UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September
30, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission File Number 000-52590
Worthington Energy, Inc.
(Exact name of registrant as specified in
its charter)
Nevada
(State or other jurisdiction of incorporation
or organization)
20-1399613
(I.R.S. Employer Identification No.)
145 Corte Madera Town Center #138
Corte Madera, California 94925
(Address of principal executive offices)
(Zip code)
(775)450-1515
(Registrant’ s telephone number, including
area code)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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 ( § 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 x
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 the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
Accelerated
filer ¨
Non-accelerated
filer ¨
Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨
No x
As of January 21, 2014, issuer had 47,476,293 outstanding shares
of common stock, par value $0.001.
TABLE OF CONTENTS
| |
Page |
| PART I – FINANCIAL INFORMATION |
|
| |
|
| Item 1. Financial Statements |
1 |
| |
|
| Condensed Consolidated Balance Sheets (Unaudited) |
2 |
| |
|
| Condensed Consolidated Statements of Operations (Unaudited) |
3 |
| |
|
| Condensed Consolidated Statement of Stockholders’ Deficiency (Unaudited) |
4 |
| |
|
| Condensed Consolidated Statements of Cash Flows (Unaudited) |
5 |
| |
|
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 |
| |
|
| Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
| |
|
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
36 |
| |
|
| Item 4. Controls and Procedures |
36 |
| |
|
| PART II – OTHER INFORMATION |
38 |
| |
|
| Item 1. Legal Proceedings |
38 |
| |
|
| Item 1A. Risk Factors |
39 |
| |
|
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
39 |
| |
|
| Item 3. Defaults Upon Senior Securities |
40 |
| |
|
| Item 4. Mine Safety Disclosures |
41 |
| |
|
| Item 5. Other Information |
42 |
| |
|
| Item 6. Exhibits |
42 |
| |
|
| Signatures |
43 |
CAUTIONARY STATEMENT
ON FORWARD-LOOKING INFORMATION
This Quarterly
Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements
discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may
include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,”
“should,” “would,” “may,” “seek,” “plan,” “might,” “will,”
“expect,” “predict,” “project,” “forecast,” “potential,” “continue”
negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various
underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially
different from the results of operations or plans expressed or implied by such forward-looking statements.
We cannot predict
all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or
conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility
for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various
places throughout this Report and include information concerning possible or assumed future results of our operations, including
statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives
of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future
financial results, and any other statements that are not historical facts.
These forward-looking
statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks,
uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially
from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions,
the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time
than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as
of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this
Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this Report.
Except to the
extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new
information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Worthington Energy, Inc. has included its
unaudited condensed consolidated balance sheets as of September 30, 2013, and December 31, 2012 (the end of its most recently completed
fiscal year); unaudited condensed consolidated statements of operations and cash flows for the nine months ended September 30,
2013 and 2012, and for the period from June 30, 2004 (date of inception) through September 30, 2013 , and the unaudited condensed consolidated
statement of stockholders' equity (deficit) for the nine months ended September 30, 2013, together with unaudited condensed notes
thereto. In the opinion of the management of Worthington Energy, Inc., the condensed consolidated financial statements reflect
all adjustments, all of which are normal recurring adjustments, necessary to fairly present the consolidated financial condition,
results of operations, and cash flows of Worthington Energy, Inc., for the interim periods presented. The condensed consolidated
financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of
Worthington Energy, Inc., and the notes thereto for the year ended December 31, 2012, included in its annual report on
Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 17, 2013.
WORTHINGTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
| | |
September 30 | | |
December 31, | |
| | |
2013 | | |
2012 | |
| | |
(unaudited) | | |
| |
| ASSETS | |
| | | |
| | |
| Current Assets: | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 4 | | |
$ | 8,065 | |
| Prepaid expenses and other current assets | |
| - | | |
| 36,431 | |
| Total Current Assets | |
| 4 | | |
| 44,496 | |
| | |
| | | |
| | |
| Property and Equipment, net of accumulated depreciation | |
| 11,614 | | |
| 14,570 | |
| Oil and gas properties | |
| 5,798,563 | | |
| 6,854,550 | |
| Deferred financing costs | |
