-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IV+TQNmEedsBzD+Xwt1lrq1/NeIf0z4mL6T3kbnWViPIiJepmimUjaiI/z0e1pAA 68tMAprkLwqMqvMLzI1sVw== 0001004878-10-000016.txt : 20100113 0001004878-10-000016.hdr.sgml : 20100113 20100113170031 ACCESSION NUMBER: 0001004878-10-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20091130 FILED AS OF DATE: 20100113 DATE AS OF CHANGE: 20100113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNERGY RESOURCES CORP CENTRAL INDEX KEY: 0001413507 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 202835920 STATE OF INCORPORATION: CO FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-146561 FILM NUMBER: 10525664 BUSINESS ADDRESS: STREET 1: 20203 HIGHWAY 60 CITY: PLATTEVILLE STATE: CO ZIP: 80651 BUSINESS PHONE: 303-591-7413 MAIL ADDRESS: STREET 1: 20203 HIGHWAY 60 CITY: PLATTEVILLE STATE: CO ZIP: 80651 FORMER COMPANY: FORMER CONFORMED NAME: Brishlin Resources, Inc. DATE OF NAME CHANGE: 20071217 FORMER COMPANY: FORMER CONFORMED NAME: Blue Star Energy Inc DATE OF NAME CHANGE: 20070926 10-Q 1 nov0910qjan10.txt NOV. 09 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2009 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _______ Commission File Number: 333-146561 SYNERGY RESOURCES CORPORATION (Exact Name of Registrant as Specified in its Charter) Colorado 20-2835920 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20203 Highway 60, Platteville, Colorado 80651 --------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (970) 737-1073 N/A - ---------------------------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Larger accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [x] Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 11,998,000 shares outstanding as of January 11, 2010. SYNERGY RESOURCES CORPORATION Index Page Part I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of November 30, 2009 (unaudited) and August 31, 2009 3 Statements of Operations for the three months ended November 30, 2009 and 2008, and for the period from inception (December 28, 2007) to November 30, 2009 (unaudited) 4 Statements of Cash Flows for the three months ended November 30 , 2009 and 2008, and for the period from inception (December 28, 2007) to November 30, 2009 (unaudited) 5 Notes to Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 4. Controls and Procedures 21 Part II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits 23 SIGNATURES 24 - 2 - SYNERGY RESOURCES CORPORATION BALANCE SHEETS November 30, August 31, 2009 2009 ------------------------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 1,260,339 $ 2,854,659 Accounts receivable 654,698 84,643 Accounts receivable, related party 311,235 - Inventory 700,636 1,132,685 Other current assets 41,890 21,105 ------------- ------------- Total current assets 2,968,798 4,093,092 ------------- ------------- Property and equipment, at cost: Oil and gas properties, full cost method, net 2,901,473 653,435 Other property and equipment, net 930 1,041 ------------- ------------- Property and equipment, net 2,902,403 654,476 ------------- ------------- Other assets 85,000 85,000 ------------- ------------- Total assets $ 5,956,201 $ 4,832,568 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,856,109 $ 622,734 Accounts payable, related party 160,894 - Accrued expenses 45,971 59,579 Bank loan payable 1,161,811 1,161,811 ------------- ------------- Total current liabilities 3,224,785 1,844,124 ------------- ------------- Commitments and contingencies (See Note 7) Shareholders' equity: Preferred stock - $0.01 par value, 10,000,000 shares authorized: no shares issued and outstanding - - Common stock - $0.001 par value, 100,000,000 shares authorized: 11,998,000 shares issued and outstanding 11,998 11,998 Additional paid-in capital 15,526,338 15,521,697 Accumulated (Deficit) (12,806,920) (12,545,251) ------------- ------------- Total shareholders' equity 2,731,416 2,988,444 ------------- ------------- Total liabilities and shareholders' equity $ 5,956,201 $ 4,832,568 ============= ============= The accompanying notes are an integral part of these financial statements. 3 SYNERGY RESOURCES CORPORATION STATEMENTS OF OPERATIONS for the three months ended November 30, 2009 and 2008 (unaudited) Three Months Three Months Ended Ended November 30, November 30, 2009 2008 ------------ ------------ Oil and gas revenues $ 52,786 $ - ------------ ------------ Expenses: Lease operating expenses 7,890 2,400 Depreciation, depletion, and amortization 28,206 - General and administrative 221,132 3,629,999 Administrative services contract - related party 60,000 60,000 Consulting fees - related party - 30,000 ------------ ------------ Total expenses 317,228 3,722,399 ------------ ------------ Operating loss (264,442) (3,722,399) Interest income 2,773 7,463 ------------ ------------ Loss before taxes (261,669) (3,714,936) Provision for income taxes - - ------------ ------------ Net loss $ (261,669) $(3,714,936) ============ ============ Net loss per common share: Basic and Diluted $ (0.02) $ (0.34) ============ ============ Weighted average shares outstanding: Basic and Diluted 11,998,000 10,874,185 ============ ============ The accompanying notes are an integral part of these financial statements. 