ITEM 1. DESCRIPTION OF BUSINESS - -------------------------------
General
Sun River Energy, Inc. ("Sun River" or the "Company") was incorporated under the laws of the State of Colorado on April 30, 1998 as Dynadapt System, Inc. to raise capital for an Internet website related project. On August 18, 2006, the Company changed its name to Sun River Energy, Inc. in connection with the acquisition of its wholly-owned subsidiary Sun River Energy, Inc. on April 21, 2006.
On April 21, 2006, we acquired 100% of the issued and outstanding shares (8,633,333) of Sun River Energy, Inc. in exchange for 8,633,333 shares of the Company's common stock, as part of a Plan and Agreement of Reorganization, dated April 21, 2006. As a result of the Plan and Agreement of Reorganization, we changed our business operations to focus on the development of the Company as an independent Energy Company engaged in the exploration of North American unconventional natural gas properties and conventional oil and gas exploration.
As part of the acquisition, we acquired 120,000 acres of a mixture of fee oil and gas mineral interest, some coal bed methane fee interest and approximately 30,000 acres, of other fee mineral rights and 4,000 gross acres of leases that we have now begun to explore for methane.
In April 2006, we signed a $64,000 secured promissory note with Nova Leasing, LLC (Nova Leasing). The $64,000 promissory note had a due date of April 2008 and was secured by a lease for 640 acres in Natrona County, Wyoming. In November 2006, we entered into a purchase agreement with Nova Leasing to acquire an 85% working interest and an 80% net revenue interest on leases in Natrona and Converse County, Wyoming from Nova Leasing, LLC. The leases were acquired in exchange for a $6,600,000 secured promissory note bearing 7.5% annual interest. The promissory note was secured by the leases on 14,000 acres in Natrona and Converse Counties in Wyoming. On April 21, 2008, the Company entered into a Release of Claim with Nova Leasing and in return for being released from payment of the outstanding balance of $6,162,564 owed in connection with the $6.6 Million Dollar Promissory note and the outstanding balance of $72,478 owed in connection with the $64,000 Promissory Note, we returned the leases securing the promissory notes to Nova Leasing.
In January 2009, Mr. Wesley Whiting, the President and a Director of the Company resigned from both positions with the Company. Mr. Redgie Green, an existing Director of the Company, was appointed President at that time.
Business Activities and Recent Developments
Our business operations are in the exploration and development of oil and gas in the exploration of North America including unconventional natural gas in the Rocky Mountain region. Specifically, in the area described below:
- Raton Basin, Colfax County New Mexico; and - Natrona County, Wyoming.
Raton Basin
Our recent field operations have been focused on exploring a coal bed methane prospect located in the Raton Basin in Northern New Mexico.
We have approximately 11,000 gross acres of coal bed methane prospects in the Raton Basin, of which 5,640 acres are fee (90% interest) and 4,730 acres of which are a lease assignment. During the year ended April 30, 2008, we drilled 3 coal bed methane wells in the Raton Basin, Myers #1, #2, and #3. All three wells have shown multiple coal zones, which will be completed to seek methane gas. We intend to frac the Myers #1 and #2 in the near future to test production thereafter. We have perforated multiple zones and intend to frac those zones.
We intend to operate all of our prospects in the Raton Basin and hold working interests of 100% on a 80% NRI our leases, except that we have a 25% working interest in the Sun River #1, LLC a drilling syndication for the Myers #1 and #2 wells which was assembled in early 2007.
The Raton Basin covers an area that is approximately 80 miles long, north to south, and about 50 miles wide, east to west, encompassing southeastern Colorado and northeastern New Mexico. The Raton Basin contains two coal-bearing formations, the Vermejo formation coals located at depths of between 450 and 4,000 feet and the shallower Raton formation coals, located at the surface to approximately 3,000 feet in depth. Production from the Vermejo coals represents approximately 79% of the total production from the Raton Basin and approximately 78% of the total proved reserves in the Raton Basin. To date, the majority of methane production has been from the Vermejo formation coals in Colorado and New Mexico.
Development History
Exploration for coal bed methane in the Raton Basin began in the late 1970s and continued through the late 1980s, with several companies drilling and testing more than 100 wells during this period. The absence of a pipeline to transport gas from the Raton Basin prevented full-scale development until January 1995, when Colorado Interstate Gas Company completed the construction of the Picket Wire Lateral.
Raton Basin Geology
We intend to explore for and produce coal bed methane from the high quality bituminous coal resource of the Raton Basin. The basin is a large asymmetric sedimentary trough that developed along the western margin of an ancient Rocky Mountain seaway during the Cretaceous and Tertiary period between 65 to 45 million years ago. Today, the geologic history of what was once a lush tropical coastline and alluvial plain cut by meandering rivers, which subsequently underwent deep burial, tectonism, igneous intrusion, and uplift, is recorded in the rocks of the region; the continued exploration of the basin by geologists is increasing the understanding of the coal bed methane resource base and identifying new hydrocarbon systems and additional unconventional reservoir types.
Our lease and fee mineral coal bed prospect acreage sits in the southerly half of the basin. In the region, the coal-bearing strata are located primarily in two major groups, the Vermejo and Raton formations, and represent coal development in two slightly contrasting environments. The Vermejo coals represent peat accumulation on an expansive flat-lying flood-plain which was partially protected from erosion by sandy coastal barriers of the underlying Trinidad Sandstone, while the Raton coals represent peat development on a broad, open, humid alluvial fan. Collectively, both formations reflect the development of substantial peat swamps and thick boggy mires, which covered most of the region during Cretaceous and Tertiary times. Subsequent burial under high pressures and temperatures has caused the original peat accumulation to convert into coal, which has high rank and consequentially high gas storage capacity. During burial, small fractured surfaces (cleats) developed throughout the coal, which, coupled with the tectonic forces acting on the region during the building of the Rocky Mountains, has provided significant permeability within the coals, allowing for the extraction of coal bed methane gas and associated water.
We hope to produce methane from Vermejo coal beds. Total net Vermejo coal thicknesses can locally approach up to 20 feet in various individual seams, which seem may vary in thickness from one to 10 feet.
The shallower Raton formation coals are generally less continuous from well to well, but increasingly represent a very significant resource throughout the basin. Total net Raton coal thickness locally approaches 15 feet in the existing wells in many individual seams, which may vary in thickness from one to 10 feet. Occasionally interbedded with the Raton coals are large sandstone channel complexes, which are increasingly identified as additional potential tight-gas and unconventional sand reservoirs. We show to attempt completion in the Raton Formation when we find it. We have it in our wells; Myers #1, #2 and #3.
Our acreage in New Mexico primarily appears to have, cetaceous-aged laminated shale. It is to have depths of 1,300 to 1,700 feet deep with a gross overall thickness of 5400 to 2,000 feet. We intend to test the Pierre shale and Niobrara, if present in the area, and perhaps Dakota horizons.
The two major producing companies in the Raton Basin are Pioneer National Resources (on the Colorado side) and El Paso Corporation (on the New Mexico side). In the last tow years, Pioneer National Resources has announced trillions of cubic feet of gas reserves, based on the 5 wells that they have sunk in the Raton Basin.
The Company intends to perform vertical drilling in the shale perhaps up to depths of 5,000 feet and then to instigate horizontal testing using, coiled tubing technology to assess the upside. This procedure may allow the Company to identify the productive shale. No funds have been raised or allocated for drilling as of date hereof.
PRODUCT INFORMATION
Coal Bed Methane Versus Traditional Natural Gas
Methane is the primary commercial component of the natural gas stream produced from traditional gas wells. Methane also exists in its natural state in coal seams. Natural gas produced from traditional wells also contains, in varying amounts, other hydrocarbons. However, the natural gas produced from coal beds generally contains only methane and, after simple dehydration, becomes pipeline-quality gas.
Coal bed methane production is similar to traditional natural gas production in terms of the physical producing facilities and the product produced. However, the subsurface mechanisms that allow the gas to move to the wellbore and the producing characteristics of coal bed methane wells differ greatly from traditional natural gas production. Unlike conventional gas wells, which require a porous and permeable reservoir, hydrocarbon migration and a natural structural and/or stratigraphic trap, coal bed methane gas is trapped in the molecular structure of the coal itself until released by pressure changes resulting from the removal of in situ water or natural gas in the micropore system.
Methane is created as part of the coalification process, though coals vary in their methane content per ton. In addition to residing in open spaces in the coal structure, methane is absorbed onto the inner coal surfaces. When the coal is hydraulically fracture stimulated and exposed to lower pressures through the de-watering process, the gas is released from (desorbs from) the coal. Whether a coal bed will produce commercial quantities of methane gas depends on the coal quality, its original content of gas per ton of coal, the thickness of the coal beds, the reservoir pressure, the rate at which gas is released from the coal (diffusivity) and the existence of natural fractures and cleating (permeability) through which the released gas can flow to the wellbore. Frequently, coal beds are partly or completely saturated with water. As the water is produced, internal pressures on the coal are decreased, allowing the gas to desorb from the coal and flow to the wellbore. Unlike traditional gas wells, new coal bed methane wells often produce water for several months and then, as the water production decreases, natural gas production increases as the coal seams de-water.
In order to establish commercial gas production rates, a permanent conduit between the individual coal seams and the wellbore must be created. This is accomplished by hydraulically creating, and propping open with special quality sand, artificial fractures within the coal seams (known as "fracing" in the industry) so the pathway for water and gas migration to the wellbore is enhanced. These fractures are filled (propped) with uniform sized sand and become the enhanced conduits for water and methane to reach the well. The rate at which the gas is released from the coal and the ability of gas to move through the coal to the wellbore are the key determinants of the rate at which a well will produce.
Deep Fractured Shales, Raton Conglomerate and Sandstone Reservoirs
There are possible additional unconventional reservoir systems throughout the Raton Basin. The Company intends to study gas-charged sandstones and conglomerates interbedded within the currently producing Vermejo and Raton formation coals and deeper gas-bearing shale, which underlie the entire region.
The conglomerate and sandstones sought reflect stacked large scale meandering river channel complexes and regional sandy braided alluvial fans that at one time crosscut the Cretaceous-Tertiary peat swamps. During burial, excess gas generated during the coalification process locally became trapped within the pore spaces of these sandstones and now form "Tight-Gas Sand" reservoirs. The increasing recognition of the orientation in the subsurface of such ancient drainage system is allowing the strategic sighting of wells in specific sand prone areas, which may ultimately increase the region's total resource base.
The Raton Basin shales, termed the Niobrara and Pierre Shale formations, are approximately 1,000 to 3,000-feet thick and underlie the currently producing intervals. The shales collectively reflect deposits of blanket-like organic rich mudstones, which accumulated in quiet water condition on the sea floor. Deeper exploratory test wells (2,000 to 6,000 feet) may identify areas of enhanced fracture permeability and could open a significant "Shale Gas" resource. Recently, other companies have started focusing on these shales to produce, using modern technology.
Coal Bed Methane Technology
Thin multi-layer coal bed methane and unconventional tight-gas reservoirs create a multitude of challenges for drilling, reservoir and production engineers, including the challenge of minimizing formation damage and then isolating and completing individual zones in order to maximize recovery of the resource in place.
Damage to the Raton Basin coals from conventional drilling mud systems invading the cleat fracture surfaces and reducing their permeability has been mitigated by utilizing specialized air-drilling techniques using percussion air-hammers.
All coals in the Raton Basin require hydraulic fracture stimulation to attain economic production rates. New techniques uses high quality nitrogen foamed fluids as the fracturing media and combined with coiled tubing fracturing units to selectively place proppant in individual seams. The Company believes that this fracturing technique will assist developing some of the region's resources.
