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 May 31, 2010

      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 [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated 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: 12,835,812 shares outstanding
as of July 12, 2010.


<PAGE>

                          SYNERGY RESOURCES CORPORATION

                                      Index

                                                                            Page
Part I - FINANCIAL INFORMATION

Item 1.    Financial Statements

           Balance Sheets as of May 31, 2010 (unaudited)
            and August 31, 2009                                               3

           Statements of Operations for the three months ended
           May 31, 2010 and 2009 (unaudited),                                 4

           Statements of Operations for the nine months ended
           May 31, 2010 and 2009 (unaudited)                                  5

           Statements of Cash Flows for the nine months ended
           May 31, 2010 and 2009 (unaudited)                                  6

           Notes to Financial Statements (unaudited)                          7

Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                             22

Item 4.    Controls and Procedures                                           28

Part II - OTHER INFORMATION

Item 1.    Legal Proceedings                                                 29

Item 2.    Unregistered Sales of Equity Securities and Use of
           Proceeds                                                          29

Item 3.    Defaults Upon Senior Securities                                   29

Item 4.    Submission of Matters to a Vote of Security Holders               29

Item 5.    Other Information                                                 29

Item 6.    Exhibits                                                          29

SIGNATURES                                                                   30




<PAGE>

                          SYNERGY RESOURCES CORPORATION
                                 BALANCE SHEETS

                                                 May 31, 2010    August 31, 2009
                                                 ------------    ---------------
                                                 (unaudited)
                         ASSETS
Current assets:
   Cash and cash equivalents                     $11,641,794       $ 2,854,659
   Accounts receivable:
     Oil and gas sales                               262,998            84,643
     Joint interest billing                          305,839                 -
     Related party receivable                        197,729                 -
   Inventory                                       1,242,276         1,132,685
   Other current assets                               39,463            21,105
                                                -------------     -------------
       Total current assets                       13,690,099         4,093,092
                                                -------------     -------------
Property and equipment:
   Oil and gas properties, full cost method, net   7,713,865           653,435
   Other property and equipment, net                  74,727             1,041
                                                -------------     -------------
       Property and equipment, net                 7,788,592           654,476
                                                -------------     -------------

Debt issuance costs, net of amortization           1,757,920                 -
Other assets                                          85,500            85,000
                                                -------------     -------------
       Total assets                             $ 23,322,111      $  4,832,568
                                                =============     =============

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                             $  2,084,839      $    622,734
   Accounts payable, related party                    34,317                 -
   Accrued expenses                                  387,978            59,579
   Bank loan payable                                       -         1,161,811
                                                -------------     -------------
       Total current liabilities                   2,507,134         1,844,124

Asset retirement obligations                         184,305                 -
Convertible promissory notes, net of discount     13,406,357                 -
Derivative conversion liability                    6,220,697                 -
                                                -------------     -------------
       Total liabilities                          22,318,493         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                     17,992,013        15,521,697
   Accumulated (deficit)                         (17,000,393)      (12,545,251)
                                                -------------     -------------
    Total shareholders' equity                     1,003,618         2,988,444
                                                -------------     -------------
    Total liabilities and shareholders' equity  $ 23,322,111      $  4,832,568
                                                =============     =============

      The accompanying notes are an integral part of these financial statements.


                                       3
<PAGE>
                          SYNERGY RESOURCES CORPORATION
                            STATEMENTS OF OPERATIONS
               for the three months ended May 31, 2010, and 2009,
                                   (unaudited)

                                                  Three Months     Three Months
                                                      Ended            Ended
                                                  May 31, 2010     May 31, 2009
                                                  ------------     ------------

Oil and gas revenues                              $   607,253      $    28,832
                                                  ------------     ------------
Expenses:
    Lease operating expenses                          106,504            1,138
    Depreciation, depletion, and accretion            200,890           21,973
    General and administrative                        290,953        3,589,775
    Administrative services contract -
      related party                                    60,000           60,000
    Consulting fees - related party                         -           30,000
                                                  ------------     ------------
               Total expenses                         658,347        3,702,886
                                                  ------------     ------------
Operating loss                                        (51,094)      (3,674,054)
                                                  ------------     ------------
Other (expense) income:
    Accretion of debt discount                       (376,871)               -
    Amortization of debt issuance costs              (183,398)               -
    Change in fair value of derivative liability   (2,764,888)               -
    Interest expense, net                            (274,113)               -
    Interest income                                       552            1,924
                                                  ------------     ------------
         Total other (expense) income              (3,598,718)           1,924
                                                  ------------     ------------
Loss before taxes                                  (3,649,812)      (3,672,130)

Provision for income taxes                                  -                -
                                                  ------------     ------------
Net loss                                          $(3,649,812)     $(3,672,130)
                                                  ============     ============
Net loss per common share:
         Basic and Diluted                        $     (0.30)     $     (0.35)
                                                  ============     ============
Weighted average shares outstanding:
         Basic and Diluted                        $11,998,000      $10,531,051
                                                  ============     ============

   The accompanying notes are an integral part of these financial statements.


