ITEM 1. DESCRIPTION OF BUSINESS
Background
Indigo-Energy, Inc. (the “Company” or “Indigo” or “We”) is an independent energy company engaged primarily in the exploration of natural gas and oil in the Appalachian Basin in Pennsylvania, West Virginia, Kentucky. Additionally, the Company began a drilling program with Epicenter Oil & Gas LLC in the DuBois field near Jasper, Indiana, in the Illinois Basin for both oil and gas prospects.
Indigo, formerly known as Procare America, Inc. (“Procare”) was incorporated in Minnesota on September 22, 1993 and in 1999 relocated its state domicile to Nevada. At the date of recapitalization on December 15, 2005, Procare was a public shell company, defined as an inactive, publicly quoted company with nominal assets and liabilities.
On December 15, 2005, pursuant to a stock exchange agreement between the Company and the shareholders of Indigo Land and Development, Inc. (“ILD”), the Company purchased all of the outstanding shares of ILD through the issuance of 49,100,000 shares of our common stock directly to the ILD shareholders. The Company was the legal acquirer in the transaction. ILD was the accounting acquirer since its stockholders acquired a majority interest in the Company. The transaction was treated for accounting purposes as a recapitalization by the accounting acquirer (ILD). Upon completion of the recapitalization, the Company changed its name to Indigo-Energy, Inc.
Business
Indigo-Energy Inc. is an independent energy company engaged in the exploration of natural gas and oil. Our strategy is to profitably grow reserves and production, primarily through acquiring oil and gas leasehold interests and participating in or actively conducting drilling operations in order to exploit those interests.
Appalachian Basin Gas Operations
We sold mineral rights (excluding coal) in Greene County, Pennsylvania and Monogalia County, West Virginia, respectively, in July 2009 (See Program #1 below) as follows: 100% interest in 420 acres, one-third interests in 13 acres, one-sixth interest in 68 acres, and various percentages in an additional 56 acres (collectively the “Indigo Property”). We do not own the surface land in these areas. These natural resources are available via subsurface drilling and recovery techniques. We drilled twenty-four (24) gas wells located in this area, twenty-one (21) of which were drilled through four turnkey drilling programs with four (4) respective operators (see status below). To quantify the potential for recoverable reserves of natural gas, oil and coal bed methane, we commissioned four independent geological and engineering studies of the Indigo Property.
Wells Operated Through Drilling and Operating Agreements
The Company operates 16 of its wells through the following Drilling and Operating Agreements:
1.
Drilling and Operating Agreement between Indigo and TAPO Energy, LLC (“TAPO”) (“Program #1”) - 5 well program, all of which have been completed and are producing.
2.
Drilling and Operating Agreement between Indigo and Dannic Energy Corp. (“Dannic”) (“Program #2”)- 5 well program, all of which have been completed and are producing.
Drilling and Operating Agreement between Indigo and Mid-East Oil Company (“Mid-East”) (“Program #3”) - 6 well program, all of which have been completed and are producing.
Pursuant to the Drilling and Operating Agreements Indigo entered into, the operators were responsible for drilling, completing, and operating the wells.
Program #1 - Drilling and Operating Agreement between Indigo and TAPO - 5 well program
Under the Drilling and Operating Agreement between Indigo and TAPO the Company has an 87.5% working interest in five wells. The operating agreement also provides for an overriding royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced from the wells drilled by TAPO. This overriding royalty interest is in addition to the customary 12.5% royalty interest due to the landowner. All five wells are currently producing and determined to be proved properties as of December 31, 2009.
On April 2, 2008, the Company entered into a Modification and Settlement Agreement with TAPO to settle its obligation due to TAPO in the amount of $671,598. Under the terms of the settlement agreement, the Company assigned all of its rights to receive revenue from the five wells for a period equal to the later of 48 months (commencing January 2008) or until the obligation to TAPO has been satisfied (“the Assignment Period”). Upon expiration of the Assignment Period, all rights assigned to TAPO will automatically revert back to the Company and a new carried interest in the five wells will be assigned to the Company.
On May 28, 2009, the Company entered into a Purchase and Sale Agreement (“PSA”) with TAPO. The PSA outlined an understanding with respect to TAPO’s purchase of all of Indigo’s oil and gas interests in certain properties located in Greene County, Pennsylvania and Monogalia County, West Virginia excluding interests in certain drilling sites previously assigned to TAPO in connection with the April 2, 2008 Modification and Settlement as described above for an aggregate purchase price of $630,000. Under the PSA, the Company keeps all its rights and interests in its three initial wells drilled on Indigo Property. In addition, the Company will be entitled to an overriding royalty interest of 3.125% of all net revenues generated by TAPO on the Indigo Property.
On July 16, 2009, the Company entered into an Amended Purchase Sale Agreement (“Amended PSA”) with Bluestone Energy Partners, a West Virginia corporation (“Bluestone”) amending the terms of the PSA dated May 28, 2009. The Amended PSA provided for all of TAPO’s rights under the PSA to be assigned to Bluestone pursuant to an Assignment and Assumption Agreement dated June 1, 2009 between TAPO and Bluestone. The Company closed the sale of Indigo Property with Bluestone for $630,000 on July 16, 2009.
Program #2 - Drilling and Operating Agreement between Indigo and Dannic - 5 well program
Under the Drilling and Operating Agreement between Indigo and Dannic the Company has a 60% working interest in the five wells. The operating agreement also provides for an overriding royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced from the wells drilled by Dannic. This overriding royalty interest is in addition to the customary 12.5% royalty interest due to the landowner. All five wells are currently producing and determined to be proved properties as of December 31, 2009.
On December 30, 2008, The Company entered into a Continuation Agreement with Dannic to settle its obligation in the amount of $381,824 to Dannic. Under the terms of the settlement agreement, Dannic agreed to release $180,186 of suspended revenue checks owed to the Company for well production through October 2008 in exchange for the payment of the outstanding obligation of $381,824 by the Company. The parties exchanged checks for their respective amounts owed on the date of the Continuation Agreement. In addition, Dannic agreed to assign the Company an additional 27% working interest in the wells, increasing the Company’s working interest in the wells to 60%. On January 29, 2009, Dannic formally recorded the assignment of the 27% interest in the wells. Dannic also agreed to distribute to Indigo its proportionate share of monthly revenue within 30 days of its receipt of the production checks.
Program #3 - Drilling and Operating Agreement between Indigo and Mid-East - 6 well program
Under the Drilling and Operating Agreement between Indigo and Mid-East the Company has a 75% working interest in the six wells. The operating agreement also provides for an overriding royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced from the wells drilled by Mid-East. This overriding royalty interest is in addition to the customary 12.5% royalty interest due to the landowner. All six wells are currently producing and determined to be proved properties as of December 31, 2009.
Revenue earned by the Company in the year 2009 under the Programs 1- 3 above have been minimal. The industry is subject to weather, pricing volatility (including for overseas production) and industrial demand. The Company’s wells are a small number of “feeder” wells to a vast pipeline network, and when the wholesale gas buyer reduces demand, they may “shut-in” excess production and only accept gas that meets their demands. Small companies, such as the Company, have no leverage when competing with larger companies to become a part of the producing wells and often are “shut in” for a period of time on any number of wells.
Drilling Agreement with P& J Resources, Inc. (“P&J”)
Under a Drilling and Operating Agreement between Indigo and P&J the Company planned on having a 75% working interest in the five wells operated by P&J. The operating agreement also provides for an overriding royalty interest of 1/16 (6.25%) of all gross revenues from oil and gas produced from the wells drilled by P&J. This overriding royalty interest is in addition to the customary 12.5% royalty interest due to the landowner.
All five wells have been drilled but have not been completed as of December 31, 2009. Management has been unable to obtain a reasonable explanation from P&J as to why these wells have not been completed since they were spudded in early 2007. Management intends to seek legal actions against P&J to recoup the money Indigo has invested in these wells, or, alternatively, to endeavor to bring such wells into production. The Company has retained counsel to initiate such legal action against P&J.
The Company’s Wells
The Company operates three of its own wells. All three wells are currently producing and determined to be proved properties as of December 31, 2009. Well #1 generates 5% of production, well #2 generates 13% and well #3 generates approximately 82% of total production of the wells that the Company operates.
Illinois Basin Gas Operations
In November 2008, the Company commenced its drilling program with Epicenter Oil and Gas, LLC (“Epicenter”) in the DuBois Field located in the Illinois Basin in southern Indiana. The drilling of the initial two wells was funded through the Global Financing Agreement (“GFA”) by Carr Miller Capital, LLC (“Carr Miller”) which provided for an amount of $1,000,000 to be used exclusively for the Company’s drilling activities. On December 30, 2008 the Company received funding separate from the GFA from Carr Miller to begin drilling a third well in the DuBois field, which well is, adjacent to, but separate and distinct from the two wells drilled by the Company that were provided for in the GFA.
On March 26, 2009, the Company entered into an agreement with Epicenter wherein Epicenter acknowledged that, between February 20, 2009 and March 23, 2009, it has received an aggregate of $900,000 from the Company, which amount was utilized for drilling and other activities related to four wells, specifically, two horizontal gas wells, joined through one vertical Hub gas well, and one vertical oil well, located in the Dubois field, in the Illinois Basin. The agreement contained a representation from Epicenter that it has the right to drill on the property and also contained an undertaking on the part of Epicenter to execute an assignment of working interest in the wells in favor of the Company and to record such assignment in the appropriate Public Records in Dubois County, Indiana.
On April 3, 2009, the Company announced that the above four wells have been completed. These four wells consist of two horizontal spokes joining a third vertical hub for natural gas production and a vertical oil well.
On April 29, 2009, the Company entered into another agreement with Epicenter wherein Epicenter acknowledged that it has received an aggregate of $2,100,000 from the Company, which amount was utilized for drilling and other activities related to the four wells located in the Dubois field, in the Illinois Basin. The agreement provides that any remaining charges for the drilling of these four wells over and above the $2,100,000 will be paid from the 100% of the net revenue interest from these four wells until all drilling and completion costs have been paid-in-full. In consideration of the $2,100,000 provided by the Company, Epicenter assigned the Company a 75% working interest in the four wells, and has been recorded in the appropriate public records of Dubois County, Indiana. In consideration of Epicenter being the operator of the wells, Epicenter will receive a 25% working interest in the wells. The working interests are subject to the customary 12.5% royalty interest due to the landowner and an overriding royalty interest of 8.25% of all gross revenues from oil and gas produced from the four wells. As of May 7, 2009, Epicenter’s assignment of the 75% working interest to the Company has been recorded in the appropriate public records of Dubois County, Indiana.
On May 11, 2009, the Company received a Sworn Statement of Intention to Hold Lien filed on behalf of Akerman Construction Co., Inc. against the Company and other third parties indicating that Akerman Construction Co., Inc. intends to hold a lien on the land, well and well improvements, casing, and mineral interests in, on and under certain real estate located in the Dubois County, State of Indiana, as well as on all buildings, structures and improvements located thereon. A pre-trial conference relating to the Hold Lien filed by Akerman Construction Co., Inc. is set for April 23, 2010.
In February 2010, the Company completed the installation of a well pump system for its three natural gas wells and one oil well located in the Illinois Basin. The main system, which is driven by a progressive cavity pump was installed in the HUB or “collector” vertical natural gas well which will be the production point for all three gas wells that were drilled in 2009. A pump was also installed in the horizontal oil well which the Company also drilled in 2009 with the help of its operating partners in the Illinois Basin.
In March 2010, the Company completed a series of required tests on a 5,800 foot transmission line regulated by the state utilities commission. This pipeline is part of the processing and transportation system which will be utilized to deliver natural gas from the wells recently completed by the Company and its operating partners in the Illinois Basin drilling project. The high pressure test along with detailed inspections, were conducted on the transmission line that connects the field’s natural gas processing plant and the interstate pipeline. The testing process was concluded on March 2, 2010 and recommended mechanical adjustments highlighted during the inspection process were completed in the field on March 3, 2010.
On March 15, 2010, the Company entered into a Memorandum of Understanding with Epicenter and Reef, LLC whereby the Company undertook to provide funding in the maximum amount of $350,000 for completion efforts required to bring the four wells into production. It was further agreed that working interest revenue from the wells, net of operational requirements, will be used, first, to pay certain outstanding obligations the amount of $1,600,000 due to contractors and subcontractors engaged to complete the four wells. Such outstanding amounts shall be paid prior to any working interest revenue being distributed to the parties to the Memorandum of Understanding.
The parties further agreed that Epicenter would be the operator of the four wells and that any costs incurred in the normal day-to-day operations shall be incurred at Epicenter’s sole discretion, while any unusual operational costs shall be subject to mutual consent. Reef, LLC is the leaseholder of the drilling rights on the property. Robert Turnage is a managing member of Reef, LLC and is a minority interest owner of Reef, LLC. Mr. Turnage is also an officer and director of Epicenter.
Operation of Producing Wells
Once a well drilled by an Operator is completed, the Operator supervises field operations of producing wells on the premises pursuant to the Drilling and Operating Agreement. The Drilling and Operating Agreement provides that the Operator is required to operate the wells as a reasonable operator in a good and workmanlike manner, in accordance with gas industry standards.
The Operators generally receive a monthly operating fee of $300 for each producing well, $100 for any “shut in” well. No fee shall be paid to the operator for any “dry” well. The operating fee covers all normal and regularly recurring operating expenses for the production, delivery and sale of gas, such as well tender, routine maintenance and adjustment, reading meters, recording production, pumping, maintaining appropriate books and records, preparing reports to the Company and to government agencies and collecting and disbursing revenues. The operating fee does not include costs and expenses related to the production and sale of oil (for natural gas wells only), purchase of equipment, materials or third party services, brine collection and disposal, compression and dehydration of natural gas, meter repair and calibration, extraordinary repairs and rebuilding of access roads, all of which will be billed at the invoice cost of materials purchased or third party services performed together with a reasonable charge by the Operator for services performed directly by it.
Liquidity
The Company has incurred losses since its inception and is delinquent on many of its obligations to its creditors. The Company’s current liabilities exceed its current assets. The Company has been borrowing money and has assigned certain net revenue interest in oil and gas properties as collateral or consideration for these loans. The Company needs to raise a significant amount of cash to fund current operations and current capital commitments. There is no assurance the Company will receive funding necessary to implement its business plan. This raises substantial doubt about the ability of the Company to continue as a going concern.
The Company plans to raise funds from private offerings of equity and debt securities in order to fund its operations through December 2010. The Company will need to raise additional funds in the event it locates additional prospects for acquisition, experiences cost overruns at its current prospects, or fails to generate projected revenues.
The Company has been able to continue operations to date through the funding provided by Carr Miller Capital, LLC (“Carr Miller”). Under a Global Financing Agreement (the “GFA”), Carr Miller loaned $1,000,000 to the Company to be used exclusively for the Company’s drilling activities. In addition, under terms and conditions set forth in the GFA, additional funding in the amount of $500,000 was to be provided to the Company each month for a period of six months. This funding is to be utilized to meet the Company’s drilling objectives of a minimum of one new well to be drilled each month.
On December 30, 2008 the Company received additional funding separate from the GFA from Carr Miller to begin drilling a third and fourth well in the DuBois field, which well is, adjacent to, but separate and distinct from the two wells drilled by the Company that were provided for in the GFA.
To date, an amount of $1,500,000 is still due to the Company from Carr Miller pursuant to the terms of the GFA. On February 23, 2010, the Company and Carr Miller entered into a Global Financing Extension Agreement pursuant to which the parties agreed that the GFA shall be extended until June 30, 2010. The agreement further provided on or before June 30, 2010, Carr Miller shall have the option to (i) provide the Company with the $1,500,000 loan remaining under the terms of the GFA; (ii) return to the Company for cancellation an aggregate of 15,000,000 shares of the Company’s common stock currently registered in the name of Carr Miller; or (iii) cancel and forgive certain debts owed by the Company to Carr Miller in the aggregate amount of $1,500,000.
The Company’s ability to continue as a going concern is dependent upon the Company earning sufficient revenue and raising additional financing on terms desirable to the Company. If the Company is unable to earn revenues sufficient to sustain its operations or obtain additional funds when they are required or if the funds cannot be obtained on terms favorable to the Company, management may be required to delay, scale back or eliminate its well development program or even be required to relinquish its interest in one or more properties or in the extreme situation, cease operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our Principal Drilling Locations
Our principal drilling locations are in the States of Pennsylvania and West Virginia. In addition, we have drilling locations in Kentucky, where the P&J wells are located. We also conduct drilling operations in the Dubois Field in Jasper, Indiana.
Geographic Markets
Our primary geographic market is the United States.
Competition
The industry in which the Company is engaged in is intensely competitive and it competes with other companies that are significantly larger and have greater resources. Many of these companies explore for and produce oil and natural gas and also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may have a greater ability to continue exploration activities during periods wherein prices for oil and natural gas are low. Moreover, our larger competitors may be able to better absorb the burden of present and future federal, state, local and other laws and regulations which would adversely affect our competitive position.
Price Fluctuation
The price of gas has been subject to high fluctuation. Gas prices have decreased substantially in the past twelve months and no assurance can be given that such prices will increase, whether incrementally or significantly, in the near future. As such, the Company cannot give assurance that its existing projects will prove to be economically feasible or profitable.
Government Regulation
The Company’s operations are affected by various governmental laws and regulations relating to the Company’s drilling activity which may require the Company to make significant capital expenditures to comply with governmental laws and regulations. Failure to comply with these laws and regulations may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.
Marketing
Wells located in our oil and gas-drilling prospects that are successfully completed are anticipated to produce oil and natural gas. The purchase price for the produced hydrocarbon is expected to be what is then being paid in the area of the prospects for similar hydrocarbons, which is dependent upon conditions over which the Company has no control. The Company cannot assure that a purchaser will pay such price, or that there will be an available purchaser.
After the Company pays its drillers amounts it owes them for drilling the wells, the Company may be able to sell a portion of its gas production on the so-called “spot market” by effecting sales of its natural gas directly to public utilities or other purchasers or through intermediaries. Although the terms of such sales contracts vary considerably, they typically are made on a shorter-term basis depending upon prevailing market conditions and may offer the possibility of obtaining a somewhat higher sales price. However, there is no assurance that the Company will be able to negotiate any such short-term sales contracts.
In order to market production from the wells, the Company must have access to pipeline transmission lines in proximity to the wells and may be required to pay transportation charges to the Operators for transmitting gas through transportation pipelines in certain geographic areas. Each Operator may charge its normal and customary fee for such transportation.
The U.S. Market
Cost of Compliance with Environmental Laws
Dismantlement, Restoration and Environmental Costs
The Company recognizes transition amounts for asset retirement obligations, asset retirement costs and accumulated depreciation. A liability is recognized for retirement obligations associated with tangible long-lived assets, such as producing well sites. The obligations are those for which a company faces a legal obligation. The initial measurement of the asset retirement obligation is to record a separate liability at its fair value with an offsetting asset retirement cost recorded as an increase to the related property and equipment on the consolidated balance sheet. The asset retirement cost will be amortized using a systematic and rational method similar to that used for the associated property and equipment upon the establishment of proven reserves for the respective wells. As of December 31, 2009, the Company’s liability for retirement obligations was $290,580, representing the obligation for wells completed as of the balance sheet date.
Retirement obligations consist of the following as of December 31:
The gas and oil business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. In projects in which the Company is not the operator, but in which it owns a non-operating interest directly or owns an equity interest in a limited partnership or limited liability company that owns a non-operating interest, the operator for the prospect maintains insurance to cover its operations.
There can be no assurance that insurance, if any, will be adequate to cover any losses or exposure to liability. Although the Company believes that the policies obtained by operators provide coverage in scope and in amounts customary in the industry, they do not provide complete coverage against all operating risks. An uninsured or partially insured claim, if successful and of significant magnitude, could have a material adverse effect on the Company and its financial condition via its contractual liability to the prospect.
Employees
As of December 31, 2009, we had one (1) employee.
Reports to Security Holders
We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports in Washington, D.C. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the U.S. Securities and Exchange Commission at www.sec.gov
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
We sold mineral rights (excluding coal) in Greene County, Pennsylvania and Monogalia County, West Virginia, respectively, in July 2009 (See Program #1 above) as follows: 100% interest in 420 acres, one-third interests in 13 acres, one-sixth interest in 68 acres, and various percentages in an additional 56 acres (collectively the “Indigo Property”). We do not own the surface land in these areas. These natural resources are available via subsurface drilling and recovery techniques. We drilled the 3 Indigo wells on this property.
We drilled twenty-one (21) wells in the Pennsylvania, West Virginia and Kentucky acreages through four turnkey drilling programs with four (4) respective operators, as previously described (see status below). To quantify the potential for recoverable reserves of natural gas, oil and coal bed methane, we commissioned four independent geological and engineering studies of the Indigo Property and the turnkey drilling program properties.
For a more detailed discussion on the Company’s operations in the Appalachian Basin, please see “Appalachian Basin Gas Operations” and “Wells Operated Through Drilling and Operating Agreements” under Item 1.