Water Production and Disposal
Based on industry practice, management believes that the groundwater produced from the Raton Basin coal seams will not exceed permit levels and will be suitable for discharge into arroyos, surface water, well-site pits or evaporation ponds pursuant to permits obtained from the State laws. Recent gas analyses confirm that the gas stream is 99% pure methane and lacks other hydrocarbon sources of contamination. In some cases the water is of such quality that it can be discharged to arroyos and surface water under general water discharge permits. These permits may give the Company the flexibility to add water discharge points on an as-needed basis. The Company contract with an independent water sampling company that collects the water samples and monitorsall the Company's water management program. These monitoring costs are directly related to the number of well-site pits, evaporation ponds and discharge points. Because water originates in a natural groundwater system, there is some uncertainty whether water currently being discharged to streams and arroyos will continue to meet permit standards for total iron and suspended solids. Water not meeting these discharge standards can be disposed of in well-site pits and evaporation ponds. When water of lesser quality is discovered or Company wells produce water in excess of the applicable permit limits, the Company may have to drill additional disposal wells to re-inject the produced water into deeper sandstone horizons. Such drilling and disposal would require the Company to obtain permits, similar to those obtained in the past.
Raton Basin Production Characteristics
Because of the importance of removing water from the coal seams to enhance gas production, the Company expects that production from meagre wells may increase because of the beneficial ambient effect of pressure reduction in adjacent, more productive wells. Each well creates its own "cone of depression" around the wellbore. The Company believes that Raton Basin wells on adjacent 160-acre sites will create overlapping cones of depression, enhancing gas production in each well within this pattern. In some cases this pattern of interference can be enhanced by drilling a fifth and sixth well in the 640-acre section.
Raton Basin gas contains insignificant amounts of contaminants, such as hydrogen sulfide, carbon dioxide or nitrogen that are sometimes present in conventional natural gas production. Therefore, the properties of Raton Basin gas, such as heat content per unit volume (British Thermal units, or "Btu"), are close to the average properties of pipeline gas from conventional gas wells.
The Company has no proven oil or gas or coal bed methane reserves, nor any production. The Company intends to explore its Wyoming Acreage for conventional Oil & Gas.
MARKET INFO
Gas Marketing and Transportation
We intend to sell any produced gas on an index basis to credit worthy companies including utilities, other end users and possibly energy marketing companies. Natural gas production from the Raton Basin may be sold into the Mid-Continent through Colorado Interstate Gas Company to the North or to Zia Natural Gas to the South.
In the United States, oil and natural gas liquids are sold under contracts extending up to a year based upon monthly refiner price postings, which generally approximate the price of West Texas Intermediate for crude oil and Applicable Conway, Kansas posting for natural gas liquids, adjusted to reflect transportation costs and quality. In Canada, oil and natural gas liquids are sold under short-term contracts at refiner posted prices for Alberta and Saskatchewan, adjusted to reflect transportation costs and quality. Our intent is to sell our oil and natural gas liquids are sold at spot market prices or under short-term contracts.
At this time, we do not have any transportation commitments in place.
Major Customers
At this time, since the Company is not in production, it does not have any customers..
Competition
We intend to compete in virtually all facets of oil and gas business with numerous other companies, including many that have significantly greater resources. Such competitors may be able to pay more for desirable leases and to evaluate, bid for, and purchase a greater number of properties than the financial or personnel resources of the Company will permit. Our ability to increase reserves in the future will be dependent on our ability to select and acquire suitable producing properties and prospects for future exploration and development. The availability of a market for oil and natural gas production depends upon numerous factors beyond the control of producers, including but not limited to the availability of other domestic or imported production, the locations and capacity of pipelines and the effect of federal, state, provincial and local regulation on such production.
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY
General
Our business is affected by numerous laws and regulations, including, among others, laws and regulations relating to energy, environment, conservation and tax. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and/or criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on our business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to the Company, we cannot predict the overall effect of such laws and regulations on its future operations.
We believe that our operations comply in all material respects with applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive effect on our method of operations than on other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations and is qualified in its entirety by the foregoing.
Federal Regulation of the Sale and Transportation of Oil and Gas
Various aspects of our oil and natural gas operations are regulated by agencies of the federal government. The Federal Energy Regulatory Commission ("FERC") regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). In the past, the federal government has regulated the prices at which oil and gas could be sold. While "first sales" by producers of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Deregulation of wellhead sales in the natural gas industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993.
Commencing in April 1992, the FERC issued Orders Nos. 636, 636-A, 636-B, 636-C and 636-D ("Order No. 636"), which require interstate pipelines to provide transportation services separate, or "unbundled," from the pipelines' sales of gas. Also, Order No. 636 require pipelines to provide open access transportation on a nondiscriminatory basis that is equal for all natural gas shippers. Although Order No. 636 does not directly regulate the Company's production activities, the FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company's activities.
The courts have largely affirmed the significant features of Order No. 636 and numerous related orders pertaining to the individual pipelines, although certain appeals remain pending and the FERC continues to review and modify its open access regulations. In particular, the FERC is conducting a broad review of its transportation regulations, including how they operate in conjunction with state proposals for retail gas marketing restructuring, whether to eliminate cost-of-service rates for short-term transportation, whether to allocate all short-term capacity on the basis of competitive auctions, and whether changes to long-term transportation policies may also be appropriate to avoid a market bias toward short-term contracts. In February 2000, the FERC issued Order No. 637 amending certain regulations governing interstate natural gas pipeline companies in response to the development of more competitive markets for natural gas and natural gas transportation. The goal of Order No. 637 is to "fine tune" the open access regulations implemented by Order No. 636 and to accommodate subsequent changes in the market. Key provisions of Order No. 637 include: (1) permitting value-oriented peak/off peak rates to better allocate revenue responsibility between short-term and long-term markets; (2) permitting term-differentiated rates, in order to better allocate risks between shippers and the pipeline; (3) revising the regulations related to scheduling procedures, capacity, segmentation, imbalance management, and penalties; (4) retaining the right of first refusal ("ROFR") and the five-year matching cap for long-term shippers at maximum rates, but significantly narrowing the ROFR for customers that the FERC does not seem to be captive; and (5) adopting new website reporting requirements that include daily transactional data on all firm and interruptible contracts and daily reporting of scheduled quantities at points or segments. Most major aspects of Order No. 637 were upheld on judicial review, though certain issues, such as capacity segmentation and rights of first refusal, were remanded to the FERC, which issued a remand order in October of 2002. In January of 2004, the FERC denied rehearing of its October 2002 remand order. The Company cannot predict whether judicial review will be sought of the FERC's remand order and, if so, whether and to what extent FERC's market reforms will survive such review and, if they do, whether the FERC's actions will achieve the goal of increasing competition in markets in which the Company's natural gas is sold. However, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers and marketers with which it competes.
Commencing in October 1993, the FERC issued a series of rules (Order Nos. 561 and 561-A) establishing an indexing system under which oil pipelines will be able to change their transportation rates, subject to prescribed ceiling levels. The indexing system, which allows pipelines to make rate changes to track changes in the Producer Price Index for Finished Goods, minus one percent, became effective January 1, 1995. The Company does not believe that these rules affect the Company any differently than other oil producers and marketers with which it competes.
The FERC has also issued numerous orders confirming the sale and abandonment of natural gas gathering facilities previously owned by interstate pipelines and acknowledging that if the FERC does not have jurisdiction over services provided thereon, then such facilities and services may be subject to regulation by state authorities in accordance with state law. A number of states have either enacted new laws or are considering the adequacy of existing laws affecting gathering rates and/or services.
Other state regulation of gathering facilities generally includes various safety, environmental, and in some circumstances, nondiscriminatory take requirements, but does not generally entail rate regulation. Thus, natural gas gathering may receive greater regulatory scrutiny of state agencies in the future. The Company's gathering operations could be adversely affected should they be subject in the future to increased state regulation of rates or services, although the Company does not believe that it would be affected by such regulation any differently than other natural gas producers or gatherers. In addition, the FERC's approval of transfers of previously regulated gathering systems to independent or pipeline affiliated gathering companies that are not subject to FERC regulation may affect competition for gathering or natural gas marketing services in areas served by those systems and thus may affect both the costs and the nature of gathering services that may be available to interested producers or shippers in the future.
We own certain natural gas pipeline facilities that we believes meet the traditional tests the FERC has used to establish a pipeline's status as a gatherer not subject to the FERC's jurisdiction. Whether on state or federal land, natural gas gathering may receive greater regulatory scrutiny in the post-Order No. 636 environment.
We may conduct certain operations on federal oil and gas leases, which are administered by the Minerals Management Service ("MMS"). Federal leases contain relatively standard terms and require compliance with detailed MMS regulations and orders, which are subject to change. Among other restrictions, the MMS has regulations restricting the flaring or venting of natural gas, and the MMS has proposed to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Under certain circumstances, the MMS may require any company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition, cash flows and operations. The MMS issued a final rule that amended its regulations governing the valuation of crude oil produced from federal leases. This rule, which became effective June 1, 2000, provides that the MMS will collect royalties based on the market value of oil produced from federal leases. On August 20, 2003, the MMS issued a proposed rule that would change certain components of its valuation procedures for the calculation of royalties owed for crude oil sales. The proposed changes included changing the valuation basis for transactions not at arm's-length from spot to NYMEX prices adjusted for locality and quality differentials, and clarifying the treatment of transactions under a joint operating agreement. Final comments on the proposed rule were due on November 10, 2003. We has no way of knowing whether the MMS will implement the proposed changes in a final rule or what effect such changes, if implemented, will have on the Company's results of operations, However, the Company does not believe that this proposed rule would affect it any differently than other producers and marketers of crude oil. We have no federal leases as of date hereof.
Additional proposals and proceedings that might affect the oil and gas industry are pending before Congress, the FERC, the MMS, state commissions and the courts. Our cannot predict when or whether any such proposals and proceedings may become effective. In the past, the natural gas industry has been heavily regulated. There is no assurance that the regulatory approach currently pursued by various agencies will continue indefinitely. Notwithstanding the foregoing, we do not anticipate that compliance with existing federal, state and local laws, rules and regulations will have a material or significantly adverse effect upon the capital expenditures, earnings or competitive position of the Company or its subsidiaries. No material portion of our business is subject to re-negotiation of profits or termination of contracts or subcontracts at the election of the federal government.
The BLM controls isolated parcels of federally owned surface and/or minerals in the areas of interests. Drilling and development of federal minerals and construction activities on federal surface are subject to the National Environmental Policy Act ("NEPA"). BLM has not completed an environmental assessment under NEPA. To date, no wells have been drilled on BLM minerals in the Raton Basin. In the Raton Basin, the BLM must complete an environmental assessment, and any future wells would need to be approved based on the results of the environmental assessment. Development of adjacent fee lands and minerals within the Raton Basin may proceed unhindered and access to fee lands is not expected to hinder by the presence of isolated parcels of federal surface.
Future activities within the Piceance and Uintah Basins will be subject to NEPA. The scope and effect are not known at the present time. We do not have any BLM leases as of this date.
State Regulations
Our operations are also subject to regulation at the state level and, in some cases, county, municipal and local governmental levels. Such regulation includes (1) requiring permits for the drilling of wells, (2) maintaining bonding requirements in order to drill or operate wells and (3) regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the disposal of fluids used and produced in connection with operations. Our operations are also subject to various conservation laws and regulations. These include (1) proration units, (2) the density of wells that may be drilled, and (3) the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, which generally limit the venting or flaring of gas and impose certain requirements regarding the ratability of production. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements, but (except as noted above) does not generally entail rate regulation. These regulatory burdens may affect profitability, and the Company is unable to predict the future cost or impact of complying with such regulations.