                                       4
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                            STATEMENTS OF OPERATIONS
                for the nine months ended May 31, 2010, and 2009,
                                   (unaudited)

                                                 Nine Months        Nine Months
                                                    Ended             Ended
                                                 May 31, 2010      May 31, 2009
                                                 ------------      ------------

Oil and gas revenues                             $   995,764       $    28,832
                                                 ------------      ------------
Expenses:
    Lease operating expenses                         161,545             3,712
    Depreciation, depletion, and accretion           293,829            21,973
    General and administrative                       806,364        10,851,811
    Administrative services contract -
      related party                                  180,000           180,000
    Consulting fees - related party                        -            90,000
                                                 ------------      ------------
               Total expenses                      1,441,738        11,147,496
                                                 ------------      ------------
Operating loss                                      (445,974)      (11,118,664)
                                                 ------------      ------------
Other (expense) income:
    Accretion of debt discount                      (622,214)                -
    Amortization of debt issuance costs             (283,535)                -
    Change in fair value of derivative liability  (2,764,888)                -
    Interest expense, net                           (342,768)                -
    Interest income                                    4,237            13,566
                                                 ------------      ------------
       Total other (expense) income               (4,009,168)           13,566
                                                 ------------      ------------
Loss before taxes                                 (4,455,142)      (11,105,098)

Provision for income taxes                                 -                 -
                                                 ------------      ------------
Net loss                                         $(4,455,142)     $(11,105,098)
                                                 ============     =============
Net loss per common share:
         Basic and Diluted                       $     (0.37)     $      (1.05)
                                                 ============     =============
Weighted average shares
outstanding:
         Basic and Diluted                        11,998,000         10,545,652
                                                 ============     =============


The accompanying notes are an integral part of these financial statements.




                                       5
<PAGE>


                          SYNERGY RESOURCES CORPORATION
                               STATEMENTS OF CASH FLOWS
                   for the nine months ended May 31, 2010, and 2009,
                                   (unaudited)

<TABLE>
<S>                                                             <C>                 <C>

                                                         Nine Months Ended   Nine Months Ended
                                                            May 31, 2010        May 31, 2009
                                                         -----------------   -----------------

 Cash flows from operating activities:
    Net loss                                             $     (4,455,142)   $    (11,105,098)
                                                         -----------------   -----------------
 Adjustments to reconcile net loss to net cash
  used in operating activities:
    Depreciation, depletion, and accretion                        293,829              21,973
    Amortization of debt issuance cost                            283,535                   -
    Accretion of debt discount                                    622,214                   -
    Stock-based compensation                                       17,790          10,282,000
    Change in fair value of derivative liability                2,764,888                   -
    Changes in operating assets and liabilities:
       Increase in accounts receivable                           (681,923)            (25,928)
       Increase in inventory                                     (109,591)                  -
       Increase in other assets                                   (18,858)             (5,413)
       Decrease in accounts payable                               (64,008)            234,561
       Increase in accounts payable - related party                34,317                   -
       Increase in accrued taxes and expenses                     328,399               7,720
       Effect of merger on operating assets (liabilities)              --             (31,438)
                                                         -----------------   -----------------
    Total adjustments                                           3,470,592          10,483,475
                                                         -----------------   -----------------
       Net cash used in operating activities                     (984,550)           (621,623)
                                                         -----------------   -----------------
   Cash flows from investing activities:
       Acquisition of property and equipment                   (5,717,527)         (2,464,426)
       Cash acquired in merger                                          -               3,987
                                                         -----------------   -----------------
       Net cash used in investing activities                   (5,717,527)         (2,460,439)
                                                         -----------------   -----------------
   Cash flows from financing activities:
       Cash proceeds from convertible promissory notes         18,000,000                   -
       Debt issuance costs                                     (1,348,977)                  -
       Cash proceeds from bank loan payable                             -           1,161,811
       Principal repayments                                    (1,161,811)                  -
       Cash proceeds from sale of stock                                 -             957,295
       Offering costs                                                   -            (275,400)
       Repurchase of shares                                             -              (1,000)
                                                         -----------------   -----------------
       Net cash provided by financing activities               15,489,212           1,842,706
                                                         -----------------   -----------------
   Net increase (decrease) in cash and equivalents              8,787,135          (1,239,356)
   Cash and equivalents at beginning of period                  2,854,659           2,292,341
                                                         -----------------   -----------------
   Cash and equivalents at end of period                 $     11,641,794    $      1,052,985
                                                         =================   =================
   Supplemental Cash Flow Information:
       Interest paid                                     $        255,936    $              -
       Income taxes paid                                                -                   -

   Non-cash investing and financing activities:
       Net assets acquired in merger                     $              -    $         11,675
       Asset retirement obligations                               182,771                   -
       Warrants issued to convertible debt
          placement agent                                        692,478                    -
       Accrued capital expenditures                            1,526,113                    -
</TABLE>

      The accompanying notes are an integral part of these financial statements.



                                       6
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (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 year 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. Subsequent to
August 31, 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.

      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


                                       7
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

drilling and overhead charges directly related to acquisition and exploration
activities.

      Capitalized costs of oil and gas properties are amortized using the
unit-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 nine months ended May 31, 2010, 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
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.

      Capitalized Interest: 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.

      Asset Retirement Obligations: The Company's activities are subject to
various laws and regulations, including legal and contractual obligations to
reclaim, remediate, or otherwise restore properties at the time the asset is
removed from service. A liability is initially recorded at the estimated present
value for an obligation associated with the retirement of tangible long-lived
assets in the period in which it is incurred if a reasonable estimate of fair
value can be made. The amount of the liability is accreted each period by the
Company's credit adjusted risk free interest rate. The costs associated with the


                                       8
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

obligation are added to the capitalized costs of the property and amortized
using the unit of production method.

      Major Customers 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.

         The table below shows for the nine months ended May 31, 2010 and 2009,
the percentages of the Company's oil and gas revenues from major customers,
i.e., those who each account for more than 10% of oil and gas sales:

                Revenues from Major Customers               2010        2009
                -----------------------------               ----        ----

                Kerr-McGee Oil & Gas Onshore LP              22%        100%
                Suncor Energy Marketing, Inc.                42%          0%
                DCP Midstream LP                             36%          0%

         As there are other purchasers that are capable of and willing to
purchase the Company's oil and gas and since the Company has the option to
change purchasers on its properties if conditions warrant, the Company believes
that its oil and gas production can be sold in the market in the event that it
is not sold to the Company's existing customers, but in some circumstances a
change in customers may entail significant transition costs and/or shutting in
or curtailing production for weeks or even months during the transition to a new
customer.