In November 2008, the Company commenced its drilling program with Epicenter Oil and Gas, LLC (“Epicenter”) in the DuBois Field located in the Illinois Basin in southern Indiana. The drilling of the initial two wells was funded through the Global Financing Agreement (“GFA”) by Carr Miller Capital, LLC (“Carr Miller”) which provided for an amount of $1,000,000 to be used exclusively for the Company’s drilling activities. On December 30, 2008 the Company received funding separate from the GFA from Carr Miller to begin drilling a third well in the DuBois field, which well is, adjacent to, but separate and distinct from the two wells drilled by the Company that were provided for in the GFA.
For a more detailed discussion on the Company’s operations in the Dubois Field, please see “Illinois Basin Gas Operations” under Item 1 above.
Productive Wells and Drilling Activity
Productive wells are producing wells and wells capable of production. The following table presents the Company's number of productive wells and plugged and abandoned dry wells:
(1)
Includes the three company wells.
(2)
On December 30, 2008, the Company entered into a Continuation Agreement with Dannic Energy Corporation which resulted in the recovery of these five (5) wells.
(3)
Consists of the P&J wells.
For a more detailed description of the Company’s wells, please see Item 1. Description of Business.
Production
The following table presents the Company's average sales price and average production cost per unit of gas produced (mmcf). Production costs are those costs incurred to operate and maintain the Company’s wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. Production costs also include depreciation, depletion, and amortization of capitalized acquisition, exploration, and development costs. Production includes only production that is owned by the Company and produced to its working interest.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation. However, on May 6, 2009, Akerman Construction Co., Inc., (“Akerman”) a subcontractor of Epicenter, filed a Mechanic’s Lien against Indigo and two other parties on the four wells drilled by it on the Dubois Field of Indiana (the “Wells”) for claims aggregating $875,969. Such claim was predicated on Epicenter’s failure to pay obligations for the drilling costs.
On July 30, 2009, Akerman filed a Complaint against the Company for Breach of Contract and to Foreclose Mechanic’s Lien. On September 14, 2009, Akerman filed a Motion for Leave to Amend its complaint seeking judgment against the defendants, jointly and severally, in the sum of $875,969, plus interest thereon as well as reasonable attorney’s fees and costs of action. The complaint further seeks an order foreclosing the plaintiff’s mechanic’s lien on the Wells and an order for the sale of the defendant’s interest in the wells, the improvements thereon and the defendant’s leasehold mineral interest therein to satisfy the amounts allegedly owing and due to Akerman. Such Motion for Leave to Amend the complaint was granted on September 14, 2009.
The Company has engaged counsel to resolve the above claims and a pre-trial conference has been scheduled for April 23, 2010.
In May 12, 2009, M&M Pump & Supply, Inc., a subcontractor of Epicenter, filed a Mechanic’s Lien against Indigo, Epicenter and four other parties on the four wells drilled on the Dubois Field of Indiana for claims aggregating $125,160. Such claim was predicated on Epicenter’s failure to pay obligations for the drilling costs. The Company has engaged counsel to resolve these lien claims. To date, no further action has been taken by M&M Pump & Supply Co.
Our address for service of process in Nevada is 2857 Sumter Valley Dr., Henderson, NV 89052.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
As of April 13, 2010, our common stock is quoted and traded under the symbol “IDGG” on the OTC Bulletin Board (“Bulletin Board”).
As of April 13, 2010, the closing price of our common stock was $0.05.
There is a limited trading market for our common stock. There is no assurance that a regular trading market for our common stock will develop or if developed that it will be sustained. A shareholder in all likelihood, therefore, may not be able to resell his securities should he or she desire to do so when eligible for public resale. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops.
Below is the market information pertaining to the range of the high and low bid information of our common stock for each quarter since the year 2008. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
Source: http://www.pinksheets.com
Holders
On April 13, 2010, there were 1,134 holders of record of our common stock.
Dividends
No cash dividend was declared in 2009.
Recent Sales of Unregistered Securities
In December 2009, the Company issued 1,000,000 shares of common stock as part of the consideration for a promissory note issued by the Company in the amount of $500,000.
In December 2009, the Company issued 300,000 shares of common stock for promissory note extensions.
In December 2009, the Company issued 1,650,000 shares of common stock for promissory note penalties.
These securities were issued in transactions not registered under the Securities Act in reliance upon the exemption provided under Section 4(2) of the Securities Act and/or Regulation D promulgated by the Securities and Exchange Commission. We believed that the exemption was available because the offer and sale of the securities did not involve a public offering and because of the limited number of recipients, each purchaser’s representation of sophistication in financial matters, and their access to information concerning our business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in the Company’s revenues and profitability, (ii) prospective business opportunities and (iii) the Company’s strategy for financing its business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes,” “anticipates,” “intends” or “expects.” These forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Annual Report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
You should read the following discussion and analysis in conjunction with the Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Annual Report.
The Company’s results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the Company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, changing government regulations domestically and internationally affecting our products and businesses.
Overview
We are an independent energy company, currently engaged in the exploration of natural gas and oil. Our strategy is to profitably grow reserves and production, primarily through acquiring oil and gas leasehold interests and participating in or actively conducting drilling operations in order to exploit those interests. The Company was formed in 1981 as Fuller-Banks Energy, Inc. and changed its name to Royal Equity Exchange Inc. in 1987, and subsequently to Procare America, Inc. in 1999. In 2001, the Company ceased all operations and became a public shell company. On December 15, 2005, the Company issued 49,100,000 shares of common stock in exchange for 100% of the outstanding shares of Indigo Land & Development, Inc. (“ILD”), which was treated as a recapitalization of ILD. On January 12, 2006, the Company changed its name to Indigo Energy, Inc.
We have incurred losses since our inception. We are delinquent on many of our obligations to our creditors. Our current liabilities exceed our current assets and we will need additional capital to fund operations. There are no assurances that we will receive funding to implement our business plan and our independent registered accountant indicated in their opinion on our 2009 annual financial statements that there was substantial doubt about our ability to continue as a going concern.
The Company has enjoyed substantial progress in development of its strategic operating plan as developed at the last shareholders meeting. We had set target goals in three specific areas: (1) new drilling and operating wells: (2) improving our balance sheet and improving our cash flow: and (3) securing sufficient capital to move the Company forward through a combination of debt and equity instruments.
·
In new well development, we have drilled and completed 2 horizontal wells joining a 3rd vertical Hub for gas production. That well is within weeks of production and early indications are very promising. Also in the Dubois field within the Illinois basin, we have successfully drilled a vertical oil well which is just coming into production and should be generating revenue by the 2nd quarter of 2010.
·
As to balance sheet improvements, we have restructured a number of toxic promissory notes, worked out settlements with 2 of our 3 operating drillers to improve cash flow, and converted a number of notes to equity at a favorable exchange rate. In the first quarter of 2010 the Company also did a roll up of 18 promissory notes of varying terms into a single longer term note with a 2 year window until first payments. Additionally the almost half-million dollar obligation to Indigo-Energy LP’s 14 partners were converted to equity.
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Regarding the search for partnership in development of additional drilling opportunities, the Company is in various stages of securing commitments to follow the successful Dubois drilling program with similar programs as well as acquisition of current operating field.
The Company needs to raise significant funds for future drilling and operating costs. Any fundraising conducted by the Company will most likely result in the issuance of additional shares of common stock which will dilute the ownership interests of the Company’s current shareholders. The Company’s expectation of its cash needs is approximately $11,100,000 to fund its current obligations under the various agreements to which the Company is a party.
During the next 12 months, we do not anticipate any significant changes in the number of our employees other than to add adequate field operating personnel to enable us to monitor and further develop our drilling and operating opportunities.
Results of Operations for the Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
We incurred a net loss for the year ended December 31, 2009 in the amount of $5,053,690 compared to a net loss of $17,128,014 for the year ended December 31, 2008. The decrease in net loss of $12,074,324 was primarily attributable to a $439,932 decrease in general and administrative expenses, a decrease of $6,904,148 in interest and forbearance expense, a reduction of $2,406,368 in loss on extinguishment of debt, a decrease in transaction costs related to a failed transaction of $400,000, and a reduction in settlement expenses of $899,392. These were offset by a decrease in revenues of $537,204, an increase of $252,545 from impairment of oil and gas properties, $629,760 from a gain on the sale of oil and gas interests and a $985,498 unrealized gain on derivatives.
Revenues
We had revenue in the amount of $139,765 for the year ended December 31, 2009 compared to $676,969 in revenues for the year ended December 31, 2008. The decrease in revenue of $537,204 was primarily attributable to $221,098 of additional revenue included in the year ended December 31, 2008 that resulted from a Continuation Agreement with Dannic Energy Corporation, $95,025 of additional revenue included in the year ended December 31, 2008 that resulted from a Modification and Settlement Agreement with TAPO Energy, LLC, a general decline in both demand and prices paid for oil and gas products, as well as adjustments to previous production estimates.
Impairment of Oil and Gas Properties
Impairment cost of $252,545 related to oil and gas properties was incurred for the year ended December 31, 2009 as a result of our ceiling test on proved properties.
Depletion Expense
We recorded a depletion expense on our proved properties of $46,807 for the year ended December 31, 2009 compared to $125,912 for the year ended December 31, 2008. The decrease of $79,105 in depletion expense was primarily due to our decreased oil and gas carrying costs at December 31, 2009.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2009 were $4,171,194, compared to $4,611,126 for the year ended December 31, 2008. The decrease of $439,932 in general and administrative expenses was primarily due to a decrease in professional fees of $467,765. General and administrative expenses of $4,171,194 for the year ended December 31, 2009 were primarily comprised of $2,497,293 of consulting fees, $782,989 of accounting and auditing fees and $303,543 of legal fees.
Interest and Forbearance Expense
Interest expense for the year ended December 31, 2009 was $2,383,822 compared to $9,287,970 for the year ended December 31, 2008. Interest expense of $2,383,822 for the year ended December 31, 2009 was primarily comprised of $2,116,555 of interest on various notes payable, including amortization of discounts on the notes in the amount of $1,122,384, and $235,947 of interest related to the amortization of the beneficial conversion feature on our Series 1 convertible notes. Interest expense of $9,287,970 for the year ended December 31, 2008 was primarily comprised of $1,170,000 of interest related to drilling lease option extensions, $7,831,351 of interest on various notes payable, including amortization of discounts on the notes in the amount of $6,440,228, $217,426 of interest related to the amortization of the beneficial conversion feature on our Series 1 convertible notes.
Gain on Extinguishment of Debt
We incurred a gain on extinguishment of debt from various modifications and settlement agreements related to our notes payable for the year ended December 31, 2009 in the amount of $119,500 compared to a loss of $2,286,868 for the year ended December 31, 2008.
Gain on Sale of Oil and Gas Interest
During 2009, the Company recorded a gain on the sale of oil and gas interests in the amount of $629,760.
Unrealized Gain on Derivative
We incurred a gain on derivatives in the amount of $1,007,455 for the year ended December 31, 2009 compared to a gain on derivatives of $21,957 for the year ended December 31, 2008.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through private sales of our common stock and the use of convertible debt. As of December 31, 2009, we had a cash balance of $411,042.
We require a minimum of approximately $11,100,000 for the next 12 months, which includes approximately $1,000,000 to pay for our outstanding professional fees, $1,700,000 to pay for the outstanding drilling costs to various drillers, $1,700,000 to pay our note payable obligations, including convertible notes as well as $200,000 to pay accrued interest and $1,500,000 fund other operating costs. In addition to the minimum amount required, the Company expects to spend an additional $5,000,000 for drilling activities. Moreover, in the event we locate additional prospects for acquisition, experience cost overruns at our current prospects or fail to generate projected revenues, we will also need additional funds during the next month. We currently do not have sufficient funds to fund our current operations or such capital calls, pay our debts and other liabilities, and operate at our current levels for the next twelve months. Accordingly, we need to raise additional funds through sales of our securities or otherwise, immediately.
If we are unable to obtain additional funds on terms favorable to us, if at all, we may be required to delay, scale back or eliminate some or all of our exploration and well development programs and may be required to relinquish our interest in one or more of our projects or in the extreme case, cease operations.
For the Year Ended December 31, 2009 Compared to the Year Ended December 31,
Net cash used in operating activities was $1,712,216 for the year ended December 31, 2009 as compared to net cash used in operating activities of $4,634,215 for the year ended December 31, 2008. The $2,921,999 decrease in cash used in operating activities was primarily due to the decreased net loss incurred during the year.
The sales of natural gas is volatile and subject to upwards and downward changes in both volume and price. Operators of gas field, pipelines, and processing centers buy gas from smaller operators like Indigo based on the market price of the gas at the street market price at the time of purchase. A slow demand winter season will drive down both the need and price for natural gas. Also outside the control of the Company is that lower demand is at the dictate of the pipeline operator as to which wells to “shut-in”. While the Company is committed to gas production, and the USA is still very gas dependent, the demand, weather, operating conditions, and pricing are outside the control of the Company.
Net cash used in investing activities was $965,255 for the year ended December 31, 2009 as compared to net cash used in investing activities of $332,621 for the year ended December 31, 2008.
Net cash provided by financing activities was $2,463,290 for the year ended December 31, 2009 as compared to net cash provided by financing activities of $5,584,363 for the year ended December 31, 2008. The amounts in both periods represent net proceeds from sales of debt and equity securities.
At December 31, 2009, we had a working capital deficit of $7,916,760 compared to a working capital deficit of $4,422,717 at December 31, 2008. The increase in working capital deficit in the amount of $3,494,043 was due primarily to an increase in accounts payable and an increase in the current portion of notes payable.
Critical Accounting Policies and Estimates
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These accounting principles require management to use estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Management reviews its estimates, including those related to the determination of proved reserves, well completion percentage under the turnkey drilling programs, estimates of future dismantlement costs, estimates of future cash flows in valuing oil and gas proprieties, debt modifications or extinguishment, income taxes and litigation. Actual results could differ from those estimates.
Our most critical accounting policies are as follows:
We account for oil and gas properties and interests under the full cost method. Under the full cost method, all acquisition, exploration and development costs incurred for the purpose of finding oil and gas are capitalized and accumulated in pools on a country-by-country basis. We only are concentrating our exploration activities in the United States and therefore we will utilize a single cost center.
Capitalized costs will include the cost of drilling and equipping productive wells, including the estimated costs of dismantling and abandoning these assets, dry hole costs, lease acquisition costs, seismic and other geological and geophysical costs, delay rentals and costs related to such activities. Employee costs associated with production and other operating activities and general corporate activities are expensed in the period incurred.
The costs of investments in unproved properties and portions of costs associated with major development projects are excluded from the depreciation, depletion and amortization (“DD&A”) calculation until the project is evaluated.
Unproved property costs include the costs associated with unevaluated properties and are not included in the full cost amortization base (where proved reserves exist) until the project is evaluated. These costs include unproved leasehold acreage, seismic data, wells in progress and wells pending determination, together with interest costs capitalized for these projects. Significant unproved properties are assessed periodically, but not less than annually, for possible impairment or reduction in value. If a reduction in value has occurred, these property costs are considered impaired and are transferred to the related full cost pool.
In situations where the existence of proved reserves has not yet been determined, unevaluated property costs remain capitalized in unproved property cost centers until proved reserves have been established, exploration activities cease or impairment and reduction in value occurs.
Impairment of unproved properties is based on factors such as the existence of events that may serve to impair the properties such as failure of a well, expiration of leases and comparison of carrying value of oil and gas properties with their fair market value at the end of the reporting period.
In evaluating the accounting for the debt modifications and exchanges, management was required to make a determination as to whether the debt modifications and exchanges should be accounted for as a troubled debt restructuring (“TDR”) or as an extinguishment or modification of debt. The relevant accounting guidance required us to determine first whether the exchanges of debt instruments should be accounted for as a TDR. A TDR results when it is determined that the debtor is experiencing financial difficulties, and the creditors grant a concession; otherwise, such exchanges should be accounted for as an extinguishment or modification of debt. The assessment of this critical accounting estimate required management to apply a significant amount of judgment in evaluating the inputs, estimates, and internally generated forecast information to conclude on the accounting for the modifications and exchanges of debt.
The Company then evaluated if the debt modification constituted a material modification, in which case the debt modification would be accounted for as the extinguishment of the original debt and the creation of new debt, resulting in the recognition of a gain or loss on the extinguishment of debt. If it was determined that the debt modification was not a material modification, then there is no recognition of gain or loss on the extinguishment of debt, and the carrying amount of the debt is adjusted for any premium or discount that is amortized over the modification period.
Based on this analysis and after the consideration of the applicable accounting guidance, management concluded the some of the modifications and exchanges of debt were deemed to be TDRs, some were deemed as an extinguishment of old debt, while others were merely a modification of the original note.
Asset Retirement Obligations
We recognize an estimated liability for the plugging and abandonment of our oil and gas wells and associated pipelines and equipment. The liability and the associated increase in the related long-lived asset are recorded in the period in which our asset retirement obligation (“ARO”) is incurred. The liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset.
The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives of those wells based on reserves estimates and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free rate.
Revisions to the liability could occur due to changes in estimates of plugging and abandonment costs, changes in the risk-free rate or remaining lives of the wells, or if federal or state regulators enact new plugging and abandonment requirements. At the time of abandonment, we recognize a gain or loss on abandonment to the extent that actual costs do not equal the estimated costs.
Off Balance Sheet Reports
The Company had no off balance sheet transactions during the year ended December 31, 2009.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
FINANCIAL STATEMENT TABLE OF CONTENT
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Indigo-Energy, Inc.
We have audited the accompanying consolidated balance sheet of Indigo-Energy, Inc. as of December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. Indigo-Energy, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We also have audited the adjustments described in Note 3 that were applied to restate the 2008 consolidated financial statements to correct errors. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2008 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2008 consolidated financial statements taken as whole.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Indigo-Energy, Inc. as of December 31, 2009, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard 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.
Mark Bailey & Company, Ltd.
Reno, Nevada
April 15,
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Indigo-Energy, Inc.
Henderson, Nevada
We have audited, before the effects of the immaterial adjustments (for the correction of an error described in Note 3, the accompanying consolidated balance sheet of Indigo-Energy, Inc. as of December 31, 2008, and the related consolidated statement of operations, stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indigo-Energy, Inc. as of December 31, 2008, and the results of its operations, changes in stockholders’ deficit and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company: has incurred net losses since inception; had a working capital deficiency of $4,422,717 as of December 31, 2008; had a net loss in 2008 of $17,128,014; is delinquent on many of its obligations to its creditors; still owes certain parties payments for drilling wells for the Company; and does not currently have sufficient funds to execute its business plan or fund current operations or current capital commitments; and has been borrowing money and assigned its interests in certain property as collateral or consideration for these loans. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
L J SOLDINGER ASSOCIATES, LLC
Deer Park, Illinois
May 13,
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INDIGO-ENERGY, INC.
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
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INDIGO-ENERGY, INC.
Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
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INDIGO-ENERGY, INC.
Consolidated Statements of Stockholders’ Deficit
The accompanying notes are an integral part of these consolidated financial statements.
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INDIGO-ENERGY, INC.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND ABILITY TO CONTINUE AS A GOING CONCERN
Indigo-Energy, Inc. (the “Company”, “Indigo”, “our”, or “we”) is an independent energy company engaged primarily in the exploration, development and production of natural gas in the Appalachian Basin in Pennsylvania, West Virginia, and Kentucky, and in the Illinois Basin in Indiana.
The Company has incurred significant losses since its inception and is delinquent on many of its obligations to its creditors. Also, its current liabilities exceed its current assets. The Company has been borrowing money and has assigned certain net revenue interests in oil and gas properties as collateral or consideration for these loans. The Company needs to raise a significant amount of cash to fund current operations and current capital commitments. There are no assurances the Company will receive funding necessary to implement its business plan. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
The Company plans to raise funds from private offerings of equity and debt securities in order to fund its operations through December 31, 2010. The Company will need to raise additional funds in the event it locates additional prospects for acquisition, experiences cost overruns at its current prospects, or fails to generate projected revenues.
The Company’s ability to continue as a going concern is dependent upon the Company raising additional financing on terms desirable to the Company. If the Company is unable to obtain additional funds when they are required or if the funds cannot be obtained on terms favorable to the Company, management may be required to delay, scale back or eliminate its well development program or even be required to relinquish its interest in one or more properties or in the extreme situation, cease operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. From inception to December 31, 2008, the Company was deemed to be in the exploration stage. The Company ceased reporting as an exploration stage entity in 2009 since planned principal operations have commenced.
Consolidated Financial Statements
The consolidated financial statements include the accounts of Indigo and Indigo Energy Partners, LP (“Indigo LP”). Our consolidated financial statements also include the accounts of variable interest entities (VIEs) where we are the primary beneficiary, regardless of our ownership percentage. Rivers West Energy, LLC (“Rivers West”) a Nevada Limited Liability Company formed in 2007, was consolidated in these financial statements as the Company determined it is a variable interest entity and the Company is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
In general, a VIE is a corporation, partnership, limited liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (i) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support; (ii) has a group of equity owners that are unable to make significant decisions about is activities; or (iii) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Determining whether we are the primary beneficiary of a VIE is complex and subjective, and requires our judgment. There are a variety of facts and circumstances and a number of variables taken into consideration to determine whether we are considered the primary beneficiary of a VIE. A change in facts and circumstances or a change in accounting guidance could require us to reconsider whether or not we are the primary beneficiary of the VIE.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rivers West is an entity designed to merge oil and gas lease interests and operations with a financing source. Steve Durdin, our CEO and President, is also a managing member of Rivers West. The Company has determined that Rivers West is a VIE and, consequently, has consolidated the entity into its financial statements.