Environmental Regulations
We are subject to extensive federal, state, and local environmental laws and regulations that, among other things, regulate the discharge or disposal of substances into the environment and otherwise are intended to protect the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial administrative, civil and/or criminal penalties and, in some cases, injunctive relief for failure to comply. Some laws and regulations relating to the protection of the environment may, in certain circumstances, impose "strict liability" for environmental contamination. Such laws and regulations render a person or company liable for environmental and natural resource damages, cleanup costs and, in the case of oil spills in certain states, consequential damages without regard to negligence or fault. Other laws and regulations may require the rate of oil and natural gas production to be below the economically optimal rate or may even restrict or prohibit exploration or production activities in environmentally sensitive areas. In addition, state laws often require some form of remedial action such as closure of inactive pits and plugging of abandoned wells to prevent pollution from former or suspended operations. Moreover, from time to time, legislation or other initiatives are proposed to Congress or to state and local governments that would place more onerous conditions on the treatment, storage, disposal or clean-up of certain oil and gas exploration and production wastes. If such legislation or other initiatives were to be enacted or adopted, it could have an adverse impact on the operating costs of the Company, as well as the oil and gas industry in general. The regulatory burden on the oil and natural gas industry increases our cost and risk of doing business and consequently affects its profitability.
Compliance with these environmental requirements, including financial assurance requirements and the costs associated with the cleanup of any spill, could have a material adverse effect upon our capital expenditures, earnings or competitive position. We believe that it is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on it. Nevertheless, changes in environmental laws and regulations have the potential to adversely affect our operations. For example, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), also known as the "Superfund" law, and analogous state laws impose liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the current or prior owner or operator of the disposal site or sites where the release occurred and companies that transported disposed or arranged for the transport or disposal of the hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to strict and joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for the federal or state government to pursue such claims. It is also not uncommon for neighboring landowners and other third parties to file claims for personal injury or property or natural resource damages allegedly caused by the hazardous substances released into the environment. Under CERCLA, certain oil and gas materials and products are, by definition, excluded from the term "hazardous substances."
We may own or lease numerous properties that have long been used for oil and gas exploration and production. Although the predecessor owners utilized operating and disposal practices that were standard for the industry at the time, hazardous substances in the past may have been disposed of or released on or under the properties owned or leased by the Company or on or under other locations where such substances have been taken or placed for disposal. In addition, many of these properties have from time to time been operated by third parties whose management of substances was not under our control. These properties and the substances disposed thereon may be subject to CERCLA, the Resource Conservation and Recovery Act, as amended and analogous state laws and regulations. Under such laws and regulations, we could be required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators) or property contamination (including groundwater contamination by prior owners or operators), or to perform remedial plugging or pit closure operations to prevent future contamination. We have no knowledge of any environmental hazards as of date hereof.
In connection with our coal bed methane gas exploration we may from time to time may conduct production enhancement techniques, including various activities designed to induce hydraulic fracturing of the coal bed. While we may perform its production enhancement techniques in substantial compliance with the requirements set forth by the State laws, neither State nor the federal Environmental Protection Agency ("EPA") regulates this coal bed formation hydraulic fracturing as a form of underground injection. It is possible that hydraulic fracturing of coal beds for methane gas production will become regulated within the United States as a form of underground injection, resulting in the imposition of stricter performance standards (which, if not met, could result in diminished opportunities for methane gas production enhancement) and increased administrative and operating costs for the Company.
Management cannot predict whether potential future regulation of hydraulic fracturing as a form of underground injection would have an adverse material effect on our operations or financial position. However, such regulation is not expected to be any more burdensome to the Company than it would be to other similarly situated companies involved in coal bed methane gas production or tight gas sands production within the United States. In our coal bed methane gas exploration the Company typically may bring naturally occurring groundwater to the surface as a by-product of the production of methane gas. This "produced water" is either re-injected into the subsurface or stored or disposed of in evaporation ponds or permitted natural collection features located on the surface at or near the well-site in compliance with federal and state statutes and regulations. In some cases, the produced water is used for stock watering, agricultural or dust suppression purposes, also in substantial compliance with federal, state and local laws and regulations. Under the Federal Water Pollution Control Act (also referred to as the "Clean Water Act") and various other state requirements and regulations, the EPA and the State of Colorado's Department of Public Health and the Environment assert administrative and regulatory enforcement authority over the discharge of produced water. Where we can meet federal and state regulatory requirements and applicable water quality standards, disposal of produced water by discharge to surface water is an option.
The Clean Water Act imposes restrictions and strict controls regarding the discharge of produced waters and other oil and gas wastes into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters. The Clean Water Act and analogous state laws provide for civil, criminal and administrative penalties for any unauthorized discharges of oil and other hazardous substances in reportable quantities and may impose substantial potential liability for the costs of removal, remediation and damages. State water discharge regulations and the federal National Pollutant Discharge Elimination System permits applicable to the oil and gas industry generally prohibit the discharge of produced water, sand and some other substances into coastal waters. The cost to comply with zero discharges mandated under federal and state law is not expected to have a material adverse impact on the Company's financial condition and results of operations. Some oil and gas exploration and production facilities are required to obtain permits for their storm water discharges. Costs may be incurred in connection with treatment of wastewater or developing storm water pollution prevention plans.
Our operations may involve the use of gas-fired compressors to transport collected gas; these compressors are subject to federal and state regulations for the control of air emissions. We will obtain construction permits for compression it enjoys production from any coal bed methane. However, in the future, additional facilities could become subject to additional monitoring and pollution control requirements as compressor facilities are expanded.
The Oil Pollution Act of 1990 ("OPA") imposes regulations on "responsible parties" related to the prevention of oil spills and liability for damages resulting from spills in waters of the United States. A "responsible party" includes the owner or operator of an onshore facility, vessel or pipeline, or the lessee or permittee of the area in which an offshore facility is located. OPA assigns strict, joint and several liabilities to each responsible party for oil removal costs and a variety of public and private damages, including natural resource damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation, or if the party fails to report a spill or to cooperate fully in the cleanup. Even if applicable, the liability limits for onshore facilities require the responsible party to pay all removal costs, plus up to $350 million in other damages. Few defenses exist to the liability imposed by OPA. Failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party to administrative, civil or criminal enforcement.
At this time, we are not required and otherwise have no plans to make any material capital expenditures to install pollution control devices at any facilities.
Title to Properties
As is customary in the oil and gas industry, only a preliminary title examination is conducted at the time the Company acquires leases of properties believed to be suitable for drilling operations. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted by independent attorneys. Once production from a given well is established, the Company prepares a division order title report indicating the proper parties and percentages for payment of production proceeds, including royalties. The Company believes that the titles to its leasehold properties are good and defensible in accordance with standards generally acceptable in the oil and gas industry.
ITEM 1 A.
ITEM 1 A. RISK FACTORS - -----------------------
Oil and gas prices are volatile, and an extended decline in prices would hurt the Company's profitability and financial condition.
We believe that the markets for oil and gas will continue to be volatile. Any substantial or extended decline in the price of oil or gas would negatively affect the Company's financial condition and results of operations. Revenues, operating results, profitability, future rate of growth and the carrying value of oil and gas properties depend heavily on prevailing market prices for oil and gas. A material decline could reduce tour cash flow and borrowing capacity, as well as the value and the amount of its oil and gas reserves. Various factors beyond our control can affect prices of oil and gas. These factors include:
o worldwide and domestic supplies of oil and gas;
o the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree to and maintain oil price and production controls;
o political instability or armed conflict in oil or gas producing regions;
o the price and level of foreign imports;
o worldwide economic conditions;
o marketability of production;
o the level of consumer demands;
o the price, availability and acceptance of alternative fuels;
o the availability of pipeline capacity;
o weather conditions; and
o actions of federal, state, and local authorities.
These external factors and the volatile nature of the energy markets make it difficult to estimate future commodity prices.
In addition, we may be required to write down or impair the carrying value of the Company's oil and gas properties when oil and gas prices are depressed or unusually volatile. If a write-down is required, it would result in a charge to earnings and book value. Once incurred, a write-down of oil and gas properties is not reversible at a later date. We reviews, on a quarterly basis, the carrying value of its oil and gas properties under the full cost accounting rules of the SEC. Under these rules, capitalized costs of proved oil and gas properties, as adjusted for estimated asset retirement obligations, may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10%. Application of the ceiling test generally requires pricing future revenue at the unescalated prices in effect as of the end of each fiscal quarter, after giving effect to our cash flow hedge positions, if any and requires a write-down for accounting purposes if the ceiling is exceeded, even if prices were depressed for only a short period of time.
Our intended operations will require large amounts of capital that may not be recovered.
If the Company's future revenues were to decrease due to lower oil and natural gas prices, decreased production or other reasons, and if it could not obtain capital through its credit facilities or otherwise, our ability to execute its development plans, replace its reserves or maintain its production levels could be greatly limited. Our current development plans will require us to make large capital expenditures for the exploration and development of its oil and natural gas properties.
Historically, the Company has funded its capital expenditures through a combination of funds generated the issuance of equity, and short-term financing arrangements. Additional financing may not be available to the Company on acceptable terms. Future cash flows and the availability of financing will be subject to a number of variables, such as:
o the success of the Company's prospects in the Raton Basin;
o the Company's success in locating and producing reserves;
o the prices of oil and natural gas.
Issuing equity securities to satisfy the Company's financing requirements could cause substantial dilution to existing stockholders. In addition, debt financing could lead to a diversion of cash flow to satisfy debt servicing obligations and restrictions on the Company's operations.
Our exploratory and development drilling activities may not be successful.
The Company's future drilling activities may not be successful, and our management cannot be sure that our overall drilling success rate or the Company's drilling success rate for activity within a particular area will not decline. In addition, the wells that we drill may not recover all or any portion of the Company's capital investment in the wells, infrastructure or the underlying leaseholds. We are currently in the early stages of evaluating our acreage in northern New Mexico for development and we can offer no assurance that the development of any projects will occur as scheduled or that actual results will be in line with any initial estimates. Unsuccessful drilling activities could negatively affect our results of operations and financial condition. The cost of drilling, completing and operating wells is often uncertain, and a number of factors can delay or prevent drilling operations, including: o unexpected drilling conditions;
o pressure or irregularities in formations;
o equipment failures or accidents;
o ability to hire and train personnel for drilling and completion services;
o adverse weather conditions;
o compliance with governmental requirements; and
o shortages or delays in the availability of drilling rigs and the delivery of equipment.
In addition, we may not be able to obtain any options or lease rights in potential drilling locations that it identifies. There is no guarantee that the potential drilling locations that we have identified will ever produce oil or natural gas.
Our Acquisition Activities may not be successful.
As part of our growth strategy, we may make additional acquisitions of businesses and properties. However, suitable acquisition candidates may not be available on terms and conditions we find acceptable, and acquisitions pose substantial risks to our business, financial condition and results of operations. In pursuing acquisitions, we compete with other companies, many of which have greater financial and other resources to acquire attractive companies and properties. Even if future acquisitions are completed, the following are some of the risks associated with acquisitions:
o the acquired businesses or properties may not produce revenues, earnings or cash flow at anticipated levels;
o the Company may assume liabilities that were not disclosed or that exceed our estimates;
o We may be unable to integrate acquired businesses successfully and realize anticipated economic, operational and other benefits in a timely manner, which could result in substantial costs and delays or other operational, technical or financial problems;
o acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures;
o We may finance future acquisitions by issuing common stock for some or all of the purchase price, which could dilute the ownership interests of the Company's stockholders; and
o We may incur additional debt related to future acquisitions.