         As of May 31, 2010, the Company's major customers (i.e. balances
greater than 10% of the total) are shown in the following table. Accounts
receivable includes amounts due from other working interest owners which have
been billed for their proportionate share of wells in progress.

     Accounts Receivable from Major Customers    May 31, 2010   August 31, 2009
     -----------------------------------------   ------------   ---------------


        Suncor Energy Marketing, Inc.                   14%            0%
        Kerr-McGee Oil & Gas Onshore LP                  0%          100%
        DCP Midstream LP                                20%            0%
        Petroleum Exploration & Management LLC          26%            0%
        FEI Energy Fund LLC                             13%            0%
        Sundance Energy, Inc                            27%            0%

      Derivative Liability: The Company accounts for its embedded conversion
features in its convertible promissory notes in accordance with the guidance for
derivative instruments, which require a periodic valuation of their fair value
and a corresponding recognition of liabilities associated with such derivatives.
The recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at
the date of the issuance. Any subsequent increase or decrease in the fair value
of the derivative liabilities is recognized as a charge or credit to operations.

      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. Payment is received at a later


                                       9
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

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 May 31, 2010, the Company has outstanding 30,646,466 potentially
dilutive securities, (4,100,000 options, 15,286,466 warrants, and 11,250,000
conversion shares) all of which were excluded from the calculation because they
were anti-dilutive. Also as of May 31, 2010, 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
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 multiple financial institutions and may exceed federally insured
limits. The Company reviews the financial strengths and weaknesses of its
depository institutions and attempts to mitigate 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.


                                       10
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

      Debt Issuance Costs: Debt issuance costs include issuance costs incurred
in connection with the sale of the Company's Convertible Promissory Notes, which
are being amortized over the three year term of the Notes (see Note 5).

      Fair Value Measurements: Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price).
The Company uses market data or assumptions that market participants would use
in pricing the asset or liability, including assumptions about risk. These
inputs can either be readily observable, market corroborated or generally
unobservable. Given the Company's historical market transactions, its markets
and instruments are not liquid. Therefore, the Company expects that its fair
value estimates will primarily be calculated using unobservable inputs and
comparable market data from other industry participants using the best available
information. Fair value balances are classified based on the observability of
the various inputs.

      A fair value hierarchy was established that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).

      Level 1 - Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are those in
which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis. Level 1 primarily
consists of financial instruments such as exchange-traded derivatives, listed
securities and U.S. government treasury securities.

      Level 2 - Pricing inputs are other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as of
the reporting date. Level 2 includes those financial instruments that are valued
using models or other valuation methodologies, where substantially all of these
assumptions are observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by observable
levels at which transactions are executed in the marketplace.

      Level 3 - Pricing inputs include significant inputs that are generally
less observable than objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair value.
Level 3 includes those financial instruments that are valued using models or
other valuation methodologies, where substantial assumptions are not observable
in the marketplace throughout the full term of the instrument, cannot be derived
from observable data or are not supported by observable levels at which
transactions are executed in the marketplace. At each balance sheet date, the
Company performs an analysis of all applicable instruments and includes in Level
3 all of those whose fair value is based on significant unobservable inputs.

      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
Accounting Standards Codification ("ASC") as the single source of authoritative
US GAAP to be applied by nongovernmental entities. Rules and interpretive


                                       11
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

releases of the SEC under authority of federal securities laws are also sources
of authoritative US GAAP for SEC registrants. The ASC is a new structure which
took existing accounting pronouncements and organized them by accounting topic.
The ASC did not change current US GAAP, but was intended to simplify user access
to all authoritative US GAAP by providing all the relevant literature related to
a particular topic in one place. All previously existing accounting standards
were superseded and all other accounting literature not included in the ASC is
considered non-authoritative. New accounting standards issued subsequent to June
30, 2009 will be communicated by the FASB through Accounting Standards Updates
(ASUs). The ASC was effective during the period ended September 30, 2009.
Adoption of the ASC did not have an impact on the Company's financial position,
results of operations or cash flows.

      Subsequent Events - In May 2009, the ASC guidance for subsequent events
was updated to establish accounting and reporting standards for events that
occur after the balance sheet date but before financial statements are issued.
The guidance was amended in February, 2010. ASU 2010-09 sets forth: (i) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (ii) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet in its financial statements, and (iii) the disclosures that an
entity should make about events or transactions occurring after the balance
sheet date in its financial statements. The amended ASU was effective
immediately and its adoption had no 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.

      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: The following accounting standards
updates were recently issued and have not yet been adopted by the Company. These
standards are currently under review to determine their impact on the Company's
financial position, results of operations, or cash flows.

      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


                                       12
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

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 of these new rules on its financial statements and disclosures.

      In 2010, the FASB issued ASU 2010-03 and ASU 2010-14, Extractive
Industries-Oil and Gas: Oil and Gas Reserve Estimation and Disclosure. These
ASUs amend the codification to align the reserve calculation and disclosure
requirements with the requirements in the new SEC Rule, Modernization of Oil and
Gas Reporting Requirements. The ASU is effective for fiscal years ending on or
after December 31, 2009.

      ASU 2010-6 amends existing disclosure requirements concerning fair value
measurements by adding required disclosures about items transferring into and
out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures
about purchases, sales, issuance, and settlements relative to level 3
measurements; and clarifying, among other things, the existing fair value
disclosures about the level of disaggregation. The new disclosures and
clarifications of existing disclosures were effective for this filing and all
new disclosure requirements have been incorporated. The disclosures regarding
the roll forward of activity in level 3 fair value measurements are effective
for the Company beginning September 1, 2011.