| - | | |
| 370,000 | |
| Earnest money deposit | |
| - | | |
| 100,000 | |
| Other assets | |
| 14,610 | | |
| 14,610 | |
| | |
| | | |
| | |
| Total Assets | |
$ | 5,824,791 | | |
$ | 7,398,226 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |
| | | |
| | |
| Current Liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 650,391 | | |
$ | 412,327 | |
| Accrued liabilities | |
| 1,579,100 | | |
| 1,432,850 | |
| Payable to Ironridge Global IV, Ltd. | |
| 68,028 | | |
| 1,489,623 | |
| Payable to former officer | |
| 115,000 | | |
| - | |
| Unsecured convertible promissory notes payable, net of discount, in default | |
| 822,425 | | |
| 663,054 | |
| Secured notes payable, net of discount, in default | |
| 601,651 | | |
| 1,502,273 | |
| Convertible debentures in default | |
| 2,453,032 | | |
| 2,550,000 | |
| Derivative liabilities | |
| 7,663,411 | | |
| 7,795,335 | |
| Total Current Liabilities | |
| 13,953,038 | | |
| 15,845,462 | |
| | |
| | | |
| | |
| Long-Term Liabilities | |
| | | |
| | |
| Long-term asset retirement obligation | |
| 37,288 | | |
| 37,288 | |
| | |
| | | |
| | |
| Total Liabilities | |
| 13,990,326 | | |
| 15,882,750 | |
| | |
| | | |
| | |
| Stockholders' Deficiency: | |
| | | |
| | |
| Undesignated preferred stock, $0.001 par value; 9,000,000 share authorized, none issued and outstanding | |
| - | | |
| - | |
| Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized, 1,000,000 and none shares; issued and outstanding, respectively | |
| 1,000 | | |
| - | |
| Common stock, $0.001 par value; 6,490,000,000 shares authorized, 45,829,525 and 1,142,244 shares issued and outstanding, respectively | |
| 45,828 | | |
| 1,141 | |
| Additional paid-in capital | |
| 26,235,158 | | |
| 23,904,706 | |
| Deficit accumulated during the exploration stage | |
| (34,447,521 | ) | |
| (32,390,371 | ) |
| Total Stockholders' Deficiency | |
| (8,165,535 | ) | |
| (8,484,524 | ) |
| | |
| | | |
| | |
| Total Liabilities and Stockholders' Deficiency | |
$ | 5,824,791 | | |
$ | 7,398,226 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
| | |
| | |
| | |
| | |
| | |
For the Period | |
| | |
| | |
| | |
| | |
| | |
from | |
| | |
| | |
| | |
| | |
| | |
June 30, 2004 | |
| | |
| | |
| | |
| | |
| | |
(Date of | |
| | |
| | |
| | |
| | |
| | |
Inception) | |
| | |
For the Three Months Ended | | |
For the Nine Months Ended | | |
through | |
| | |
September 30, | | |
September 30, | | |
September 30, | |
| | |
2013 | | |
2012 | | |
2013 | | |
2012 | | |
2013 | |
| | |
| | |
| | |
| | |
| | |
| |
| Oil and gas revenues, net | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 370,437 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Costs and Operating Expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
| Lease operating expenses | |
| - | | |
| 3,583 | | |
| | | |
| 3,583 | | |
| 164,381 | |
| Impairment loss on oil and gas properties | |
| - | | |
| - | | |
| 11,623 | | |
| - | | |
| 5,096,701 | |
| Accretion of asset retirement obligations | |
| - | | |
| 57 | | |
| - | | |
| 171 | | |
| 8,982 | |
| General and administrative expense | |
| 209,277 | | |
| 402,457 | | |
| 1,015,555 | | |
| 1,449,866 | | |
| 7,309,745 | |
| Share-based compensation | |
| - | | |
| 88,768 | | |
| 84,214 | | |
| 278,565 | | |
| 8,198,057 | |
| Total costs and operating expenses | |
| 209,277 | | |
| 494,865 | | |
| 1,111,392 | | |
| 1,732,185 | | |
| 20,777,866 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
| (209,277 | ) | |
| (494,865 | ) | |
| (1,111,392 | ) | |
| (1,732,185 | ) | |
| (20,407,429 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | |
| Interest income | |
| - | | |
| - | | |
| | | |
| - | | |
| 63,982 | |
| Change in fair value of derviative liabilities | |
| (185,515 | ) | |
| (3,094,402 | ) | |
| 1,216,999 | | |
| (3,162,483 | ) | |
| (2,972,149 | ) |
| Gain on transfer of common stock from Bayshore Exploration, L. L. C. | |
| - | | |
| - | | |
| | | |
| - | | |
| 24,000 | |
| Interest expense | |
| (142,968 | ) | |
| (215,643 | ) | |
| (451,201 | ) | |
| (628,819 | ) | |
| (2,102,827 | ) |
| Amortization of discount on convertible debentures and notes and other debt | |
| (212,969 | ) | |
| (25,000 | ) | |
| (1,341,556 | ) | |
| (224,451 | ) | |
| (7,531,475 | ) |
| Interest expense - Ironridge Global IV, Ltd | |
| - | | |
| - | | |
| | | |
| - | | |
| (594,935 | ) |
| Amortization of deferred financing costs | |
| - | | |
| (470,322 | ) | |
| (370,000 | ) | |
| (3,002,567 | ) | |
| (926,688 | ) |
| Total other income (expense) | |
| (541,452 | ) | |
| (3,805,367 | ) | |
| (945,758 | ) | |
| (7,018,320 | ) | |
| (14,040,092 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
$ | (750,729 | ) | |
$ | (4,300,232 | ) | |
$ | (2,057,150 | ) | |
$ | (8,750,505 | ) | |
$ | (34,447,521 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic and Diluted Loss Per Common Share | |
$ | (0.02 | ) | |
$ | (9.31 | ) | |
$ | (0.13 | ) | |
$ | (31.39 | ) | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic and Diluted Weighted-Average Common Shares Outstanding | |
| 36,845,556 | | |
| 461,989 | | |
| 16,003,402 | | |
| 278,723 | | |
| | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIENCY
(UNAUDITED)
| | |
| | |
| | |
| | |
| | |
| | |
Deficit | | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| | |
| | |
| | |
| | |
Additional | | |
During the | | |
Total | |
| | |
Series A Preferred
Stock | | |
Common Stock | | |
Paid in | | |
Exploration | | |
Stockholders' | |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Stage | | |
(Deficit) | |