In April, July and September 2008, Indigo provided an aggregate of $715,000 to Rivers West under the belief it needed to preserve the lease rights to certain properties included in its planned drilling program with Epicenter Oil and Gas, LLC (“Epicenter”), which was to commence upon the Company’s obtaining of sufficient funding from an outside party. The $715,000 payment was considered essentially a forbearance for the landholders and leaseholders to continue their patience giving Rivers West additional time to complete the payment and obtain the leases and therefore, was recorded as interest expense on the consolidated financial statements. Subsequently these expenditures were converted into a loan due to the Company (See Note 4).
In November and December 2008, the Company provided an aggregate of $550,000 to Rivers West to commence drilling operations in the Illinois Basin in southern Indiana, of which $332,921 was recorded as unproved properties at December 31, 2008, $80,917 as prepaid expenses, and $136,162 was expensed during 2008 (See Note 4).
In January and February 2009, the Company provided an aggregate of $650,000 to Rivers West in connection with its drilling operations in the Illinois Basin in Southern Indiana.
Use of Estimates
The preparation of financial statements in conformity with US GAAP 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. Management periodically reviews its estimates, including those related to the determination of proved reserves, well completion percentage under the turnkey drilling programs, estimates of future dismantlement costs, estimates of average expected life and annual forfeitures of stock options and warrants, estimates of fair market value of debt used in evaluating whether the accounting for debt modifications should be accounted for as a troubled debt restructuring or as an extinguishment or modification of debt, estimates for the liability for variable conversion features on its convertible debt, estimates of future cash flows in valuing oil and gas properties, income taxes and litigation and estimates of the fair value of the derivatives associated with some of our warrants and certain non-employee stock options. Actual results could differ from those estimates.
Management believes that it is reasonably possible the following material estimates affecting the financial statements could significantly change in the coming year: (1) estimates of proved gas reserves and (2) estimates as to the expected future cash flows from proved gas properties (3) estimates of the fair value of the derivatives associated with certain warrants and non-employee stock options.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on a country-by-country (cost center) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities. We are concentrating our exploration activities only in the United States and therefore utilize a single cost center.
Capitalized costs include the cost of drilling and equipping productive wells, including the estimated costs of dismantling and abandoning these assets, dry hole costs, lease acquisition costs, seismic and other geological and geophysical costs, delay rentals and costs related to such activities. Employee costs associated with production and other operating activities and general corporate activities are expensed in the period incurred.
Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If capitalized costs, less related accumulated amortization and deferred income taxes, exceed the “full cost ceiling” the excess is expensed in the period such excess occurs. The “full cost ceiling” is determined based on the present value of estimated future net revenues attributed to proved reserves.
Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center.
Troubled Debt Restructuring, Debt Extinguishments and Modifications
In evaluating the accounting for the debt modifications and exchanges, management was required to make a determination as to whether the debt modifications and exchanges should be accounted for as a troubled debt restructuring (“TDR”) or as an extinguishment or modification of debt. The relevant accounting guidance required us to determine first whether the exchanges of debt instruments should be accounted for as a TDR. A TDR results when it is determined that a debtor is experiencing financial difficulties and the creditors grant a concession; otherwise, such exchanges should be accounted for as an extinguishment or modification of debt. The assessment of this critical accounting estimate required management to apply a significant amount of judgment in evaluating the inputs, estimates, and internally generated forecast information to conclude on the accounting for the modifications and exchanges of debt.
The Company then evaluated if the debt modification constituted a material modification, in which case the debt modification would be accounted for as the extinguishment of the original debt and the creation of new debt, resulting in the recognition of a gain or loss on the extinguishment of debt. If it was determined that the debt modification was a TDR, then there is no recognition of gain or loss on the extinguishment of debt, and the carrying amount of the debt is adjusted for any premium or discount that is amortized over the modification period.
Based on this analysis and after the consideration of the applicable accounting guidance, management concluded the some of the modifications and exchanges of debt were deemed to be TDRs some were deemed to be a modification of the original note.
Impairment of Long-lived Assets
The carrying value of intangible assets and other long-lived assets are reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. Impairment on the properties with unproved reserves is evaluated by considering criteria such as future drilling plans for the properties, the results of geographic and geologic data related to the unproved properties and the remaining term of the property leases. For the year ended December 31, 2009, the Company recorded an impairment to proved oil and gas properties in the amount of $252,545.
Revenue Recognition
Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if the collection of the revenue is probable. When the Company has an interest in a property with operators, it uses the sales method of accounting for its oil and gas to its customers, which can be different from its net working interest in field production.
Segment Information
The Company has determined that during the period of these financial statements it has one reportable operating segment; which is the acquisition and exploration of natural gas and oil properties in the United States.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of Interest
We capitalize interest, including amortization of debt discounts, on expenditures for significant exploration projects while activities are in progress to bring the assets to their intended use. As costs are transferred to the full cost pool, the associated capitalized interest is also transferred to the full cost pool. For the year ended December 31, 2009 the Company recorded capitalized interest in the amount of $88,381.
Asset Retirement Obligations and Environmental Obligations
The Company recognizes transition amounts for asset retirement obligations, asset retirement costs and accumulated depreciation. A liability is recognized for retirement obligations associated with tangible long-lived assets, such as producing well sites. The obligations are those for which a company faces a legal obligation. The initial measurement of the asset retirement obligation is to record a separate liability at its fair value with an offsetting asset retirement cost recorded as an increase to the related property and equipment on the consolidated balance sheet. The asset retirement cost will be depreciated using a systematic and rational method similar to that used for the associated property and equipment upon the establishment of proven reserves for the respective wells.
Cash
Cash includes cash on hand. The Company did not have any cash equivalents during the years ended December 31, 2009 and 2008.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places its cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal.
Accounts Receivable
The Company establishes allowances for doubtful accounts based on a review of the credit profiles of customers, contractual terms and conditions, current economic trends and historical collection experience. The allowance for doubtful accounts is reassessed for each period. If different judgments and estimates were utilized is establishing the allowance, the amount or timing of bad debt expense or revenue recognized could differ materially from the amounts reported. In the Company’s limited historical experience, actual losses and credits related to accounts receivable have been consistent with the recorded provisions. If, however, actual future receipts differ materially from the current assessments due, among other things, to unexpected events or significant changes in trends, additional provisions may be necessary and future cash flows and statements of operations could be materially negatively impacted. Allowances for doubtful accounts as a percentage of revenues have been immaterial.
Financial Instruments
The carrying value of the notes payable is recorded at face value less unamortized discounts for beneficial conversion features, variable conversion features and alloction for the fair value of other consideration received by the lenders. The face value of the notes payable is disclosed in Note 5.
Income Taxes
Deferred tax assets and liabilities are recorded to reflect temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The tax rate used to determine the deferred tax assets and liabilities is the enacted tax rate for the year in which the differences are expected to reverse. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation Expense
Compensation cost relating to share-based payment transactions are recognized under fair value accounting and recorded in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
The fair value of the stock option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based on an average of historical volatility of common stock prices of the Company or its peer companies where there is a lack of relevant volatility information of the Company for the length of the expected term. The expected term is derived from estimates and represents the period of time that the stock option granted is expected to be outstanding. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for the expected term is the yield on the zero-coupon U.S. Treasury security with a term comparable to the expected term of the option. The Company does not include an estimated dividend yield since it has not paid dividends on its common stock historically.
For the year ending December 31, 2009, there was $2,020,000 of compensation cost related to warrants issued to consultants and shares of common stock issued to Steven Durdin and James Walter Sr., related parties, as compensation for consulting services. For the year ending December 31, 2008, there was $1,073,710 of compensation cost related to stock options we issued to our non-employee board members, consultants, and legal counsel. Since the Company has generated losses from its inception, no associated future income tax benefit was recognized for the year ended December 31, 2009 (see Preferred Stock and Shares Issued Pursuant to Various Consulting Agreements sections in Note 7 for more details).
Valuation of Derivative Instruments
US GAAP requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants and non-employee stock-options to determine whether they should be considered a derivative liability and subject to re-measurement at their fair value. In estimating the appropriate fair value, the Company uses a Black-Scholes option pricing model. At December 31, 2009, the Company adjusted its derivative liability to its fair value, and reflected the net decrease in the obligation of $1,007,455.
Fair Value Measurements
The Company applies the fair value hierarchy as established by US GAAP. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value as follows.
·
Level 1 - quoted prices in active markets for identical assets or liabilities.
·
Level 2 - other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.
·
Level 3 - significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The following table summarizes fair value measurements by level at December 31, 2009 for assets and liabilities measured at fair value on a recurring basis:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative liability was valued under the Black-Scholes model, with the following assumptions:
Risk free interest rate
4.4%
Expected life
5.25 to 7.84 years
Dividend Yield
0%
Volatility
181%
The following table summarizes fair value measurements by level at December 31, 2008 for assets and liabilities measured at fair value on a recurring basis:
Derivative liability was valued under the Black-Scholes model, with the following assumptions:
Risk free interest rate
4.4%
Expected life
6.25 to 8.84 years
Dividend Yield
0%
Volatility
181%
The following tables provides a reconciliation between beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):
Loss Per Share
Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued and if the additional common shares were dilutive. Shares associated with convertible debt, stock options and stock warrants are not included because their inclusion would be antidilutive (i.e., reduce the net loss per share).
At December 31, 2009 and 2008, the Company had outstanding potentially dilutive shares of 142,966,667 and 104,471,429, respectively.
Reclassifications
Certain amounts reported in the prior periods have been reclassified to conform to the current period’s presentation.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RESTATEMENTS TO PRIOR YEAR CONSOLIDATED FINANCIAL STATEMENTS
In the course of preparing our books and records for our 2009 audit, we became aware of several transactions that were not properly recorded for the year ended December 31, 2008. Subsequently we evaluated the impact of the potential misstatements individually and in the aggregate, as well as both quantitatively and qualitatively. We determined that the adjustments indicated were not material to the financial statements at December 31, 2008. We found it necessary to correct the accounting treatments because of the potential material effect on the financial statements at December 31, 2009, which necessitated restating the balances at December 31, 2008 of certain accounts which are summarized in the following tables.
In certain cases, when considered separately in relation to individual line items or sub-totals, misstated amounts were numerically significant, however, because of their nature and the accounts affected when considered qualitatively they were not significant from an entity specific perspective. Because of the homogenous nature of the errors, it is more appropriate to consider the impact to the financial statements in the aggregate.
The effect of the combined adjustments was to increase total liabilities 1.3%; reduce additional paid-in-capital 1.4%; reduce the net loss 4%; and, reduce the accumulated deficit 1.15% for the year ended December 31, 2008.
The net effects of the restatement on the balance sheets as of December 31, 2008 are as follows:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net effects of the restatement on the consolidated statements of operations for the year ended December 31, 2008 are as follows:
The net effects of the adjustments on the consolidated statements of cash flows for the year ended December 31, 2008 are as follows:
The restatements were as follows:
a)
This restatement is to correct an error in the recording of a payroll tax liability that originated from Procare America, Inc., the public shell company that the Company recapitalized on December 15, 2005. As a result, the Company reduced its accounts payable and accrued expenses and increased its retained earnings by $176,000.
b)
This restatement is to correct an error in the classification of the Company’s asset retirement obligation. As a result, the Company reclassified $227,800 of its asset retirement obligation from current liabilities to long term liabilities.
c)
This restatement is to correct an error in the application of certain accounting principles related to the issuance of some of the Company’s previously issued and vested non-employee stock options and warrant transactions resulting from the Global Settlement Agreement with the former partners of Indigo-Energy Partners, LP in prior periods. These vested non-employee options and warrants were previously recorded in equity. Due to the Company having other instruments outstanding that were convertible into an indeterminate number of shares of common stock at the grant date of the vested non-employee options and warrants, these options and warrants should have been classified as liabilities.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reclassified the fair value of these previously issued vested non-employee options and warrants from additional paid-in capital to derivative liability accounts on the balance sheet. At December 31, 2008, the effect of the restatement related to the Company’s options and warrants was to record a derivative liability in the amount of $1,295,040, an unrealized gain on derivative in the amount of $21,957, and a reduction in additional paid-in capital in the amount of $1,316,997.
d)
This restatement is to correct an error in the application of a discount rate to calculate the discount on the Company’s promissory note issued in December 2008 aggregating $2,861,218. At December 31, 2008, the effect of the restatement related to the Company’s discounts resulted in both an increase in the discount and a decrease in the loss on extinguishment of debt in the amount of $605,791.
e)
This restatement is to correct an error in the application of the valuation of the fair market value used to calculate the relative fair market value and the corresponding discount on some of the Company’s promissory notes issued in December 2008 aggregating $2,180,000. At December 31, 2008, the effect of the restatement related to the Company’s discounts resulted in both an increase in the discount and a decrease in additional paid-in capital in the amount of $407,504.
f)
Additionally, the Company previously recognized $92,035 of financing expenses during the year ended December 31, 2008 related to the issuance of contingent warrants. Accounting principles require that when accounting for a security that becomes convertible only upon the occurrence of a future event outside the control of the holder, known as contingent beneficial conversion feature, the security should not be recognized in earnings until the contingency is resolved. As a result, the Company reversed its previous recording of this transaction by both decreasing interest expense and increasing additional paid-in capital by $92,035.
NOTE 4 - OIL AND GAS PROPERTIES
Oil and Gas Operations in Appalachian Basin
As of December 31, 2009, the Company had $426,636 of oil and gas property costs related to its proved wells, net of impairment and accumulated depletion. During the year ended December 31, 2009, the Company recorded revenue of $139,765 and depletion expense of $46,807 on its proved wells.
Indigo-Energy Partners, LP (“Indigo LP”)
Prior to March 31, 2008, the Company owned a 50% ownership interest in Indigo LP, which was consolidated with the Company in accordance with the guidance of FASB ASC 810-20 (formerly EITF 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights).
On March 31, 2008, the Company entered into a Global Settlement Agreement with all the other partners of Indigo LP pursuant to which the Company acquired the remaining 50% partnership interests from the other partners in exchange for 1) an aggregate monthly cash payment of $50,000 for a period of 36 months for a total amount of $1,800,000, which will be allocated proportionately to each of the other partners based on their respective ownership interest in Indigo LP, commencing upon the Company’s receiving of funding of $10,000,000 or more (Indigo LP Settlement Obligation) , and 2) the Company’s issuance of three warrants to each of the other partners for each dollar they originally invested, which resulted in the issuance of warrants to purchase a total of 13,200,000 shares of the Company’s common stock to all of the other partners at an exercise price of $0.25 per share (“Indigo LP Settlement Warrants”). These warrants vested on October 1, 2008 and will expire seven years from the grant date.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company commenced the required monthly payments of $50,000 in January 2009 and has paid an aggregate amount of $450,000 at December 31, 2009. As of December 31, 2009 the Company was late on $150,000 of payments. On February 26, 2010, the Company settled the remaining monthly payments aggregating $1,350,000 by issuing 54,000,000 shares of the Company’s common stock at $0.025 per share, a 50% discount to the closing share price on the date of the agreement. The shares were issued in March 2010.
The Company calculated the present value of the $1,800,000 aggregate cash settlement amount to be $1,178,756 on the date of the Global Settlement Agreement, of which $549,182 was ascribed to related parties due to Steve Durdin, the Company’s President, James Walter Sr., a former member of the Company’s Board of Directors, Jerry L. Braatz, Sr. and Kirsten K. Braatz (the “Braatz Family”) who became a related party in October 2008 when their combined holdings of the common stock of the Company exceeded 5% of the then outstanding stock of the Company, and their affiliates collectively owning 55.68% of the interest not owned by the Company in Indigo LP before the Global Settlement Agreement. The present value of the cash settlement amount was based on a 20% discount rate which is commensurate with the interest rate incurred on the Company’s borrowings in close proximity to the Global Settlement Agreement. The Company has ascribed a value of $907,000 to the Indigo LP Settlement Warrants, using the Black-Scholes model, assuming a volatility of 185.36%, a risk-free rate of 2.595% and an expected dividend yield of zero.
For the year ended December 31, 2009, the Company recorded interest expense of $214,573, $95,099 of which was ascribed to related parties, which represented interest on the cash installment payment due to the former noncontrolling interest.
Oil and Gas Interests and Operations
On April 2, 2008, the Company entered into a Modification and Settlement Agreement with TAPO Energy, LLC (“TAPO”) to settle its obligation due to TAPO in the amount of $671,598. Under the terms of the settlement agreement, the Company assigned all of its rights to receive revenue from the five TAPO wells for a period equal to the later of 48 months (commencing January 2008) or until the obligation to TAPO has been satisfied (“the Assignment Period”). Upon expiration of the Assignment Period, all rights assigned to TAPO will automatically revert back to the Company and a new carried interest in the five TAPO wells will be assigned to the Company. Under the settlement agreement, the Company also agreed to enter into a transportation agreement with TAPO, whereby TAPO will transport all gas produced and recovered from the five wells. As a result of the settlement agreement, the Company’s obligation due to TAPO was reduced by $156,677 in 2008 and by $48,533 in 2009 to $466,388 as of December 31, 2009 due to the application of the Company’s revenue from the five TAPO wells for the twelve months ended December 31, 2009 against the Company’s settlement obligation due to TAPO.
On December 29, 2008, the Company entered into a Continuation Agreement with Mid-East Oil Company (“Mid-East”) and Mid-East’s advisor HUB to settle its obligation in the amount of $283,039 to Mid-East and $65,000 to HUB in accordance with the November 2007 Modification and Settlement Agreement with HUB, Mid-East, and Mark Thompson (Mid-East and HUB are under the common control of Mark Thompson). In addition, the Company paid Mid-East $18,000 for the completion of a well in September 2008. As consideration for the Continuation Agreement, Mid-East agreed to reduce the Company’s obligation by the amounts owed under previously suspended revenue checks in the amount of $138,553. As of December 31, 2008, the Company paid the remaining balance owed under the 2007 Modification and Settlement Agreement in the amount of $227,486. The Continuation Agreement reaffirmed the Company’s 75% working interest in its five completed wells that it acknowledged are free of any additional encumbrance, lien or hindrance, or Department of Environmental Protection default or claim. In addition, Mid-East agreed to distribute to Indigo its proportionate share of monthly revenue within 10 days of its receipt of the production checks.
On December 30, 2008, The Company entered into a Continuation Agreement with Dannic Energy Corporation (“Dannic”) to settle its obligation in the amount of $381,824 to Dannic. Under the terms of the settlement agreement, Dannic agreed to release $180,186 of suspended revenue checks owed to the Company for well production through October 2008 in exchange for the payment of the outstanding obligation of $381,824 by the Company. The parties exchanged checks for their respective amounts owed on the date of the Continuation Agreement. In addition, Dannic agreed to assign the Company an additional 27% working interest in the wells, increasing the Company’s working interest in the wells to 60%. On January 29, 2009, Dannic formally recorded the assignment of the 27% interest in the wells. Dannic also agreed to distribute to Indigo its proportionate share of monthly revenue within 30 days of its receipt of the production checks.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 2009, the Company entered into a Purchase and Sale Agreement (“PSA”) with TAPO. The PSA outlined an understanding with respect to TAPO’s purchase of all of Indigo’s oil and gas interests in certain properties located in Greene County, Pennsylvania and Monogalia County, West Virginia excluding interests in certain drilling sites previously assigned to TAPO in connection with the April 2, 2008 Modification and Settlement as described above (“Indigo Property”) for an aggregate purchase price of $630,000. Under the PSA, the Company keeps all its rights and interests in its three initial wells drilled on Indigo Property. In addition, the Company will be entitled to an overriding royalty interest of 3.125% of all net revenues generated by TAPO on the Indigo Property.
On July 16, 2009, the Company entered into an Amended Purchase Sale Agreement (“Amended PSA”) with Bluestone Energy Partners, a West Virginia corporation (“Bluestone”) amending the terms of the PSA dated May 28, 2009. The Amended PSA provided for all of TAPO’s rights under the PSA to be assigned to Bluestone pursuant to an Assignment and Assumption Agreement dated June 1, 2009 between TAPO and Bluestone. The Company closed the sale of Indigo Property with Bluestone for $630,000 on July 16, 2009. For the year ending December 31, 2009, the Company recorded a gain on sale of oil and gas interests in the amount of $629,760.