      There were various other updates recently issued, most of which
represented technical corrections to the accounting literature or application to
specific industries, and are not expected to a have a material impact on the
Company's financial position, results of 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 nine months ended May 31, 2010, the Company undertook a well
drilling program that is expected to include 35 wells. As of May 31, 2010, the
Company has drilled 23 wells to total depth and each well encountered
commercially productive formations. Between December 29, 2009 and March 12,
2010, the Company received net proceeds of $16,651,023 from the sale of 180
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.

      With the additional funding, the Company plans to continue its drilling
program 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.


                                       13
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)


3.     Property and Equipment

      Oil and gas property primarily consists of various interests in oil and
gas leases, wells in progress, and producing and non-producing wells.

      Capitalized costs of property and equipment at May 31, 2010 and August 31,
2009, consisted of the following:

<TABLE>
               <S>                                             <C>              <C>

   Oil and Gas Properties, full cost method:              May 31, 2010    August 31, 2009
                                                          ------------    ---------------

      Unevaluated costs, not subject to amortization:
         Acquisition and other costs                      $  1,715,858     $    420,478
         Wells in progress                                   2,851,508               --
                                                          -------------    -------------
            Subtotal, unevaluated costs                      4,567,366          420,478
                                                          -------------    -------------
      Evaluated costs:
         Producing and non-producing                         3,894,512          689,779
         Less, accumulated depletion                          (748,013)        (456,822)
                                                          -------------    -------------
            Subtotal, evaluated costs                        3,146,499          232,957
                                                          -------------    -------------
               Oil and gas properties, net                   7,713,865          653,435
                                                          -------------    -------------
   Other property and equipment:
       Vehicles                                                 46,248               --
       Leasehold Improvements                                   27,794               --
       Office equipment                                          2,085            1,337
         Less, accumulated depreciation                         (1,400)            (296)
                                                          -------------    -------------
           Other property and equipment, net                    74,727            1,041
                                                          -------------    -------------
   Total Property and Equipment, net                      $  7,788,592     $    654,476
                                                          =============    =============
</TABLE>


      Interest capitalized during the three and nine months ended May 31, 2010,
was $84,153 and $139,626, respectively.

      The capitalized costs of evaluated oil and gas properties are depleted
using the unit-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 and nine months ended May 31, 2010, depletion of
oil and gas properties was $198,474 and $291,191, respectively, or $10.50 and
$10.22 per barrel of oil equivalent, respectively.

      For the three and nine months ended May 31, 2010, depreciation of other
property and equipment was $882 and $1,104, respectively.

4.      Bank Loan Payable

      In May 2009 the Company arranged a credit facility with a commercial bank
that provided for maximum borrowings up to $1,161,811. Proceeds from the
borrowing were used to purchase pipe used to drill and complete oil and gas
wells and the borrowing was collateralized primarily by the pipe. During 2010,


                                       14
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

the pipe was used in the drilling program and the outstanding principal balance
was periodically reduced. In April 2010 the outstanding balance was paid in
full.

5.      Convertible Promissory Notes and Derivative Conversion Liability

      Between December 29, 2009, and March 12, 2010, the Company received gross
proceeds of $18,000,000 from the sale of 180 Units at $100,000 per Unit. Each
Unit consists of one Convertible Promissory Note ("Note") in the principal
amount of $100,000 and 50,000 Series C warrants. The Notes bear interest at 8%
per year, payable quarterly, and mature on December 31, 2012. Each Series C
warrant entitles the holder to purchase one share of common stock at a price of
$6.00 per share and expires on December 31, 2014.

      The Company paid fees and expenses of $1,348,997 to the placement agent,
and issued 1,125,000 Series D warrants, to the placement agent with an exercise
price of $1.60 and an expiration date of December 31, 2014. The warrants were
valued at $692,478 using the Black-Scholes-Merton option pricing model. Net cash
proceeds of $16,651,023 from the sale of the Units are being used primarily to
drill and complete oil and gas wells in the Wattenburg field, located in the
Denver-Julesburg Basin. The Notes are collateralized by any oil and gas wells
drilled, completed, or acquired with the proceeds from the offering.

      The Notes are considered hybrid debt instruments containing a detachable
warrant and a conversion feature under which the proceeds of the offering are
allocated to the detachable warrants, and the conversion feature based on their
fair values. The warrants were determined to be a component of equity, and the
fair value of the warrants was credited to additional paid in capital. Since the
warrants were recorded as a component of equity, the fair value was estimated at
inception and will not be re-measured in future periods. The notes contain a
conversion feature, at an initial conversion price of $1.60 and subject to
adjustment under certain circumstances, which allow the shareholders to convert
the principal balance into a maximum of 11,250,000 common shares, plus
conversion of accrued and unpaid interest into common shares, also at $1.60 per
share. The conversion feature was determined to be an embedded derivative
requiring the conversion option to be separated from the host contract and
measured at its fair value. The conversion option will continue to be recorded
at fair value each reporting period until settlement or conversion, with changes
in the fair value reflected in earnings. The fair value of the conversion
feature was credited to derivative conversion liability.

      As of March 12, 2010, the estimated fair value of the Series C warrants
was $1,760,048. The estimated fair value of the conversion feature was
$3,455,809. Allocation of value to the components as of March 12, 2010, resulted
in a debt discount of $5,215,857, which will be amortized over the 36 month life
of the Notes.