We may be affected by the gas prices in the Rocky Mountain region.
Oversupply of gas and pipeline capacity issues, as well as spot market prices may affect prices achievable for any gas sales.
We face strong competition in the oil and gas industry, and many of its competitors have greater resources than the Company.
We operate in a highly competitive industry. We will competes with major oil companies, independent producers and institutional and individual investors, which are actively seeking oil and gas properties throughout the world, along with the equipment, labor and materials required to operate properties. Many of our competitors have financial and technological resources vastly exceeding those available to us Many oil and gas properties are sold in a competitive bidding process in which we may lack the technological information or expertise available to other bidders. We can offer no assurance that it will be successful in acquiring and developing profitable properties in the face of this competition.
Our operations are subject to the business and financial risk of oil and gas exploration.
The business of exploring for and, to a lesser extent, developing oil and gas properties is an activity that involves a high degree of business and financial risk. Property acquisition decisions generally are based on various assumptions and subjective judgments that are speculative. It is impossible to predict accurately the ultimate production potential, if any, of a particular property or well. Moreover, the successful completion of an oil or gas well does not ensure a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomic or marginally economic.
Our business is subject to operating hazards that could result in substantial losses.
The oil and natural gas business involves operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks, any of which could cause the Company a substantial loss. In addition, we may be held liable for environmental damage caused by previous owners of property it owns or leases. As a result, the Company may face substantial liabilities to third parties or governmental entities, which could reduce or eliminate funds available for exploration, development or acquisitions or cause the Company to incur losses. An event that is not fully covered by insurance--for example, losses resulting from pollution and environmental risks, which are not fully insurable--could have a material adverse effect on the Company's financial condition and results of operations.
The Company may face unanticipated water disposal costs.
Where groundwater produced from coal bed methane projects fails to meet the quality requirements of applicable regulatory agencies or methane wells produce water in excess of the applicable volumetric permit limit, we may have to drill additional disposal wells to re-inject the produced water back into deep underground rock formations. The costs to dispose of this produced water may increase if any of the following occur:
o We cannot obtain future permits from applicable regulatory agencies;
o water of lesser quality is produced;
o Methane wells produce excess water; or
o new laws or regulations require water to be disposed of in a different manner.
We have limited protection for its technology and depend on technology owned by others.
We intend to use operating practices that management believes are of value in developing coal bed methane resources. In most cases, patent or other intellectual property protection is unavailable for this technology. Our use of independent contractors in most aspects of its drilling and some completion operations makes the protection of such technology more difficult. Moreover, we rely on the technological expertise of the independent contractors that it retains for its oil and gas operations. We do not have any long-term agreements with these contractors, and management cannot be sure that we will continue to have access to this expertise.
We must comply with complex federal, state, and local laws and regulations.
Federal, state, and local authorities extensively regulate the oil and gas industry. Noncompliance with these statutes and regulations may lead to substantial penalties, and the overall regulatory burden on the industry increases the cost of doing business and, in turn, decreases profitability. Regulations affect various aspects of oil and gas drilling and production activities, including the pricing and marketing of oil and gas production, the drilling of wells (through permit and bonding requirements), the positioning of wells, the unitization or pooling of oil and gas properties, environmental matters, safety standards, the sharing of markets, production limitations, plugging and abandonment and restoration. These laws and regulations are under constant review for amendment or expansion.
We may incur substantial costs to comply with stringent environmental regulations.
Our operations are subject to stringent and constantly changing environmental laws and regulations adopted by federal, state, and local governmental authorities. We could be forced to expend significant resources to comply with new laws or regulations, or changes to current requirements. Governmental environmental agencies have relatively little experience with the regulation of coal bed methane operations, which are technologically different from conventional oil and gas operations. This inexperience has created uncertainty regarding how these agencies will interpret air, water and waste laws and regulations and other requirements to coal bed methane drilling, fracture stimulation methods, production and water disposal operations. We will continue to be subject to uncertainty associated with new regulatory interpretations and inconsistent interpretations between governmental environmental agencies. We could face significant liabilities to the government and third parties for discharges of oil, natural gas or other pollutants into the air, soil or water, and we could have to spend substantial amounts on investigations, litigation and remediation. Moreover, failure by the Company to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of investigatory and remedial obligations and the issuance of injunctions that restrict or prohibit the performance of operations. See "--Government Regulation of the Oil and Gas Industry--Environmental Matters."
Our business will depend on transportation facilities owned by others.
The marketability of our gas production depends in part on the availability, proximity and capacity of pipeline systems owned by third parties, and changes in our contracts with these third parties could materially affect the Company's operations. The Company, through its subsidiaries, has entered into a series of firm transportation service agreements with pipeline companies providing for the transportation of our natural gas production from the Raton Basin to the Mid-Continent markets. See "--Customers and Markets--Gas Marketing and Transportation."
In addition, federal, state, and local regulation of gas and oil production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, and general economic conditions could adversely affect our ability to transport its natural gas.
Market conditions could cause us to incur losses on any transportation contracts.
General Risk Factors
Conflicts of Interest.
Certain conflicts of interest may exist between the Company and its officers and directors. They have other business interests to which they devote their attention, and may be expected to continue to do so although management time should be devoted to the business of the Company. As a result, conflicts of interest may arise that can be resolved only through exercise of such judgment as is consistent with fiduciary duties to the Company. See "Management," and "Conflicts of Interest."
Need For Additional Financing.
For its business plan to exploit oil, gas, and coal bed methane opportunities we must seek additional financing, which may or may not be available. The Company is investigating the availability, source, or terms that might govern the acquisition of additional capital and will not do so until it determines a need for additional financing. If not available, our operations will be limited to those that can be financed with its available capital.
Regulation of Penny Stocks.
Our securities are subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of purchasers in this offering to sell their securities in any market that might develop therefore.
In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act of 1934, as amended. Because the securities of the Company may constitute "penny stocks" within the meaning of the rules, the rules would apply to the Company and to its securities. The rules may further affect the ability of owners of Shares to sell the securities of the Company in any market that might develop for them.
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The Company's management is aware of the abuses that have occurred historically in the penny stock market. Although the Company does not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to the Company's securities.
Lack of Operating History.
The Company was organized in April 1998 and remained dormant until Spring 1999 when it raised money to explore a business plan involving internet websites. The Company is not profitable. We have not had successful operating history. We face all of the risks of a new business and the special risks inherent in the investigation, acquisition, or involvement in a new business opportunity. The Company must be regarded as a new or "start-up" venture with all of the unforeseen costs, expenses, problems, and difficulties to which such ventures are subject.
Lack of Diversification.
Because of the limited financial-resources that we have, it is unlikely that we will be able to diversify its acquisitions or operations. The Company's probable inability to diversify its activities into more than one area will subject us to economic fluctuations within a particular business or industry and therefore increase the risks associated with our operations.
Dependence upon Management; Limited Participation of Management.
The Company currently has only four individuals who are serving as its officer and directors. We will be heavily dependent upon their skills, talents, and abilities to implement its business plan, and may, from time to time, find that the inability of the officers and directors to devote their full time attention to the business of the Company results in a delay in progress toward implementing its business plan. See "Management." Because investors will not be able to evaluate the merits of possible business decisions by us, they should critically assess the information concerning our officers and directors.
Lack of Continuity in Management.
The Company does not have an employment agreement with its officer and directors, and as a result, there is no assurance they will continue to manage the Company in the future. In connection with acquisition of a business opportunity, it is likely the current officers and directors of the Company may resign subject to compliance with Section 14f of the Securities Exchange Act of 1934. A decision to resign will be based upon the identity of the business opportunity and the nature of the transaction, and is likely to occur without the vote or consent of the stockholders of the Company.
Indemnification of Officers and Directors.
Colorado Revised Statutes provide for the indemnification of its directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any directors, officers, employees, or agents, upon such person's promise to repay the Company therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.
Director's Liability Limited.
Colorado Revised Statutes exclude personal liability of its directors to the Company and its stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. Accordingly, we will have a much more limited right of action against its directors than otherwise would be the case. This provision does not affect the liability of any director under federal or applicable state securities laws.
Dependence upon Outside Advisors.
To supplement the business experience of its officers and directors, we may be required to employ accountants, technical experts, appraisers, attorneys, or other consultants or advisors. The Company's President, without any input from stockholders, will make the selection of any such advisors. Furthermore, it is anticipated that such persons may be engaged on an "as needed" basis without a continuing fiduciary or other obligation to the Company. In the event the President of the Company considers it necessary to hire outside advisors, he may elect to hire persons who are affiliates, if they are able to provide the required services.
Leveraged Transactions.
Acquisitions of assets by the Company maybe leveraged, i.e., we may finance the acquisition of the assets by borrowing against the assets of the business, or against the projected future revenues or profits of the assets. If done, this could increase our exposure to larger losses. Assets acquired through a leveraged transaction are profitable only if it generates enough revenues to cover the related debt and expenses. Failure to make payments on the debt incurred to purchase the business opportunity could result in the loss of a portion or all of the assets acquired. There is no assurance that any assets acquired through a leveraged transaction will generate sufficient revenues to cover the related debt and expenses.
Loss of Control by Present Management and Stockholders.
We may consider an acquisition in which we would issue, as consideration for the business opportunity to be acquired, an amount of the Company's authorized but unissued common stock that could, upon issuance, represent the great majority of the voting power and equity of the Company. The result of such an acquisition would be that the acquired company's stockholders and management would control the Company, and persons unknown could replace our management at this time. Such a merger would result in a greatly reduced percentage of ownership of the Company by its current shareholders.
Volatility of Stock Price.
There is a limited recent history relating to the market price of our stock, but what exists indicates the market price is highly volatile and it is very thinly traded. Factors such as those discussed in this "Risk Factors" section may have a significant impact upon the market price of the securities. Due to the low price of the securities, many brokerage firms may not be willing to effect transactions in the securities. Further, many lending institutions will not permit the use of such securities as collateral for any loans.
We depend on key personnel and do not have employment agreements with our executive officers.
Our success depends on the continued services of our executive officers and a limited number of other senior management and technical personnel, and we do not have employment agreements with these employees. Loss of the services of any of these people could result in financial losses and interruptions in operations.
We do not pay dividends.
We have never declared nor paid any cash dividends on our common stock and management has no intention to do so in the near future.
RESERVES
The Company has no proven oil or gas or coalbed methane reserves, nor any production.
Employees
The Company is a development stage company and currently has no fulltime employees. Management of the Company expects to use consultants, attorneys and accountants as necessary, and anticipates a need to engage at least 3 full-time employees as it expands its oil and gas operations.
Office and Operations Facilities
The Company leases no corporate office space at this time, using offices of its consultants as needed.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS - ----------------------------------
Not Applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES/ASSETS/OIL AND GAS PROSPECTS
(a) Real Estate. None.
(b) Title to properties.
The Company owns fee title to various minerals on 150,000 gross acres approximately in Colfax County, New Mexico subject to a 10% royalty interest. These interests constitute oil, gas and coalbed methane on 120,000 acres, approximately, and 50% of oil and gas rights on approximately 22,000 acres and 20,000 acres approximately of other miscellaneous mineral rights.
(c) Oil and Gas Leases and Interests
Historical Oil or Gas Production for Company
Productive Wells
During the year ended April 30, 2009, the Company did not have any gross or net producing wells.
