had no revenues during the nine months ended January 31, 2010. The
Company has 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 evaluate the potential to stimulate
the Myers #1 and #2 through hydraulic-fracturing in order to test production
thereafter. We have previously perforated multiple zones in both of these wells.
The Company intends to operate all of our prospects in the Raton Basin and hold
working interests of 100% on an 80% NRI on our leases, except that the Company
has 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 December 17, 2010, the Company entered into a Share Purchase Agreement with
Skana Capital Corp. (Skana) and Skana's wholly-owned subsidiary, Raven Wing
Resources, Inc. (Raven Wing) to purchase 100% of the outstanding equity of Raven
Wing in exchange for cash $3,500,000. The Company has paid a $50,000 option
deposit as part of the transaction. The acquisition was contingent upon the
deliverance of audited financial statements of Raven Wing, which were unable to
be completed by a scheduled end date of the agreement. At the time of this
filing, the transaction has not closed, although the Company remains interested.
The Company will still need substantial additional capital to support our
proposed future operations. The Company has no revenues. The Company has no
committed source for any funds as of the date herein. No representation is made
that any funds will be available when needed. In the event funds cannot be
raised when needed, the Company may not be able to carry out its business plan,
may never achieve sales or royalty income, and could fail in business as a
result of these uncertainties.
1
In addition, the United States, during the last year has experienced severe
instability in the commercial and investment banking systems and the energy
industry is suffering from low energy prices, which these factors are 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 and adverse.
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended January 31, 2010 compared to
the Three Months Ended January 31, 2009.
During the three months ended January 31, 2010 and 2009, the Company did not
recognize any revenues from its operating activities.
During the three months ended January 31, 2010, operating expenses were $410,542
compared to $404,421 during the three months ended January 31, 2009, an increase
of $6,121 over the prior period. Consulting expenses increased by $155,487 as a
result of the expenses associated with the issuance of the Company's common
stock and warrants for services, as discussed below. The increase of $100,694 in
general and administrative expenses was a result of the Company's increased
legal activities and increased administrative activities.
The Company recognized interest expense of $28,785 during the three months ended
January 31, 2010 compared to $79,936 for the same period in 2009.
During the three months ended January 31, 2010, the Company recognized a net
loss of $438,407, compared to a net loss of $481,013 for the comparable three
months in 2009. The decrease of $42,606 was due to the $6,121 increase in
operating expenses, offset by a $51,151 decrease in interest expense.
Results of Operations for the Nine Months Ended January 31, 2010 compared to the
Nine Months Ended January 31, 2009.
During the nine months ended January 31, 2010 and 2009, the Company did not
recognize any revenues from its operating activities.
During the nine months ended January 31, 2010, operating expenses were
$1,598,986 compared to $424,900 during the nine months ended January 31, 2009.
The $1,174,086 increase is a result of the $1,027,554 increase in consulting
expenses and increase of $400,330 in general and administrative expenses.
Consulting expenses increased as a result of the expenses associated with the
issuance of the Company's common stock and warrants for services, as discussed
below. The increase of $400,330 in general and administrative expenses was a
result of the Company's increased legal activities and increased administrative
activities.
The Company recognized interest expense of $89,244 during the nine months ended
January 31, 2010 compared to $110,011 for the same period in 2009.
During the nine months ended January 31, 2010, the Company recognized a net loss
of $1,611,537, compared to a net loss of $536,833 for the comparable six months
in 2009. The increase of $1,074,704 was due to the $1,174,086 increase in
operating expenses offset by the decrease in interest expense of $20,767.
2
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2010, the Company had cash and cash equivalents of $39,817 and a
$50,000 deposit for total current assets of $89,817 at January 31, 2010. At
January 31, 2010, the Company had total liabilities of $1,088,598, all current.
Total liabilities at January 31, 2010, included accounts payable of $765,392,
accrued interest payable of $149,360, accrued litigation expense of $550,000,
$37,508 in drilling bonds payable and $466,939 in notes payable. At January 31,
2010, the Company had a working capital deficit of $998,781.
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.
During the nine months ended January 31, 2010, the Company used cash of $22,096.
Net losses of $1,611,537 were adjusted for the non-cash item of $905,189 in
expenses paid for by the issuance of the Company's stock and warrants,
depreciation of $540, a $75,773 gain on debt and $150,000 in litigation expense.
During the nine months ended January 31, 2009, the Company used cash of $46,370
from its operational activities. Net losses of $536,833 during the nine months
ended January 31, 2009, were adjusted for non-cash items of $180 in depreciation
expenses, an unrealized gain on investment of $40,675, and amortization expense
of $7,880 for consulting stock.
During the nine months ended January 31, 2010, the Company did not receive or
use cash in its investing activities. During the nine months ended January 31,
2009, the Company used $345,437 in its investing activities for the purchase of
other assets.
During the nine months ended January 31, 2010, the Company received $23,062 from
its financing activities. During the nine months ended January 31, 2009, the
Company received $418,768 from its financing activities.