Oil and Gas Operations in Illinois Basin
During 2008, Indigo was under the belief it needed to preserve the lease rights to certain properties included in its planned drilling program with Epicenter Oil and Gas, LLC (“Epicenter”) for 2008. Given that a number of these leases were held by various interests, and that these development interests were commingled with the interests of Epicenter, the Company provided to Epicenter $840,000 in cash payments and 2,500,000 shares of its common stock as essentially a forbearance for the landholders and leaseholders to provide the Company additional time to complete the payment and obtain the leases. The 2,500,000 shares were valued at $0.12 per share based on the stock trading price of the Company on March 7, 2008, the date of the Company’s letter agreement with Epicenter for a total value of $300,000. All these amounts were expensed as forbearance costs in 2008 since the Company was not a named party on any lease agreements.
On February 16, 2009, Epicenter indicated it viewed the monies forwarded by the Company in 2008 as a loan and the Company entered into a promissory note with Epicenter in the amount of $940,000, which represented amounts including $840,000 the Company initially paid to Epicenter for the purpose to preserve the lease rights to certain properties (including a $715,000 payment the Company paid to Rivers West) and a $100,000 deposit paid to Epicenter against future development costs of oil and gas leases and purchases of oil field equipment. The promissory note matures on the earlier of (i) one year from its issuance; or (ii) five days after Epicenter receives any funding, whether through the issuance of debt or of equity, in the amount of at least $5,000,000. The promissory note provided for interest at 5% per annum. The $940,000 was primarily used as forbearance on options to purchase leases and equipment that expired before the Company could enter into the leases or acquire the equipment. The Company has recorded a loan loss provision equal to 100% of the value of the note receivable from Epicenter as of December 31, 2009 due to the Company’s belief that Epicenter has no ability to repay the loan.
In November 2008, the Company commenced its drilling program with Epicenter in the Dubois Field located in the Illinois Basin in southern Indiana. The drilling program was funded through the Global Financing Agreement (“GFA”) by Carr Miller Capital, LLC (“Carr Miller”) (See Global Financing Agreement - Note 5). As of December 31, 2009, the Company has incurred $3,743,736 of costs related to the drilling program which are recorded as unproved property costs, of which $1,633,380 was accrued at December 31, 2009. On April 3, 2009, the Company announced that four wells had been completed.
On March 26, 2009, the Company entered into an agreement (the “Agreement”) with Epicenter wherein Epicenter acknowledged that, between February 20, 2009 and March 23, 2009, it had received an aggregate of $900,000 from the Company, which amount was utilized for drilling and other activities related to the four wells located in the Dubois Field, in the Illinois Basin. The Agreement contained a representation from Epicenter that it has the right to drill on the property and also contained an undertaking on the part of Epicenter to execute an assignment of working interest in the Wells in favor of the Company and to record such assignment in the appropriate Public Records in Dubois County, Indiana.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2009 the Company commenced testing operations on the completed wells within the Dubois field of the Illinois basin. The wells were expected to have a high water cut, which is natural for the horizons drilled in the Illinois basin, and pumps were sourced and installed upon well completion meeting those specifications. Unfortunately, the water cut was significantly less and the amount of gas flowing significantly higher on a percentage basis. This change resulted in the pump failing, as without the high water cut it was unable to operate properly. On February 16, 2010, the Company completed the installation of a new well pumps system. On March 4, 2010 the Company completed required high pressure tests on the transmission lines from the wells. The Company still needs approval by the utilities regulatory commission before production can commence.
On April 29, 2009, The Company entered into another agreement with Epicenter wherein Epicenter acknowledged that it has received an aggregate of $2,100,000 from the Company, which amount was utilized for drilling and other activities related to the four wells located in the Dubois field, in the Illinois Basin. The agreement provides that any remaining charges for the drilling of these four wells over and above the $2,100,000 will be paid from the 100% of the net revenue interest from these four wells until all drilling and completion costs have been paid-in-full. In consideration of the $2,100,000 provided by the Company, Epicenter assigned the Company a 75% working interest in the four wells, to be recorded in the appropriate public records of Dubois County, Indiana. In consideration of Epicenter being the operator of the wells, Epicenter will receive a 25% working interest in the wells. The working interests are subject to the customary 12.5% royalty interest due to the landowner and an overriding royalty interest of 8.25% of all gross revenues from oil and gas produced from the four wells. On May 7, 2009, Epicenter’s assignment of the 75% working interest to the Company was recorded in the public records of Dubois County, Indiana.
On March 15, 2010, the Company entered into a Memorandum of Understanding (“MOU”) with Epicenter (Epicenter together with the Company, the “Parties”) which supersedes all agreements between the Parties with respect to the four wells located in the Dubois field, in the Illinois Basin (“Wells”). Within 60 days after the execution of the MOU the Parties will execute a formal operating agreement patterned after the standard industry operating agreement as published by the American Petroleum Institute. The parties agreed that:
·
The Company provided to Epicenter an aggregate of $2,100,000 which was utilized for drilling and other activities related to the Wells.
·
The working interest revenue generated by the Wells shall be owned 75% by Indigo and 25% by Epicenter.
·
The working interests are subject to the customary 12.5% royalty interest due to the landowner and an overriding royalty interest of 8.25% of all gross revenues from oil and gas produced from the Wells.
·
The Company will provide funding to a maximum of $350,000 for completion efforts that are required to bring the Wells online and into production.
·
Working interest revenue, net of operational requirements, will be utilized to pay outstanding accounts payable incurred during the drilling and completion of the Wells beginning with mechanics lien holders.
Summary
Oil and gas properties consisted of the following:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A significant portion of the Company’s oil and gas assets in the Illinois Basin are subject to mechanics’ liens filed by certain oil and gas subcontractors (see Note 9 - Commitments and Contingencies - Not Disclosed Elsewhere).
NOTE 5 - NOTES PAYABLE
Convertible Notes - Series 1
In return for $400,000 received in 2006, we issued convertible notes. The notes had maturity dates three years from the date of issuance and bore interest at 8% per annum. The notes provided that the 8% interest is due and payable only if the trading price of our stock fell below $0.15625 in a given month, whereby we would then be responsible for paying interest on the outstanding balance of the notes for that month. On October 1, 2008, upon the adoption of FASB ASC 470-20-65 and FASB ASC 480-10, the Company recorded an additional liability for variable conversion features on the notes and a corresponding discount in the amount of $266,667. As of December 31, 2009, the Company has recorded $78,100 of accrued interest on the remaining $400,000 of notes that are outstanding as a result of the stock price falling below $0.15625. As of December 31, 2009, the Company has failed to pay obligations amounting to $400,000 on this series of notes, and as such, was in default on the obligations
Notes - Series 2
In April and May 2007, we borrowed a total of $510,000 from various lenders and issued promissory notes to the lenders. In July 2007, $100,000 of these promissory notes was settled. On September 30, 2008, the Company settled five of the promissory notes aggregating $296,986, including $86,986 of accrued interest and penalties in exchange for 9,899,524 shares of common stock (See Promissory Note Settlement Agreements below). On November 30, 2008, the Company settled one of the promissory notes aggregating $110,910, including $35,910 of interest and late fees in exchange for 3,697,000 shares of common stock.
As of December 31, 2009, the Company failed to pay obligations amounting to $203,372, which includes $78,372 of accrued interest, on this series of notes, of which $121,870, which includes $46,870 of accrued interest, is due to the Braatz family, a related party, and as such, was in default on the obligations. On February 26, 2010, the lenders agreed to settle all outstanding obligations in exchange for 5,000,000 shares of the Company’s common stock. The shares were issued in March 2010.
Convertible Notes - Series 3
On September 30, 2008, the Company settled four of the promissory notes aggregating $148,587, including $33,587 of accrued interest and penalties, of which promissory notes aggregating $116,113, including $26,113 of accrued interest and penalties is attributable to related parties, in exchange for 4,952,886 shares of common stock, of which 3,870,449 shares of common stock is attributable to related parties (See Promissory Note Settlement Agreements below).
On January 10, 2009, Carr Miller acquired the remaining unpaid Series 3 notes from the original noteholders in the amount of $155,000, of which $75,000 was due to the Braatz Family, a related party. As part of the transaction, the noteholders agreed to waive all obligations including but not limited to interest, principal, and penalties owed by the Company, which totaled $51,886 as of the refinance. Also on January 10, 2009, the Company issued replacement Series 3 notes to Carr Miller that provided for interest at 20% per annum with a maturity date of January 29, 2014. Consequently, the Company’s original notes acquired by Carr Miller were canceled. Commencing February 6, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of refinancing the notes, Carr Miller was to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan which was 1,550,000 shares of Company stock. These shares were issued in April 2009. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This transaction has been accounted for in accordance with ASC 470-60 as a troubled debt restructuring because the creditor is deemed to have granted a concession if the debtor’s effective borrowing rate on the restructured debt is less than the effective borrowing rate of the old debt immediately prior to the restructuring. In addition, on the modification date it was determined that the total future cash payments under the terms of the modified note were greater than the carrying amount of the original note. Accordingly, the effects of the restructuring were accounted for prospectively from the time of the restructuring, and the difference between the total future cash payments under the terms of the modified note and the carrying amount of the original note are being amortized to interest expense. The 1,550,000 shares of common stock issued to Carr Miller were valued at $93,000 based on the stock trading price on January 10, 2009, which was recorded as a note discount.
Convertible Notes - Series 4
In April and June 2008, we borrowed a total of $875,000 from various lenders and issued promissory notes of which $700,000 were due to related parties ($600,000 was due to Carr Miller and $100,000 was due to James Walter Sr.). In October 2008, Jerry L. Braatz, Sr. and Kirsten K. Braatz (collectively the “Braatz Family”) became a related party when their combined holdings of the common stock of the Company exceeded 5% of the then outstanding stock of the Company. As a result, their notes totaling $175,000 were classified as related party as of December 31, 2008. On September 30, 2008, the Company settled the $100,000 note due to James Walter, Sr., a related party, in addition to $19,524 of accrued interest and penalties in exchange for 3,984,141 shares of common stock (See Promissory Note Settlement Agreements below). On November 30, 2008, pursuant to the Global Financing Agreement (“GFA”), a promissory note in the amount of $500,000 due to Carr Miller was converted into 25,000,000 shares of common. Accrued interest on this note in the amount of $92,192 as of November 30, 2008 was included in the revised promissory note (see Global Financing Agreement section below).
On January 10, 2009, Carr Miller acquired the remaining unpaid Series 4 notes from the original noteholders, the Braatz Family, a related party, in the amount of $175,000. As part of the transaction, the noteholders agreed to waive all obligations including but not limited to interest, principal, and penalties owed by the Company, which totaled $41,569 as of the date of the refinance. Also on January 10, 2009, the Company issued replacement Series 4 notes to Carr Miller that provided for interest at 20% per annum with a maturity date of January 29, 2014. Consequently, the Company’s original Series 4 notes acquired by Carr Miller were canceled. Commencing February 6, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of refinancing of the Series 4 notes, Carr Miller is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan which was 1,750,000 shares of Company common stock. These shares were issued in April 2009. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Carr Miller, can be accelerated and due on demand.
This transaction has been accounted for in accordance with ASC 470-60 as a troubled debt restructuring because the creditor is deemed to have granted a concession if the debtor’s effective borrowing rate on the restructured debt is less than the effective borrowing rate of the old debt immediately prior to the restructuring. In addition, on the modification date it was determined that the total future cash payments under the terms of the modified note were greater than the carrying amount of the original note of $175,000. Accordingly, the effects of the restructuring were accounted for prospectively from the time of the restructuring, and the difference between the total future cash payments under the terms of the modified note and the carrying amount of the original note are being amortized to interest expense. The 1,750,000 shares of common stock issued to Carr Miller were valued at $105,000 based on the stock trading price on January 10, 2009, which was recorded as a note discount.
Convertible Notes - Series 5 - Related Party
In July and September 2008, we borrowed a total of $1,000,000 from Carr Miller, a related party. On November 30, 2008, pursuant to the GFA, this promissory note was replaced by a revised promissory note (see Global Financing Agreement section below).
Other Convertible Notes
On July 9, 2007, we borrowed $100,000 from an individual lender and issued a promissory note. On September 30, 2008, the Company settled this note, including $37,066 of accrued interest and penalties in exchange for 4,568,857 shares of common stock (See Promissory Note Settlement Agreements below).
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2008, the Company borrowed $55,000 from two individual lenders and issued promissory notes. On September 30, 2008, the Company settled these notes aggregating $67,899, including $12,899 of accrued interest and penalties in exchange for 2,263,312 shares of common stock (See Promissory Note Settlement Agreements below).
Promissory Notes
Note Payable 1
On October 15, 2008, the Company entered into a settlement agreement on a promissory note in the amount of $450,000 whereby the parties agreed that 1) the total due to the lender is $450,000 of principal plus $46,250 of accrued interest, late charges, and net royalty interests; 2) the principal will accrue simple interest at 15% per annum via monthly payments of $5,625 commencing October 15th until paid; 3) if any monthly interest payment is not paid by the 25th of the month, a one-time late payment penalty of $250 will be applied and accrued; 4) the lender waives forever any and all claim against the revenues, ownership, net royalty interest and any claim against Indigo No. 3 well; 5) in the event that Indigo does not pay the balance by October 15, 2009 and the agreement is not automatically renewed per item 7 below, or Indigo declares bankruptcy, the lender’s rights to the net revenue interest in Indigo No. 3 well will revert to 100% for the life of the well; 6) the lender releases Indigo, its officers, directors and agents from any liability arising out of the replacement of this settlement agreement and terminating all prior agreements and notes including any and all defaults, fees, penalties and interest on any notes as well as any other claims that the lender may have against Indigo; and 7) this initial term is for one-year commencing October 15, 2008 and will automatically renew from year to year under the same terms and conditions unless terminated by either party after the initial term or payment in full of the balance. The note automatically renewed on October 15, 2009. As of December 31, 2009, the Company has not made three of the required monthly payments of $5,625 aggregating $16,875 which are included in accounts payable and accrued expenses. The note includes a clause, in the event of default, giving the Maker an option to accelerate the note and cause it to be immediately due on demand.
Note Payable 2 - Related Party
On January 19, 2007, we borrowed $200,000 from the Braatz Family, who became a related party in October 2008. On March 15, 2008, the Company entered into a Modification and Settlement Agreement with the noteholders whereby the Company was released from all its obligations under the original promissory note. Under the settlement agreement, since the Company did not pay the principal amount of the original note plus a 10% penalty fee on or before May 1, 2008 (“Due Date”), the Company was required to issue to the noteholder one share of its common stock for every dollar of the principal and penalty then outstanding for every month past the Due Date on which the note principal and penalty charge remain unpaid. In July 2009, the Company paid the lender the 10% penalty fee of $20,000 required by the Modification and Settlement Agreement. For the year ended December 31, 2009, the Company has issued 2,540,000 penalty shares to the noteholder. The shares were valued at $106,800 and recorded as interest expense. On February 26, 2010, the lender agreed to settle all outstanding obligations in exchange for 8,000,000 shares of the Company’s common stock. The shares were issued in March 2010.
Note Payable 3
On January 25, 2007, we borrowed $80,000 from an individual lender and issued a promissory note. On September 30, 2008, the Company settled this note, including $37,185 of accrued interest and penalties in exchange for 4,572,843 shares of common stock (See Promissory Note Settlement Agreements below).
Note Payable 4
On February 7, 2007, we borrowed $200,000 from an individual lender and issued a promissory note. On September 30, 2008, the Company settled the promissory note aggregating $220,000, including $20,000 of penalties in exchange for 7,333,333 shares of common stock (See Promissory Note Settlement Agreements below).
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Payable 5
On February 15, 2007, we borrowed $100,000 from an individual lender and issued a promissory note. On March 15, 2008, the Company entered into a Modification and Settlement Agreement with the note holder whereby the Company was released from all its obligations under the original promissory note. Under the Modification and Settlement Agreement, since the Company did not pay the principal amount of the original note plus a 10% penalty fee on or before May 1, 2008 (“Due Date”), the Company was required to issue to the note holder one share of its common stock for every dollar of the principal and penalty then outstanding for every month past the Due Date on which the note principal and penalty charge remain unpaid. For the year ended December 31, 2009, the Company has issued 1,320,000 penalty shares to the noteholder. The penalty shares were valued at $55,000 and recorded as interest expense. On February 26, 2010, the lender agreed to settle all outstanding obligations in exchange for 4,400,000 shares of the Company’s common stock. The shares were issued in March 2010.
Other Promissory Notes
In 2007, we borrowed $300,000 from various individual lenders and issued promissory notes. On September 30, 2008, the Company settled the promissory notes aggregating $373,570, including $73,570 of accrued interest and penalties in exchange for 12,452,320 shares of common stock (See Promissory Note Settlement Agreements below).
In 2007, we borrowed $165,000 from various individual lenders and issued promissory notes. In January 2009, a note in the amount of $25,000 was extended for the seventh time to March 2009 in exchange for which we agreed to issue 150,000 shares to the lender. We valued the 150,000 shares at $9,000 based on the stock trading price on the note extension date. In April 2009, this note was extended for the eighth time to June 2009 in exchange for which we agreed to issue 150,000 shares to the lender. We valued the 150,000 shares at $7,500 based on the stock trading price on the note extension date. In July 2009, this note was extended for a ninth time to September 2009 in exchange for which we agreed to issue 150,000 shares to the lender. We valued the 150,000 shares at $4,500 based on the stock trading price on the note extension date. In December 2009, this note was extended for a tenth time to March 2010 in exchange for which we agreed to issue 300,000 shares to the lender. We valued the 150,000 shares at $9,000 based on the stock trading price on the note extension date. For the year ended December 31, 2009, the Company recorded interest expense for the amortization of discounts on the extensions in the amount of $25,500. As of December 31, 2009, the Company was in default on $140,000 of these notes. In February and March 2010, the lenders holding notes aggregating $75,000 agreed to settle all outstanding obligations in exchange for 3,000,000 shares of the Company’s common stock. The shares were issued in March 2010. As of April 10, 2010 the Company was in default on $90,000 of these notes.
On March 18, 2009, the Company borrowed $125,000 from two lenders, of which $100,000 was due to James C. Walter, Sr., a related party, and issued promissory notes that provided for interest at 12% per annum with a maturity date of December 23, 2009. Within thirty days of funding of the loan, the lenders are also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. These shares were issued in April 2009. In the event these notes are unpaid within ten days of their maturity date, the Company will incur a late charge equal to $625 for each 30 day period beyond the maturity date and at the option of the Maker, can be accelerated and due on demand. The funds are designated for two monthly settlement payments to the former partners of Indigo-Energy, LP and general working capital.
We valued the 1,250,000 shares at $60,000 based on our stock trading price on the date of the promissory notes. We allocated the proceeds from issuance of the two notes and common stock based on the proportional fair value for each item. Consequently, we recorded total discounts of $40,450 on the promissory notes, which are being amortized over the term of the notes. For the year ended December 31, 2009, amortization of the discounts amounted to $40,450, which was recorded as interest expense. The Company also recorded an additional interest expense of $11,745 during 2009 which was accrued at December 31, 2009. As of December 31, 2009 the Company was in default on these notes. On February 26, 2010, a lender holding note in the amount of $100,000 agreed to settle all outstanding obligations in exchange for 4,000,000 shares of the Company’s common stock. The shares were issued in March 2010. On March 25, 2010, a lender holding note in the amount of $25,000 agreed to settle all outstanding obligations in exchange for 1,000,000 shares of the Company’s common stock. The shares were issued in March 2010.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 10, 2009, the Company borrowed $500,000 from an individual lender and issued promissory notes that provided for interest at 9% per annum with a maturity date of December 10, 2010. Within thirty days of funding of the loan, the lenders are also to receive shares of the Company’s common stock equal to two times the numerical dollars of the principal of the loan. These shares were issued in December 2009. The borrowed funds are to be utilized for the completion of the Company’s 4-well DuBois drilling program. In the event these notes are unpaid within ten days of their maturity date, the Company will incur a late charge equal to 10% of the note amount, and issue 5,000,000 shares within 30 days of default. In the event of default, up to 50% of the net revenue in the Company’s 4-well DuBois drilling program which is actually received by the Company, net of expenses, liens, and related obligations, shall be used to repay any remaining balance due under this note and at the option of the Maker, can be accelerated and due on demand.
We valued the 1,000,000 shares at $40,000 based on our stock trading price on the date of the promissory note. We allocated the proceeds from issuance of the note and common stock based on the proportional fair value for each item. Consequently, we recorded a discount of $37,000 on the promissory notes, which is being amortized over the term of the note. For the year ended December 31, 2009, amortization of the discount amounted to $2,051, which was recorded as interest expense. The Company also recorded an additional interest expense of $2,712 during 2009 which was accrued at December 31, 2009.
Promissory Note Settlement Agreements
On September 30, 2008, the Company entered into a total of 20 settlement agreements (“September Settlement Agreements”) with individual lenders holding various convertible and non-convertible promissory notes previously issued by the Company in the aggregate amount of $1,500,817, consisting of $1,180,000 of principal and $320,817 of accrued interest. The settlements also included promissory notes in the total amount of $372,823 issued to one of the Company’s directors, Mr. Walter, Sr. and his affiliates. Under the terms of the September Settlement Agreements, the individual lenders agreed to the retirement of their promissory notes in exchange for an aggregate of 50,027,216 shares of the Company’s common stock, 12,427,433 of which was issued to Mr. Walter, Sr. and his affiliates. As part of the settlement agreements, the individual lenders agreed to release the Company from any liability arising out of the issuance of and defaults on the promissory notes as well as any other claims that the individual lenders may have against the Company.