(d) Patents. None
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
On October 24, 2008, the Company received notice from LPC Investment, LLC ("LPC") of a demand of payment in connection with $74,600 in an unsecured promissory notes held by LPC. LPC is demanding payment of the outstanding principal and accrued interest. The promissory note had a due date of September 30, 2008. LPC filed a lawsuit against the Company in December 2008, seeking payment and alleging he was entitled to damages in excess of$1,400,000. LPC has moved to dismiss its lawsuit in July 2009, and it is expected to be dismissed about mid to late August 2009
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
During the year end April 30, 2009, the Company did not submit any matters for approval to its shareholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- AND ISSUER PURCHASES OF EQUITY SECURITIES. - -----------------------------------------
The Common Stock is presently traded on the over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority (the "FINRA"). The OTCBB symbol for the Common Stock is "SNRV". The following table sets forth the range of high and low bid quotations for the Common Stock of each full quarterly period during the fiscal year or equivalent period for the fiscal periods indicated below. The quotations were obtained from information published by the FINRA and reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
2009 HIGH LOW ---- ---- --- April 30, 2009 $1.65 $1.58 January 31, 2009 0.65 0.65 October 31, 2008 0.495 0.495 July 31, 2008 0.20 0.20
2008 HIGH LOW ---- ---- --- April 30, 2008 $0.30 $0.29 January 31, 2008 0.39 0.39 October 31, 2007 0.60 0.60 July 31, 2007 1.59 1.59
At April 30, 2009, there were 88 holders of record of the Company's common stock. A significant number of the shares are held in street name and, as such, the Company believes that the actual number of beneficial owners is higher.
Dividends
The Company has not established a policy concerning payment of regular dividends nor has it paid any dividends on its common stock to date. Any payment of dividends in the future will be determined by the Board of Directors in light of conditions then existing, including restrictions imposed by the Company's preferred stock then outstanding, the Company's earnings, financial condition, capital requirements and debt covenants, if any, and the tax treatment consequences of paying dividends.
Effective August 11, 1993, the SEC adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) that the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) states that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Exemption from Registration Claimed
All of the sales by the Company of its unregistered securities were made by the Company in reliance upon Section 4(2) of the Act. All of the individuals and/or entities listed above that purchased the unregistered securities were all known to the Company and its management, through pre-existing business relationships, as long standing business associates, friends, and employees. All purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and were afforded access to management of the Company in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ---------------------------------
Not Applicable
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS. - -------------------------------
CAUTIONARY AND FORWARD LOOKING STATEMENTS
In addition to statements of historical fact, this Annual Report on Form 10-K for the year ended April 30, 2009 contains forward-looking statements. The presentation of future aspects of Sun River Energy, Inc. ("Sun River," the "Company" or "issuer") found in these statements is subject to a number of risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," or "could" or the negative variations thereof or comparable terminology are intended to identify forward-looking statements.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause the Company's actual results to be materially different from any future results expressed or implied by the Company in those statements. Important facts that could prevent the Company from achieving any stated goals include, but are not limited to, the following:
Some of these risks might include, but are not limited to, the following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement business plans;
(e) failure to commercialize its technology or to make sales;
(f) rapid and significant changes in markets;
(g) litigation with or legal claims and allegations by outside parties; and
(h) insufficient revenues to cover operating costs.
There is no assurance that the Company will be profitable, the Company may not be able to successfully develop, manage or market its products and services, the Company may not be able to attract or retain qualified executives and technology personnel, the Company's products and services may become obsolete, government regulation may hinder the Company's business, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of warrants and stock options, and other risks inherent in the Company's businesses.
The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the factors described in other documents the Company files, from time to time, with the SEC, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed by the Company.
Plan Of Operations - ------------------
We had no revenues during the years ended April 30, 2009 and 2008. We have minimal capital and minimal cash.
During the years ended April 30 2009 and, 2008, our operations were focused exploring a coal bed methane prospect located in the Raton Basin in Northern New Mexico. During the year ended April 30, 2008, we drilled 3 coal bed methane wells in the Raton Basin, Myers #1, #2 and #3. All three wells have shown multiple coal zones, which will be completed to seek methane gas.
Over the next twelve months, we intend to frac the Myers #1 and #2 in order to test production thereafter. We have perforated multiple zones and intend to frac these zones.
We intend to operate all of our prospects in the Raton Basin and hold working interest of 100% on an 80% NRI on our leases, except that we have a 25% working interest in the Sun River #1, LLC, a drilling syndication for the Myers #1 and #2 wells, which was assembled in early 2007.
On April 21, 2008, the Company entered into a Release of Claims, with Nova Leasing, LLC, the holder of a $6.6 Million Promissory Note and a $64,000 Promissory Note. In return for the releasement of the Company from any further payment obligations under the promissory notes, the Company returned to Nova Leasing, LLC, all rights and interests into and/or entitlements to the following leases:
(a) the working interest in and the net revenue interest on the lease totaling 640 acres in Natrona County, Wyoming; and
(b) the 85% working interest in and the 80% net revenue interest on certain leases totaling approximately 14,000 acres (gross) in Natrona and Converse County Wyoming, in the Powder River Basin.
In connection with the forgiveness of debt and the return of the releases, the Company recorded a loss for the year ended April 30, 2008 of $1,298,603 and income of $429,645 in connection with the release of the debt.
We will need substantial additional capital to support our proposed future operations. We have no revenues. We have no committed source for any funds as of date here. No representation is made that any funds will be available when needed. In the event funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales or royalty income, and could fail in business as a result of these uncertainties.
The independent registered public accounting firm's report on the Company's financial statements as of April 30, 2009, and for each of the years in the two-year period then ended, includes a "going concern" explanatory paragraph, that describes substantial doubt about the Company's ability to continue as a going concern.
Results Of Operations - Year Ended April 30, 2009 Compared To Year Ended April - -------------------------------------------------------------------------------- 30, 2009 - --------
During the year ended April 30, 2009 and 2008, the Company did not recognize any revenues from its operating activities.
During the year ended April 30, 2009, operating losses were $2,655,423 compared to $975,667 during the year ended April 30, 2007. The $1,679,756 increase is due to a $1,822,330 increase in consulting expenses, an $112,500 increase in director fees and a $400,000 increase in litigations expenses offset by a $632,230 decrease in lease expenses.
The Company recognized interest expense of $170,030 during the year ended April 30, 2009 compared to $512,874 during the year ended April 30, 2008. Interest expenses decreased by $342,844 due to settlement of outstanding debt during the year ended April 30, 2009.
During the year ended April 30, 2009, the Company recognized a net loss of $2,827,376, compared to a net loss of $2,537,051 for the year ended April 30, 2008. The increase of $290,325 was due the $1,679,756 increase in operational expenses offset by the $342,844 decrease in interest expense combined with the recorded a loss for the year ended April 30, 2008 of $1,298,603 and income of $429,645 in connection with the release of the debt, as discussed above.
Liquidity and Capital Resources - -------------------------------
At April 30, 2009, the Company had cash of $38,851, total current assets of $38,851 consisting solely of cash on hand. At April 30, 2009, the Company had current liabilities of $2,277,743, consisting of accounts payable of $320,859, accrued interest payable of $168,866, accrued litigation expense of $400,000, drilling bonds payable of $37,508 and notes payable of $1,350,780. At April 30, 2009, the Company has a working capital deficit of $2,238,892.
During the year ended April 30, 2009, the Company used cash of $205,580 in its operating activities. During the year end April 30, 2009, net losses of $2,827,376 were adjusted for $420 in depreciation, $40,756 in unrealized losses on marketable securities, $2,252,310 in expenses for stock and warrants issued for services.
During the year ended April 30, 2008, the Company used cash of $521,671 in its operating activities. During the year ended April 30, 2008, net losses of $2,537,051 were adjusted for $240 in depreciation, $12,035 in unrealized losses on marketable securities, $448,340 in consulting expense for stock and options issued and $107,120 in amortization of stock issued for consulting services.
The Company used funds of $423,833 in its investment activities. We expended $423,833 in connection with wells in process. The Company was used funds of $6,851,322 from investing activities during the year ended April 30, 2008. We expended $188,678 on assets and recognized $7,040,000 from the return of leases as part of a Release of Claim, described above.
During the year ended April 30, 2009, the Company received $656,226 from its financing activities. The Company used $6,335,185 in its financing activities during the year ended April 30, 2008.
The Company during the year ended April 30, 2008, received $1,100,000 from the payment of a subscription receivable. In exchange for the receivable, the Company issued 2,200,000 of its common shares at the time of the issuance of the receivable in April 2007. The Company used these funds to make a payment on $6,600,000 note payable owed to Nova Leasing, LLC.
During the year ended April 30, 2009, the Company entered into a Consulting Services Agreement with a third party for services. Payment for such services includes a monthly payment of 20,000 shares of the Company's common stock and a warrant exercisable for 20,000 shares of the Company's common stock. During the year ended April 30, 2009, the Company issued 60,000 shares of the Company's common stock to such consultant. The Company recognized an expense of $57,000.
During the year ended April 30, 2009, the Company issued 500,000 shares of the Company's common stock in connection with the conversion of $125,000 of the principal of a $125,000 unsecured corporate promissory note.
During the year ended April 30, 2009, the Company issued 100,000 shares of its common stock as forbearance on a $373,540 unsecured corporate promissory note held by a vendor.
During the year ended April 30, 2009, the Company issued 156,563 shares of common stock in exchange for 507,500 warrants and options that were outstanding. This was accounted for as solely a capital transaction between common stock and additional paid-in capital.
During the year ended April 30, 2009, the Company issued a total of 250,000 shares of its common stock to its directors for services. The Company recognized an $112,500 expense in relation to the issuance.
During the year ended April 30, 2009, the Company issued 150,000 shares of its common stock to a third party for consulting services of $52,500. The value of the shares was based on a closing market price of $0.35 per share.
During the year ended April 30, 2009, officers and directors of the Company were issued warrants exercisable for 1,400,000 shares of the Company's restricted common stock. The warrants have a term of 3 years, an exercise price of $1.65 and provide for a cashless exercise. Using the Black-Scholes valuation method, the Company recognized an expense of $1,960,000 in connection with the warrants.
During the year ended April 30, 2009, the Company entered into a Consulting Services Agreement with a third party for services. Payment for such services includes a monthly payment of 20,000 shares of the Company's common stock and a warrant exercisable for 20,000 shares of the Company's common stock. During the year ended April 30, 2009, the Company issued 60,000 shares of the Company's common stock to such consultant. The Company recognized an expense of $57,000 in connection with the issuance of the common stock. During the year ended April 30, 2009, warrants exercisable for 60,000 shares were issued by the Company. The warrants have a term of 2 years, exercises prices based on closing market price on the last day of the month of issuance and provide for a cashless exercise.
During the year ended April 30, 2009, the warrants exercisable for 60,000 shares had exercise prices ranging from $0.54 to $1.65 per share. The fair value of the options at the date of grant was $36,060 and was recorded as compensation expense.
The Company will need to either borrow or make private placements of stock in order to fund operations. No assurance exists as to the ability to achieve loans or make private placements of stock.
Capital Resources
The Company has only common stock as its capital resource.
Garner Investments has no material commitments for capital expenditures within the next year, however if operations are commenced, substantial capital will be needed to pay for participation, investigation, exploration, acquisition and working capital.
Need for Additional Financing
The Company does not have capital sufficient to meet its cash needs. The Company will have to seek loans or equity placements to cover such cash needs. Once exploration commences, its needs for additional financing is likely to increase substantially.