| Balance - December 31, 2012 | |
| - | | |
$ | - | | |
| 1,142,244 | | |
$ | 1,141 | | |
$ | 23,904,706 | | |
$ | (32,390,371 | ) | |
$ | (8,484,524 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Issuance of common stock upon conversion of notes payable and accrued
interest - weighted average of $0.018 per share | |
| | | |
| | | |
| 36,942,373 | | |
| 36,942 | | |
| 634,158 | | |
| | | |
| 671,100 | |
| Issuance of common stock to Ironridge in settlement of liabilities,
January 2013 to June 2013, $0.217 per share | |
| | | |
| | | |
| 6,550,000 | | |
| 6,550 | | |
| 1,415,045 | | |
| | | |
| 1,421,595 | |
| Issuance of common stock to La Jolla Cove Investors, Inc. upon conversion
of convertible debentures weighted average of $0.026 per share | |
| | | |
| | | |
| 310,494 | | |
| 310 | | |
| 7,690 | | |
| | | |
| 8,000 | |
| Issuance of common stock to La Jolla under an equity imvestment
agreement - weighted average of $0.391 per share | |
| | | |
| | | |
| 202,814 | | |
| 203 | | |
| 79,027 | | |
| | | |
| 79,230 | |
| Issuance of common stock and warrants for cash, February 2013, $0.607
per unit | |
| | | |
| | | |
| 641,600 | | |
| 642 | | |
| 90,358 | | |
| | | |
| 91,000 | |
| Issuance of common stock to chief executive officer in satisfaction
of certain amounts owed to him, February 2013, $0.25 per share | |
| | | |
| | | |
| 100,000 | | |
| 100 | | |
| 24,900 | | |
| | | |
| 25,000 | |
| Issuance of common stock for services, February 2013 - weighted avearage of $0.673 per share | |
| | | |
| | | |
| 30,000 | | |
| 30 | | |
| 20,170 | | |
| | | |
| 20,200 | |
| Return and cancelation of common stock in connection with the Settlement
Agreement with | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Black Cat Exploration & Production, LLC and
former officer, January 25, 2013, valued at $0.60 per share | |
| | | |
| | | |
| (90,000 | ) | |
| (90 | ) | |
| (53,910 | ) | |
| | | |
| (54,000 | ) |
| Share-based compensation from grant of common stock options and
issuance of common stock warrants to officers, directors and consultants | |
| | | |
| | | |
| - | | |
| - | | |
| 64,014 | | |
| | | |
| 64,014 | |
| Issuance of Series A Preferred Stock for accrued compensation | |
| 1,000,000 | | |
| 1,000 | | |
| | | |
| | | |
| 49,000 | | |
| | | |
| 50,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net Loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (2,057,150 | ) | |
| (2,057,150 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance - September 30, 2013 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 45,829,525 | | |
$ | 45,828 | | |
$ | 26,235,158 | | |
$ | (34,447,521 | ) | |
$ | (8,165,535 | ) |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
(AN EXPLORATION-STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
| | |
| | |
| | |
For the Period | |
| | |
| | |
| | |
from | |
| | |
| | |
| | |
June 30, 2004 | |
| | |
| | |
| | |
(Date of | |
| | |
| | |
| | |
Inception) | |
| | |
For the Nine Months Ended | | |
through | |
| | |
September 30, | | |
September 30, | |
| | |
2013 | | |
2012 | | |
2013 | |
| | |
| | |
| | |
| |
| Cash Flows From Operating Activities | |
| | | |
| | | |
| | |
| Net loss | |
$ | (2,057,150 | ) | |
$ | (8,750,505 | ) | |
$ | (34,447,521 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
| Impairment loss on oil and gas properties | |
| 11,623 | | |
| - | | |
| 5,096,701 | |
| Share-based compensation for services | |
| 84,214 | | |
| 278,565 | | |
| 8,198,056 | |
| Amortization of deferred financing costs and discount on convertible debentures and notes and other debt | |
| 1,711,556 | | |
| 3,227,018 | | |
| 8,458,163 | |
| Interest expense - Ironridge Global IV, Ltd. | |
| - | | |
| - | | |
| 594,935 | |
| Gain on transfer of common stock from Bayshore Exploration, L.L.C. | |
| - | | |
| - | | |
| (24,000 | ) |
| Accretion of asset retirement obligation | |
| - | | |
| 171 | | |
| 8,982 | |
| Depreciation expense | |
| 3,822 | | |
| 3,273 | | |
| 15,168 | |
| Change in fair value of derivative liabilities | |
| (1,216,999 | ) | |
| 3,162,483 | | |
| 2,972,149 | |
| Change in assets and liabilities: | |
| | | |
| | | |
| | |
| Prepaid expense and other current assets | |
| 36,431 | | |
| 11,509 | | |
| 16,818 | |
| Other assets | |
| 100,000 | | |
| - | | |
| 85,390 | |
| Accounts payable and accrued liabilities | |
| 908,558 | | |
| 1,122,545 | | |
| 4,577,640 | |
| Net Cash Used In Operating Activities | |
| (417,945 | ) | |
| (944,941 | ) | |
| (4,447,519 | ) |
| | |
| | | |
| | | |
| | |
| Cash Flows From Investing Activities | |
| | | |
| | | |
| | |
| Proceeds from the sale of oil and gas properties | |
| | | |
| - | | |
| 500,000 | |
| Acquisition of oil and gas properties | |
| | | |
| (214,425 | ) | |
| (3,658,565 | ) |
| Earnest money deposit | |
| | | |
| (100,000 | ) | |
| (100,000 | ) |
| Purchase of property and equipment | |
| (866 | ) | |
| (4,321 | ) | |
| (26,782 | ) |
| Net Cash Used in Investing Activities | |
| (866 | ) | |
| (318,746 | ) | |
| (3,285,347 | ) |
| | |
| | | |
| | | |
| | |
| Cash Flows From Financing Activities | |
| | | |
| | | |
| | |
| Proceeds from the issuance of common stock and warrants, net of registration and offering costs | |
| 149,000 | | |
| 50,000 | | |
| 3,378,970 | |
| Proceeds from issuance of convertible notes and other debt, and related beneficial conversion features and common stock, less amount held in attorney's trust accounts | |
| 265,500 | | |
| 1,400,668 | | |
| 3,348,500 | |
| Proceeds from issuance of convertible debentures | |
| | | |
| - | | |