The total of the promissory notes, accrued interest, and late fees were settled at $0.03 per share of the Company’s common stock, which was below the Company’s stock trading price of $0.06 per share on the September 30, 2008 settlement date. The settlement of the convertible notes requires the debtor enterprise to recognize an expense equal to the fair value of all securities and other consideration transferred in the transaction in excess of the fair value of securities issuable pursuant to the original conversion terms. Consequently, the Company recorded a net loss on extinguishment on convertible notes in the amount of $1,045,377 for the year ending December 31, 2008, of which $143,254 of loss on extinguishment is ascribed to related parties. The settlement of the non-convertible notes require the difference between the net carrying amount of the extinguished debt and the reacquisition price of the extinguished debt be recognized currently in income in the period of extinguishment. The Company recorded a loss on extinguishment on non-convertible notes in the amount of $730,755 for the period ending December 31, 2008, of which $137,185 is ascribed to a related party.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Notes Payable - Related Party
On December 5, 2008, pursuant to the GFA (See Global Financing Agreement below), promissory notes previously issued to Carr Miller in the aggregate principal amount of $2,450,000 and their accrued interest in the amount of $248,412, and accrued interest of $162,806 on three other Carr Miller notes with aggregate principle amount of $1,000,000, which were converted into Indigo’s common stock pursuant to the GFA, were amended and replaced by a new promissory note (“New Note”) totaling $2,861,218. The note required that commencing December 31, 2009, the Company is required to make equal monthly installment payments of principal and interest on the note. The New Note is secured by all the assets of the Company, has a maturity date of November 30, 2013 and bears interest at the rate of 10% per annum. In the event of default principal and interest due shall become immediately due and payable. The new debt instruments were recorded with discounts amounting to $2,026,623, which are being amortized over the term of the New Note, and recorded as interest expense. Amortization of the discounts on this note for the year ended December 31, 2009 amounted to $401,154, which was recorded as interest expense. Additional interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $286,122. As of December 31, 2009 the Company was delinquent on one payment of principal and interest in the amount of $79,642. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
On December 16, 2008, pursuant to the GFA, the Company borrowed $1,080,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of December 16, 2010. This note represents the $1,000,000 of funding for the drilling of the initial two wells per the GFA. The additional $80,000 of funding represents a deposit on legal fees as outlined in the GFA that was paid to Pappas & Richardson, LLC, of which Hercules Pappas, a partner at the law firm, became a related party of the Company at the end of January 2008 upon his appointment as a Board Director. The note required that commencing January 16, 2009, the Company is required to make 12 equal monthly interest installment payments on the note, and commencing January 16, 2010, the Company is required to make 12 equal monthly payments equal to the interest plus an equal proportion of the principal amount. As of September 30, 2009, the Company has made the first three interest installment payments aggregating $27,592. The second three interest installment payments aggregating $27,592 plus the seventh interest installment payment in the amount of $9,197 were included in a promissory note from Carr Miller dated July 28, 2009 (See below). Payments not made within 10 days of their due date are subject to a late charge of 10% of said payment. As of December 31, 2009, the August through December installment payments were unpaid, and as a result the Company was in default on the note and incurred a late charges in the amount of $6,438, which was recorded as interest expense. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
Within thirty days of funding of the loan, the lender is also to receive 50,000,000 shares of the Company’s common stock. The shares were issued in December 2008. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. The Company valued the 50,000,000 shares at $2,666,667 based on its stock trading price on the date of promissory note. The Company allocated the proceeds from issuance of the note and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $916,329, based on the ascribed value of the 50,000,000 shares of common stock issued to the lender. Amortization of the discounts on this note for the year ended December 31, 2009 amounted to $318,612, which was recorded as interest expense. Additional interest expense on this note and late payment penalties on scheduled interest payments were recorded for the year ended December 31, 2009 in the amount of $115,622. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
On December 30, 2008, the Company borrowed $900,000 from Carr Miller and issued two promissory notes that provided for interest at 20% per annum with maturity dates of December 30, 2013. One of the notes in the amount of $500,000 required that commencing January 5, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Another note in the amount of $400,000 required that commencing January 5, 2011, the Company is required to make 36 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loans, the lender is also to receive shares of the Company’s common stock equal to fifty times the numerical dollars of the principal of the loans. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. The Company valued the 45,000,000 shares at $3,600,000 based on its stock trading price of $0.08 on the date of promissory notes. The Company allocated the proceeds from issuance of the notes and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $851,324, based on the ascribed value of the 45,000,000 shares of common stock issued to the lender. The purpose of the loans is: (i) to procure an accounts payable settlement on ten operating wells previously drilled by the Company (ii) to provide the Company with the necessary funds to settle the Company’s obligations with certain professionals; and (iii) to provide the Company with the funding it requires to begin drilling a third well in the Dubois field, which well is, adjacent to, but separate and distinct from the two wells currently being drilled by the Company that were provided for in the Global Financing Agreement. Amortization of the discounts on these notes for the year ended December 31, 2009 amounted to $61,780, which was recorded as interest expense. Additional interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $179,877. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 2008, the Company borrowed $200,000 from Carr Miller and issued promissory notes that provided for interest at 20% per annum with a maturity date of December 31, 2013. The note required that commencing January 6, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. The shares were issued in January 2009. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. The Company valued the 2,000,000 shares at $160,000 based on its stock trading price of $0.08 on the date of promissory note. The Company allocated the proceeds from issuance of the note and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $151,730, based on the ascribed value of the 2,000,000 shares of common stock issued to the lender was recorded. Amortization of the discounts on this note for the year ended December 31, 2009 amounted to $4,830, which was recorded as interest expense. Additional interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $40,000. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
In February 2009, the Company borrowed an aggregate of $300,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity date in February 2014. Commencing February 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. These shares were issued in April 2009. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand. The Company valued the 3,000,000 shares at $235,000 based on the stock trading price on the dates of promissory notes. The Company allocated the proceeds from issuance of the note and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $255,938, based on the ascribed value of the 3,000,000 shares of common stock issued to the lender. Amortization of the discounts on these notes for the year ended December 31, 2009 amounted to $7,105, which was recorded as interest expense. Additional interest expense on these notes was recorded for the year ended December 31, 2009 in the amount of $26,596. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
In February through June 2009, the Company borrowed an aggregate of $1,140,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity dates in February through June of 2011. These notes represent the first and second traunch and part of the third traunch of the Additional Funding per the GFA (See Global Financing Agreement - Related Party section under Note 5). In the event these notes are unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand. Interest expense on these notes was recorded for the year ended December 31, 2009 in the amount of $89,520. In July 2009, one of the notes was amended to change $25,000 of the note from being designated as Additional Funding per the GFA (See Global Financing Agreement - Related Party section under Note 5) to being designated for general and operating expenses. In exchange, the lender is to receive shares of the Company’s common stock equal to ten times the numerical dollars of the amended amount. The 250,000 shares were issued in July 2009. The Company valued the 250,000 shares at $10,000 based on the stock trading price on the dates of promissory notes. The Company allocated the proceeds from issuance of the $25,000 portion of the note and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $7,150, based on the ascribed value of the 250,000 shares of common stock issued to the lender. Amortization of the discounts on these notes for the year ended December 31, 2009 amounted to $1,739, which was recorded as interest expense. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 6, 2009, the Company borrowed $50,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity date of May 6, 2014. The note required that commencing May 6, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. The shares were issued in July 2009. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand. The Company valued the 500,000 shares at $20,000 based on its stock trading price of $0.04 on the date of promissory note. The Company allocated the proceeds from issuance of the note and common stock based on the proportionate fair value for each item. Consequently, we recorded a discount of $36,752, based on the ascribed value of the 500,000 shares of common stock issued to the lender was recorded. Amortization of the discounts on this note for the year ended December 31, 2009 amounted to $702, which was recorded as interest expense. Additional interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $3,253. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
On July 16, 2009, the Company borrowed $15,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of July 16, 2011. This note represents part of the third traunch of the Additional Funding per the GFA (See Global Financing Agreement - Related Party section under Note 5). In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand.. Interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $687. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
On July 28, 2009, the Company borrowed $370,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of July 28, 2011. This note represents final part of the third traunch of the Additional Funding per the GFA (See Global Financing Agreement - Related Party section under Note 5) and includes $36,789 for unpaid interest as required under a promissory note with Carr Miller dated December 16, 2008 (See above). In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand. Interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $15,721. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
On March 3, 2010, the Company borrowed $75,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of March 3, 2012. This note represents part of the fourth traunch of the Additional Funding per the GFA (See Global Financing Agreement - Related Party section under Note 5). In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount and at the option of the Maker, can be accelerated and due on demand. Interest expense on this note was recorded for the year ended December 31, 2009 in the amount of $4,264. On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement below).
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Modification and Consolidation Agreement - Related Party
On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby all outstanding Carr Miller promissory notes in the aggregate principal amount of $7,321,218 plus any accrued interest and penalties thereon were consolidated into one new promissory note (“New Note”). The New Note has a principal amount of $8,376,169 and requires that commencing March 25, 2012, the Company is required to make equal monthly installment payments of principal and interest on the note. The New Note has a maturity date of March 25, 2014 and bears interest at the rate of 10% per annum. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. As an inducement to enter into the Modification and Consolidation Agreement, within thirty days of the agreement, the lender is also to receive shares of the Company’s common stock equal one share for each dollar of the principal of the loan. These shares were issued in March 2010.
Global Financing Agreement (“GFA”) - Related Party
On December 5, 2008, the Company entered into a Global Financing Agreement (the “GFA” or “Agreement”) with Carr Miller (“CMC”) and together with the Company, the “Parties”), wherein CMC agreed to restructure the Company’s existing debt obligations to CMC and to provide the Company, subject to the terms and conditions set forth in the Agreement, with funding to finance and institute a new drilling program for the Company.
Under the terms of the Agreement, CMC irrevocably agreed to provide the Company with funding in the amount of up to $1,000,000 to be used exclusively for the Company’s drilling activities (the “Funding”). The Company received this funding in November and December of 2008 (See Long-Term Notes Payable - Related Party section above). Upon the completion of the drilling activities, CMC also committed to provide the Company with additional funding in the amount of $500,000 each month for a period of 6 months, which amount shall be used to meet the Company’s objective of one new well drilled each month and to fund other reasonable expenses (the “Additional Funding”). The Additional Funding will be in the form of promissory notes with two year maturities and an interest rate of 10%. The first traunch of this funding was received in February 2009, the second traunch of this funding was received in March and April 2009, third traunch of this funding was received in June and July 2009, and part of the fourth tranche of this funding was received in March 2010.
On March 12, 2010, the Parties agreed to enter into a Global Financing Agreement Extension, whereby CMC’s commitment to provide the Company with the remaining funding shall be extended to June 30, 2010. In satisfaction of its commitment under the GFA, CMC shall, prior to June 30, 2010, have the option to (a) return an aggregate of 15,000,000 shares of the Company’s common stock currently registered under CMC’s name to the Company for cancellation; (b) cancel and forgive certain debts owed by the Company to CMC in the amount of $1,500,000; or (c) provide the Company with the remaining funding as set forth under the GFA.
The Agreement further provides that promissory notes previously issued by the Company to CMC in the aggregate amount of $1,000,000 (the “First Notes”) shall be converted into 50,000,000 shares of the Company’s common stock, based on the per share price when the Agreement was negotiated. The shares were issued in December 2008. Further, the Parties agreed that promissory notes previously issued to CMC in the aggregate principal amount of $2,450,000 and their accrued interest in the amount of $248,412 (the “Second Notes”) in addition to the accrued interest on the First Notes, in the amount of $162,806, shall be amended and replaced by a new promissory note (“New Note”) totaling $2,861,218 (See Long-Term Notes Payable - Related Party section above). The New Note shall be secured by all the assets of the Company, shall have a maturity date of November 30, 2013 and shall bear interest at the rate of 10% per annum. In the event of default principal and interest due shall become immediately due and payable. The Second Notes that were restructured originally provided for interest at a rate of 20% per annum.
In consideration for the restructuring of the First and Second Notes and financing commitment, and other undertakings under the Agreement, the Company agreed to grant CMC, in addition to the restricted shares issued upon conversion of the First Notes:
a.
125,000,000 restricted shares of the Company’s common stock as additional consideration for the New Note. The shares were issued in December 2008.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b.
Warrants (“CMC Warrants”) to purchase 37,950,000 shares of common stock, which warrants shall be exercisable within 7 years at an exercise price of $0.02 per share, the per share price when the Agreement was negotiated, provided that such warrants shall only be exercisable in the event that existing options/warrants are exercised. The CMC Warrants were issued to ensure anti-dilution protection to CMC. The CMC Warrants were issued and vested on December 5, 2008 and expire in 7 years from date of grant.
c.
Upon the delivery of the Funding of $1,000,000 as described above, the Company agreed to issue to CMC 50,000,000 shares of Common Stock. The number of shares to be issued to CMC was arrived at using the same formula the Company has used for similar funding activities throughout 2008. The shares were issued in December 2008.
d.
In consideration of the commitment for the Additional Funding, the Company shall issue to CMC 10 shares of Common Stock for every dollar committed to the Company from such Additional Funding, which equals an aggregate of 30,000,000 shares. The number of shares issuable to CMC upon the occurrence of the Additional Funding was arrived at using the same formula the Company has used for similar funding activities throughout 2008. The Company valued the 30,000,000 shares at $600,000 based on its stock trading price of $0.02 on the date of the agreement, and recorded the amount to deferred loan fees. The Company recorded amortization expense of deferred loan fees in the amount of $101,682 for the year ending December 31, 2009 based on receiving the first, second and third traunch of the Additional Funding.
The above share issuances combined with the shares previously issued to Carr Miller and shares assigned to Carr Miller under a Voting Agreement (see Common Stock under Note 8) resulted in Carr Miller having voting rights to more than 50% of the Company’s common stock as of December 31, 2008.
Lastly, the Company also agreed to appoint Mr. Everett Miller as the Company’s Chief Operating Officer. On December 24, 2008, our Board of Directors adopted a resolution approving the amendment of the Company’s Articles of Incorporation to allow for a change in the Company’s corporate name from “Indigo-Energy, Inc.” to “Carr Miller Energy, Inc.” (the “Name Change”). Subsequently, stockholders representing 53.6% of the Company’s outstanding common stock as of January 14, 2009 (the "Majority Stockholders") executed a written consent to allow for the Name Change. Although a decision has yet to be made as to the name change, at the appropriate time a Certificate of Amendment to our Articles of Incorporation effectuating the Name Change will be filed with the Secretary of State of Nevada (the “Certificate of Amendment”) and the Name Change will become effective at the close of business on the date it is accepted for filing by the Secretary of State of Nevada.
On March 25, 2010, the Company entered into a Modification and Consolidation Agreement with Carr Miller whereby this note was consolidated with other Carr Miller notes into a new note (See Modification and Consolidation Agreement above).
Summary
The following summarizes the Company’s notes and loan payable as of December 31, 2009:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These notes carried effective interest rates ranging between 9% and 162% based on various factors including the Company’s effective borrowing rates at the date of issue and discounts based on amounts allocated to equity shares issued and other beneficial conversion features arising in conjunction with certain of these notes at their issue date.
The following summarizes the Company’s notes and loan payable as of December 31, 2008:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The current portion is reflected in the balance sheet as follows:
The following is a schedule by year of the future minimum payments required under the Company’s notes payable.**
**This schedule includes both principal and interest due, and excludes discount amortization and the additional liability for variable conversion features on our Series 1 Convertible notes (see Convertible Notes - Series 1 section above.)
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense related to the amortization of discounts on notes payable, value of penalty shares and shares issued in connection with amended notes for the year ended December 31, 2009 was $1,046,629, of which $720,984 was from related parties. Additional interest on notes payable pursuant to the rates charged on the notes for the year ended December 31, 2009 was $1,817,194 of which $1,694,157 was from related parties. Accrued interest at December 31, 2009 was $1,205,878, of which $928,152 was due to related parties.
NOTE 6 - DUE TO RELATED PARTY
On September 3, 2005, we entered into a agreement with one of our then principal stockholders, Leo Moore, to redeem his entire interest in the Company. At the time of the agreement, he held a 33⅓ interest in our common stock. On May 18, 2009, the Company entered into a Global Settlement Agreement with Leo Moore whereby Leo Moore agreed to release his rights to outstanding debt of approximately $199,500, including accrued interest of $35,000, in exchange for 3,000,000 shares of the Company’s stock.
On May 18, 2009, the Company entered into a Global Settlement Agreement with the Moore Family. The Moore Family agreed to release their rights to outstanding debt of approximately $100,000, including accrued interest of $20,000, in exchange for 3,000,000 shares of the Company’s stock. The Moore Family had originally received 49,100,000 of our shares of common stock and became the majority shareholder of us on December 15, 2005 during the recapitalization of the Company in 2005. Under the terms of an earlier settlement agreement, the Moore Family agreed to surrender to us 28,485,000 shares of our common stock, in exchange for which we agreed to pay Moore Family a total of $150,000 in installment payments.
The Company valued the aggregate 6,000,000 shares issued to Leo Moore and Moore Family pursuant to the Global Settlement Agreements as described above at $180,000 based on its stock trading price of $0.03 on the date of the Global Settlement Agreements. Accordingly, the Company recorded a gain on extinguishment of debt in the amount of $119,500 for the year ending December 31, 2009.
NOTE 7 - STOCKHOLDERS’ EQUITY - NOT DISCLOSED ELSEWHERE
Preferred Stock
On December 24, 2008, our Board of Directors authorized the designation of 100 of shares of preferred stock as Series C Preferred Stock with par value of $0.001. On January 9, 2009, the Company filed the Certificate of Designation with the Nevada Secretary of State for the Series C Preferred Stock. Each share of the Series C Preferred Stock will automatically convert into 1,000,000 shares of the Company’s common stock upon the increase of the Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares. Each share of Series C Preferred Stock shall be entitled to vote on an “as converted” basis. Holders of the Series C Preferred Stock are not entitled to receive dividends paid on common stock. In the event of liquidation, dissolution or winding up of the Company, the holders of shares of Series C Preferred Stock shall be entitled to receive an aggregate amount per share equal to the amount they would have otherwise held if those shares had been converted into shares of common stock.
In January 2009, we issued an aggregate of 75 shares of the Series C Preferred Stock to Carr Miller, consisting of 30 shares related the additional funding in the amount of $500,000 each month for a period of 6 months provided for in the GFA (See Global Financial Agreement - Related Party section under Note 5), 25 shares related to a $500,000 promissory note dated December 30, 2008, and 20 shares related to a $400,000 promissory note dated December 30, 2008 (See Notes Payable - Related Party section under Note 5). On April 21, 2009, upon the increase in the Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares (see Common Stock section below), the 75 shares of Series C Preferred Stock automatically converted into 75,000,000 shares of common stock, which were issued on April 22, 2009.
Common Stock
In April 2008, the Company issued 56,250 shares of common stock for legal services performed in 2006 valued at $0.21 per share.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 7, 2008, the Company reached a settlement agreement with an individual who agreed to perform services in exchange for 4,000,000 shares of the Company’s common stock in 2005. As a result of the settlement, the individual returned 2,000,000 of the shares to the Company. The 4,000,000 shares were originally issued to the individual in November 2005 prior to the Company’s recapitalization on December 15, 2005, which had no effect on the Company’s statement of operations. Therefore, the Company accounted for the return of the 2,000,000 shares simply as a reduction in common stock at par value for a total of $2,000 with a corresponding increase in additional paid-in capital at the same amount.
On December 15, 2008, our Board of Directors authorized the issuance of 250,000 shares of common stock each to two of our board members, Brad Hoffman and Hercules Pappas. These shares were issued on December 29, 2008 and were valued at $.07 per share, based on the closing price of the Company’s common stock, resulting in a compensation expense of $35,000 in the twelve months ended December 31, 2008.
In November 2008, the Company entered into a voting rights agreement with Carr Miller and related party stockholders of the corporation (“Related Stockholders”) (James Walter Sr., who became one of our Board Members in October 2007 and James Walter, Jr. and Tammy Walter, family members of James Walter Sr. who then collectively owned 33,119,454 shares of common stock; and Steve Durdin, the Company’s CEO and President who then owned 3,959,031 shares of common stock), whereby the Related Stockholders agreed to assign Carr Miller all the voting rights attributable to the 37,078,485 shares of common stock then held by them for a period of 5 years. 1/5th of the voting rights shall be released back to the Related Stockholders from Carr Miller at the end of each year for a period of 5 years. The combination of the shares assigned under this voting rights agreement and the shares issued or to be issued under the GFA (See Global Financial Agreement section under Note 5) gave Carr Miller control of the majority of the common stock of the Company.