No commitments to provide additional funds have been made by the Company's management or other stockholders. Accordingly, there can be no assurance that any additional funds will be available to the Company to allow it to cover the Company's expenses as they may be incurred.
In addition, the United States and the global business community has experienced severe instability in the commercial and investment banking systems which is likely to continue to have far-reaching effects on the economic activity in the country for an indeterminable period. The long-term impact on the United States economy and the Company's operating activities and ability to raise capital cannot be predicted at this time, but may be substantial.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Sun River Energy operations do not employ financial instruments or derivatives which are market sensitive. Short term funds are held in non-interest bearing accounts and funds held for longer periods are placed in interest bearing accounts. Large amounts of funds, if available, will be distributed among multiple financial institutions to reduce risk of loss. The Company's cash holdings do not generate interest income.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
The audited consolidated financial statements and the related notes are set forth at pages through attached hereto.
ITEM 9.
ITEM 9 A. CONTROLS AND PROCEDURES - ---------------------------------
The Company maintains a system of disclosure controls and procedures that are designed for the purposes of ensuring that information required to be disclosed in the Company's SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer as appropriate to allow timely decisions regarding required disclosure.
Management, after evaluating the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-14(c) as of April 30, 2009 (the "Evaluation Date") concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure that material information relating to the Company would be made known to them by individuals within those entities, particularly during the period in which this annual report was being prepared and that information required to be disclosed in the Company's SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES - -----------------------------------
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorizations of Garner Investment's management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Management's assessment of the effectiveness of the registrant's internal control over financial reporting is as of the year ended April 30, 2009. The Company believes that internal control over financial reporting is effective. The Company has not identified any current material weaknesses considering the nature and extent of its current operations and any risks or errors in financial reporting under current operations.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
There was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended April 30, 2009 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - ---------------------------
Not applicable.
PART II
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE - -------------------------------------------------------------------------------- GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. - -------------------------------------------------------------
All directors of the Company hold office until the next annual meeting of the security holders or until their successors have been elected and qualified. The officers of the Company are appointed by the board of directors and hold office until their death, resignation or removal from office. The Company's directors and executive officers, their ages, positions held, and the duration of their office are as follows:
Name Position Term - ------ -------- ----
Redgie T. Green President and Director Annual
Stephen W. Weathers Director Annual
Thomas Anderson Director Annual
David Surgnier Director Annual
* Wesley Whiting resigned as President and Director of the Company on January 8, 2009. At that time, Mr. Redgie T. Green was appointed as the President of the Company.
The directors named above will serve until the next annual meeting of the Company's stockholders. Directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement or understanding between the directors and officers of the Company and any other person pursuant to which any director or officer was or is to be selected as a director or officer.
Our directors and officers will devote such time to the Company's affairs on an "as needed" basis. As a result, the actual amount of time, which they will devote to the Company's affairs, is unknown and is likely to vary substantially from month to month.
DIRECTORS AND EXECUTIVE OFFICERS
REDGIE T. GREEN, age 56, Mr. Green has served as the President and Director of the Company, since January of 2009. He has served as a director of the Company since 1998. Mr. Green was co-owner and operator of Green's B&R Enterprises, a wholesale donut baker since 1983. He has been an active investor in small capital and high-tech adventures since 1987. Mr. Green was a director of Colorado Gold & Silver, Inc. in 2000. He was a director for Houston Operating Company in late 2004 until December 2004. He recently served as a director for Mountains West Exploration, Inc. in 2005. He is a Director of Concord Ventures, Inc. (2006) and Aspeon, Inc. (2006) and has been appointed as an officer and director of Captech Financial, Inc. in May 2006. He served as a director of Baymark Technologies, Inc. 2005-2006.
STEPHEN W. WEATHERS, age 47, Director, earned his B. S. in Geology from Boise State University. He has worked as an environmental geologist both in the mining industry and oil and gas industry. His duties included permitting, environmental compliance, environmental remediation/reclamation and natural gas asset acquisitions both in the United States and Canada. Mr. Weathers worked for Maxxim Environmental/Terracon from 1997 through 1999 and presently works in the environmental remediation division for a Duke Energy Field Services which is a natural gas processing company (1999-2002). Mr. Weathers also serves as a director of Sun River Mining, Inc.. Mr. Weathers has served as director of the Company since 2002.
THOMAS ANDERSON, age 41, Director, presently works as a Senior Environmental Scientist for the Energy and Environmental Engineering Division of Apogen Technologies in Los Alamos, New Mexico. He earned his B.S. in Geology from Denison University and his M.S. in Environmental Science and Engineering from Colorado School of Mines. Mr. Anderson has worked for past 16 years in the environmental consulting field, providing environmental compliance, characterization and remediation services to Department of Energy, Department of Defense, and industrial clients. He formerly worked as a Senior Environmental Scientist at Concurrent Technologies Corp. from November 2000 to December 2004. From March 2000 to November 2000, he was employed as a hydrologist at Stone & Webster Engineering, Inc. From July 1998 to March 2000, he was employed by advanced Integrated Management Services as an Environmental Scientist/Engineer. From 1997 to 1998, he was a graduate research assistant at Colorado School of Mines in the Environmental Science and Engineering Program. Mr. Anderson has served as a director of the Company since 2002.
DAVID SURGNIER, age 58, Director, earned his B.S. in Mathematics in 1971 from the University of Oklahoma, his B.S. in Petroleum Engineering in 1972 from the University of Oklahoma, and his M.S. in Petroleum Engineering in 1984 from the University of Texas. Mr. Surgnier currently serves as President/Engineer for Delta Gas Corporation and Delta Environmental since 1992. From 1986 to 1992 he was the Rocky Mountain Regional Manager for Completion Technology International of Denver, Colorado. Mr. Surgnier was the Manager of Special Projects for Texas Iron Works of Houston, Texas from 1980-1986. Mr. Surgnier was the Drilling and Production Engineer from 1972-1980 for Atlantic Richfield Oil Company located in Houston, Texas and ARCO Alaska. Mr. Surgnier has 33 years experience as a Petroleum Engineer, Project and Regional Manager, Technical writer and presenter. Developer, Inventor and co-Inventor of Patented and Proprietary equipment and products, for the Petroleum and Environmental Industry. He has operated and managed projects onshore and offshore in North & South America, North Slope of Alaska, Cook Inlet of Alaska and the Middle East. He has also drilled and completed domestic water supply wells for individuals, the Chickasaw, Choctaw and Seminole Nations, and U.S. Public Health Services. Oilfield water supply wells for Cities Service Co., Framers Energy Corporation, Botcher Gas Company, Cameron Oil Company and Phillips Petroleum Corporation. Municipal Water Supply Wells for the Cities of Stewart, McAlister, Stonewall Ada and Tribbey, Oklahoma. He has been Environmental Consultant to Environmental Resource Management, Biotreatment, Inc., Aarow Environmental, Inc., Argonne National Laboratory and the University of Chicago. Mr. Surgnier has served as a director of the Company since 2002.
Indemnification of Officers and Directors
As permitted by Colorado Revised Statutes, we may indemnify its directors and officers against expenses and liabilities they incur to defend, settle, or satisfy any civil or criminal action brought against them on account of their being or having been Company's directors or officers unless, in any such action, they are adjudged to have acted with gross negligence or willful misconduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable.
Exclusion of Liability
The Colorado Corporation Code excludes personal liability for its directors for monetary damages based upon any violation of their fiduciary duties as directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts in violation of the Colorado Corporation Act, or any transaction from which a director receives an improper personal benefit. This exclusion of liability does not limit any right, which a director may have to be indemnified, and does not affect any director's liability under federal or applicable state securities laws.
Conflicts of Interest
Our officers and directors will not devote more than a portion of their time to the affairs of the Company. There will be occasions when the time requirements of our business conflict with the demands of their other business and investment activities. Such conflicts may require that we attempt to employ additional personnel. There is no assurance that the services of such persons will be available or that they can be obtained upon terms favorable to the Company.
Officers and directors of the Company may participate in business ventures, which could be deemed to compete directly with the Company. Additional conflicts of interest and non-arms length transactions may also arise in the future in the event our officers or directors are involved in the management of any firm with which we transact business. Our Board of Directors has adopted a policy that the Company will not seek a merger with, or acquisition of, any entity in which management serve as officers or directors, or in which they or their family members own or hold a controlling ownership interest. Although the Board of Directors could elect to change this policy, the Board of Directors has no present intention to do so.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC reports of ownership and changes in ownership of Common Stock and other equity securities of the Company. Such reporting persons are required to furnish the Company with copies of all Section 16(a) forms they file.
(1) Mr. Whiting resigned as the President of the Company in January 2009.
(2) Mr. Green was appointed the President of the Company in January 2009.
(3) During the year ended April 30, 2009, Mr. Whiting was issued 25,000 shares of the Company's restricted common stock valued at $11,250 based on a closing market price of $0.45 per share on the date of issuance. The shares were issued for services as a director.
(4) During the year ended April 30, 2009, Mr. Green was issued 25,000 shares of the Company's restricted common stock valued at $11,250 based on a closing market price of $0.45 per share on the date of the issuance. The shares were issued for services as a director.
During the year ended April 30, 21009, the Company issued Mr. Green a warrant exercisable for 350,000 shares of the Company's restricted common stock. The Warrant has a term 3 years and on exercise price of $1.65 per share and provides for a cashless exercise. Using the Black-Scholes method of valuation the warrant has a value of $490,000.
(1) During the year ended April 30, 2009, the Company granted to Mr. Green, a warrant exercisable for 350,000 shares of the Company's restricted common stock. The warrant has a term of 3 years, an exercise price of $1.65 per share and provides for a cashless exercise. The warrant was valued using the Black-Scholes Valuation Method and was determined to have a value of $490,000.
Option/SAR Grants Table
No options were granted during the fiscal years ended April 30, 2009 and 2008 to our officers and/or directors.
(1) Mr. Whiting resigned as the president of the Company in January 2009.
(2) Mr. Green was appointed the President of the Company in January 2009.
(3) During the year ended April 30, 2009, each director was issued 25,000 shares of the Company's restricted common stock valued at $11,250 based on a closing market price of $0.45 per share on the date of issuance. The shares were issued for services as a director.
(4) During the year ended April 30, 2009, the Company issued each director a warrant exercisable for 350,000 shares of the Company's restricted common stock. The warrant has a term of 3 years and an exercise price of $1.65 per share and provides for a cashless exercise. Using the Black-Scholes method of valuation that each warrant has a value of $490,000.
The Company does not currently pay any cash fees to its directors, nor does the Company pay directors' expenses in attending board meetings.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - -------------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS. - ---------------------------
Beneficial Ownership
The following table sets forth certain information regarding the beneficial ownership of outstanding shares of Common Stock as of April 30, 2009, by (a) each person known by the Company to own beneficially 5% or more of the outstanding shares of Common Stock, (b) the Company's directors, Chief Executive Officer and executive officers whose total compensation exceeded $100,000 for the last fiscal year, and (c) all directors and executive officers of the Company as a group.
(1) Based upon 16,317,423 shares of common stock issued and outstanding on April 30, 2009, warrants exercisable for 1,110,000 shares of common stock for a total of 17,427,423 shares of common stock.
(2) Mr. Green holds 113,500 shares of the Company's common stock and a warrant exercisable for 450,000 shares of common stock. The warrant has a term of 3 years, an exercise price of $1.65 per share and provides for a cashless exercise.
(3) Mr. Weathers holds 100,000 shares of the Company's common stock and a warrant exercisable for 450,000 shares of common stock. The warrant has a term of 3 years, an exercise price of $1.65 per share and provides for a cashless exercise.