| 2,550,000 | |
| Proceeds from related parties for issuance of secured convertible notes and other debt, and related beneficial conversion features and common stock | |
| | | |
| - | | |
| 180,000 | |
| Payment of deferred financing costs | |
| | | |
| (50,000 | ) | |
| (506,000 | ) |
| Payment of payable to Bayshore Exploration, L.L.C. | |
| | | |
| - | | |
| (489,600 | ) |
| Payment of principal on notes payable stockholder | |
| | | |
| - | | |
| (325,000 | ) |
| Payment on principal on notes payable | |
| (3,750 | ) | |
| (125,000 | ) | |
| (404,000 | ) |
| Net Cash Provided By Financing Activities | |
| 410,750 | | |
| 1,275,668 | | |
| 7,732,870 | |
| | |
| | | |
| | | |
| | |
| Net Increase (Decrease) In Cash and Cash Equivalents | |
| (8,061 | ) | |
| 11,981 | | |
| 4 | |
| Cash and Cash Equivalents At Beginning Of Period | |
| 8,065 | | |
| 1,552 | | |
| - | |
| Cash and Cash Equivalents At End Of Period | |
$ | 4 | | |
$ | 13,533 | | |
$ | 4 | |
Supplemental Cash Flow Information - Note 12
The accompanying notes are an integral part
of these unaudited financial statements.
WORTHINGTON ENERGY, INC.
(An Exploration
Stage Company)
Notes to Condensed Consolidated Financial
Statements (unaudited)
Three and Nine Months Ended September
30, 2013 and 2012
Note 1 - Organization and Significant
Accounting Policies
Organization –
Paxton Energy, Inc. was organized under the laws of the State of Nevada on June 30, 2004. During August 2004, shareholder
control of the Company was transferred, a new board of directors was elected and new officers were appointed. These
officers and directors managed the Company until March 17, 2010, at which time, the existing members of the Company’s board
of directors resigned, new members were appointed to the board of directors, and managerial control of the Company was transferred
to new management. The new board of directors immediately commenced, among other things, the placement of unsecured
convertible promissory notes to raise funds for working capital and held a meeting of stockholders on June 29, 2010, at which the
stockholders approved 1) a 1-for-3 reverse common stock split, 2) a second reverse stock split of approximately 1 share for 2.4
shares of common stock, 3) the amendment of the Company’s certificate of incorporation to increase the Company’s authorized
capital from 100 million to 500 million shares of common stock and from 5 million to 10 million shares of preferred stock, and
4) the adoption of the 2010 Stock Option Plan. On January 27, 2012, Paxton Energy, Inc. changed its name to Worthington
Energy, Inc. (the “Company”). The Company held its annual meeting of stockholders on October 12, 2012, at
which the Company’s stockholders approved a proposal a 1-for-10 reverse common stock split. In addition, on October
2, 2013 the Company affected a 1-for-50 reverse common stock split. All references in these condensed consolidated financial statements
and related notes to numbers of shares of common stock, prices per share of common stock, and weighted average number of shares
of common stock outstanding prior to the reverse stock splits have been adjusted to reflect the reverse stock splits on a retroactive
basis for all periods presented, unless otherwise noted. As more fully disclosed in Note 9 to these condensed consolidated
financial statements, on April 17, 2013, the Company designated one million shares of preferred stock as Series A Preferred Stock;
issued one million shares of Series A Preferred Stock to Charles Volk, the Company’s chief executive officer; and pursuant
to an Action by Written Consent of the Stockholders of the Company, the Company’s certificate of incorporation was amended
to increase the Company’s authorized common stock from 500 million to 1.49 billion shares of common stock. On
May 8, 2013, pursuant to an Action by Written Consent of the Stockholders of the Company, the Company’s certificate of incorporation
was amended again to increase the Company’s authorized common stock from 1.49 billion to 2.49 billion shares of common stock.
Also June 24, 2013, pursuant to an Action by Written Consent of the Stockholders of the Company, the Company’s certificate
of incorporation was amended again to increase the Company’s authorized common stock from 2.49 billion to 6.49 billion shares
of common stock.
Nature of Operations –
As further described in Note 2 to these condensed consolidated financial statements, the Company commenced acquiring working interests
in oil and gas properties in June 2005. The Company owns oil and gas properties in the Cooke Ranch prospect in LaSalle
County, Texas, where the Company has been engaged primarily as a joint interest owner with Bayshore Exploration L.L.C. in the acquisition,
exploration, and development of oil and gas properties and the production and sale of oil and gas. In March 2012, the
Company acquired certain assets from Black Cat Exploration & Production LLC consisting of a 2% override interest in the Mustang
Island 818-L lease, covering 1,400 acres in the Gulf of Mexico, with a 10.35% carried interest in the recently drilled I-1 well,
located on the lease. However, as further described in Note 2 to these consolidated financial statements, the Company
sold the 2% override interest in these properties in November 2012 and entered into a settlement agreement and mutual release of
claims in January 2013, which resulted in, among other things, the transfer of the Company’s remaining interest in the Mustang
Island 818-L lease and I-1 well back to Black Cat Exploration & Production LLC.