On December 24, 2008, our Board of Directors approved an increase in authorized common stock of the Company from its existing 600,000,000 shares to 1,000,000,000 shares. Subsequently, stockholders representing 53.6% of the Company’s outstanding common stock as of January 14, 2009 (the "Majority Stockholders") executed a written consent to effect the increase in authorized common stock. On January 20, 2009, the Company filed a Schedule 14C Definitive Information Statement with the SEC (“Schedule 14C”). On March 30, 2009, the SEC approved the Schedule 14C. On April 21, 2009, the Company filed its Certificate of Amendment to its Article of Incorporation with the State of Nevada increasing the total number of shares of common stock which the Company has the authority to issue to 1,000,000,000 shares with a par value of $0.001 per share.
On January 12, 2009, the Company issued 384,811 shares of common stock to Gersten Savage for legal services performed in 2008 valued at $0.06 per share.
On March 10, 2009, the Company’s Board of Directors approved the issuance of 20,000,000 shares of the Company’s common stock to each of Mr. Steven Durdin and Mr. James Walter Jr., which were valued at an aggregate of $2,000,000 based on the Company’s stock trading price of $0.05 per share on March 10, 2009. This consulting expense is reflected under the caption general and administrative expense - related party in the statement of operations. The shares were issued on April 22, 2009.The issuance of the shares to both Mr. Durdin and Mr. Walter are in consideration for the extensive efforts extended by each of them in relation to the completion of the drilling on the wells in the Dubois Field and for their continued efforts in preparation for other drilling activities in the Illinois Basin.
Shares Issued Pursuant to Various Consulting Agreements
On January 30, 2008, the Company entered into a consulting agreement with David Rosania to provide consulting services and support for business development of energy related properties, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company management. As compensation, 155,000 shares of the Company’s common stock were to be issued to Mr. Rosania. The term of this agreement was for a one month period commencing January 1, 2008. These shares were issued on February 1, 2008 and were valued at $.17 per share, based on the closing price of the Company’s common stock, resulting in consulting expense of $26,350 in the twelve months ended December 31, 2008.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 1, 2008, the Company entered into a consulting agreement with William E. Schumacher (“Schumacher”) to provide consulting services and support for the Company’s interim fundraising efforts, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company’s management. As compensation, 25,000 shares of the Company’s common stock were issued to Mr. Schumacher. The term of this agreement was for a three month period commencing April 1, 2008. These shares were issued on May 20, 2008 and were valued at $0.13 per share, based on the closing price of the Company’s common stock, resulting in consulting expense of $3,250 in the twelve months ended December 31, 2008.
On April 17, 2008, the Company entered into a consulting agreement with Robert McIlhinney (“McIlhinney”) to provide consulting services and support for the Company’s interim fundraising efforts, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company management. As compensation, 75,000 shares of the Company’s common stock were to be issued to Mr. McIlhinney. The term of this agreement was for a three month period commencing April 15, 2008. These shares were issued on May 1, 2008 and were valued at $0.11 per share, based on the closing price of the Company’s common stock, resulting in consulting expense of $5,275 in the twelve months ended December 31, 2008.
On May 1, 2008, the Company entered into a consulting agreement with Randall P. Cohen (“Cohen”) to provide consulting services and support for the Company’s interim fundraising efforts, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company’s management. As compensation, 50,000 shares of the Company’s common stock are to be issued to Mr. Cohen. The term of this agreement was for a three month period commencing April 1, 2008. These shares were issued on May 20, 2008 and were valued at $0.13 per share, based on the closing price of the Company’s common stock, resulting in consulting expense of $6,500 in the twelve months ended December 31, 2008.
On May 6, 2008, the Company and World Stock Exchange (“WSE”) entered into an Investment Relation Agreement, whereby the Company agreed to engage the Investment Relation services of WSE for one month and for compensation in the amount of $1,980 and 150,000 restricted shares of the Company’s common stock which were issued on May 20, 2008. The shares were valued at $0.13 per share, the trading price, and were recorded as consulting expense in the amount of $19,500 for the twelve months ending December 31, 2008.
On June 1, 2008, the Company entered into a Consulting Agreement with Karl Schmidt (“Schmidt”), whereby, for compensation in the amount of 12,000,000 restricted shares of the Company’s common stock and reimbursement for all approved related business expenses, Schmidt will provide consulting services to the Company for a term of one-quarter commencing on June 1, 2008. The shares were issued on June 24, 2008. On June 30, 2008, the parties agreed that the shares issued were partial consideration for a loan agreement with International Financial Corporation, LLC. They further agreed that if the Company did not receive gross loan proceeds of at least $30,000,000 prior to the end of business on July 3, 2008, Schmidt would return the shares to the Company for cancellation. The Company did not receive the loan proceeds prior to the end of business on July 3, 2008, and as a result the shares were returned and assigned no value as of December 31, 2008.
On June 1, 2008, the Company entered into a Consulting Agreement with D&P Development LLC (“D&P”), a Florida corporation, whereby, for compensation in the amount of 5,000,000 restricted shares of the Company’s common stock and reimbursement for all approved related business expenses, D&P will provide consulting services to the Company for a term of one-quarter commencing on June 1, 2008. The shares were issued on June 24, 2008. On June 30, 2008, the parties agreed that the shares issued were partial consideration for a loan agreement with International Financial Corporation, LLC. They further agreed that if the Company did not receive gross loan proceeds of at least $30,000,000 prior to the end of business on July 3, 2008, D&P would return the shares to the Company for cancellation. The Company did not receive the loan proceeds prior to the end of business on July 3, 2008, and as a result the shares were returned and assigned no value as of December 31, 2008.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 7, 2007, the Company entered into a consulting agreement with Big Apple Consulting USA, Inc. (“Big Apple”), whereby Big Apple was to market and promote the Company to its network of brokerage firms and market makers. Big Apple was responsible for locating and introducing potential investors to the Company through telemarketing and other networking activities, as well as representing the Company in responding to investor inquiries. The Company was to compensate Big Apple in the form of either the Company’s shares of free trading common stock or cash, at the Company’s option. The term of the consulting agreement was for one year, and the Company had the right to extend the term for an additional year after the initial expiration date. The Company was unable to compensate Big Apple with free trading common stock however did issue 5,000,000 shares of its restricted common stock to Big Apple in 2007, and the Company recorded $5,250,000 of consulting expense in the first quarter of 2007 for the value of the common stock issued to Big Apple. Because the Company was unable to provide Big Apple with free trading shares, Big Apple failed to perform under the terms of the contract. Big Apple subsequently asserted that the Company had a remaining obligation under the contract in the amount of $260,000 for services performed under the consulting agreement. In April 2008 the Company agreed to pay $20,000 and issue 1,030,000 shares of restricted common stock to Big Apple as payment for the $260,000 obligation. The Company has recorded this obligation as consulting expense for the twelve-months ended December 31, 2008. The Company issued the 1,030,000 shares of common stock to Big Apple in May 2008. Big Apple subsequently asserted that the Company had a remaining obligation under the contract in the amount of $40,000 for services performed, but not limited to, invoices from April and May 2008, under the consulting agreement. In December 2008 the Company agreed to pay $20,000 and issue 500,000 shares of restricted common stock to Big Apple as payment for the $40,000 obligation. The Company has recorded this obligation as consulting expense for the twelve-months ended December 31, 2008. The Company issued the 500,000 shares of common stock to Big Apple in January 2009.
On February 1, 2009, the Company entered into a consulting agreement with James T. Dunn III (“Dunn”) to provide consulting services and support for the Company’s business development, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company’s management. The term of this consulting agreement was for a one month period commencing February 1, 2009. As compensation, a warrant to purchase 200,000 shares of the Company’s common stock was issued to Mr. Dunn. The warrant will have an exercise price of $0.05 per share, vest immediately, and expire in five years. The warrant was issued on March 13, 2009 and ascribed a value of $10,000, using the Black-Scholes model, assuming a volatility of 248.55%, a risk-free rate of 1.875% and an expected dividend yield of zero, resulting in consulting expense of $10,000 in the year ended December 31, 2009.
On February 1, 2009, the Company entered into a consulting agreement with Denny Ramos (“Ramos”) to provide consulting services and support for the Company’s business development, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company’s management. The term of this consulting agreement was for a one month period commencing February 1, 2009. As compensation, a warrant to purchase 200,000 shares of the Company’s common stock was issued to Mr. Ramos. The warrant has an exercise price of $0.05 per share, vest immediately, and expire in five years. The warrant was issued on March 13, 2009 and ascribed a value of $10,000, using the Black-Scholes model, assuming a volatility of 248.55%, a risk-free rate of 1.875% and an expected dividend yield of zero, resulting in consulting expense of $10,000 in the year ended December 31, 2009.
Stock Options Granted
On October 29, 2007, the Board of Directors approved the issuance of stock options to the individuals named below in accordance with the 2007 Stock Option Plan. The options vested immediately.
The estimated fair value of the aforementioned options was calculated using the Black-Scholes model. Consequently, the Company recorded a share-based compensation expense of $1,873,700 for the year ended December 31, 2007. The following table summarizes the weighted average of the assumptions used in the method.
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 26, 2008, the Company’s Board of Directors approved the issuance of non-qualified stock options to the following individuals in accordance with the 2007 Stock Option Plan. The options vested immediately.
The estimated fair value of the aforementioned options was calculated using the Black-Scholes model. Consequently, the Company recorded a share-based compensation expense of $1,073,700 for the twelve months ended December 31, 2008. The following table summarizes the weighted average of the assumptions used in the method.
The following table summarizes the Company’s stock option activity and related information:
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INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ASSET RETIREMENT OBLIGATIONS
Total future asset retirement obligations were estimated by management based on the Company’s net ownership interest, estimated costs to reclaim and abandon the wells and the estimated timing of the costs to be incurred in future periods. The Company has estimated the net present value of its total assets retirement obligations at December 31, 2009 to be $290,580.
NOTE 9 - COMMITMENTS AND CONTINGENCIES - NOT DISCLOSED ELSEWHERE
General
There have been significant changes in the US economy, oil and gas prices and the finance industry which have adversely affected and may continue to adversely affect the Ccompany in its attempt to obtain financing or in its process to produce commercially feasible gas exploration or production.
Federal, state and local authorities regulate the oil and gas industry. In particular, gas and oil production operations and economics are affected by environmental protection statutes, tax statutes and other laws and regulations relating to the petroleum industry, as well as changes in such laws, changing administrative regulations and the interpretations and application of such laws, rules and regulations. The Company believes it is in compliance with all federal, state and local laws, regulations, and orders applicable to the Company and its properties and operations, the violation of which would have a material adverse effect on the Company or its financial condition.
Operating Hazards and Insurance
The gas and oil business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations.
In those projects for which the Company is an operator, the Company maintains certain insurance of various types to cover its operations with policy limits and retention liability customary in the industry. In those projects in which the Company is not the operator, but in which it owns a non-operating interest, the operator for the prospect maintains insurance to cover its operations and the Company may purchase additional insurance coverage when necessary.
There can be no assurance that insurance, if any, will be adequate to cover any losses or exposure to liability. Although the Company believes that the policies obtained by operators or the Company itself provide coverage in scope and in amounts customary in the industry, they do not provide complete coverage against all operating risks. An uninsured or partially insured claim, if successful and of significant magnitude, could have a material adverse effect on the Company and its financial condition via its contractual liability to the prospect.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of August 2008 the Company was in default on all of its insurance policies including, but not limited to, its policies covering general and excess liability, directors and officers, errors and omissions, as well as sudden and accidental coverage on the wells. The occurrence of an uninsured event which may result in financial damage to the Company could have a material adverse effect on our financial condition and results of operations. Management intends to have all of these policies reinstated. On September 18, 2008, the Company obtained a new policy for directors and officers insurance and was current on this policy through September 17, 2009. As of April 10, 2010, most policies have not been reinstated, and management is unaware of any uninsured event which may result in financial damages to the Company.
Title to Properties
The Company’s practice has been to acquire ownership or leasehold rights to oil and natural gas properties from third parties. Most of the Company’s current drilling operations are conducted on properties acquired from third parties. Our existing rights are dependent on those previous third parties having obtained valid title to the properties. Prior to the commencement of gas drilling operations on those properties, the third parties customarily conduct a title examination. The Company generally does not conduct examinations of title prior to obtaining its interests in its operations, but rely on representations from the third parties that they have good, valid and enforceable title to the oil and gas properties. Based upon the foregoing, we believe that we have satisfactory title to our producing properties in accordance with customary practices in the gas industry. The Company became aware of potential historical discrepancies in the chain of title and other possible title imperfections pertaining to certain of its properties. The Company is not aware of the assertion or threatened assertion of any adverse claims against title to such properties. The Company intends to work with the third party predecessors in interest to resolve these discrepancies and imperfections in accordance with accepted industry practices.
Potential Loss of Oil and Gas Interests/ Cash Calls
The Company has entered into turnkey contracts with various operators for the drilling of oil and gas properties, and still owes certain operator payments on drilling wells. In addition, it might be subject to future cash calls due to (1) the drilling of any new well or wells on drilling sites not covered by the original turnkey contracts; (2) rework or recompletion of a well; (3) deepening or plugging back of dry holes, etc. If the Company does not pay delinquent amounts due or its share of future Authorization For Expenditures (“AFE”) invoices, it may have to forfeit all of its rights in certain of its interests in the applicable prospects and any related profits. If one or more of the other members of the prospects fail to pay their share of the prospect costs, the Company may need to pay additional funds to protect its investments.
Other
On April 25, 2008, the Company entered into a Letter of Intent (“LOI”) with International Financial Corporation, LLC, a Nevada Limited Liability Company (“International”) whereby both parties agreed to become members of Rivers West Energy, LLC. Under the LOI, International also agreed to provide the Company, upon the execution of a definitive agreement governing the understanding between the Company and International, with funds for capital expenditures specified in the agreement and general working capital of the Company. The Company did not receive the funds that International committed to deliver.
As further consideration for the LOI, the Company agreed to pay to Spectrum Facilitating Technologies, LLC, a Limited Liability Company (“Spectrum”) engaged by International to seek and investigate loan transactions on its behalf, the amount of $150,000, as well as to transfer to Spectrum 5,000,000 shares of the Company’s restricted common stock for bridge financing due diligence services. The Company paid the $150,000 in April and issued the 5,000,000 shares to Spectrum in May 2008. The shares were valued at $0.19 per share based on the Company’s stock trading price on the date of LOI for a total of $950,000, which was expensed by the Company for the twelve months ended December 31, 2008.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 6, 2009, Akerman Construction Co., Inc. (“Akerman”), a subcontractor of Epicenter, filed a Mechanic’s Lien against Indigo and two other parties on the four wells drilled by the subcontractor on the Dubois Field of Indiana (see Oil and Gas Operations in Illinois Basin section under Note 5) for claims aggregating $875,969, due to Epicenter’s failure to pay obligations for the drilling costs. The Company has engaged counsel to resolve these lien claims, which were still pending as of April 10, 2010.
In May 12, 2009, M&M Pump & Supply, Inc. (“M&M”), a subcontractor of Epicenter, filed a Mechanic’s Lien against Indigo, Epicenter and four other parties on the four wells drilled on the Dubois Field of Indiana (see Oil and Gas Operations in Illinois Basin section under Note 5) for claims aggregating $125,160, due to Epicenter’s failure to pay obligations for the drilling costs. The Company has engaged counsel to resolve these lien claims, which were still pending as of April 10, 2010.
On May 15, 2009, the Company entered into a consulting agreement with Dr. Larry Stowe (“Stowe”) to 1) assist in the Company’s interim fundraising efforts for the Company’s drilling activities in the Dubois field in Indiana (“Wells”), 2) develop a 45 day completion strategy to ensure the Company’s completion of the Wells to full production capacity, 3) represent the Company’s interests in discussions and negotiations with field personnel, and 4) provide direct assistance in the execution of the completion strategy described above. As compensation, Stowe will receive $5,000 by May 15, 2009 and $5,000 by May 22, 2009 for items 1 through 3 above; and $25,000 for the completion of item 4 above subject to receipt of funding from any source for the completion of the Wells. The term of this agreement is for 45 days commencing May 15, 2009. As of April 10, 2010, Stowe has received an aggregate of $10,000 for items 1 through 3 above, and item 4 remains uncompleted.
NOTE 10 - INCOME TAXES
Deferred income taxes result from the net tax effects of temporary differences between the carrying amounts of assets and liabilities reflected on the financial statements and the amounts recognized for income tax purposes. The tax effects of temporary differences and net operating loss carryforwards that give rise to significant portions of deferred tax assets and liabilities are as follows at December 31:
As of December 31, 2009 and 2008, the Company had losses which resulted in net operating loss carryforwards for tax purposes amounting to approximately $27,000,000 and $18,000,000, respectively, that may be offset against future taxable income. These NOL carryforwards expire beginning 2027 through 2030. However, these carryforwards may be significantly limited due to changes in the ownership of the Company as a result of past and future equity offerings.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recognition of the benefits of the deferred tax assets will require that the Company generate future taxable income. There can be no assurance that the Company will generate any earnings or any specific level of earnings in future years. Therefore, the Company has established a valuation allowance for deferred tax assets (net of liabilities) of approximately $11,521,000 and $6,820,000 as of December 31, 2009 and 2008, respectively.
The following table presents the principal reasons for the difference between the Company’s effective tax rates and the United States federal statutory income tax rate of 35%.
Tax Uncertainties
Uncertainty in income taxes arise from tax positions taken or expected to be taken in the Company’s tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. The periods subject to examination for the Company’s tax returns are for the years from 2006 to 2009. The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded.
The Company is subject to U.S. federal income tax including state and local jurisdictions. Currently, no federal or state income tax returns are under examination by the respective taxing jurisdictions.
The Company’s accounting policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company has not accrued interest for any periods.
NOTE 11 - RELATED PARTY TRANSACTIONS - NOT DISCLOSED ELSEWHERE
In January 2008, John Hurley resigned as our Board Director and Everett Miller and Hercules Pappas were elected to fill in the two vacancies of our Board of Directors. As compensation for their services as members of our Board of Directors, Mr. Miller and Mr. Pappas each received an option to purchase 250,000 shares of our common stock pursuant to our 2007 Stock Option Plan. The options vested immediately on the option grant date, have an exercise price of $0.25 per share and expire on October 16, 2017 (see Stock Option Granted section under Note 7). During the twelve months ended December 31, 2008, we recorded an aggregate consulting expense of $59,660 for the options issued to Messrs. Miller and Pappas.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2008, the Company entered into a consulting agreement with Everett Miller, our Board Member and a related party, to provide consulting services and support for business development of energy related properties, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company management. As compensation, the Company was required to issue a non-qualified stock option to Mr. Miller under its 2007 Stock Option Plan to purchase 2,500,000 shares of the Company’s common stock with an exercise price of $0.25 per share. This option was issued by the Company on February 26, 2008 (see Stock Options Granted section under Note 7). The Company recorded consulting expense in the amount of $298,250 related to this option in the twelve month period ending December 31, 2008. The term of this agreement was for a three month period commencing January 1, 2008 and is subject to cancellation by either party with 30-day written notice.
On December 2, 2008, the Company engaged the law firm, Pappas & Richardson, LLC (the “Law Firm”), to institute legal action against certain entities and individuals that the Company believes it has a claim against. Hercules Pappas, a partner at the Law Firm, became a related party of the Company at the end of January 2008 upon his appointment as a Board Director. The Company agreed to pay the Law Firm a flat fee $80,000 up front, and a 25% contingent fee upon recovery. On December 4, 2008, the Company paid to the Law Firm the $80,000 up front fee.
In December 2008, Brad Hoffman and Steve Durdin were elected as our Board Directors for one year term. In addition, Brad Hoffman was appointed as Chair of the Audit Committee. Everett Miller, Hercules Pappas, and Stan Teeple were re-elected to two-year terms.
NOTE 12 - SUBSEQUENT EVENTS NOT DISCLOSED ELSEWHERE
The Company has evaluated subsequent events through April 13, 2010, which is the date they issued their financial statements, and concluded that no subsequent events have occurred that would require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
NOTE 13 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest expense and income taxes for 2009 were as follows:
Non-Cash Investing and Financing Transactions:
For the year ended December 31, 2008, the Company recorded capitalized interest of $7,531 related to interest incurred on the promissory notes.
During 2008, the Company acquired oil and gas properties in the total amount of $442,403, of which $109,482 was accrued for at December 31, 2008.
At December 31, 2008, the Company had 30 shares of Series C Preferred Stock issuable to Carr Miller in connection with the GFA, which were valued at $600,000 and recorded as a deferred loan fee.
In February 2008, a noteholder converted the principal and interest of his note of $27,542 into 285,110 shares of the Company’s common stock.
In December 2008, pursuant to the GFA, Carr Miller converted $1,000,000 of its promissory notes into 50,000,000 shares of the Company’s common stock.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2008, pursuant to the GFA, the Company issued a new promissory note to Carr Miller in the amount of $2,861,218 to replace certain notes issued to Carr Miller previously, in consideration for which the Company issued 125,000,000 shares of common stock to Carr Miller. The shares were valued at $2,500,000. The Company recorded a discount of $1,420,832 on the new note.