4 SYNERGY RESOURCES CORPORATION STATEMENTS OF CASH FLOWS for the three months ended November 30, 2009 and 2008 (unaudited) Three Months Three Months Ended Ended November 30, 2009 November 30, 2008 ----------------- ----------------- Cash flows from operating activities: Net loss $ (261,669) $ (3,714,936) ---------------- ---------------- Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 4,641 3,424,755 Depreciation, depletion and amortization 28,206 - Changes in operating assets and liabilities: Increase in accounts receivable (881,290) - Increase in other current assets (20,785) (17,287) Increase in accounts payable 17,484 127,197 Increase (decrease) in accrued taxes and expenses (13,608) 2,486 Effect of merger on operating assets (liabilities) - (31,437) ---------------- ---------------- Total adjustments (865,352) 3,505,714 ---------------- ---------------- Net cash used in operating activities (1,127,021) (209,222) ---------------- ---------------- Cash flows from investing activities: Acquisition of property and equipment (467,299) (264,814) Cash acquired in merger - 3,987 ---------------- ---------------- Net cash used in investing activities (467,299) (260,827) ---------------- ---------------- Cash flows from financing activities: Cash proceeds from sale of stock - 52,294 Payment of deferred offering costs - (158,000) ---------------- ---------------- Net cash used in financing activities - (105,706) ---------------- ---------------- Net decrease in cash and equivalents (1,594,320) (575,755) Cash and equivalents at beginning of period 2,854,659 2,292,341 ---------------- ---------------- Cash and equivalents at end of period $ 1,260,339 $ 1,716,586 ================ ================ The accompanying notes are an integral part of these financial statements. 5 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) 1. Description of Business and Summary of Significant Accounting Policies Basis of Presentation: Synergy Resources Corporation (the "Company") represents the result of a merger transaction on September 10, 2008 between Brishlin Resources, Inc. ("Predecessor Brishlin"), a public company, and Synergy Resources Corporation ("Predecessor Synergy"), a private company. In conjunction with the transaction, Predecessor Brishlin changed its name to Synergy Resources Corporation. The Company was organized under the laws of the State of Colorado and, for accounting purposes, the inception date is deemed to be December 28, 2007, the day that Predecessor Synergy was organized. The Company is engaged in oil and gas acquisitions, exploration, development and production activities, primarily in the area known as the Denver-Julesburg Basin. The Company has adopted August 31st as the end of its fiscal year. Interim Financial Information: The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") as promulgated in Item 210 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures included are adequate to make the information presented not misleading, and recommends that these financial statements be read in conjunction with the audited financial statements and notes thereto for the period ended August 31, 2009. In management's opinion, the unaudited financial statements contained herein reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company's financial position, results of operations, and cash flows on a basis consistent with that of its prior audited financial statements. However, the results of operations for interim periods may not be indicative of results to be expected for the full fiscal year. Exploration Stage Company: As of August 31, 2009, the Company was considered an exploration stage company for accounting purposes. During the three months ended November 30, 2009, the Company completed the requirements to exit the exploration stage. Reclassifications: Certain amounts previously presented for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net loss, total assets, or total shareholders' equity. Cash and Cash Equivalents: The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. 6 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) Inventory: Inventories consist primarily of tubular goods and well equipment to be used in future drilling operations or repair operations and are carried at the lower of cost or market. Oil and Gas Properties: The Company uses the full cost method of accounting for costs related to its oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves (including the costs of unsuccessful efforts) are capitalized into a single full cost pool. These costs include land acquisition costs, geological and geophysical expense, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities. Capitalized costs of oil and gas properties are amortized using the units-of-production method based upon estimates of proved reserves. For amortization purposes, the volume of petroleum reserves and production is converted into a common unit of measure at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil. Investments in unevaluated properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test prescribed by SEC regulations. The ceiling test determines a limit on the book value of oil and gas properties. The capitalized costs of proved oil and gas properties, net of accumulated depreciation, depletion, and amortization, the related deferred income taxes, and the cost of unevaluated properties, may not exceed the estimated future net cash flows from proved oil and gas reserves, less future cash outflows associated with asset retirement obligations that have been accrued plus the lower of cost or estimated fair value of unevaluated properties not being amortized. Prices are held constant for the productive life of each well. Net cash flows are discounted at 10%. If net capitalized costs exceed this limit, the excess is charged to expense and reflected as additional accumulated depreciation, depletion and amortization. The calculation of future net cash flows assumes continuation of current economic conditions, including current prices and costs. The ceiling is highly sensitive to changing prices for oil and gas. Once impairment expense is recognized, it cannot be reversed in future periods, even if increasing prices raise the ceiling amount. For the year ended August 31, 2009, the Company made a provision for impairment of oil and gas properties of $945,079. For the three months ended November 30, 2009, no provision for impairment was required. Oil and Gas Reserves: The determination of depreciation, depletion and amortization expense, as well as ceiling test write-downs related to the recorded value of the Company's oil and natural gas properties, will be highly dependent on the