(4) Mr. Surgnier holds 100,000 shares of the Company's common stock and a warrant exercisable for 450,000 shares of common stock. The warrant has a term of 3 years, an exercise price of $1.65 per share and provides for a cashless exercise.
(5) Mr. Anderson holds 100,000 shares of the Company's common stock and a warrant exercisable for 450,000 shares of common stock. The warrant has a term of 3 years, an exercise price of $1.65 per share and provides for a cashless exercise.
(6) Mr. Doak directly owns 3,182,067 shares of the Company's common stock. He indirectly owns 2,941,666 shares of the Company's common stock through New Mexico Energy, LLC which is a member.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS, AND DIRECTOR - -------------------------------------------------------------------------------- INDEPENDENCE. - ------------
Fiscal Year Ended April 30, 2009
During the year ended April 30, 2009, officers and directors of the Company were issued a total of 250,000 shares of the Company's restricted common stock for their services. The shares were issued at an average price of $0.45 per share for a total expense of $112,500. The shares were issued to the individuals in the amounts set forth below:
Redgie Green, President & Director 25,000 shares Wesley Whiting** 25,000 shares Stephen Weathers, Director 25,000 shares Thomas Anderson, Director 25,000 shares David Surgnier, Director 25,000 shares
** Mr. Whiting resigned as an officer and director of the Company in January 2009.
During the year ended April 30, 2009, officers and directors of the Company were issued warrants exercisable for 1,400,000 shares of the Company's restricted common stock. The warrants have a term of 3 years, an exercise price of $1.65 and provide for a cashless exercise. Using the Black-Scholes valuation method, the Company recognized an expense of $1,960,000 in connection with the warrants. The warrants were issued in the amounts and to the individuals set forth below:
Redgie Green, President & Director 450,000 shares Stephen Weathers, Director 450,000 shares Thomas Anderson, Director 450,000 shares David Surgnier, Director 450,000 shares
Note Payable - LPC Investments, LLC
On October 24, 2008, the Company received notice from LPC Investment, LLC ("LPC"), a greater than 10% shareholder of the Company, of a demand of payment in connection with $74,600 in unsecured promissory notes held by LPC. LPC is demanding payment of the outstanding principal and accrued interest. The promissory note had a due date of September 30, 2008. At this time, the Company has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in the Jefferson County District Court, against the Company. The lawsuit alleges a breach of contract against the Company in connection with the payment of an unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the Company's common stock into a preferred note. LPC Investments is seeking not only payment of the unsecured, 8.75% promissory note and accrued interest but also attorney fees. At this time, the Company has filed a response to the complaint, and intends to defend itself against the claims. LPC Investments has filed a motion for dismissal (See Item 3).
Fiscal Year Ended April 30, 2008
During the year ended April 30, 2008, we entered into a Release of Claims, with Nova Leasing, a greater than 5% shareholder of the Company. The Release of Claim provided that in return for being released form payment of the outstanding balance f $6,162,564 owed in connection with the %6.6 Million Dollar Promissory Note held by Nova Leasing and the outstanding balance of $72,478 owed in connection with the $64,000 Promissory Note also held by Nova Leasing, we returned the leases securing the promissory notes to Nova Leasing.
In the year ended April 30, 2008, LPC Investments, LLC, a greater than 10% shareholder of the Company, provided us with funds of $74,600 in the form of an 8.75% Promissory Note. The note has a due date of September 30, 2008 and is unsecured.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - -------------------------------------------------
GENERAL. Larry O' Donnell, CPA, PC (O'Donnell) has been engaged as the Company's principal audit accounting firm from November 13, 2008 to date. Prior to November 13, 2008, Jaspers + Hall, P.C. was engaged as the Company's principal accounting firm for the year ended April 30, 2008 and the period of May 1, 2008 through October 28, 2008. The Company's Board of Directors has considered whether the provisions of audit services are compatible with maintaining O'Donnell's independence.
The following table represents aggregate fees billed to the Company during the year ended April 30, 2009 by both O'Donnell ($1,100) and by Jaspers ($0) and for the year ended April 30, 2008 by Jaspers ($7,500).
All audit work was performed by the auditors' full time employees.
The Company uses a different CPA/Attorney firm for the preparation of income tax reporting.
ITEM 15.
ITEM 15. INDEX TO EXHIBITS.
The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
Exhibit Description of Document ------ ------------------------
31.1 Certification by Chief Executive Officer. * 32.1 Section 906 Certification by Chief Executive Officer* - --------------- * Filed herewith.
Telephone (303) 745-4545 2228 South Fraser Street Fax (303)369-9384 Unit I Email larryodonnellcpa@msn.com Aurora, Colorado 80014 www.larryodonnellcpa.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors Sun River Energy, Inc.
I have audited the accompanying balance sheet of Sun River Energy, Inc. as of April 30, 2009 , and the related statements of operations, changes in stockholders' equity and cash flows for the year then ended and for the period April 30, 1998 (inception) to April 30, 2009. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sun River Energy, Inc. as of April 30, 2009, and the results of its operations and its cash flows for the year then ended and for the period April 30, 1998 (inception) to April 30, 2009, in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $6,375,866 at April 30, 2009. Additionally, for the year ended April 30, 2009, the Company incurred a net loss of $2,827,376. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Larry O'Donnell - ------------------ Larry O'Donnell, CPA, PC August 12, 2009
SUN RIVER ENERGY, INC. (A Development Stage Company) Notes to Financial Statements For the Year Ended April 30, 2009
Note 1 - Organization, Basis of Presentation and Summary of Significant Accounting Policies:
Organization:
Sun River Energy, Inc. was incorporated on October 22, 2002, under the laws of the State of Colorado.
The Company's is as an independent energy company engaged in the, exploration of North American unconventional natural gas properties and conventional oil and gas exploration. Its intended operations are principally energy prospects in the Rocky Mountain region including a coal bed methane prospect located in the Raton Basin in Northern New Mexico and the Company is seeking other opportunities.
On January 8, 2009, Mr. Wesley Whiting resigned as the Chief Executive Officer and Director of the Company. On January 8, 2009, Mr. Redgie Green, a director of the Company, was appointed the Chief Executive Officer of the Company.
Basis of Presentation:
Development Stage Company
The Company has not earned any significant revenues from its limited principal operations. Accordingly, the Company's activities have been accounted for as those of a "Development Stage Enterprise" as set forth in Financial Accounting Standards Board Statement No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the Company's financial statements be identified as those of a development stage company, and that the statements of operation, stockholders' equity (deficit) and cash flows disclose activity since the date of the Company's inception.
Going Concern
The Company's financial statements for the year ended April 30, 2009 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported a net loss of $2,827,376 for the year ended April 30, 2009 and an accumulated deficit during the development stage of $6,375,866 as of April 30, 2009. At April 30, 2009, the Company's total current liabilities exceed total current assets by $2,238,893.
The Company is in the development stage and has not earned any revenue from operations. The Company's ability to continue as a going concern is dependent upon its ability to develop additional sources of capital or locate a merger candidate and ultimately, achieve profitable operations. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less and money market instruments to be cash equivalents.
Revenue Recognition
The Company recognizes revenue when it is earned and expenses are recognized when they occur.
Marketable Securities
On August 17, 2006, in exchange for 800,000 shares of the Company's restricted common stock, the Company acquired 200,000 shares of the common stock of Tonga Capital Corporation, kna Momentum BioFuels, Inc. ("Momentum") from a non-affiliate. At the time of the acquisition, the Momentum shares had a market value of $400,000 ($0.50 per share). The 800,000 shares of the Company's stock issued for the shares had a value of $400,000 ($0.50 per share).
At April 30, 2008, marketable securities consisted of 57,400 shares of common stock of Momentum. These securities had an estimated fair value of $11,835 at April 30, 2008, based upon quoted market prices, and were included in current assets in the Company's April 30, 2008 balance sheet.
At October 31, 2008, the Company had liquidated all of the remaining 57,400 shares of common stock of Momentum. These securities are no longer carried on the books of the Company.
Unrealized gains and losses are computed on the basis of specific identification and are reported as a component of other income (loss), included as a separate item on the Company's statement of operations. The Company reported an unrealized gain on marketable securities of $40,765 during the year ended April 30, 2009 (an unrealized gain of $12,035 for the year ended April 30, 2008).
Realized gains, realized losses, and declines in value, judged to be other-than-temporary, are included in other income (expense). The Company recognized a loss on the sale of these shares of $44,035 during the year ended April 30, 2009 (a realized loss of $191,663 for the year ended April 30, 2008).
Deferred Consulting Costs
In May 2007, the Company entered into a twelve-month consulting services agreement with a third party, in which the party agreed to provide investment banking services. Compensation consisted of 100,000 shares of the Company's restricted common stock with a market value of approximately $115,000 (based on a closing market price of $1.15 per share at the date the transaction was entered into) The deferred cost is being amortized on a straight-line basis as earned over the twelve-month period from the date of the agreement. During the year ended April 30, 2009, $7,880 was expensed ($107,120 during the year ended April 30, 2009).
Fair Value of Financial Instruments
The carrying amount of cash, accounts payable and notes payable is considered to be representative of its fair value because of the short-term nature of this financial instrument.
Stock-Based Compensation
The Company has adopted the provisions of and accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 - revised 2004 ("SFAS 123R"), "Share-Based Payment", which replaced Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation", and supersedes APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees". Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expenses on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. All options granted prior to the adoption of SFAS 123R and outstanding during the periods presented were fully-vested.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss), and accordingly, net loss is equal to comprehensive loss in all periods.
Loss Per Share
SFAS No. 128, Earnings per Share, requires dual presentation of basic and diluted earnings or loss per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable of deductive amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss). Valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160". SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We believe that SFAS 160 should not have a material impact on our financial position or results of operations.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133" (SFAS 161). The Statement requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities. It requires companies to better convey the purpose of derivative use in terms of the risks that such company is intending to manage. Disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows are required. This Statement retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a material effect on its results of operations and financial condition.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible Assets." This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (Revised 2007), "Business Combinations," and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of FAS 142-3 to have a material effect on its results of operations and financial condition.
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by the Company in the first quarter of fiscal 2009. The Company does not expect the adoption of FSP APB 14-1 to have a material effect on its results of operations and financial condition.
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities." This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, companies are required to retrospectively adjust earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to provisions of this FSP. The Company does not anticipate the adoption of FSP EITF 03-6-1 will have a material impact on its results of operations, cash flows or financial condition.
There were various other accounting standards and interpretations issued in 2009 and 2008, none of which are expected to have a material impact on the Company's financial position, operations or cash flows.
Note 2 - Leases and Mineral Rights:
Mineral Rights - New Mexico
The Mineral rights in New Mexico are valued at $100,000, which is based on the predecessor basis in mineral rights.
In February of 2007 the Company entered into an agreement with Sun River #1 LLC to drill two wells on acreage controlled by the Company in the Raton Basin area of New Mexico. Terms of the agreement provide for a carried 25% working interest in the two of the three wells.
On September 5, 2008, the Company announced that it had executed a Farmout Agreement with Myriad Resources, Inc. on approximately 17,000 acres of its northern StateplaceNew Mexico property. The Farmout provided a checkerboard pattern on about 11,000 acres and alternating half-mile wide strips on approximately 3,000 acres. The Farmout contemplates testing through the Pierre Shale and requires drilling on or before June 1, 2009 with additional wells each 120 days thereafter. The drilling was not started and the Agreement has expired.