During 2008, the Company issued a total of 146,829,993 shares of common stock to various lenders in connection with the issuance, amendment, or penalty shares of promissory notes. The value of these shares together with the value assigned to the beneficial conversion feature or variable conversion feature on certain of the convertible notes were valued at $7,245,874 and recorded as discounts on the notes.
The Company has recorded asset retirement obligations in the aggregate amount of $290,580 as of December 31, 2009 and increased oil and gas properties for $40,000 in 2009.
For the year ended December 31, 2009 the Company recorded capitalized interest of $88,381 related to interest incurred on the promissory notes.
During 2009, the Company acquired oil and gas properties in the total amount of $3,301,333, of which $1,633,380 was accrued for at December 31, 2009.
On January 12, 2009, the Company issued 384,811 shares of common stock to Gersten Savage for legal services performed in 2008 valued at $0.06 per share.
In February 2009, the Company issued warrants to purchase 400,000 shares of the Company’s common stock to two consultants, which were valued at $20,000 and recorded as interest expense.
In March 2009, the Company issued an aggregate of 40,000,000 shares of common stock to Steven Durdin and James Walter Jr., which were valued at $2,000,000 and recorded as interest expense.
In April 2009, 75 shares of Series C Preferred Stock issued to Carr Miller in connection with the GFA were converted into 75,000,000 shares of the Company’s common stock.
In May 2009, the Company settled its outstanding obligation to Leo Moore and the Moore Family with 6,000,000 shares of the Company’s common stock, which were valued at $180,000.
During 2009, the Company issued a total of 13,910,000 shares of common stock to various lenders in connection with the issuance, amendment, or penalty shares of promissory notes. The value of these shares together with the value assigned to the beneficial conversion feature or variable conversion feature on certain of the convertible notes were valued at $620,300 and recorded as discounts on the notes.
NOTE 14 - SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)
Gas Reserves
Users of this information should be aware that the process of estimating quantities of “proved” and “proved developed” natural gas reserves is very complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proved gas reserves are the estimated quantities of natural gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed gas reserves are those reserves expected to be recovered through existing wells with existing equipment and operating methods. The reserve data is based on studies prepared by an outside petroleum engineer. The proved developed reserves of gas are located in the state of West Virginia and Pennsylvania in the United States of America.
In 2008, Wright & Company, Inc. performed an evaluation to estimate proved reserves and cash flow for the Company’s oil and gas properties. Wright & Co. specializes in petroleum consulting and related property evaluations, economic reviews/forcasts, SEC reports, and other services required by the Oil and Gas Industry. D. Randall Wright, the founder of Wright & Company, is a Registered Professional Engineer in the State of Texas. In 2009, the Company revised these estimates using average, first-day-of-the-month price during the 12-month period before the end of the year rather than the year-end price when estimating whether reserve quantities as required by the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008 (more fully described below).
The following table presents estimates of the Company's net proved developed gas reserves:
Capitalized Costs Relating to Gas Producing Activities:
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Costs Incurred in Gas Property Acquisition, Exploration and Development Activities for the Years Ended December 31:
(1) These amounts represent costs incurred by the Company in the Dubois Field in Indiana and are excluded from the amortization base until proved reserves are established or impairment is determined.
Results of Operations for Gas Producing Activities for the Years Ended December 31:
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
In December 2009, the Company adopted revised oil and gas reserve estimation and disclosure requirements. The primary impact of the new disclosures is to conform the definition of proved reserves with the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC at the end of 2008. The accounting standards update revised the definition of proved oil and gas reserves to require that the average, first-day-of-the-month price during the 12-month period before the end of the year rather than the year-end price, must be used when estimating whether reserve quantities are economical to produce. This same 12-month average price is also used in calculating the aggregate amount of (and changes in) future cash inflows related to the standardized measure of discounted future net cash flows. The rules also allow for the use of reliable technology to estimate proved oil and gas reserves if those technologies have been demonstrated to result in reliable conclusions about reserve volumes. The unaudited supplemental information on oil and gas exploration and production activities for 2009 has been presented in accordance with the new reserve estimation and disclosure rules, which may not be applied retrospectively. The 2008 data is presented in accordance with FASB oil and gas disclosure requirements effective during those periods.
The supplemental unaudited presentation of proved reserve quantities and related standardized measure of discounted future net cash flows provides estimates only and does not purport to reflect realizable values or fair market values of the Company’s reserves. Volumes reported for proved reserves are based on reasonable estimates. These estimates are consistent with current knowledge of the characteristics and production history of the reserves.
The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, significant changes to these estimates can be expected as future information becomes available.
Proved reserves are those estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment, and operating methods.
F -
INDIGO-ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reserve estimates have been prepared by the Company from data prepared by an independent petroleum engineer in respect to certain producing properties. Revisions in previous estimates as set forth above resulted from analysis of new information, as well as from additional production experience or from a change in economic factors.
The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available.
Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the estimated quantities of gas to be produced. Estimated future income taxes are computed using current statutory income tax rates for where production occurs. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor.
The following summary sets forth the Company's future net cash flows relating to proved gas reserves.
Changes in Standardized Measure (Unaudited)
The following are the principal sources of change in the standardized measure of discounted future net cash flows at December 31 in thousands:
F -
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On October 5, 2009, the Company terminated the services of L J Soldinger Associates LLC as the Company’s Independent Certified Public Accountants. L J Soldinger Associates LLC served as the Company’s Independent Certified Public Accountants for each of the fiscal years ended December 31, 2006, 2007 and 2008, and for the first and second quarters of 2009. The decision to terminate the services of L J Soldinger Associates LLC was approved by the Audit Committee of the Company’s Board of Directors.
During the fiscal years ended December 31, 2008 and 2007, and the subsequent interim periods through the date of L J Soldinger Associates LLC’s termination, (i) there were no disagreements with L J Soldinger Associates LLC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of L J Soldinger Associates LLC , would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports. The reports of L J Soldinger Associates LLC on the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2008 and 2007 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except for an explanatory paragraph indicating substantial doubt about the Company’s ability to continue as a going concern in the audit report for the fiscal years 2007 and 2008.
During the Company’s two most recent fiscal years and through the effective date of Mark Bailey & Company, Ltd.’s appointment, the Company did not have any reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K except that LJ Soldinger Associates LLC have advised the Company of numerous material weaknesses in internal controls over financial reporting necessary for the registrant to develop reliable financial statements.
The Company provided L J Soldinger Associates LLC with a copy of the foregoing disclosures and requested from L J Soldinger Associates LLC a letter addressed to the U.S. Securities and Exchange Commission stating whether it agrees with such statements, made by the Company in response to Item 304(a) of Regulation S-K and, if not, stating the respects in which it does not agree.
On October 5, 2009, the Company engaged Mark Bailey & Company, Ltd. (“Mark Bailey”) as the Company’s new independent accountants.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining internal controls over financial reporting and disclosure controls. Internal Control Over Financial Reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, 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 and includes those policies and procedures that:
1.
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
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 receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is appropriately recorded, processed, summarized and reported within the specified time periods.
Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this assessment, management concluded that as of December 31, 2009 it had material weaknesses in its internal control procedures over financial reporting.
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
As of December 31, 2009, we have concluded that our internal control over financial reporting was ineffective as of December 31, 2009.
The Company’s assessment identified certain material weaknesses which are set forth below:
Financial Statement Close Process
There are insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
There is insufficient supervision and review by our corporate management, particularly relating to complex transactions relating to equity and debt instruments.
There is a lack of formal process and timeline for closing the books and records at the end of each reporting period.
There is a lack of expertise with US generally accepted accounting principles, SEC rules and regulations, and oil and gas operations for review of critical accounting areas and disclosures and material non-standard transactions.
The Company currently has an insufficient level of monitoring and oversight controls for review and recording of stock issuances, agreements and contracts, including insufficient documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. In addition this has resulted in a lack of control over the issuance of the Company's stock which resulted in several instances of extra or duplicate shares being issued.
There is a lack of support for certain of the Company’s cash disbursements to Epicenter, which the Company initially expensed as lease forbearance expenses in the total amount of $940,000 during 2008. In addition, in 2008 and through March 12, 2009, the Company paid Epicenter $1,500,000 for the drilling of oil and gas wells prior to obtaining the assignment of well interests or having a drilling contract with the Company as a named party.
These weaknesses restrict the Company's ability to timely gather, analyze and report information relative to the financial statements. However, the Company utilizes the services of a recognized accounting firm that specialized in public companies engaged in the oil and gas business for accounting activities and oversight.
Entity Level Controls
There are insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented. Specifically, decisions made by the board to be carried out by management should be documented and communicated on a timely basis to reduce the likelihood of any misunderstandings regarding key decisions affecting our operations and management.
There are no human resource policies or controls in place to address the risks of fraud nor are there: procedures for background checks on hiring and promotions; formal Board of director and audit committee oversight parameters; or a Risk Assessment policy in concurrence with its securities counsel and insurance carrier. During the year 2008, the Company implemented a code of ethics and conduct and a hotline/whistleblower program in the event an employee or outsider discovers fraudulent or questionable activities taking place.
The board devotes almost all of its time and resources to raising funds to allow the Company to sustain its operations. There is very little time spent by the board monitoring the activities of the Company or review and oversight of the operating wells and other assets owned by the Company.
The Company currently has insufficient resources and an insufficient level of monitoring and oversight, which may restrict the Company's ability to gather, analyze and report information relative to the financial statements in a timely manner, including insufficient documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. In addition, the limited size of the accounting department makes it impractical to achieve an optimum segregation of duties.
There are limited processes and limited or no documentation in place for the identification and assessment of internal and external risks that would influence the success or failure of the achievement of entity-wide and activity-level objectives.
The Company’s size (1 full time employee/CEO plus 1 consultant/CFO) dictates that most policies are self policing and adjusted on-the-fly as required so formal policies are essentially not formed and recorded.
Due to insufficient resources, the company does not have the capacity nor does it take action to monitor the functioning of its system of internal control, which is a material weakness.
The board members lack expertise and experience in the oil and gas industry. However, the Company utilizes the services of an accounting firm for accounting activities and oversight.
Computer Controls
The top-down, risk based approach evaluation of the IT department revealed that although the Company only uses two laptop computers which have sensitive and financial materials on their system, the systems are properly backed up on a routine basis.
The computer systems were not properly password protected from outside intrusion, but have virus and firewall protection.
The Company utilizes standard accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and does not provide an adequate audit trail of entries made in the accounting software.
Functional Controls and Segregation of Duties
The Company has ineffective controls relating to the revenue cycle.
Because of the Company’s limited resources, there are limited controls over information processing, and no internal controls over the accuracy, completeness and authorization of transactions.
There is an inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible.
Because of the small size of the Company, the limited nature of its activities, and its inadequate financial resources, there are limited or no written policies or procedures in place for various areas, which is a material weakness in the company’s control activities.
There is a lack of top level reviews in place to review targets, product development, joint ventures or financing. All major business decisions are carried out by the officers with board of director approval when needed.
Accordingly, as the result of identifying the above material weaknesses we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.
Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for the Company’s business operations.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report herein.
(c) CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting in the fiscal quarter ending December 31, 2009.
We are committed to improving our financial organization. As part of this commitment, we intend to create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us by preparing and implementing sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our bylaws provide that we have at least one director. The number of Directors which shall constitute the whole board shall be five (5). The number of Directors may from time to time be increased or decreased to not less than one nor more than seven (7) by action of the Board of Directors. The Directors shall be elected at the annual meeting of the stockholders and each Director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Vacancies in the Board of Directors including those caused by an increase in the number of directors, may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director, and each Director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The holders of two-thirds of the outstanding shares of stock entitled to vote may at any time peremptorily terminate the term of office of all or any of the Directors by vote at a meeting called for such purpose or by a written statement filed with the secretary or, in his absence, with any other officer. Such removal shall be effective immediately, even if successors are not elected simultaneously and the vacancies on the Board of Directors resulting there from shall only be filled from the stockholders.
A vacancy or vacancies in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any Directors, or if the authorized number of Directors be increased, or if the stockholders fail at any annual or special meeting of stockholders at which any Director or Directors are elected to elect the full authorized number of Directors to be voted for at that meeting.
The stockholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors. If the Board of Directors accepts the resignation of a Director tendered to take effect at a future time, the Board or the stockholders shall have power to elect a successor to take office when the resignation is to become effective.
No reduction of the authorized number of Directors shall have the effect of removing any Director prior to the expiration of his term of office.
The directors and executive officers of the Company currently serving are as follows:
Name
Age
Office
Steven P. Durdin
Director, President and Chief Executive Officer
Stanley L. Teeple
Director and Chief Financial Officer
Everett Miller
Director and Chief Operating Officer
Hercules Pappas
Director
Brad Hoffman
Director
Management
Significant Employees / Consultants
Steven P. Durdin - Mr. Durdin joined the Company as a Director in April 2007 and was later appointed as the Company’s President and Chief Executive Officer. He graduated from Rider University in Lawrenceville, New Jersey with a degree in Finance and, upon graduation, went to work for Allstate Insurance Company. During a career that lasted for over 16 years, Steve moved from the ranks of associate agent to Senior Account agent and was asked to join the management team of the corporation in 1999. In his management role, Steve was promoted through multiple levels of responsibility and eventually was given a seat on the Senior Staff Board for the company in the Midlantic Region. In both of his tracks through Allstate (Agency Owner and Corporate Management), Steve was consistently recognized with awards for outstanding results and leadership. During his tenure there, he learned volumes about building and growing organizations, raising capital, financial management and accountability and working within the public company arena. During his last 5 years with Allstate, Steve had started to pursue other business interests which led him through many successful projects in real estate development and the formation of an international trading company in Colon, Panama. He also began consulting with small companies in the U.S. on expansion into international markets and simultaneously helped them to develop stronger infrastructure bases from which to operate. Because of the successes in his other pursuits, Steve officially retired from Allstate in 2000 and eventually sold his remaining agency interests. Steve became involved with Indigo-Energy in the Fall of 2005 and has been the foundation for the Company’s fund raising since its inception. As a founding member of Indigo-Partners, L.P. and core investor representing several different groups within the Company, he has personally been responsible for raising approximately 95% of the company funding to date and has been responsible for raising in excess of $ 500,000 within the past 45 days to help the company meet its short-term obligations. Additionally, Steve has personally invested over $ 1.2 million of personal funds over the past year. Steve is a key link with major shareholder groups and has demonstrated through his actions his commitment to the future success of the Company.
Stanley L. Teeple - Over the last 30 years Stan has held numerous senior management positions in a number of public and private companies across a broad spectrum of industries. In his capacity as a turnaround consultant he has taken over and ultimately owned, operated, and then sold two $50 plus million perishables distribution businesses involved in commercial, wholesale, franchise and retail operations. Additionally he has operated and worked for various court appointed trustees and principals as CEO, COO, and CFO in the entertainment, pharmaceuticals, food, travel, and tech industries. He presently operates his consulting business on a project-to-project basis, and holds various other directorships. His businesses operational strengths include knowing how to manage and maximize the resources and preserve the integrity of a company from start-up through to maturity. In his capacity as President of Stan Teeple, Inc. for the last 25 plus years, he has provided services to various bankruptcy Trustees and Counsel primarily in the Central District of California. These services included interim operator, CEO, CFO, appraisals, plan structuring and various other capacities as required. These situations required delicate negotiations with creditors, vendors, lenders, and the debtors themselves to evolve and maximize the assets of the corporations. Some of the companies included as clients are United Artists Theatre Circuit, Chiquita Brands, Inc., United Airlines, Warner Lambert, General Mills, Coca-Cola Foods, Numero Uno Pizza, Pro Image Entertainment Corporation, and Compass Microsystems.
Everett Miller - Mr. Miller joined the Company in January 2008. He has been in the investment banking, venture capital and securities business for more than 25 years. He started and operated Carr Miller Capital, LLC in November of 2006, a developer of real estate, banking and securities funding techniques, which has since partnered with global financial companies such as ICA Investment Group and Fortis Bank. From March 2005 until June 2006, he operated Everett Miller Financial, a developer of funding techniques. He also operated Millenium Brokerage LLC from June 2002 to January 2005. Mr. Miller has several securities licenses, including the Series 55 Equity Floor trader and Series 24 General Principal. He is a member of both the New Jersey Energy Traders and the Securities and Trading Advisory Board of Seton Hall University, where he acts as a mentor and advisory teacher of securities and financial software and real time operations/practices. Mr. Miller attended college at University of Maryland and Embry-Riddle Aeronautical College in Florida. He lived in Europe for several years, has worked for the United States DOD as a GS-12 rated employee, has a Paralegal Certification in New Jersey and Pennsylvania.
Hercules Pappas- Mr. Pappas joined the Company in January 2008. Mr. Pappas formed the law firm of Pappas & Richardson, LLC in October 1998 and is currently the firm’s Managing Partner His practice since opening the firm has primarily been in the business litigation related practice fields. The firm changed ownership to Pappas & Wolf in 2009, with the addition of Captain Matthew S. Wolf, Esquire. Mr. Pappas currently holds licenses to practice in New Jersey, Pennsylvania, New York, the United States Court in the Eastern District of Pennsylvania and the District of New Jersey. He is also admitted to practice in the Supreme Court of the United States. As well as his litigation practice, Mr. Pappas is also a Court approved mediator and maintains a private practice offering economic mediation services as an alternative to business and commercial litigation. He also acts as the General Legal Counsel to Carr Miller Capital and has held the position of Economic Advisor to ICA Investments. Mr. Pappas has advised many business entities throughout his career and has partnered with several real estate developers for residential and commercial real estate development projects in the Northeast. Mr. Pappas obtained his Bachelor of Arts degree in Economics and Political Science from East Stroudsburg University and earned his Juris Doctor from Widener University School of Law.
Brad Hoffman - Mr. Hoffman launched his career in financing fifteen years ago as co-founder of Hoffman, Hoffman & Associates (HH&A), a financial services company specific to the financing and factoring markets with clients which included hospitals, surgery centers, manufacturers and transportation companies. In 1995, HH&A merged with IHRS, Inc. to provide a broader set of financing services to the healthcare, manufacturing and transportation industries. In 1999, Mr. Hoffman joined the merchant banking and private equity firm of Dubrow Kavanaugh Capital, LLC (DKCap) overseeing new business development, M&A due diligence, and portfolio management. Two years later, Mr. Hoffman joined Ashford Capital, LLC (Ashford) a new venture firm created by several former partners from DKCap in partnership with Japan’s largest Venture Capital firm, Hikari Capital. In January 2004, Mr. Hoffman co-founded Surgifund, Inc. (SFI) and acquired California-based healthcare accounts receivables. In conjunction with SFI, Mr. Hoffman also co-founded Castlegate Holdings in 2005, which is the J.V. partner with Fortress, one of the larger New York hedge funds. Mr. Hoffman attended UCLA and Pepperdine University and is degreed in Business Science Financing and Management.
Involvement in certain legal proceedings
No director, person nominated to become a director, executive officer, promoter or control person of the Company has, during the last ten years: (i) been convicted in or is currently subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to any Federal or state securities or banking or commodities laws including, without limitation, in any way limiting involvement in any business activity, or finding any violation with respect to such law, nor (iii) any bankruptcy petition been filed by or against the business of which such person was an executive officer or a general partner, whether at the time of the bankruptcy or for the two years prior thereto.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, our directors, executive (and certain other) officers, and any persons holding ten percent or more of our common stock must report on their ownership of the common stock and any changes in that ownership to the Commission. Specific due dates for these reports have been established. During the fiscal year ended December 31, 2009, we believe that all reports required to be filed by Section 16(a) were filed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Executives and Directors Compensation
The following table provides certain summary information concerning compensation paid to or accrued by the executive officers named below during the fiscal years ended December 31, 2009 and 2008.
(1)
On October 8, 2007, we entered into an employment agreement with Steve Durdin to become our President, which replaced the consulting agreement we had with Mr. Durdin as described above. We agreed to pay Mr. Durdin $9,500 per month, and issue to Mr. Durdin options or cashless exercise warrants to acquire a minimum of 10,000,000 shares of our common stock pursuant to our 2007 Stock Option Plan. Mr. Durdin will also receive immediate family medical and dental insurance coverage and life insurance equal to three times his annual base salary. In addition, Mr. Durdin will receive an auto allowance of $1,000 per month and a home office allowance of $1,000 per month, as well as reimbursement for reasonable out-of-pocket expenses. As part of the agreement, Mr. Durdin will not be entitled to additional compensation by reason of service as a member of the Board of Directors. The agreement was effective on October 1, 2007 for a fifteen-month period and will automatically renew for consecutive one-year periods unless terminated by either party.
On April 2, 2009, pursuant to the recommendation of the Company’s Compensation Committee, the Company increased the base salary of its Chief Executive Officer, Steven Durdin, to $250,000 a year. Mr. Durdin has agreed that the Company shall only pay such portion of the base salary, as increased, permitted by the Company’s current cash flow. Any balance thereof shall be accrued until the Company has sufficient positive cash flow to allow an additional payment of Mr. Durdin’s base salary. The Company also issued 20 shares of the Company’s Series D to Mr. Durdin. On April 21, 2009, upon the increase in the Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares, the 40 shares of Series D Preferred Stock automatically converted into 40,000,000 shares of common stock, which were issued on April 22, 2009.The increase in Mr. Durdin’s base salary, as well as the issuance of Series D to Mr. Durdin are in consideration for his extensive efforts extended in relation to the completion of the drilling on the Wells and for his continued efforts in preparation for other drilling activities in the Illinois Basin.