estimates of the proved oil and natural gas reserves. Oil and natural gas reserves include proved reserves that represent estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. There are numerous 7 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) uncertainties inherent in estimating oil and natural gas reserves and their values, including many factors beyond the Company's control. Accordingly, reserve estimates are often different from the quantities of oil and natural gas ultimately recovered and the corresponding lifting costs associated with the recovery of these reserves. Major Customer and Operating Region: The Company operates exclusively within the United States. Except for cash investments, all of the Company's assets are employed in, and all of its revenues are derived from, the oil and gas industry. For the three months ended November 30, 2009, all of the Company's sales were to one customer. As of November 30, 2009, the accounts receivable balance was due from four customers, including other working interest owners which have been billed for their proportionate share of wells in progress. Revenue Recognition: Revenue is generally recognized for the sale of oil and gas when there is persuasive evidence of a sale arrangement, delivery has occurred, the price is determinable, and collection of sales proceeds is reasonably assured. Revenue is accrued when these four conditions have been satisfied and reasonable estimates can be made. Revenue estimates are prepared for the quantity of petroleum product delivered to the customer and the price that will be received. Payment is received at a later date, often sixty to ninety days after production. Revenue accruals are adjusted to reflect updated information as it is received. Earnings Per Share Amounts: Basic earnings per share includes no dilution and is computed by dividing net income (or loss) by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. As of November 30, 2009, the Company has outstanding 9,261,466 potentially dilutive securities, all of which were excluded from the calculation because they were anti-dilutive. Also as of November 30, 2009, the Company had a contingent obligation to issue 63,466 potentially dilutive securities, all of which were excluded from the calculation because the contingency conditions had not been met. Stock-Based Compensation: The Company records stock-based compensation by estimating the fair value of stock options at their grant date using the Black-Scholes-Merton option-pricing model and provides for expense recognition over the service period, if any, of the stock option. The Company accounts for common stock issued to employees for services based on the fair value of the equity instruments issued, and accounts for common stock issued to other than employees based on the fair value of the consideration received or the fair value of the equity instruments, whichever is more reliably measurable. Income Taxes: Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes using the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are 8 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not. Use of Estimates: The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions are revised periodically and the effects of revisions are reflected in the financial statements in the period it is determined to be necessary. Actual results could differ from these estimates. Concentration of Credit Risk: The Company's operating cash balances are maintained in one primary financial institution and currently exceed federally insured limits. The Company believes that the financial strength of this institution mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company's financial position or results of operations. Recently Adopted Accounting Standards: The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board ("FASB"), the SEC, and the Emerging Issues Task Force ("EITF"), to determine the impact of new pronouncements on US GAAP and the impact on the Company. The Company has recently adopted the following new accounting standards: Accounting Standards Codification - In June, 2009, FASB established the FASB Accounting Standards Codification ("ASC") as the single source of authoritative GAAP. The ASC is a new structure which took existing accounting pronouncements and organized them by accounting topic. Relevant authoritative literature issued by the Securities and Exchange Commission ("SEC") and select SEC staff interpretations and administrative literature was also included in the ASC. All other accounting guidance not included in the ASC is non-authoritative. The ASC was effective for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC did not have an impact on the Company's financial position, results of operations or cash flows. Business Combinations - In December 2007, the guidance for business combinations was updated to provide new guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. The updated guidance also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company adopted the updated guidance on September 1, 2009 and it will be applied to any future acquisitions. 