Note 3 - Notes Payable:
In March 2009, the Company issued a 4.0% unsecured corporate promissory note to a vendor for outstanding amounts owed totaling $88,230. The note is due on demand and requires a monthly payment of $10,000. At April 30, 2009, the note has a principal balance of $88,230 and accrued interest of $406.10.
In February 2008, the Company issued a 18% unsecured corporate promissory note to a vendor for outstanding amounts owed totaling $373,540. The note is due on demand. At April 30, 2009, the note has a principal balance of $373,540 and accrued interest of $63,000.
In January 2008, the Company issued a 7.5% unsecured corporate promissory note in exchange for $125,000 to support operations. The note is due on demand. In February and April 2009, the principal of the note was converted into 500,000 shares of the Company's common stock ($0.25 per share). At April 30, 2009, the note's principal balance was paid in full, though accrued interest of $10,428 is still outstanding.
In December 2007, the Company issued a 7.5% unsecured corporate promissory note in exchange for $75,000 to support operations. The note is due on demand. At April 30, 2009, the note has an outstanding principal balance of $75,000 and accrued interest of $5,610.
In October 2007, the Company issued a 7.5% unsecured corporate promissory note in exchange for $40,627 to support operations. The note has a due on demand. At April 30, 2009, the note has an outstanding principal balance of $40,627 and accrued interest of $3,065.
In October 2007, the Company issued a 7.5% unsecured corporate promissory note for $211,855. The note is due on demand. At April 30, 2009, the note has an outstanding principal balance of $211,855 and accrued interest of $24,508. Subsequent to year ended, $69,154 in principal of the promissory note was converted into 324,036 shares of the Company's common stock ($0.25 per share).
In April 2006, in exchange for $150,000, the Company issued a 6% secured corporate promissory note. The note is secured by certain leases held by the Company. At April 30, 2009, the note has an outstanding principal balance of $6,637 and accrued interest of $797.
On April 10, 2006, the Company issued a 6% secured corporate promissory note for $600,000, to a shareholder of the Company, Mr. Robert A. Doak, Jr. The promissory note had an original due date of March 31, 2007 and it has been assigned to unrelated parties, the due date extended several times and now been divided into several notes. At April 30, 2009, the notes has an unpaid principal balance of $438,290. The new unsecured promissory notes have an annual interest rate of 7.5% and are due on demand. At April 30, 2009, the notes have an outstanding accrued interest of $51,334. Subsequent, to April 30, 2009, principal in the amount of $100,000 was converted into 400,000 shares of the Company's common stock ($0.25 per share).
Note Payable - LPC Investments, LLC
On October 24, 2008, the Company received notice from LPC Investment, LLC ("LPC") of a demand of payment in connection with $74,600 in unsecured promissory notes held by LPC. LPC is demanding payment of the outstanding principal and accrued interest. The promissory note had a due date of September 30, 2008. At this time, the Company has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in the Jefferson County District Court, against the Company. The lawsuit alleges a breach of contract against the Company in connection with the payment of an unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the Company's common stock into a preferred note. LPC Investments is seeking not only payment of the unsecured, 8.75% promissory note and accrued interest but also attorney fees. At this time, the Company has filed a response to the complaint, and intends to defend itself against the claims.
Note 4 -Stockholders' (Deficit) Equity:
Preferred Stock
At a Special Meeting of the Shareholders of the Company on June 23, 2008, the shareholders voted to authorized the creation of 25,000,000 shares of Preferred Stock with a par value of $0.0001, to be issued in such classes or series and with such rights, designations, privileges and preferences as to be determined by the Company's Board of Directors at the time of the issuance of any preferred shares.
Common Stock
Year Ended April 30, 2009
During the year ended April 30, 2009, the Company entered into a Consulting Services Agreement with a third party for services. Payment for such services includes a monthly payment of 20,000 shares of the Company's common stock and a warrant exercisable for 20,000 shares of the Company's common stock (see below). During the year ended April 30, 2009, the Company issued 60,000 shares of the Company's common stock to such consultant. The Company recognized an expense of $57,000.
During the year ended April 30, 2009, the Company issued 500,000 shares of the Company's common stock in connection with the conversion of $125,000 of the principal of a $125,000 unsecured corporate promissory note.
During the year ended April 30, 2009, the Company issued 100,000 shares of its common stock as forbearance on a $373,540 unsecured corporate promissory note held by a vendor.
During the year ended April 30, 2009, the Company issued 156,563 shares of common stock in exchange for 507,500 warrants and options that were outstanding. This was accounted for as solely a capital transaction between common stock and additional paid-in capital.
During the year ended April 30, 2009, the Company issued a total of 250,000 shares of its common stock to its directors for services. The Company recognized an $112,500 expense in relation to the issuance.
During the year ended April 30, 2009, the Company issued 150,000 shares of its common stock to a third party for consulting services of $52,500. The value of the shares was based on a closing market price of $0.35 per share.
Year Ended April 30, 2008
During the year ended April 30, 2008, the Company issued 20,000 shares of its restricted common stock as payment for an extension on the due date of the $64,000 promissory note due to Nova Leasing. The shares had a value of $51,000 based on a closing market price of $2.55 per share.
During the year ended April 30, 2008, the Company issued 100,000 shares of its restricted common stock as payment for services in connection with drilling activities. The shares had a value of $190,000, based on a closing market price of $1.90 per share.
During the year ended April 30, 2008, the Company issued 60,000 shares to a third party as payment for services in negotiating drilling contracts. The shares had a value of $114,000, based on a closing market price of $1.90 per share.
During the year ended April 30, 2008, the Company issued 50,000 shares to third parties, as payment for services in connection with drilling activities. The shares had a value of $163,967, based on an average closing market price of $1.10 per share.
During the year ended April 30, 2008, the Company entered into a twelve-month consulting services agreement with a third party, in which the party agreed to provide investment banking services. Compensation consisted of 100,000 shares of the Company's restricted common stock with a market value of approximately $115,000 (based on a closing market price of $1.15 per share at the date the transaction was entered into). The deferred cost is being amortized on a straight-line basis as earned over the twelve-month period from the date of the agreement. During the year ended April 30, 2008, $107,120 was expensed.
Options
During the year ended April 30, 2009, the Company did not grant any options.
On May 31, 2007, the Company entered into an agreement with a third party for public relation services. Compensation consists of options of 10,000 shares of the Company's restricted common stock per month, to be issued at the end of each month of service. The options are to have a term of 2 years from the date of issuance and an exercise price to be determined by the closing market price on the last day of each month of service. The options are fully vested at issuance and will provide for cashless exercise.
During the year ended April 30, 2008, the Company granted 60,000 stock options to the third party at an exercise prices ranging from $0.70 to $2.25 per share. The fair value of the options at the date of grant was $43,340 and was recorded as compensation expense. The Company used the following assumptions to determine the fair value of stock option grants during the year ended April 30, 2008:
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Expected life 1 year Volatility 117% - 130% Risk-free interest rate 4.85% - 4.91% Dividend yield 0
During the nine months ended January 31, 2009, the Company cancelled options exercisable for 60,000 shares.
The expected term of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of the Company's common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options.
The dividend yield represents our anticipated cash dividend over the expected life of the stock options.
A summary of stock option activity for the year ended April 30, 2009 is presented below:
Warrants
During the year ended April 30, 2009, the Company entered into a Consulting Services Agreement with a third party for services. Payment for such services includes a monthly payment of 20,000 shares of the Company's common stock and a warrant exercisable for 20,000 shares of the Company's common stock. During the year ended April 30, 2009, the Company issued 60,000 shares of the Company's common stock to such consultant. The Company recognized an expense of $57,000 in connection with the issuance of the common stock. During the year ended April 30, 2009, warrants exercisable for 60,000 shares were issued by the Company. The warrants have a term of 2 years, exercises prices based on closing market price on the last day of the month of issuance and provide for a cashless exercise.
During the year ended April 30, 2009, the warrants exercisable for 60,000 shares had exercise prices ranging from $0.54 to $1.65 per share. The fair value of the options at the date of grant was $36,060 and was recorded as compensation expense. The Company used the following assumptions to determine the fair value of warrant grants during the year ended April 30, 2009:
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Expected life 1 year Volatility 162% - 179% Risk-free interest rate 4.5% - 4.75% Dividend yield 0
The expected term of the warrants represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of the Company's common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related warrants.
The dividend yield represents our anticipated cash dividend over the expected life of the warrants.
Director Warrants
During the year ended April 30, 2009, the Company issued warrants exercisable for a total of 1,400,000 shares of the Company's stock to its directors. The warrants have a term of 3 years, an exercise price of $1.65 and provide for a cashless exercise.
The fair value of the options at the date of grant was $1,960,000 and was recorded as compensation expense. The Company used the following assumptions to determine the fair value of warrant grants during the year ended April 30, 2009:
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Expected life 1.5 year Volatility 234% Risk-free interest rate 4.5% Dividend yield 0
The expected term of the warrants represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of the Company's common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related warrants.
The dividend yield represents our anticipated cash dividend over the expected life of the warrants.
At April 30, 2009, the following warrants were outstanding:
Number of Shares Exercise Price Expiration Date ---------------- -------------- --------------- 60,000 $0.54 2/28/2011 60,000 $0.70 3/31/2011 60,000 $1.65 4/30/2011 1,400,000 $1.65 4/30/2012 --------- 1,580,000
During the year ended April 30, 2009, the Company issued 156,563 shares of common stock in exchange for 507,500 warrants and options that were outstanding. This was accounted for as solely a capital transaction between common stock and additional paid-in capital.
During the year ended April 30, 2008, the Company did not issue, cancel or expire any warrants.
Note 5 - Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable of deductive amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss). Valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
2009 2008 ---- ---- Net Loss Carry Forwards $ 961,307 $ 862,598 Less Valuation Allowance $( 961,307) $(862,598) ---------- --------- $ - $ - ========== =============
At April 30, 2009, the Company has financial reporting and net operating loss carry forwards of approximately $1,909,854 for which the tax effect has not been recognized for financial purposes. Such losses expire in 2014, if not utilized earlier.
Note 6 - Litigation
Note Payable - LPC Investments, LLC
On October 24, 2008, the Company received notice from LPC Investment, LLC ("LPC") of a demand of payment in connection with $74,600 in unsecured promissory notes held by LPC. LPC is demanding payment of the outstanding principal and accrued interest. The promissory note had a due date of September 30, 2008. At this time, the Company has not made payment on the promissory note
On December 12, 2008, LPC Investments, LLC (LPC Investments) filed a lawsuit, in the Jefferson County District Court, against the Company. The lawsuit alleges a breach of contract against the Company in connection with the payment of an unsecured, 8.75% promissory note and conversion of 2,200,000 shares of the Company's common stock into a preferred note. LPC Investments is seeking not only payment of the unsecured, 8.75% promissory note and accrued interest but also attorney fees. At this time, the Company has filed a response to the complaint, and intends to defend itself against the claims. LPC has filed a Motion to Dismiss with the Court, at this time.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUN RIVER ENERGY, INC.
Date: August 13, 2009 By: /s/ Redgie T. Green ------------------- Redgie T. Green, President and Chief Executive Officer and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: August 13, 2009 By: / s/Redgie T. Green ------------------- Redgie T. Green, President, and Director
Date: August 13, 2009 By: /s/ Stephen W. Weathers ----------------------- Stephen W. Weathers Director
Date: August 13, 2009 By: /s/ Thomas Anderson ------------------- Thomas Anderson, Director
Date: August 13, 2009 By: /s/David Surgnier ----------------------- David Surgnier, Director