In February 2008, the Company issued an 18% unsecured corporate promissory note
to a vendor for outstanding amounts owed totaling $373,540. The note is due on
demand. At October 31, 2009, the note has a principal balance of $373,540 and
accrued interest of $96,895. On October 31, 2009, the Board of Directors
approved the issuance of 241,249 shares of the Company's restricted common stock
as payment of the principal and accrued interest.
In December 2007, the Company issued a 7.5% unsecured corporate promissory note
in exchange for $75,000 to support operations. In June 2009, the Company issued
100,000 shares of its common stock in payment of $25,000 of the outstanding
principal ($0.25 per share). The note is due on demand. At September 16, 2009,
the note has an outstanding principal balance of $50,000 and accrued interest of
$6,916. On September 16, 2009, the Company issued 200,000 shares its common
stock in payment of the remaining $50,000 in principal ($0.25 per share).
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
November 16, 2009, the note had an outstanding principal $40,627 and accrued
interest $1,696. On November 16, 2009, the Company issued 162,508 shares of
common stock in payment of the $40,627 in principal ($0.25 per share.) At
January 31, 2010, the accrued interest of $1,696.
3
In October 2007, the Company issued a 7.5% unsecured corporate promissory note
for $211,855. The note is due on demand. During the three months ended July 31,
2009, $69,154 in principal of the promissory note was converted into 324,036
shares of the Company's common stock ($0.25 per share). At January 31, 2010, the
note has an outstanding balance of $142,701 and accrued interest of $20,900.
Prior to May 1, 2009, the Company entered into a Consulting 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 nine months
ended January 31, 2010, the Company issued 180,000 shares of the Company's
common stock to such consultant. The Company recognized an expense of $354,200
(a range of $1.60 to $2.73 per share, based on closing market prices on the date
of issuance.) During the nine months ended January 31, 2010, warrants
exercisable for 180,000 shares were issued by the Company. During the nine
months ended January 31, 2010, the warrants exercisable for 180,000 shares had
exercise prices ranging from $1.60 to $2.73 per share. The total fair value of
the options at the date of grant was $195,240 and was recorded as consulting
expense. The warrants have a term of two years. The warrants were valued using
the Black-Scholes model.
During the nine months ended January 31, 2010, the Company issued 65,000 shares
of its restricted common stock to individuals in return for their services on
the Company's advisory board. The Company recognized an expense of $151,500 (at
prices ranging from $1.95 to $2.50 per share based on closing market prices at
the date of issuance.)
During the nine months ended January 31, 2010, the Company issued 40,000 shares
of its restricted common stock to Mr. Kelloff and Mr. Leaver for their services
as officers of the Company (30,000 and 10,000 shares, respectively). The Company
recognized an expense of $83,500 ($1.95 and $2.50 per share based on closing
market prices at the date of issuance.)
During the nine months ended January 31, 2010, the Company issued 4,500 shares
of its restricted common stock to an unrelated third party for services in the
maintenance of the Company's website. The Company has recognized an expense of
$11,250 ($2.50 per share based on closing market prices at the date of
issuance.)
During the nine months ended January 31, 2010, the Company issued 1,024,036
shares of its common stock to holders of promissory notes as payment of
principal of $244,154 and accrued interest of $11,855 ($0.25 per share.) (See
Note 3)
During the nine months ended January 31, 2010, the Company issued 287,545 shares
of its restricted common stock to vendors as payment for outstanding amounts
totaling $560,712 ($1.95 per share based on closing market price at the date of
issuance.)
During the nine months ended January 31, 2010, the Company issued 29,491 shares
of its restricted common stock as a result of the cashless exercise of a warrant
for 40,000 shares of the Company's common stock.
4
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. The new unsecured promissory notes have an annual
interest rate of 7.5% and are due on demand. During the nine months ended
January 31, 2010, principal in the amount of $249,873 was converted into 999,492
shares of the Company's common stock ($0.25 per share). At January 31, 2010, the
notes have an unpaid principal balance of $188,327 and accrued interest of
$70,056.
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 a
$74,600 unsecured, 8.75% promissory note and conversion of 2,200,000 shares of
the Company's common stock into a preferred note. LPC Investments sought not
only payment of the promissory note and accrued interest but also attorney fees.
LPC dismissed its lawsuit, but never withdrew its Notice and Demand for
conversion of promissory note into 2,200,000 shares of the Company. The Company
continues to record a $550,000 liability in connection with this event.
GOING CONCERN
The Company's 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 is in the development stage. 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. Management is seeking
new capital to revitalize the Company.
ADDITIONAL FINANCING
NEED FOR ADDITIONAL FINANCING
The Company does not have capital sufficient to meet the Company's cash needs,
including the costs of compliance with the continuing reporting requirements of
the Securities Exchange Act of 1934. The Company will have to seek loans or
equity placements to cover such cash needs. In the event the Company is able to
complete a business combination during this period, lack of its existing capital
may be a sufficient impediment to prevent it from accomplishing the goal of
completing a business combination. There is no assurance, however, that without
funds it will ultimately allow the Company to carry out its business.