      The Company estimated the fair value of the warrants and the conversion
feature at inception by using the Black-Scholes-Merton option pricing model. The
following assumptions were the same for both components: volatility of 55%,
dividend yield of 0%, and interest rate of 1.5%. The expected term of the
derivative conversion liability was 1.5 years and the expected term of the
warrants was 5 years. The Black-Scholes-Merton option pricing model also
requires an assumption about the fair value of the Company's common stock. It
was concluded that the Company's stock is traded in an illiquid market, and the
reported sales prices may not represent fair value. (See Note 10.) As a result,
the value of the common stock was assumed to be $1.39 by using a model that
estimated the enterprise value of the Company based upon oil and gas reserve
estimates.


                                       15
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

      The fair value of the derivative conversion liability was adjusted as of
May 31, 2010, to reflect the change in value during the quarter. The estimated
fair value of the derivative conversion liability as of May 31, 2010, was
$6,220,697, an increase in fair value of $2,764,888, which was recorded as a
change in value of derivative liability. Further discussion of fair value is
included in Note 10.

      The valuation model as of May 31, 2010 was changed from the
Black-Scholes-Merton option pricing model to a Monte Carlo Simulation (MCS)
model, with the following assumptions: discount rate of 6.47%, volatility of
58%, and expected common stock value of $1.63. The Company believes this model
provides a more robust method to determine estimates of the future share prices
of its common stock, which is a significant input to the calculation. Further,
the use of a MCS model allows the use of stochastic methodology which allows for
simulations when the payoff depends upon the path followed by the underlying
variable, i.e., the common stock price. Payoffs can occur at several times
during the life of the conversion feature rather than at the end of its life.
The change in valuation methods increased the change in derivative conversion
liability by approximately $300,000, which was included in the change in the
fair value of derivative liability reported for the period.

      Certain details of the initial value allocation and subsequent activity
are presented in the following table:

                                                 Derivative     Convertible
                                                  Liability      Promissory
                                  Warrants                          Note
                                  --------       ----------     -----------

Face value of debt                                               $18,000,000
Allocation of value to           $ 1,760,048      $3,455,809      (5,215,857)
components
Change in value of                                 2,764,888
derivative liability
Accretion of debt discount                                           622,214
                                  ----------     ------------   -------------
Carrying value at May 31, 2010    $1,760,048      $6,220,697     $13,406,357
                                  ==========     ============   =============

6.     Asset Retirement Obligations

      During the nine months ended May 31, 2010, the Company incurred
obligations for its oil and gas operations which include estimated reclamation,
remediation and closure costs. The estimated present value of the obligations
was determined using several assumptions and judgments about the ultimate
settlement amounts, inflation factors, credit adjusted discount rates, timing of
settlement, and changes in regulations. Changes in estimates are reflected in
the obligations as they occur.

      The following table summarizes the change in asset retirement obligations
for the nine months ended May 31, 2010:

        Balance, beginning  of period              $       --
          Liabilities incurred                        182,771
          Liabilities settled                              --
          Accretion                                     1,534
          Revisions in estimated liabilities               --
                                                   -----------
        Balance, end of period                     $  184,305
                                                   ===========


                                       16
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

7.     Shareholders' Equity

      During the nine months ended May 31, 2010, no common shares were issued.
The carrying value of additional paid in capital increased $17,790 to reflect
the pro-rata recognition of stock based compensation for options issued in prior
periods. Additional paid in capital increased $2,452,526 to reflect the value of
the Series C and Series D warrants issued in connection with the private
offering dated November 27, 2009.

      As of May 31, 2010, there were various warrants outstanding to purchase
15,286,466 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
May 31, 2010, 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 May 31,
2010, there were Series B warrants outstanding to purchase 1,000,000 shares of
common stock. Each Series C warrant entitles the holder to purchase one share of
common stock at a price of $6.00 per share. The Series C warrants expire on
December 31, 2014. As of May 31, 2010, there were Series C warrants outstanding
to purchase 9,000,000 shares of common stock.

      In addition to the Series A, B and C 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.

      In connection with the 180 Units sold pursuant to an Offering Memorandum
dated November 27, 2009, the Company issued 1,125,000 Series D warrants to the
placement agent for the offering. The Series D warrants are exercisable at a
price of $1.60 per share and expire on December 31, 2014. The warrants are an
equity instrument and were valued at $692,478 using the Black-Scholes-Merton
option pricing model. The value was recorded as a debt issuance cost and will be
amortized over 36 months.

      The following table summarizes activity for common stock warrants for the
period from August 31, 2009 to May 31, 2010:

                                              Number         Weighted average
                                            of warrants       exercise price
                                            -----------      ----------------


            Outstanding, August 31, 2009      5,161,466              $6.72
            Granted                          10,125,000                 --
            Exercised                                --                 --
                                             -----------
            Outstanding, May 31, 2010        15,286,466              $5.92
                                             ===========



                                       17
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

         The following table summarizes information about the Company's issued
and outstanding common stock warrants as of May 31, 2010:

                                             Remaining        Exercise Price
              Exercise       Number of      Contractual        times Number
                Price          Shares      Life (in years)      of Shares
              --------       ---------     ---------------    --------------

              $  1.60        1,125,000           4.6           $ 1,800,000
              $  1.80           63,466           2.6           $   114,239
              $  6.00        4,098,000           2.6           $24,588,000
              $  6.00        9,000,000           4.6           $54,000,000
               $10.00        1,000,000           2.6           $10,000,000

8.     Stock-Based Compensation

      No stock based compensation was granted during the nine months ended May
31, 2010.