The Company is considered to be in the
exploration stage due to the lack of significant revenues.
Condensed Interim Consolidated Financial
Statements – The accompanying unaudited condensed consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q. Accordingly, these condensed consolidated financial statements do not include all
of the information and disclosures required by generally accepted accounting principles for complete financial statements. These
condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial
statements and the notes thereto for the year ended December 31, 2012, and for the period from June 30, 2004 (date of inception)
through December 31, 2012, included in the Company’s annual report on Form 10-K. In the opinion of the Company’s
management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to fairly present the Company’s consolidated financial position as of September 30,
2013, and its consolidated results of operations and cash flows for the nine months ended September 30, 2013 and 2012, and for
the period from June 30, 2004 (date of inception), through September 30, 2013. The results of operations for the nine
months ended September 30, 2013, may not be indicative of the results that may be expected for the year ending December 31, 2013.
The condensed consolidated financial statements included in this report on Form 10-Q should be read in conjunction with the audited
financial statements of Worthington Energy, Inc., and the notes thereto for the year ended December 31, 2012, included in
its annual report on Form 10-K filed with the SEC on April 17, 2013.
Going Concern – The accompanying
unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The
Company has not had significant revenue and is still considered to be in the exploration stage. The Company incurred
losses of $2,057,150 for the nine months ended September 30, 2013 and $13,255,095 for the year ended December 31, 2012. The
Company also used cash of $417,945 and $1,348,778 in its operating activities during the nine months ended September 30, 2013 and
the year ended December 31, 2012, respectively, and a significant portion of the Company’s debt is in default. At
September 30, 2013, the Company has a working capital deficit of $13,953,034 including current liabilities of $13,953,038. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going
concern. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s December
31, 2012 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
The Company is currently seeking debt and
equity financing to fund potential acquisitions and other expenditures, although it does not have any contracts or commitments
for either at this time. The Company will have to raise additional funds to continue operations and, while it has been successful
in doing so in the past, there can be no assurance that it will be able to do so in the future. The Company’s continuation
as a going concern is dependent upon its ability to obtain necessary additional funds to continue operations and the attainment
of profitable operations. The Company hopes that working capital will become available via financing activities currently
contemplated with regards to its intended operating activities.
The Company’s continuation as a going
concern is dependent upon its ability to obtain necessary additional funds to continue operations and to attain profitable operations.
Use of Estimates – In preparing these condensed
consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenues and
expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions
included in the Company’s condensed consolidated financial statements relate to the valuation of long-lived assets, accrued
other liabilities, and valuation assumptions related to share-based payments and derivative liability.
Basic and Diluted Loss per Common
Share – Basic loss per common share amounts are computed by dividing net loss by the weighted-average number of shares
of common stock outstanding during each period. Diluted loss per share amounts are computed assuming the issuance of
common stock for potentially dilutive common stock equivalents. All outstanding stock options, warrants, stock awards, convertible
promissory notes, and other obligations to be satisfied with the issuance of common stock are currently antidilutive and have been
excluded from the diluted loss per share calculations. As such options, warrants, and stock awards to acquire 2,029,594
shares of common stock; the promissory notes and debentures convertible into 697,345,978 shares of common stock; or shares of common
stock issuable under the Equity Investment Agreement with La Jolla Cove Investors, Inc. of 112,666,667 shares were included in
the computation of diluted loss per share at September 30, 2013 as their effect would have been anti-dilutive. None
of the options, warrants, and stock awards to acquire 95,794 shares of common stock; the promissory notes and debentures convertible
into 3,144,222 shares of common stock; shares of common stock issuable under the Equity Investment Agreement with La Jolla Cove
Investors, Inc. of 439,437 shares; or the 677,849 estimated shares issuable to Ironridge under the arrangement to settle liabilities
were included in the computation of diluted loss per share at September 30, 2012 as their effect would have been anti-dilutive.
Fair Values of Financial Instruments
– The carrying amounts reported in the condensed consolidated balance sheets for accounts payable, payable to Ironridge Global
IV, Ltd., and payable to former officer approximate fair value because of the immediate or short-term maturity of these financial
instruments. The carrying amounts reported for unsecured convertible promissory notes payable, secured notes payable,
and convertible debentures approximate fair value because the underlying instruments are at interest rates which approximate current
market rates. The fair value of derivative liabilities are estimated based on the method disclosed in Note 8 to these
condensed consolidated financial statements.
Derivative Financial Instruments – The Company
evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements
of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton
pricing model to value the derivative instruments on September 30, 2013. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within 12 months of the balance sheet date.
Recently Issued Accounting Statements
– The FASB has issued ASU No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability
Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance
for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which
the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed
within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the
reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity
expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact
on the Company’s financial statements.
In July 2013, the FASB issued ASU 2013-11,
Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss,
or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial
statement presentation of unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack
of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have
tax loss or tax credit carryforward in the same tax jurisdiction as of the reporting date. This amendment is effective for public
entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect
the adoption of this standard to have a material impact on the Company’s financial position and results of operations.