9 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) Non-controlling Interests - In December 2007, the guidance for non-controlling Interests was updated to establish accounting and reporting standards pertaining to: (i) ownership interests in subsidiaries held by parties other than the parent ("non-controlling interest"), (ii) the amount of net income attributable to the parent and to the non-controlling interest, (iii) changes in a parent's ownership interest, and (iv) the valuation of any retained non-controlling equity investment when a subsidiary is deconsolidated. If a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary is measured at fair value and a gain or loss is recognized in net income based on such fair value. For presentation and disclosure purposes, the guidance requires non-controlling interests (formerly referred to as minority interest) to be classified as a separate component of equity. The Company adopted the updated guidance on September 1, 2009. The adoption had no impact on the Company's financial position, results of operations or cash flows. Recent Accounting Pronouncements: There were various accounting standards and interpretations recently issued which have not yet been adopted, including: Oil and Gas Disclosures - On December 29, 2008, the SEC announced final approval of new requirements for reporting oil and gas reserves to be effective in January 2010. The new disclosure requirements provide for consideration of new technologies in evaluating reserves, allow companies to disclose their probable and possible reserves to investors, report oil and gas reserves using an average price based on the prior 12 month period rather than year-end prices, and revise the disclosure requirements for oil and gas operations. The accounting for the limitation on capitalized costs for full cost companies will also be revised. The new rule is effective for years ending on or after December 31, 2009, and early adoption is not permitted. The Company has not yet evaluated the effects on its financial statements and disclosures. There were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on the Company's financial position, operations or cash flows. 2. Management Plan The report of the Company's independent registered public accounting firm on the Company's audited financial statements as of August 31, 2009, contained an explanatory paragraph expressing significant uncertainty about the Company's ability to continue as a going concern. Since August 31, 2009, events have occurred that mitigate the uncertainties. During the three months ended November 30, 2009, the Company drilled eleven wells to total depth and each well encountered commercially productive formations. The Company expects that these wells will be completed and brought on-stream during the next several months. On December 29, 2009, the Company received net proceeds of $3,743,824 from the sale of 41.65 units in a private offering. It is believed that the proceeds from this offering are sufficient to fund the completion of wells in progress and to meet existing obligations for the next twelve months. 10 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) Subject to the availability of additional funding, the Company plans to expand its drilling program to include 24 new wells and may raise additional capital through the sale of its common stock and the issuance of debt instruments, and may also seek other funding or corporate transactions to achieve its business objectives. 3. Property and Equipment Oil and gas property primarily consists of various interests in oil and gas leases, eleven wells in progress and two producing wells. Capitalized costs of property and equipment at November 30, 2009 and August 31, 2009, consisted of the following: Oil and Gas Properties, full cost method: November 30, 2009 August 31, 2009 ----------------- --------------- Unevaluated costs, not subject to amortization: Acquisition and other costs $ 642,081 $ 420,478 Wells in progress 2,035,845 -- ------------- ------------- Subtotal, unevaluated costs 2,677,926 420,478 ------------- ------------- Evaluated costs: Producing and non-producing 1,294,030 1,275,345 Less, accumulated depletion and impairment (1,070,483) (1,042,388) ------------- ------------- Subtotal, evaluated costs 223,547 232,957 ------------- ------------- Oil and gas properties, net 2,901,473 653,435 ------------- ------------- Other property and equipment: Office equipment 1,337 1,337 Less, accumulated depreciation (407) (296) ------------- ------------- Other property and equipment, net 930 1,041 ------------- ------------- Total Property and Equipment, net $ 2,902,403 $ 654,476 ============= ============= The capitalized costs of evaluated oil and gas properties are depleted using the units-of-production method based on estimated reserves and the calculation is performed quarterly. Production volumes for the quarter are compared to beginning of quarter estimated total reserves to calculate a depletion rate. For the three months ended November 30, 2009, depletion of oil and gas properties was $28,095, or $7.22 per barrel of oil equivalent, and depreciation of other property and equipment was $111. 11 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) 4. Bank Loan Payable In May 2009, the Company borrowed $1,161,811 from a commercial bank. The loan proceeds were used to purchase, and the loan is collateralized primarily by, pipe used to drill and complete oil and gas wells. The maximum allowable borrowing amount may be reduced by a reduction in the collateral. Effective November 1, 2009, terms of the agreement were modified to provide for 24 monthly payments of $16,738, including principal and interest. The loan bears interest at the prime rate plus 1/2%, with a minimum interest rate of 5.5%. The loan maturity date is November 1, 2011 at which time the entire remaining principal balance will be due. Interest costs of $16,152 were incurred during the period ended November 30, 2009. The loan is classified as a current liability because the outstanding principal balance will be reduced as the tubular goods are utilized, which is expected to occur during the next twelve months. The Company capitalizes interest on expenditures made in connection with exploration and development projects that are not subject to current amortization. Interest is capitalized during the period that activities are in progress to bring the projects to their intended use. During the three months ended November 30, 2009, interest expense of $16,152, was capitalized. 