The Company will need to raise additional funds to conduct any business
activities in the next twelve months.
No commitments to provide additional funds have been made by 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 its expenses as they may
be incurred.
Irrespective of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of stock in lieu of cash.
5
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is
defined in Rules 13a 15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act, is
recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our Chief Executive Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer has concluded that our disclosure controls and procedures are not
effective in timely alerting them to material information required to be
included in our periodic SEC filings and to ensure that information required to
be disclosed in our periodic SEC filings is accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure as a result of the deficiency in our internal
control over financial reporting discussed below.
ITEM 4T. CONTROLS AND PROCEDURES
The information in this Item 4T of this Quarterly Report on Form 10-Q is
furnished pursuant to Item 308T of Regulation of S-K and shall be deemed "filed"
for all purposes, including for the purposes of Section 18 of the Exchange Act,
or otherwise subject to the liabilities of the Section. The information in this
Quarterly Report on Form 10-Q shall be deemed incorporated by reference into any
filing under the Securities Act of the Exchange Act by this reference.
Management's Quarterly Report on Internal Control over Financial Reporting.
Our 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. Our management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Our 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. Our internal control over financial
reporting includes those policies and procedures that:
6
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on our financial statements.
Management's assessment of the effectiveness of the small business issuer's
internal control over financial reporting is as of the quarter ended January 31,
2010. 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 quarterly 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 our internal control over financial reporting that
occurred during the fiscal quarter ended January 31, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
Note Payable - LPC Investments, LLC
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 sought not only
payment of the unsecured, 8.75% promissory note and accrued interest but also
attorney fees. A payment of $75,654 has been made on the promissory note.
On August 18, 2009, the Court granted the Motion to Dismiss filed by LPC in July
2009. The case has been dismissed without prejudice and all claims against the
Company have been dropped, however LPC has not withdrawn its conversion notice
and demand. Therefore, the Company has recorded a $550,000 litigation liability
in connection with the conversion notice and demand.
7
On September 24, 2009, LPC Investments filed suit in the District Court of
Jefferson County, Colorado against the Company. Among other things, the suit
asks that the Court issue a declaratory judgment in requesting that 2.2 million
shares previously purchased by LPC Investments (the Disputed Shares) are indeed
owned by LPC Investments, and to direct the Company to co-operate with LPC
Investment's outstanding legend removal requests submitted to the Company's
transfer agent by LPC Investments. LPC Investments is also seeking payment of
attorney fees and costs. In that same litigation, on October 2, 2009, the
Company filed Counterclaims and Third Party Claims in the District Court of
Jefferson County, Colorado against LPC Investments and Kevin Paul. The claims
and the relief sought by the Company are substantially similar to the claims and
relief previously sought in the Douglas County litigation.
Following a hearing on October 9, 2009, the District Court denied the Company's
notion to compel LPC Investments to deliver the Disputed Shares to the Company,
and issued findings relating to an option contract that existed between the
Company and LPC Investments. Among other things, the Court found that the
Company was in material breach of the contract as March 1, 2009 and that a
material breach deprives the breaching part of the right to demand performance
from the other party.
Texas Litigation
On March 10, 2010, the Company filed an Original Petition and Application for
Temporary Injunction and Permanent Injunctive Relief in the County Court of
Dallas County, in the State of Texas against Spencer Edwards, Inc. Co-
Plaintiffs in the action are shareholders of the Company, J.H. Brech, LLC and
Richard L. Toupal.
The suit alleges, among other things, that Spencer Edwards, Inc. has violated
Rule 144 of the U.S. Securities Act of 1933 in the selling of common shares of
the Company on the open market.
ITEM 1A. RISK FACTORS
Not Applicable.
8
ITEM 2. CHANGES IN SECURITIES
The Company made the following unregistered sales of its securities from
November 1, 2009 through January 31, 2010.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------ ------------------- ------------- ------------- ------------------
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
11/19/09 Common Stock 400,000 Conversion of Business Associate
Promissory Note
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
11/31/09 Warrant 20,000 Consulting Fee Business Associate
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
12/1/09 Common Stock 20,000 Consulting Fee Business Associate
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
12/31/09 Warrant 20,000 Consulting Fee Business Associate
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
1/4/10 Common Stock 20,000 Consulting Fee Business Associate
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
1/27/10 Common Stock 262,000 Conversion of Business Associate
Promissory Note
- ------------------ -------------------- ---------------- ----------------------- -----------------------------
1/29/10 Common Stock 300,000 Conversion of Business Associate
Promissory Note
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1/31/10 Warrant 20,000 Consulting Fee Business Associate
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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 Securities Act of 1933, as amended
(the "1933 Act"). All of the individuals and/or entities listed above that
purchased the unregistered securities were almost all existing shareholders, all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates 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.
9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS
Exhibits. The following is a complete list of exhibits filed as part of this
Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive and Officer pursuant to
Section 906 of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and 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.
(Registrant)
Dated: March 22, 2010 By: /s/Redgie Green
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Redgie Green,
Chief Executive Officer &
Accounting Officer