Note 2 - Oil and Gas Properties
Summary of Oil and Gas Properties
At September 30, 2013 and December 31,
2012, oil and gas properties, net of impairment losses recognized, consist of the following:
| | |
September 30 | | |
December 31, | |
| | |
2013 | | |
2012 | |
| | |
| | |
| |
| Leasehold interest costs - Vermillion 179 | |
$ | 5,698,563 | | |
$ | 5,698,563 | |
| Leasehold interest costs - Mustang Island | |
| - | | |
| 1,055,987 | |
| Leasehold interest costs - Texas | |
| 100,000 | | |
| 100,000 | |
| Wells - Texas | |
| - | | |
| - | |
| | |
| | | |
| | |
| | |
$ | 5,798,563 | | |
$ | 6,854,550 | |
Black Cat Purchase and Sale Agreement
(Mustang Island)
On March 9, 2012, the Company acquired
certain assets from Black Cat Exploration & Production LLC (“Black Cat”) pursuant to an amended Purchase and Sale
Agreement for Oil & Gas Properties and Related Assets (the “Black Cat Agreement”). The Company acquired
a 2% override interest in the Mustang Island 818-L lease, covering 1,400 acres in the Gulf of Mexico, with a 10.35% carried interest
in the recently drilled I-1 well, located on the lease. The Company paid $175,000 in cash, issued a note for $1,075,000 and agreed
to issue 90,000 shares of common stock, of which 45,000 shares were issued to Black Cat at the time of closing and the remaining
45,000 shares were issued on August 30, 2012 pursuant to when the well was connected to the main offshore pipeline of the Six Pigs
Processing facility. The leasehold interest was capitalized in the amount of $2,305,987, representing $1,250,000 in
cash and promissory note, $855,000 for the initial common stock issued in March 2012 (based on a closing price of $19.00 per share
on the closing date), $157,500 for the second issuance of common stock in August 2012 (based on the most recent closing price of
$3.50 per share at the time of connecting the well), and $43,487 in acquisition and well costs.
On November 1, 2012, the Company sold its
2% overriding royalty interest in the Mustang Island 818-L lease for $500,000. The sale reduced the carrying cost of
the lease and well to $1,805,987. Proceeds from the sale were used to reduce the principal balance of the junior secured
promissory note with Black Cat by $200,000 and the remaining $300,000 was used by the Company for working capital purposes.
On January 25, 2013, the Company entered
into a Settlement Agreement and Mutual Release of Claims (the “Settlement Agreement”) with Mr. Anthony Mason and Black
Cat. Pursuant to the terms of the Settlement Agreement, the Company agreed to pay Black Cat and/or Mr. Mason $125,000 in 10 equal
payments, with the first payment due March 11, 2013 and the remaining payments every 30 days thereafter until paid in full. The
Company has paid $10,000 to Mr. Mason resulting in a remaining liability of $115,000 at September 30, 2013. In the event
that the Company obtains a credit facility in an amount equal to or greater than $3,500,000, the full amount of the settlement
payment then outstanding will become immediately due and payable. In addition, the Company agreed to transfer to Black Cat all
title and interest the Company owned in the I-1 well, Mustang Island 818-L lease and other assets acquired from Black Cat pursuant
to the Black Cat Agreement. Furthermore, all production from the I-1 well, from the date the well went online was transferred to
Black Cat in connection with the Settlement Agreement. In return, Black Cat agreed to return to the Company for cancellation
the 90,000 shares of the Company’s common stock it received in connection with the Black Cat Agreement and to release the
Company from all of its claims, which included the balance of the promissory note and accrued interest, unpaid compensation and
other miscellaneous amounts. Further, in connection with the Settlement Agreement, Mr. Mason agreed to resign as President, Chief
Executive Officer and a Director of the Company.
In connection with its accounting for the
year ended December 31, 2012, the Company evaluated the accounting effects of the Settlement Agreement and concluded that estimated
impairment in the approximate amount of $750,000 should be recorded as of December 31, 2012 by further reducing the carrying cost
of the properties to $1,055,987. In January 2013, the Company accounted for the Settlement Agreement by removing the
carrying value of the property; removed the released liabilities for the promissory note in the amount of $850,000; removed current
liabilities for amounts owed to Mr. Mason, Black Cat, and others for accrued interest, accrued compensation, lease operating expenses,
and other expenses in the aggregate amount of $265,364; recorded the fair value of the common stock returned to the Company for
cancelation in the amount of $54,000; recorded a liability to Mr. Mason of $125,000; and recognized additional impairment expense
of $11,623.
Montecito Asset Sale Agreement (Vermillion
179)
On May 6, 2011, the Company completed its
acquisition of certain assets pursuant to an Asset Sale Agreement (the Montecito Agreement) with Montecito Offshore, L.L.C. (Montecito). The
assets consist of certain oil and gas leases located in the Vermillion 179 tract, which is in the shallow waters of the Gulf of
Mexico offshore from Louisiana. Pursuant to the terms of the Montecito Agreement, as amended, Montecito agreed to sell
the Company a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases owned by Montecito,
for $1,500,000 in cash, a subordinated promissory note in the amount of $500,000, and 30,000 shares of common stock. The
leasehold interest has been capitalized in the amount of $5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000
for the common stock based on a closing price of $2.45 per share on the closing date, and $23,563 in acquisition costs. No
drilling or production has commenced as of September 30, 2013. Consequently, the oil and gas properties have not been subjected
to amortization of the full cost pool.
In December 2011, Montecito filed a lawsuit in the Civil District
Court for the Parish of Orleans of the State of Louisiana against the Company by filing a Petition to Rescind Sale. In
this action, Montecito is seeking to rescind the asset sale transaction, as described in the previous paragraph. The
Company has entered into settlement discussions and has reached a preliminary settlement, but final document remain to be signed
as of the date of this Report. Pursuant to the anticipated settlement, the Company will return its leasehold interests in Vermillion
179 to Montecito, and would be released from all liabilities related to a subordinated promissory note due Montecito (see Note
6), Convertible Debentures (see Note 7), and accrued interest thereon, and any related derivative liabilities will be extinguished.