5. Shareholders' Equity As of November 30, 2009, there were various warrants outstanding to purchase 5,161,466 shares of common stock. Each Series A warrant entitles the holder to purchase one share of common stock at a price of $6.00 per share. The Series A warrants expire on December 31, 2012, or earlier under certain conditions. As of November 30, 2009, there were Series A warrants outstanding to purchase 4,098,000 shares of common stock. Each Series B warrant entitles the holder to purchase one share of common stock at a price of $10.00 per share. The Series B warrants expire on December 31, 2012, or earlier under certain conditions. As of November 30, 2009, there were Series B warrants outstanding to purchase 1,000,000 shares of common stock. In addition to the Series A and B warrants, the Company issued 31,733 placement agent warrants in connection with the Private Offering Memorandum dated December 1, 2008. Each placement agent warrant entitles the holder to purchase one Unit (which Unit is identical to the Units sold under the Private Offering Memorandum dated December 1, 2008) at a price of $3.60. Each Unit consists of two shares of common stock, one Series A warrant, and one Series B warrant. To maintain comparability of the placement agent warrants with the other warrants, the placement agent warrants are presented as 63,466 shares at an exercise price of $1.80. The Series A and Series B warrants issuable upon exercise of the placement agent warrants are not considered outstanding for accounting purposes until such time, if ever, that the placement agent warrants are exercised, and are disclosed as a commitment in the Related Party Transactions and Commitments footnote. 12 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) The following table summarizes activity for common stock warrants for the period from August 31, 2009 to November 30, 2009: Weighted Number of average warrants exercise price --------- -------------- Outstanding, August 31, 2009 5,161,466 $6.72 Granted -- -- Exercised -- -- ----------- Outstanding, November 30, 2009 5,161,466 $6.72 =========== The following table summarizes information about the Company's issued and outstanding common stock warrants as of November 30, 2009: Remaining Exercise Contractual Price times Number of Life (in Number of Exercise Price Shares years) Shares - -------------- --------- ----------- ----------- $1.80 63,466 3.1 $ 114,239 $6.00 4,098,000 3.1 $ 24,588,000 $10.00 1,000,000 3.1 $ 10,000,000 6. Stock-Based Compensation The Company recorded stock-based compensation expense of $4,641 and $3,424,755 for the three months ended November 30, 2009 and 2008, respectively. The estimated unrecognized compensation cost from unvested stock options as of November 30, 2009 was approximately $168,000, which will be recognized ratably through December 31, 2013. The following table summarizes activity for stock options for the period from August 31, 2009 to November 30, 2009: Number of Weighted average shares exercise price --------- ---------------- Outstanding August 31, 2009 4,100,000 $ 5.44 Granted -- -- Exercised -- -- ------------ Outstanding, November 30, 2009 4,100,000 $ 5.44 ============ 13 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) The following table summarizes information about outstanding stock options as of November 30, 2009: Remaining Weighted Contractual Average Aggregate Exercise Number Life (in Exercise Number Intrinsic Prices of Shares years) Price Exercisable Value - ------------- ---------- ------------- ---------- ------------------------ $10.00 2,000,000 3.5 $10.00 2,000,000 -- $1.00 2,000,000 3.5 $1.00 2,000,000 $700,000 $3.00 100,000 9.1 $3.00 -- -- ---------- ----------- 4,100,000 $5.44 4,000,000 ========== =========== 7. Related Party Transactions and Commitments The Company's executive officers control two entities that have entered into agreements with the Company. The entities are Petroleum Management, LLC ("PM") and Petroleum Exploration and Management, LLC ("PEM"). One agreement provides various administrative services to the Company and the other agreement provides an option to acquire certain oil and gas interests. Effective June 11, 2008, the Company entered into an Administrative Services Agreement with PM. The Company will pay $10,000 per month for leasing office space and an equipment yard located in Platteville, Colorado, and will pay $10,000 per month for office support services including secretarial service, word processing, communication services, office equipment and supplies. Additional goods or services provided to the Company by PM, such as employees, independent contractors or oil and gas professionals, and equipment, will be reimbursed at actual cost. Either party may terminate the agreement with 30 days notice. For each of the three month periods ended November 30, 2009 and 2008, the Company paid $60,000 under the administrative services agreement. Effective August 7, 2008, the Company entered into a letter of intent with the related entities that provides an option to acquire working interests in oil and gas leases which are owned by PM and/or PEM. The oil and gas leases cover 640 acres in Weld County, Colorado, and subject to certain conditions, will be transferred to the Company for payment of $1,000 per net mineral acre. The working interests in the leases vary but the net revenue interest in the leases, if acquired by the Company, will not be less than 75%. The letter of intent had an original expiration date of November 1, 2008, but has been extended by mutual agreement to August 31, 2010. 