(2)
On December 21, 2006, we entered into a third consulting agreement with Stanley Teeple, Inc. (“STI”), an entity affiliated with Stanley Teeple, our then Secretary and Treasurer and Board Director, pursuant to which we agreed to pay STI a weekly consulting fee of $5,000, and issue to STI options or cashless exercise warrants during the first quarter of 2007 to acquire a minimum of 5,000,000 shares of our common stock at terms to be determined by our Board of Directors. The agreement was effective on January 1, 2007 for a two-year period and would be automatically renewed for consecutive one-year periods unless terminated by either party. On March 8, 2007, the Company entered into a fourth consulting agreement with STI, which superseded but provided for the identical terms of cash compensation as STI’s agreement of December 21, 2006. In addition, STI is to be reimbursed for certain medical and dental insurance coverage, an auto allowance of $1,000 per month, and certain other fringe benefits. STI was also entitled to receive options or cashless warrants to acquire 20,000,000 shares of our common stock at prices to be determined by the terms of a stock option plan to be adopted by the Company. In 2007, STI waived its rights to 10,000,000 of the options to acquire our common stock. Mr. Teeple currently owns options to purchase 10,000,000 shares of the Company’s common stock personally of which 5,000,000 options were granted in 2007, at an exercise price of $0.25 per share, and 5,000,000 options were granted in April 2008, pursuant to the Company’s Stock Option Plan.
(3)
In January 2008 Everett Miller was elected to our Board of Directors. As compensation for his services, Mr. Miller received an option to purchase 250,000 shares of our common stock pursuant to our 2007 Stock Option Plan. In January 2008, the Company entered into a consulting agreement with Everett Miller, our Board Member and a related party, to provide consulting services and support for business development of energy related properties, assist in development of the Company’s strategic marketing and business plan and to handle other duties as assigned by Company management. As compensation, the Company was required to issue a non-qualified stock option to Mr. Miller under its 2007 Stock Option Plan to purchase 2,500,000 shares of the Company’s common stock with an exercise price of $0.25 per share. This option was issued by the Company on February 26, 2008.
(4)
In December 2008 Hercules Pappas was elected to our Board of Directors. As compensation for his services, Mr. Pappas received 250,000 shares of our common stock as well as 250,000 options to purchase the Company’s common stock.
(5)
In December 2008 Brad Hoffman was elected to our Board of Directors. As compensation for his services, Mr. Hoffman received 250,000 shares of our common stock.
Outstanding Equity Awards at Fiscal Year End
The table below sets forth the options and stock awards received by the executive officers of the Company as of December 31, 2009.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, as of April 1, 2010, with respect to the beneficial ownership of the Company’s common stock by each person known by the Company to be the beneficial owner of more than 5% of the outstanding common stock, by each of the Company’s officers and directors, and by the officers and directors of the Company as a group.
*Each stockholder’s address is c/o Indigo Energy, Inc. 701 N. Green Valley Pkwy, Suite 200, Henderson, Nevada 89074
** Less than 1%
(1)
Based on an aggregate of 828,861,382 shares outstanding as of April 1, 2010.
(2)
Consists of 250,000 stock options pursuant to the Company’s 2007 Stock Option Plan, 2,400,000 warrants issued in the name of James Walter, Sr. and 1,950,000 warrants issued in the name of Tammy Walter, a family member of James Walter, Sr., 25,000,000 shares of common stock issued to James Walter, Sr., 7,975,800 shares of common stock issued to Tammy Walter, and 10,365,600 shares of common stock issued to Infinity Investments, LLC an entity controlled by James Walter Sr.
(3)
Consists of 10,000,000 stock options pursuant to the Company’s 2007 Stock Option Plan, 1,800,000 warrants, and 23,959,031 shares of common stock issued in the name of Mr. Durdin and 100,000 shares of common stock issued in the name of S. Durdin Insurance Agency, Inc, an entity of which Mr. Durdin is the controlling person.
4) Consists of options pursuant to the Company’s 2007 Stock Option Plan.
(5)
Consists of 2,750,000 stock options pursuant to the Company’s 2007 Stock Option Plan, 37,950,000 warrants to purchase shares of the Company’s common stock issued pursuant to a Global Financing Agreement and 304,453,457 shares of common stock that have been issued to Carr Miller Capital, LLC and which are beneficially owned by Mr. Miller as a principal of Carr Miller Capital, LLC.
(6)
Consists of 250,000 stock options pursuant to the Company’s 2007 Stock Option Plan and 20,250,000 shares of Common Stock.
(7)
Consists of 250,000 shares of common stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Other than as disclosed below, none of the following persons have, since our date of incorporation, had any material interest, direct or indirect, in any transaction with us or in any presently proposed transaction that has or will materially affect us:
¨
Any person proposed as a nominee for election as a director;
o Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our outstanding shares of common stock;
¨
Any of our promoters;
¨
Any relative or spouse of any of the foregoing persons who has the same house as such person.
Related Stockholder Matters
On April 14, 2007, we entered into a consulting agreement with Steve Durdin, who was appointed our Board Director on April 11, 2007. Pursuant to the consulting agreement, Mr. Durdin will assist the Company in raising funds and developing financial strategy, act as a liaison with current investors and assist with business development. We agreed to pay Mr. Durdin a weekly consulting fee of $1,200 commencing August 2007, and issue to Mr. Durdin options or cashless exercise warrants to acquire a minimum of 6,000,000 shares of our common stock pursuant to our 2007 Stock Option Plan, which has been approved by our Board of Directors and stockholders. Payment of the weekly consulting fee may be deferred by the Company, but must be paid no later than August 1, 2007. The agreement was effective on April 1, 2007 for a one-year period and would be automatically renewed for consecutive one-year periods unless terminated by either party. During the year 2007, we have paid $9,600 to Mr. Durdin for consulting fees.
On October 8, 2007, we entered into an employment agreement with Steve Durdin to become our President, which replaced the consulting agreement we had with Mr. Durdin as described above. We agreed to pay Mr. Durdin $9,500 per month, and issue to Mr. Durdin options or cashless exercise warrants to acquire a minimum of 10,000,000 shares of our common stock pursuant to our 2007 Stock Option Plan. On October 29, 2007, our Board of Directors approved the issuance of stock option to Mr. Durdin to purchase 10,000,000 shares of our common stock. Mr. Durdin will also receive immediate family medical and dental insurance coverage and life insurance equal to three times his annual base salary. In addition, Mr. Durdin will receive an auto allowance of $1,000 per month and a home office allowance of $1,000 per month, as well as reimbursement for reasonable out-of-pocket expenses. The agreement was effective on October 1, 2007 for a fifteen-month period and will automatically renew for consecutive one-year periods unless terminated by either party.
On April 2, 2009, pursuant to the recommendation of the Company’s Compensation Committee, the Company increased the base salary of its Chief Executive Officer, Steven Durdin, to $250,000 a year. Mr. Durdin has agreed that the Company shall only pay such portion of the base salary, as increased, permitted by the Company’s current cash flow. Any balance thereof shall be accrued until the Company has sufficient positive cash flow to allow an additional payment of Mr. Durdin’s base salary. The Company also issued 20 shares of the Company’s Series D to Mr. Durdin. On April 21, 2009, upon the increase in the Company’s authorized common stock from 600,000,000 to 1,000,000,000 shares, the 40 shares of Series D Preferred Stock automatically converted into 40,000,000 shares of common stock, which were issued on April 22, 2009.The increase in Mr. Durdin’s base salary, as well as the issuance of Series D to Mr. Durdin are in consideration for his extensive efforts extended in relation to the completion of the drilling on the Wells and for his continued efforts in preparation for other drilling activities in the Illinois Basin.
On May 26, 2006, we executed a consulting agreement with Stanley Teeple, Inc. (“STI”) to provide services related to accounting and SEC reporting for a one-time fee of $10,000 plus reimbursement of certain expenses. On June 15, 2006, we executed a new consulting agreement with STI to provide the aforementioned services for a compensation of $5,000 per week for six months and reimbursement of related costs. In July 2006, our Board of Directors appointed Stan Teeple to replace Alex Winfrey as our new Secretary and Treasurer and Board Director. On December 21, 2006, we entered into a third consulting agreement with STI pursuant to which we agreed to pay STI a weekly consulting fee of $5,000, and issue to STI options or cashless exercise warrants during the first quarter of 2007 to acquire a minimum of 5,000,000 shares of our common stock at terms to be determined by our Board of Directors. The agreement was effective on January 1, 2007 for a two-year period and would be automatically renewed for consecutive one-year periods unless terminated by either party. On March 8, 2007, the Company entered into a fourth consulting agreement with STI, which superceded but provided for the identical terms of cash compensation as STI’s agreement of December 21, 2006. In addition, STI is to be reimbursed for certain medical and dental insurance coverage, an auto allowance of $1,000 per month, and certain other fringe benefits. STI is also entitled to receive options or cashless warrants to acquire shares of our common stock pursuant to our 2007 Stock Option Plan. On October 29, 2007, our Board of Directors approved the issuance of stock option to STI to purchase 5,000,000 shares of our common stock at an exercise price of $0.25. Subsequently on February 28, 2008, our Board of Directors approved the issuance of stock option to STI to purchase another 5,000,000 shares of our common stock pursuant to our 2007 Stock Option Plan. The option vested immediately on the option grant date, has an exercise price of $0.25 per share and expires on October 16, 2007.
On March 6, 2008, the Company borrowed $500,000 from Carr Miller and issued a promissory note that provided for interest at 20% per annum with a maturity date of September 10, 2008. Carr Miller became a related party of the Company at the end of January 2008 upon the appointment of Everett Miller, who controls Carr Miller, as one of the Company’s Board of Directors. Within thirty days of funding of the loan, Carr Miller is also to receive shares of the Company’s common stock equal to eleven times the numerical dollars of the principal of the loan. As a result, 5,500,000 shares of the Company’s common stock were issued to Carr Miller on April 2, 2008. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. On September 29, 2008, the Company modified the terms of this note by extending its due date until December 31, 2008. In exchange, the Company agreed to issue 1,022,222 shares of its common stock. These shares were issued in October 2008.
On April 11, 2008, the Company borrowed $120,000 from Carr Miller and issued a promissory note that provided for interest at 20% per annum with a maturity date of October 11, 2008. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to eleven times the numerical dollars of the principal of the loan. As a result, 1,320,000 shares of the Company’s common stock were issued to Carr Miller on May 1, 2008. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. On September 29, 2008, the Company modified the terms of this note by extending its due date until December 31, 2008. In exchange, the Company agreed to issue 458,667 shares of its common stock. These shares were issued in October 2008.
On September 30, 2008, the Company borrowed $150,000 from Carr Miller and issued a promissory note that provided for interest at 20% per annum with a maturity date of April 1, 2009. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. As a result, 1,500,000 shares of the Company’s common stock were issuable to Carr Miller as of September 30, 2008. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
On November 4, 2008, the Company borrowed $150,000 from Carr Miller, a related party, and issued a promissory note that provided for interest at 20% per annum with a maturity date of May 4, 2009. Within thirty days of funding of the loan, Carr Miller is to receive 1,500,000 shares of our common stock. In addition, Carr Miller has the option to either receive all principal and interest due on the loan within ten days of the maturity date or to convert the principal and interest due on the notes into shares of our common stock at a conversion price equal to 80% of the average ten-day closing price of the stock immediately preceding the due date. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
On November 19, 2008, the Company borrowed $250,000 from Carr Miller, a related party, and issued a promissory note that provided for interest at 20% per annum with a maturity date of May 19, 2009. Within thirty days of funding of the loan, Carr Miller is to receive 2,500,000 shares of our common stock. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
In November 2008, the Company entered into a voting rights agreement with Carr Miller and related party stockholders of the corporation (“Related Stockholders”) (James Walter Sr., who became one of our Board Members in October 2007 and James Walter, Jr. and Tammy Walter, family members of James Walter Sr. who then collectively owned 33,119,454 shares of common stock; and Steve Durdin, the Company’s CEO and President who then owned 3,959,031 shares of common stock), whereby the Related Stockholders agreed to assign Carr Miller all the voting rights attributable to the 37,078,485 shares of common stock then held by them for a period of 5 years. 1/5th of the voting rights shall be released back to the Related Stockholders from Carr Miller at the end of each year for a period of 5 years.
On December 5, 2008, the Company entered into a Global Financing Agreement (the “GFA”) with Carr Miller wherein Carr Miller agreed to restructure the Company’s existing debt obligations to Carr Miller (as set forth above). Under the terms of the GFA, Carr Miller irrevocably agreed that the promissory notes previously issued by the Company to Carr Miller in the aggregate amount of One Million Dollars ($1,000,000) (the “First Notes”) shall be converted into fifty million (50,000,000) shares of the Company’s common stock, which was the per share price when the Agreement was negotiated. Further, the parties agreed that promissory notes previously issued to Carr Miller in the aggregate principal amount of Two Million Four Hundred Thousand ($2,400,000) (the “Second Notes”) shall be amended and replaced by a new promissory note (“New Note”). The New Note shall be secured by all the assets of the Company, shall have a maturity date of no earlier than sixty (60) months from the date of its issuance and shall bear interest at the rate of 10% per annum.
On December 30, 2008, the Company issued two (2) promissory notes (the “Notes”) in favor of Carr Miller Capital in the aggregate principal amount of Nine Hundred Thousand Dollars ($900,000) (the “Loan”). The purpose of the Loan was: (i) to procure an accounts payable settlement on ten (10) operating wells previously drilled by the Company (ii) to provide the Company with the necessary funds to settle the Company’s obligations with certain professionals; and (iii) to provide the Company with the funding it requires to begin drilling a third and fourth well in the DuBois field, which well is, adjacent to, but separate and distinct from the two (2) wells currently being drilled by the Company. The Notes earn interest at the rate of twenty percent (20%) per annum.
In February 2009, the Company borrowed an aggregate of $300,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity date in February 2014. Commencing February 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
In February through June 2009, the Company borrowed an aggregate of $1,140,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity dates in February through June of 2011. These notes represent the first and second tranche and part of the third tranche of the Additional Funding per the GFA. In the event these notes are unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount. Interest expense on these notes was recorded for the year ended December 31, 2009 in the amount of $89,520 In July 2009, one of the notes was amended to change $25,000 of the note from being designated as Additional Funding per the GFA to being designated for general and operating expenses. In exchange, the lender received shares of the Company’s common stock equal to ten times the numerical dollars of the amended amount. The 250,000 shares were issued in July 2009.
On May 6, 2009, the Company borrowed $50,000 from Carr Miller and issued promissory notes that provided for interest at 10% per annum with a maturity date of May 6, 2014. The note required that commencing May 6, 2010, the Company is required to make 48 equal monthly interest installment payments equal to the total interest due on the note. Within thirty days of funding of the loan, the lender is also to receive shares of the Company’s common stock equal to ten times the numerical dollars of the principal of the loan. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
On July 16, 2009, the Company borrowed $15,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of July 16, 2011. This note represents part of the third tranche of the Additional Funding per the GFA. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
On July 28, 2009, the Company borrowed $370,000 from Carr Miller and issued a promissory note that provided for interest at 10% per annum with a maturity date of July 28, 2011. This note represents final part of the third tranche of the Additional Funding per the GFA and includes $36,789 for unpaid interest as required under a promissory note with Carr Miller dated December 16, 2008. In the event this note is unpaid within ten days of its maturity date, the Company will incur a late charge equal to 10% of the note amount.
Settlement with Previous Shareholders
On October 6, 2008, the Company issued shares of the Company’s common stock to various creditors pursuant to the terms of settlement agreements (the “Settlement Agreements”) previously entered into with a total of 21 of the Company’s creditors, including one of the Company’s former directors, Mr. James Walter, Sr. The Settlement Agreements were related to various promissory notes previously issued by the Company in the aggregate amount of $1,500,816 (the “Promissory Notes”), including promissory notes in the total amount of $372,823 issued to Mr. Walter, Sr. Under the terms of the Settlement Agreements, each of the creditors agreed to the retirement of the Promissory Notes held by them.
Stock Options Granted
On October 29, 2007, the Board of Directors approved the issuance of stock options to the individuals named below in accordance with the 2007 Stock Option Plan. The options vest immediately.
On February 26, 2008, the Company’s Board of Directors approved the issuance of non-qualified stock options to the following individuals in accordance with the 2007 Stock Option Plan. The options vested immediately.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our Audit Committee pre-approved all audit and non-audit services provided to us and during the periods listed below. The Audit Committee approves discrete projects on a case-by-case basis that may have a material effect on our operations and also considers whether proposed services are compatible with the independence of the public accountants.
The following table presents fees for professional services rendered by our auditors for the calendar years 2009 and 2008:
Audit fees represent fees billed for professional services provided in connection with the audit of the Company’s annual financial statements, reviews of its quarterly financial statements, audit services provided in connection with statutory and regulatory filings for those years and audit services provided in connection with securities registration and/or other issues resulting from that process.
Audit-related fees represent fees billed primarily for assurance and related services reasonably related to securities registration and/or other issues resulting from that process and the Company’s amendment to Form 10-K.
Tax fees principally represent fees billed for tax preparation, tax advice and tax planning services.
All other fees principally would include fees billed for products and services provided by the accountant, other than the services reported under the three captions above.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
Exhibits and Index of Exhibits
Exhibit
No.
Identification of Exhibit
2.1
Exchange Agreement dated December 15, 2005 (1)
2.2
Amended Exchange Agreement dated December 15, 2005 (1)
3.1
Articles of Incorporation (1)
3.2
Articles of Amendment dated November 8, 1982 (1)
3.3
Certificate of Amendment to Articles of Incorporation dated May 29, 1987 (1)
3.4
Articles of Amendment dated December 4, 1987 (1)
3.5
Certificate of Amendment dated February 25, 1999 (1)
3.6
Certificate of Amendment dated January 11, 2006 (1)
3.7
By-Laws dated January 25, 2006 (1)
4.1
Form of Specimen of Common Stock (1)
10.1
Agreement between Epicenter Oil & Gas and Indigo-Energy, Inc. dated March 26, 2009 (1)
10.2
Promissory Note dated October 10, 2009 in favor of Oliver/Polycomp
10.3
Promissory Note Extension dated December 2009 in favor of Janelle M. Anderson
10.4
Global Financing Agreement between Carr Miller Capital, LLC and Indigo-Energy, Inc. (1)
10.5
Global Financing Agreement Extension between Carr Miller Capital, LLC and Indigo-Energy, Inc. dated February 22, 2010
10.6
Memorandum of Understanding by and among Indigo-Energy, Inc., Epicenter Oil & Gas LLC and Reef, LLC dated March 17, 2010
10.7
Agreement with consultant dated March 24, 2010
10.8
Agreement between Everett Miller and Indigo-Energy, Inc. dated March 25,
31.1
Sarbanes Oxley Section 302 Certification
31.2
Sarbanes Oxley Section 302 Certification
32.1
Sarbanes Oxley Section 906 Certification
32.2
Sarbanes Oxley Section 906 Certification
(1) Previously filed.
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.
Exhibits and Index of Exhibits
Exhibit
No.
Identification of Exhibit
2.1
Exchange Agreement dated December 15, 2005 (1)
2.2
Amended Exchange Agreement dated December 15, 2005 (1)
3.1
Articles of Incorporation (1)
3.2
Articles of Amendment dated November 8, 1982 (1)
3.3
Certificate of Amendment to Articles of Incorporation dated May 29, 1987 (1)
3.4
Articles of Amendment dated December 4, 1987 (1)
3.5
Certificate of Amendment dated February 25, 1999 (1)
3.6
Certificate of Amendment dated January 11, 2006 (1)
3.7
By-Laws dated January 25, 2006 (1)
4.1
Form of Specimen of Common Stock (1)
10.1
Agreement between Epicenter Oil & Gas and Indigo-Energy, Inc. dated March 26, 2009 (1)
10.2
Promissory Note dated October 10, 2009 in favor of Oliver/Polycomp
10.3
Promissory Note Extension dated December 2009 in favor of Janelle M. Anderson
10.4
Global Financing Agreement between Carr Miller Capital, LLC and Indigo-Energy, Inc. (1)
10.5
Global Financing Agreement Extension between Carr Miller Capital, LLC and Indigo-Energy, Inc. dated February 22, 2010
10.6
Memorandum of Understanding by and among Indigo-Energy, Inc., Epicenter Oil & Gas LLC and Reef, LLC dated March 17, 2010
10.7
Consulting Agreement with J. Cory Martelli dated March 24, 2010
10.8
Agreement between Everett Miller and Indigo-Energy, Inc. dated March 25,
31.1
Sarbanes Oxley Section 302 Certification
31.2
Sarbanes Oxley Section 302 Certification
32.1
Sarbanes Oxley Section 906 Certification
32.2
Sarbanes Oxley Section 906 Certification
(1) Previously filed.