The Company currently estimates this will result in a net increase to equity to the Company but there is no assurance that such
settlement will be finalized as contemplated by the Company.
Texas Oil and Gas Operations
Commencing in the year ended December 31,
2005 and continuing into the year ended December 31, 2009, the Company participated in oil and gas exploration and development
activities in Texas, principally with Bayshore Exploration L.L.C. (“Bayshore”) in La Salle County, Texas. During
2005, the Company acquired from Bayshore a 31.75% working interest (23.8125% net revenue interest) in the Cooke Ranch prospect,
consisting of approximately 8,883 acres. During 2006, the Company entered into an agreement with Bayshore to acquire
a 50% working interest in approximately 3,200 acres of oil and gas leases and oil and gas lease options located in La Salle County,
Texas, for the purpose of oil and gas exploration and production. The Company was also granted an option to increase
its working interest in the leases to 75% within 90 days of the date of the agreement, on the same terms and conditions. On
June 13, 2006, the Company exercised its option to increase its working interest to 75% (56.25% net revenue interest). To date,
the Company has acquired a 75% working interest in approximately 2,268 acres. Additionally during 2006, the Company
entered into a Joint Exploration Agreement with Bayshore covering the 8,883 acres of the Cooke Ranch prospect. The Exploration
Agreement provides for the Company and Bayshore to join together for the purpose of drilling exploratory wells and performing studies
of the Cooke Ranch prospect acreage and acquiring additional prospective oil and gas properties on which to explore for, develop,
and produce oil and gas. During 2008, Bayshore entered into a lease of 220 acres in LaSalle County, Texas within the
area of mutual interest covered by the exploration agreement. The Company exercised its right to purchase its proportionate
share (31.75%) of that lease and paid Bayshore for the Company’s share of the lease bonus and related expenses. In
connection with that new lease, the Company entered into a participation in a farm out whereby the Company retained approximately
a 4% fully carried working interest in the Cartwright No. 3 well drilled on the new lease by third parties.
During the period of time commencing with
the year ended December 31, 2005 and continuing into the year ended December 31, 2009, the Company participated with Bayshore in
the drilling of ten wells and participated with another entity in the drilling of a well in another county in Texas. Three
of these wells were determined to be dry and were plugged and abandoned. The Company has sold all or part of its interests
in two wells to Bayshore in order to reduce its indebtedness to Bayshore. At September 30, 2013, the Company has remaining
interests in six wells in Texas with working interests ranging from 4.0% to 31.75%. Management of the Company has the
understanding that the six wells are currently shut in and not producing. At September 30, 2013, given that the Company
is still considered to be in the exploration stage, a determination has not been made about the extent of oil reserves that should
be classified as proved reserves. Consequently, the oil and gas properties have not been subjected to amortization of
the full cost pool.
Each year, the management of the Company
has performed evaluations of its producing oil and gas properties to determine whether oil and gas properties are impaired. Management
has also considered the market value of its nonproducing properties. During 2006, 2008, 2009, and 2012, the Company
determined that capitalized costs for wells drilled, for leasehold interests, and other related costs were in excess of the present
value of estimated future cash flows from those properties. As a result, the Company recognized impairment losses in
the total amount of $4,335,078 during those years, including reducing the carrying value of wells drilled to zero and the carrying
value of leasehold interests to $100,000 as of September 30, 2013 and December 31, 2012.
Note 3 - Accrued Liabilities
Accrued liabilities consisted of the following
at September 30, 2013 and December 31, 2012:
| | |
September 30, | | |
December 31, | |
| | |
2013 | | |
2012 | |
| | |
| | |
| |
| Accrued salaries | |
$ | 194,687 | | |
$ | 352,038 | |
| Accrued payroll taxes | |
| 104,899 | | |
| 85,323 | |
| Accrued directors fees | |
| 64,969 | | |
| 69,033 | |
| Accrued interest | |
| 1,197,417 | | |
| 909,606 | |
| Accrued registration rights penalties and interest | |
| 14,628 | | |
| 14,350 | |
| Other accrued expenses | |
| 2,500 | | |
| 2,500 | |
| | |
| | | |
| | |
| Total accrued liabilities | |
$ | 1,579,100 | | |
$ | 1,432,850 | |
Note 4 – Payable to Ironridge
Global IV, Ltd.
In March 2012, Ironridge Global IV, Ltd.
(“Ironridge”) filed a complaint against the Company for the payment of $1,388,407 in outstanding accounts payable,
accrued compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Ironridge had purchased
from various creditors of the Company. The lawsuit was filed in the Superior Court of the State of California for the
County of Los Angeles Central District, and the case was Ironridge Global IV, Ltd. v. Worthington Energy, Inc., Case No. BC
480184 . On March 22, 2012, the court approved an Order for Approval of Stipulation for Settlement of Claims (the
"Order").