14 SYNERGY RESOURCES CORPORATION NOTES TO FINANCIAL STATEMENTS November 30, 2009 (Unaudited) During the quarter ended November 30, 2009, the Company agreed to purchase certain oil and gas equipment with an aggregate cost of $209,440 from PM. As of November 30, 2009, accounts payable of $160,894 was due to PM. PEM is a joint working interest owner of certain wells in progress. During the three months ended November 30, 2009, costs of $311,235 were incurred on behalf of PEM, all of which were settled subsequent to November 30, 2009. On June 11, 2008, the Company entered into two year employment agreements with its executive officers. For each of the three month periods ended November 30, 2009 and 2008, the Company paid $75,000 under these agreements. The Company issued 31,733 placement agent warrants in connection with the Private Offering Memorandum dated December 1, 2008. Each placement agent warrant entitles the holder to purchase one Unit (which Unit is identical to the Units sold under the Private Offering Memorandum dated December 1, 2008) at a price of $3.60. Each Unit consists of two shares of common stock, one Series A warrant, and one Series B warrant. The Series A and Series B warrants issuable upon exercise of the placement agent warrants are not considered outstanding for accounting purposes until such time, if ever, that the placement agent warrants are exercised. In the event that the placement agent warrants are exercised, the Company will be obligated to issue 31,733 Series A warrants and 31,733 Series B warrants. 8. Subsequent Events The Company evaluated all events subsequent to the balance sheet date of November 30, 2009 through January 13, 2010, the date that these financial statements were available to be issued and has determined that, except as set forth below, there are no subsequent events that require disclosure. Effective December 29, 2009, the Company received net proceeds of $3,743,824 from the sale of 41.65 units in a private offering. Each unit consists of one convertible promissory note in the principal amount of $100,000 and 50,000 warrants to purchase common stock. The notes are convertible into common stock at $1.60 per share. The notes bear interest at an annual rate of 8% and mature on December 31, 2012. Each warrant entitles the holder to purchase one share of common stock at $6.00 per share. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We evaluate undeveloped oil and gas prospects and participate in drilling activities on those prospects, which, in the opinion of management, are favorable for the production of oil or gas. If, through our review, a geographical area indicates geological and economic potential, we will attempt to acquire leases or other interests in the area. We may then attempt to sell portions of our leasehold interests in a prospect to third parties, thus sharing the risks and rewards of the exploration and development of the prospect with the other owners. One or more wells may be drilled on a prospect, and if the results indicate the presence of sufficient oil and gas reserves, additional wells may be drilled on the prospect. We may also: o acquire a working interest in one or more prospects from others and participate with the other working interest owners in drilling, and if warranted, completing oil or gas wells on a prospect, or o purchase producing oil or gas properties. We are licensed as an oil and gas operator in Colorado. Our first oil and gas well began producing in February, 2009. Prior to that time we did not have any revenue from the sale of oil or gas. As of December 31, 2009 we had: o two producing oil and gas wells; and o eleven wells which were in the process of completion. Our future plans will be dependent upon the amount of capital we are able to raise. We expect that most of our wells will be drilled in the Denver - Julesburg ("D-J") Basin in northeast Colorado. The following discussion analyzes our financial condition at November 30, 2009 and summarizes the results of our operations for the three months ended November 30, 2009 and 2008. This discussion and analysis should be read in conjunction with the financial statements included as part of this report and with our audited financial statements for the period ended August 31, 2009, including footnotes thereto, and the discussion and analysis included in our 10-K report filed with the SEC. Exploration Stage Company. We were considered an exploration stage company for accounting purposes until August 31, 2009. During the three months ended November 30, 2009, we drilled 11 development wells which are expected to begin generating revenue during the next several months. Accordingly, our November 30, 2009 financial statements are presented to reflect our exit from the exploration stage. 16 Going Concern. The report of our independent registered public accounting firm on our audited financial statements as of August 31, 2009 contained an explanatory paragraph expressing significant uncertainty about our ability to continue as a going concern. The factors that contributed to this uncertainty include our status as an exploration stage company, our need to raise significant additional capital to fund our business plan, and the operating losses that we have incurred since inception. Since August 31, 2009, events have occurred that mitigate the uncertainties. During the three months ended November 30, 2009, we drilled eleven wells to total depth and each well encountered commercially productive formations. These wells will be completed and brought on-stream during the next several months. On December 29, 2009, we received net proceeds of $3,743,824 from the sale of 41.65 units in a private offering. It is believed that the proceeds from this offering are sufficient to fund the completion of wells in progress and to meet existing obligations for the next twelve months. RESULTS OF OPERATIONS The factors that will most significantly affect our results of operations will be (i) the sales prices of crude oil and natural gas, (ii) the amount of production from oil or gas wells in which we have an interest, and (iii) and lease operating expenses. Our revenues will also be significantly impacted by our ability to maintain or increase oil or gas production through exploration and development activities. Other than the foregoing, we do not know of any trends, events or uncertainties that will have or are reasonably expected to have a material impact on our sales, revenues or expenses. Material changes of certain items in our statements of operations for the three months ended November 30, 