      The Company recorded stock-based compensation expense of $17,790 and
$10,282,000 for the nine months ended May 31, 2010 and 2009, respectively. The
estimated unrecognized compensation cost from unvested stock options as of May
31, 2010, was approximately $155,000, 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 May 31, 2010:

                                      Number of      Weighted average
                                       shares         exercise price

Outstanding August 31, 2009           4,100,000            $ 5.44
Granted                                      --                --
Exercised                                    --                --
                                     -----------
Outstanding, May 31, 2010             4,100,000            $ 5.44
                                     ===========

      The following table summarizes information about outstanding stock options
as of May 31, 2010:

  Exercise      Number of     Remaining     Weighted    Number        Aggregate
                             Contractual    Average
                              Life (in      Exercise                  Intrinsic
   Prices         Shares       years)         Price     Exercisable     Value
-------------   -----------  ------------   ----------  -----------------------
   $10.00        2,000,000       3.0         $10.00     2,000,000         --
   $1.00         2,000,000       3.0          $1.00     2,000,000     $3,200,000
   $3.00           100,000       8.6          $3.00        10,000         --
               -----------                             ----------
                4,100,000       3.2          $5.44      4,010,000
               ===========                             ==========

9.     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").


                                       18
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

      Effective June 11, 2008, the Company entered into an Administrative
Services Agreement with PM. The Company pays $10,000 per month for leasing
office space and an equipment yard located in Platteville, Colorado, and pays
$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, are
reimbursed at actual cost. Either party may terminate the agreement with 30 days
notice. For each of the nine month periods ended May 31, 2010 and 2009, the
Company paid $180,000 under the administrative services agreement. Effective
June 30, 2010, the Company terminated the agreement to provide office support
services.

      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 gross 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. As of May 31 2010, the Company
had exercised its options on all available leases at a total cost of $360,000.

      During the nine months ended May 31, 2010, the Company agreed to purchase
certain oil and gas equipment with an aggregate cost of $353,148 from PM. As of
May 31 2010, $68 was due to PM. PEM is a joint working interest owner of certain
wells operated by the Company. During the nine months ended May 31, 2010, joint
interest costs of $537,295 were billed to PEM and, as of May 31, 2010, a balance
of $197,729 was due from PEM. Similarly, the Company collected certain oil and
gas revenues on behalf of PEM for the nine months ended May 31, 2010, and, as of
May 31, 2010, owed PEM a balance of $37,158.

      On June 11, 2008, the Company entered into two year employment agreements
with its executive officers. For each of the nine month periods ended May 31,
2010 and 2009, the Company paid $225,000 under these agreements.

      On June 1, 2010 the Company entered into new employment agreements with
its executive officers. The employment agreements, which expire on May 31, 2013,
provide that Synergy will pay each executive officer a monthly salary of
$25,000. As additional consideration, the officers will receive shares of the
Company's common stock for every fifty wells that begin production after June 1,
2010.

      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.



                                       19
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

10.     Fair Value Measurements

      The following table sets forth by level within the fair value hierarchy
the Company's financial assets and financial liabilities as of May 31, 2010,
that were measured at fair value on a recurring basis. Assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The Company's assessment of the
significance of a particular input to the fair value measurement requires
judgment and may affect the valuation of assets and liabilities and their
placement within the fair value hierarchy levels.

      The following table presents the Company's financial instruments measured
at fair value on a recurring basis:


                                 Level    Level 2       Level 3     Total
                               --------- ---------   ----------- -----------
 Assets
     None                      $   --     $  --        $     --    $     --

 Liabilities
    Derivative Conversion
     Liability                      --          --      6,220,697   6,220,697

      The following methods and assumptions were used to estimate the fair
values of the assets and liabilities in the table above.

      Level 1 Fair Value Measurements - As of May 31 2010, the Company did not
have assets or liabilities measured under a Level 1 fair value hierarchy.

      Level 2 Fair Value Measurements - As of May 31, 2010, the Company did not
have assets or liabilities measured under a Level 2 fair value hierarchy.

      Level 3 Fair Value Measurements - In determining the fair value associated
with the conversion feature of the Company's convertible notes, the Company uses
various valuation methodologies. The Company continuously evaluates its
methodologies and makes changes when better information to determine the fair
value becomes available. For the fair value of the conversion feature, the
Company has previously used a BSM approach until this quarter when it switched
to a Monte Carlo Simulation (MCS) model. The Company believes this model
provides a more robust method to determine estimates of the future share prices
of its common stock, which is a significant input to the Company's calculation.
Further, the use of a MCS model allows the use of stochastic methodology which
allows for simulations when the payoff depends upon the path followed by the
underlying variable, the Company's stock price. Payoffs can occur at several
times during the life of the conversion feature rather than just at the very end
of its life. The change in valuation methods did not have a significant impact
on the Company's results of operations.

      The Company makes certain assumptions in determining the inputs to the
fair value models discussed above. These include, among other things,
assumptions about the volatility of the instruments, the future share prices of
the Company's stock, the expected terms of the instruments, and the liquidity of
its stock. The Company has determined that its stock is traded in an illiquid
market. This is due, in part, because there has been limited trading activity in
the Company's stock, and when it has traded, the price has fluctuated widely.
The Company considers its common stock to be "thinly traded" and any last


                                       20
<PAGE>

                          SYNERGY RESOURCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                  May 31, 2010
                                   (Unaudited)

reported sale prices may not be a true market-based valuation of the common
stock. As of May 31, 2010 the Company only had 11,998,000 shares outstanding,
and full conversion of the Notes would essentially double the amount of shares
outstanding. In addition, due to the "thinly traded" nature of the Company's
stock, a conversion of the Notes could place downward pressure on the Company's
share price. The Company incorporates an illiquidity assumption into the fair
value by using a diluted share price in the MCS. Some of the assumptions are
considered unobservable inputs. As such, the measurement of the fair value of
the conversion feature is considered a Level 3 fair value input.

      Other financial instruments not measured at fair value on a recurring
basis include cash and equivalents, accounts receivable, accounts payable, and
accrued expenses. The financial statement carrying amounts of these items
approximate their fair values due to their short term nature.