2009 and 2008 are discussed below. Oil and Gas Revenues, Lease Operating Expenses, and Depreciation, Depletion and Amortization increased during the three months ended November 30, 2009. Our first wells began producing in February, 2009. We did not have an interest in any producing oil or gas wells during the three months ended November 30, 2008. Oil and gas sales for the three months ended November 30, 2009 are summarized in the following table: Oil Gas Total --------- -------- ----- (bbl) (mcf) (boe) Revenues $46,205 $ 6,581 $ 52,786 Average sales price $ 58.12 $ 3.67 $ 48.25 Stock-Based Compensation decreased during the current three-month period. In connection with our acquisition of predecessor Synergy in September 2008, we issued options covering 4,000,000 shares of common stock to replace similar 17 options that had previously been issued by predecessor Synergy. When stock options are issued, we calculate a non-cash expense based upon an estimated fair value for the options. We estimate fair values using the Black-Scholes-Merton option-pricing model. The estimated fair value is recorded as an expense on a pro-rata basis over the vesting period of the options. We estimated that the fair value of the replacement options exceeded the fair value of the surrendered options by $10,185,345. The pro-rata portion of the fair value of the options allocated to the three months ended November 30, 2008 was $3,424,755. During the three months ended November 30, 2009, we recognized a portion ($4,641) of the fair value of 100,000 options which were issued to an employee in December 2008. LIQUIDITY AND CAPITAL RESOURCES Our sources and (uses) of funds for the three months ended November 30, 2009 and 2008 are shown below: Three Months Ended -------------------------------------- November 30, 2009 November 30, 2008 Cash provided by (used in) operating activities $(1,127,021) $ 209,222) Acquisition of oil and gas properties, equipment, and expenditures on wells in progress (467,299) (264,814) Proceeds from sale of stock -- 52,294 Deferred offering costs -- (158,000) Other -- 3,987 Use of cash on hand at beginning of three-month period 1,594,320 575,755 In May 2009, we borrowed $1,161,811 from a commercial bank. The loan proceeds were used to purchase, and the loan is collateralized primarily by, pipe used to drill and complete oil and gas wells. The loan bears interest at the prime rate plus 1/2% and requires monthly payment of principal and interest of $16,738. The maturity date of the loan was subsequently extended to November 1, 2011, at which time all unpaid principal and interest is due. We classified the loan as a current liability since we expect to reduce the outstanding principal balance as the pipe is used. In December 2009, we received net proceeds of $3,743,824 from the private sale of 41.65 Units. The Units were sold at a price of $100,000 per Unit. Each Unit consisted of one Promissory Note in the principal amount of $100,000 and 50,000 warrants. The Notes bear interest at 8% per year, payable quarterly, and mature on December 31, 2012. At any time after May 31, 2010 the Notes can be converted into shares of our common stock, initially at a 18 conversion price of $1.60 per share. Each warrant entitles the holder to purchase one share of our common stock at a price of $6.00 per share. The warrants expire December 31, 2014. With the proceeds from the December 2009 offering, we plan to drill and complete oil and gas wells in the Wattenburg field located in the Denver-Julesburg Basin. The Notes will be secured by any oil or gas wells drilled, completed or acquired with the proceeds from the offering. As of December 31, 2009, our operating expenses requiring cash were approximately $95,000 per month, which amount includes salaries and other corporate overhead. Our capital requirements for the next twelve months include participation in 35 gross wells (in which our interest will approximate 24 net wells) and various other projects for total costs of approximately $15,000,000 to $18,000,000. As our capital expenditure plans exceed our capital resources, we plan to seek additional funding. Our capital expenditure plans are subject to periodic revision based upon the availability of funds and expected return on investment. It is expected that our principal source of cash flow will be from the sale of our securities and from the production and sale of crude oil and natural gas reserves, which are depleting assets. Cash flow from the sale of oil and gas production depends upon the quantity of production and the price obtained for the production. An increase in prices will permit us to finance our operations to a greater extent with internally generated funds, may allow us to obtain equity financing more easily or on better terms, and lessens the difficulty of obtaining financing. However, price increases heighten the competition for oil and gas prospects, increase the costs of exploration and development, and, because of potential price declines, increase the risks associated with the purchase of producing properties during times that prices are at higher levels. A decline in oil and gas prices (i) will reduce our cash flow which in turn will reduce the funds available for exploring for and replacing oil and gas reserves, (ii) will increase the difficulty of obtaining equity and debt financing and worsen the terms on which such financing may be obtained, (iii) will reduce the number of oil and gas prospects which have reasonable economic terms, (iv) may cause us to permit leases to expire based upon the value of potential oil and gas reserves in relation to the costs of exploration, (v) may result in marginally productive oil and gas wells being abandoned as non-commercial, and (vi) may increase the difficulty of obtaining financing. However, price declines reduce the competition for oil and gas properties and correspondingly reduce the prices paid for leases and prospects. We plan to generate profits by drilling productive oil or gas wells. However, we will need to raise the funds required to drill new wells through the sale of its securities, from loans from third parties or from third parties willing to pay our share of drilling and completing the wells. We do not have any commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available when needed, we may need to cease operations. We may not be successful in raising the capital needed to drill oil or gas wells. Any wells which may be drilled by us may not be productive of oil or gas. 19 MISCELLANEOUS In addition to the amounts recorded as current liabilities as of November 30, 2009, we have contractual obligations for service contracts totaling $270,000, all of which are expected to be satisfied during the next twelve months. We do not have any off-balance sheet arrangements that have or are reasonable likely to have a current or future effect on our financial condition, changes in financial condition, results of operations, liquidity or capital resources. We do not currently engage in any commodity hedging activities, although we may do so in the future. FORWARD-LOOKING STATEMENTS This Form 10-Q contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others: - statements concerning the benefits that we expect will result from our business activities and results of exploration that we contemplate or have completed, such as increased revenues; and - statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this document or may be incorporated by reference to other documents that we will file with the SEC. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates" or similar expressions used in this report or incorporated by reference in this report. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, and may change at any time and without notice, based on changes in such facts or assumptions. The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, the following: o The worldwide economic situation; o Volatility in the price of oil and gas; o Any change in interest rates or inflation; 20 o The willingness and ability of third parties to honor their contractual commitments; o Our ability to raise additional capital, as it may be affected by current conditions in the stock market and competition in the oil and gas industry for risk capital; o Our capital costs, as they may be affected by delays or cost overruns; o Our costs of production; o Environmental and other regulations, as the same presently exist and may hereafter be amended; o Our ability to identify, finance and integrate other acquisitions; and o Volatility of our stock price. We undertake no responsibility or obligation to update publicly these forward-looking statements, but may do so in the future in written or oral statements. Investors should take note of any future statements made by or on our behalf. Item 4. Controls and Procedures. We maintain a system of controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended ("1934 Act"), is recorded, processed, summarized and reported, within time periods specified in the SEC's rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act, is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of November 30, 2009, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting during the quarter ended November 30, 2009 that materially affected or are reasonably likely to materially affect, our internal control over financial reporting. 21 PART II Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Securities Holders. None. Item 5. Other Information. None. Item 6. Exhibits a. Exhibits 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Edward Holloway. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Frank L. Jennings. 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Edward Holloway and Frank L. Jennings. 22 SIGNATURES Pursuant to the requirements 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. SYNERGY RESOURCES CORPORATION Date: January 13, 2010 By: /s/ Ed Holloway ----------------------------------- Ed Holloway, President and Principal Executive Officer Date: January 13, 2010 By: /s/ Frank L. Jennings ----------------------------------- Frank L. Jennings, Principal Financial and Accounting Officer EX-31 2 nov0910qjan10ex31.txt EXHIBIT 31 EXHIBIT 31 CERTIFICATIONS I, Ed Holloway, certify that; 1. I have reviewed this quarterly report on Form 10-Q of Synergy Resources Corporation; 2. Based on my knowledge, this report, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, no misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is make known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. January 13, 2010 /s/ Ed Holloway ------------------------------------ Ed Holloway, Principal Executive Officer CERTIFICATIONS I, Frank L. Jennings, certify that; 1. I have reviewed this quarterly report on Form 10-Q of Synergy Resources Corporation; 2. Based on my knowledge, this report, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, no misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is make known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. January 13, 2010 /s/ Frank L. Jennings ------------------------------ Frank L. Jennings, Principal Financial Officer EX-32 3 nov0910qjan10ex32.txt EXHIBIT 32 EXHIBIT 32 In connection with the quarterly report of Synergy Resources Corporation, (the "Company") on Form 10-Q for the quarter ended November 30, 2009 as filed with the Securities Exchange Commission on the date hereof (the "Report") Ed Holloway, the Principal Executive Officer of the Company and Frank L. Jennings, the Principal Financial Officer of the Company, certify pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the company. January 13, 2010 /s/ Ed Holloway ------------------------------------ Ed Holloway, Principal Executive Officer January 13, 2010 /s/ Frank L. Jennings ------------------------------------ Frank L. Jennings, Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----