      The Company estimates the fair value of asset retirement obligations based
on discounted cash flow projections using numerous estimates, assumptions, and
judgments regarding such factors as the existence of a legal obligation, amounts
and timing of settlement, the credit adjusted risk free interest rate, and
inflation rates. Asset retirement obligations incurred in the current period
were Level 3 fair value measurements. A summary of the change in the fair value
of the asset retirement obligation is presented in Note 6.

11.     Subsequent Events

      Subsequent to May 31, 2010, holders of Convertible Promissory Notes with a
face amount of $1,340,000 plus accrued interest elected to convert the Notes
into 837,812 shares of common stock at the conversion price of $1.60 per share.


                                       21
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operation

      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 approved 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 May 31,
2010, we had:

     o    thirteen producing oil and gas wells; and

     o    twelve wells which were in the process of completion.


      Our future plans will be dependent upon the amount of capital we are able
to raise and the cash flow from our producing properties. 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 May 31, 2010
and summarizes the results of our operations for the three and nine months ended
May 31, 2010 and 2009. 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
Form 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 nine months ended May
31, 2010, we drilled 23 development wells which have either commenced production
or are expected to begin generating revenue during the next several months.
Accordingly, our financial statements are presented to reflect our exit from the
exploration stage.

      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.


                                       22
<PAGE>

      During the nine months ended May 31, 2010, we undertook a drilling program
that is expected to include thirty-five wells. Through July 8, 2010, we drilled
twenty-six wells to total depth and each well encountered commercially
productive formations. Between December 29, 2009 and March 12, 2010, we received
net proceeds of $16,651,023 from the sale of 180 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

For the three months ended May 31, 2010 and May 31, 2009
--------------------------------------------------------

      Material changes of certain items in our Statements of Operations for the
three months ended May 31, 2010 and 2009 are discussed below.

      Oil and gas revenues and related expenses increased during the three
months ended May 31, 2010. Our first wells began producing in February 2009.
Since May 31, 2009, eleven new wells have begun producing revenue, including
seven new wells that were brought on-stream during the three months ended May
31, 2010.

      Oil and gas sales for the three months ended May 31, 2010, are summarized
in the following table:

                                 Oil            Gas       Total
                                -----          -----      -----
                                (bbl)          (mcf)      (boe)

      Production volumes         4,679        54,024       13,683
      Revenues               $ 356,818      $250,434    $ 607,253
      Average sales price    $   76.26         $4.64    $   44.38

      General and administrative expenses decreased during the current
three-month period, primarily because of a decrease in stock based compensation.
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
options that had previously been issued by predecessor Synergy. The pro-rata
portion of the fair value of the options allocated to the three months ended May
31, 2009 was $3,429,396. During the three months ended May 31, 2010, stock based
compensation decreased to $6,962. The decrease in stock compensation was
partially offset by increases in substantially all other general and
administrative expenses, including salaries, professional fees, investor
relations, and insurance. Our general and administrative expenses have
increased, and are expected to further increase, as we increase the number of
wells that we operate.

      Other expenses increased significantly in 2010 as a result of expenses
associated with the sale of $18,000,000 convertible promissory notes.
Furthermore, the conversion feature of the debt is considered an embedded
derivative that must be recorded as a liability at its estimated fair value. As
of May 31, 2010, the fair value of the derivative liability was estimated to be
$6,220,697 and the change in derivative liability for the three months ended May
31, 2010, was recorded as an additional expense of $2,764,888.

For the nine months ended May 31, 2010 and May 31, 2009
-------------------------------------------------------

      Material changes of certain items in our Statements of Operations for the
nine months ended May 31, 2010 and 2009 are discussed below.


                                       23
<PAGE>

      Oil and gas revenues and related expenses increased during the nine months
ended May 31, 2010. Our first wells began producing in February 2009. Eleven new
wells were brought on-stream during the nine months ended May 31, 2010.

      Oil and gas sales for the nine months ended May 31, 2010, are summarized
in the following table:

                                 Oil           Gas        Total
                                -----         -----       -----
                                (bbl)         (mcf)       (boe)

      Production volumes         8,327        75,340       20,884
      Revenues                $601,415      $394,349     $995,764
      Average sales price     $  72.22      $   5.23     $  46.78

      General and administrative expenses decreased during the current
nine-month period, primarily because of a decrease in stock based compensation.
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
options that had previously been issued by predecessor Synergy. The pro-rata
portion of the fair value of the options allocated to the nine months ended May
31, 2009 was $10,282,000. During the nine months ended May 31, 2010, stock based
compensation decreased to $17,790. The decrease in stock compensation was
partially offset by increases in substantially all other general and
administrative expenses, including salaries, professional fees, investor
relations, and insurance. Our general and administrative expenses have
increased, and are expected to further increase, as we increase the number of
wells that we operate.

      Other expenses increased significantly in 2010 as a result of expenses
associated with the sale of $18,000,000 convertible promissory notes.
Furthermore, the conversion feature of the debt is considered an embedded
derivative that must be recorded as a liability at its estimated fair value. As
of May 31, 2010, the fair value of the derivative liability was estimated to be
$6,220,697 and the change in derivative liability for the nine months ended May
31, 2010, was recorded as an additional expense of $2,764,888.

Trend and Outlook
-----------------

      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.

LIQUIDITY AND CAPITAL RESOURCES

      Our sources and (uses) of funds for the nine months ended May 31, 2010 and
2009 are shown below:


                                       24
<PAGE>

                                                        Nine Months Ended
                                                 ------------------------------
                                                 May 31, 2010      May 31, 2009

Cash (used in) operating activities              $  (984,550)      $  (621,623)
Acquisition of oil and gas properties,
    equipment, drilling and completion costs      (5,717,527)       (2,460,439)
Proceeds from sale of convertible notes,
    net of debt issuance costs                    16,651,023                --
Proceeds from bank debt                                              1,161,811
Proceeds from sale of stock, net of offering costs        --           680,895
Principal repayments                              (1,161,811)               --
Other                                                     --             3,987
Cash on hand at beginning of period              $        --      $  1,239,356

      In May 2009 we borrowed $1,161,811 from a commercial bank. The loan
proceeds were used to purchase, and the loan was collateralized primarily by,
pipe used to drill and complete oil and gas wells. During 2010, we used the pipe
in our drilling program and periodically reduced the outstanding principal
balance of the borrowing. In April 2010 the remaining outstanding balance was
paid in full.

      Between December 2009 and March 2010 we received net proceeds of
$16,651,023 from the private sale of 180 Units in six tranches. 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 Series C 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 conversion price of $1.60 per share. Each Series C
warrant entitles the holder to purchase one share of our common stock at a price
of $6.00 per share at any time on or before December 31, 2014.

      The proceeds from the sale of the Units have been used to drill and
complete oil and gas wells in the Wattenburg field located in the
Denver-Julesburg Basin. The Notes are secured by any oil or gas wells drilled,
completed or acquired with the proceeds from the offering.

      For financial statement purposes, we allocated a portion of the
$18,000,000 gross proceeds to the value of the warrants and valued the
conversion feature at fair value as it was an embedded derivative requiring
separation and reporting as a liability. As of March 12, 2010, the day that we
completed the offering, we estimated that the value of the warrants was
$1,760,048, which was reclassified from debt to additional paid in capital. We
estimated that the value of the conversion feature was $3,455,809, which was
classified as an embedded derivative liability. As of March 12, 2010, the
amounts allocated to the warrants and the derivative conversion liability were
recorded as a debt discount of $5,215,857, which will be amortized over the 36
month life of the Notes.

      The fair value of the derivative conversion liability was adjusted as of
May 31, 2010, to reflect the change in value during the quarter. The estimated
fair value of the derivative conversion liability as of May 31, 2010, was
$6,220,697, an increase in fair value of $2,764,888, which was recorded as a
change in value of derivative liability. Further discussion of fair value
methods and assumptions is included in Note 10.

      Our operating expenses requiring cash currently approximate $150,000 per
month which amount includes salaries and other corporate overhead. Our capital
requirements for the next twelve months include completion of the remaining
wells in our 2010 drilling program and various other projects for remaining
costs of approximately $8,000,000 to $10,000,000. We have not developed our
capital expenditure plan for fiscal year 2011, but expect to add to our oil and
gas properties during that period. As our future capital expenditure plans may


                                       25
<PAGE>

exceed our available capital resources, it may be necessary 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 will be 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 or 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, and (v)
may result in marginally productive oil and gas wells being abandoned as
non-commercial. 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 our 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 modify our operations and future plans. 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.

CONTRACTUAL OBLIGATIONS

                                 Year 1       Year 2      Year 3        Total
                                 ------       ------      ------        -----

Purchase Obligations            $645,000     $600,000    $600,000    $1,845,000
Principal - Convertible
Promissory Notes                       -            -   18,000,000   18,000,000
Interest - Convertible
Promissory Notes               1,440,000    1,440,000    1,080,000    4,320,000


      The following table summarizes our contractual obligations as of May 31,
2010:


OFF-BALANCE SHEET ARRANGEMENTS

      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

CRITICAL ACCOUNTING POLICIES

      Since the filing of the Form 10-K for the year ended August 31, 2009, the
following critical accounting policies have been implemented. There are no
material changes to the other critical accounting policies.


                                       26
<PAGE>

       Capitalized Interest: We capitalize 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.

      Asset Retirement Obligations: Our activities are subject to various laws
and regulations, including legal and contractual obligations to reclaim,
remediate, or otherwise restore properties at the time the asset is removed from
service. A liability is initially recorded at the estimated present value for an
obligation associated with the retirement of tangible long-lived assets in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The amount of the liability is accreted each period by our credit adjusted
risk free interest rate. The costs associated with the obligation are added to
the capitalized costs of the property and amortized using the unit of production
method.

      Derivative Liability: We account for the embedded conversion features in
our convertible promissory notes in accordance with the guidance for derivative
instruments, which require a periodic valuation of their fair value and a
corresponding recognition of liabilities associated with such derivatives. The
recognition of derivative liabilities related to the issuance of convertible
debt is applied first to the proceeds of such issuance as a debt discount, at
the date of the issuance. Any subsequent increase or decrease in the fair value
of the derivative liabilities is recognized as a charge or credit to operations.

      Debt Issuance Costs: Debt issuance costs include issuance costs incurred
in connection with the sale of the Company's Convertible Promissory Notes, which
are being amortized over the three year term of the Notes (see Note 5).

FORWARD-LOOKING STATEMENTS

      This Form 10-Q contains or incorporates by reference "forward-looking
statements," as that term is used in federal securities laws, concerning 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


                                       27
<PAGE>

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;
     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 May 31, 2010, 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 May 31, 2010 that materially affected or are reasonably
likely to materially affect, our internal control over financial reporting.



                                       28
<PAGE>


                                     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.




                                       29
<PAGE>

                                   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:  July 14, 2010
                                      By: /s/ Ed Holloway
                                          -----------------------------------
                                          Ed Holloway, President and Principal
                                          Executive Officer



Date:  July 14, 2010
                                      By: /s/ Frank L. Jennings
                                          -----------------------------------
                                          Frank L. Jennings, Principal Financial
                                          and Accounting Officer