The Order provided for the immediate issuance
by the Company of 20,300 shares of common stock (the “Initial Shares”) to Ironridge towards settlement of the Claim
Amount. The Order also provided for an adjustment in the total number of shares which may be issuable to Ironridge based
on a calculation period for the transaction, defined as that number of consecutive trading days following the date on which the
Initial Shares were issued (the "Issuance Date") required for the aggregate trading volume of the common stock, as reported
by Bloomberg LP, to exceed $4.2 million (the "Calculation Period"). Pursuant to the Order, Ironridge would retain 2,000
shares of the Company's common stock as a fee, plus that number of shares (the "Final Amount") with an aggregate value
equal to (a) the $1,358,135 plus reasonable attorney fees through the end of the Calculation Period, (b) divided by 70% of the
following: the volume weighted average price ("VWAP") of the Common Stock over the length of the Calculation Period,
as reported by Bloomberg, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the
Calculation Period. The Company has calculated that the Calculation Period ended during the December 31, 2012 and calculated
that the Final Amount to be issued under the Order is 856,291 shares of common stock. Additionally, during the December
31, 2012 when the Final Amount was determined, the Company calculated the fair value of the original liability to Ironridge Global
IV, Ltd to be $1,981,312, that amount which when discounted to 70% of the VWAP and multiplied by the Final Amount, would equal
$1,358,135 plus reasonable attorney fees. In so doing, the Company recognized an expense for the excess of the fair
value of the resultant liability to Ironridge Global IV, Ltd. in excess of the original carrying amount of the liabilities acquired
by Ironridge and adjusted the liability to Ironridge Global IV, Ltd. for the fair value adjustment.
Pursuant to the Order, for every 8,400
shares of the Company's common stock that traded during the Calculation Period, or if at any time during the Calculation Period
a daily VWAP is below 90% of the closing price on the day before the Issuance Date, the Company was to immediately issue additional
shares (each, an "Additional Issuance"), subject to the limitation in the paragraph below. Since the issuance of the
Initial Shares, the Company has issued an additional 194,200 shares of common stock during the nine months ended December 31, 2012
plus an additional 6,520,000 shares of common stock during the nine months ended September 30, 2013. At the end of the
Calculation Period, (a) if the sum of the Initial Shares and any Additional Issuance is less than the Final Amount, the Company
shall immediately issue additional shares to Ironridge, up to the Final Amount, and (b) if the sum of the Initial Shares and any
Additional Issuance is greater than the Final Amount, Ironridge shall promptly return any remaining shares to the Company and its
transfer agent for cancellation. However, the Order also provides that under no circumstances shall the Company issue
to Ironridge a number of shares of common stock in connection with the settlement of claims which, when aggregated with all shares
of common stock then owned or beneficially owned or controlled by Ironridge and its affiliates, at any one time exceed 9.99% of
the total number of shares of common stock of the Company then issued and outstanding.
The total issuances of 6,764,500 have been
accounted for as 1) the issuance of 2,000 shares for fees in connection with the settlement transaction and 2) the issuance of
6,762,500 shares as part of the Final Amount and issued in settlement of the fair value of the liability to Ironridge Global IV,
Ltd. The fee shares were valued at the closing price of the Company’s common stock of $0.40 per share on March
22, 2012, or $40,000, and recorded as share-based compensation for services. The issuance of 6,762,500 shares in settlement
of the fair value of the liability to Ironridge Global IV, Ltd. has been accounted for as the reduction of a proportionate amount
of the calculated fair value of the original liability to Ironridge, or $1,395,251 through December 31, 2012 and $1,886,258 through
September 30, 2013. Accordingly, the amount of the liability to Ironridge reported in the accompanying condensed consolidated
balance sheet is $1,489,623 at December 31, 2012 and $68,028 at September 30, 2013.
Note 5 - Unsecured Convertible Promissory Notes Payable
A summary of unsecured convertible promissory
notes at September 30, 2013 and December 31, 2012 is as follows:
| | |
September 30, 2013 | | |
December 31, 2012 | |
| | |
Unpaid | | |
Unamortized | | |
Carrying | | |
Unpaid | | |
Unamortized | | |
Carrying | |
| | |
Principal | | |
Discount | | |
Value | | |
Principal | | |
Discount | | |
Value | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Asher Enterprises, Inc. | |
$ | 111,900 | | |
$ | 29,300 | | |
$ | 82,600 | | |
$ | 133,000 | | |
$ | 69,821 | | |
$ | 63,179 | |
| GEL Properties, LLC | |
| 149,000 | | |
| 26,075 | | |
| 122,925 | | |
| 167,762 | | |
| 84,690 | | |
| 83,072 | |
| Prolific Group, LLC | |
| 79,900 | | |
| 30,754 | | |
| 49,146 | | |
| 64,150 | | |
| 38,123 | | |
| 26,027 | |
| Various Other Individuals and Entities | |
| 3,750 | | |
| - | | |
| 3,750 | | |
| 45,000 | | |
| - | | |
| 45,000 | |
| Haverstock Master Fund, LTD and Common Stock, LLC | |
| 289,906 | | |
| - | | |
| 289,906 | | |
| 344,102 | | |
| 107,591 | | |
| 236,511 | |
| Magna Group, LLC | |
| - | | |
| - | | |
| - | | |
| 40,000 | | |
| 37,808 | | |
| 2,192 | |
| Hanover Holdings I, LLC | |
| - | | |
| - | | |
| - | | |
| 25,500 | | |
| 23,717 | | |
| 1,783 | |
| Five Individuals | |
| 206,250 | | |
| - | | |
| 206,250 | | |
| 206,250 | | |
| 960 | | |
| 205,290 | |
| JMJ Financial | |
| 25,000 | | |
| 17,534 | | |
| 7,466 | | |
| - | | |
| - | | |
| - | |
| Charles Volk (related party) | |
| 125,000 | | |
| 84,846 | | |
| 40,154 | | |
| - | | |
| - | | |
| - | |
| Tomer Tal | |
| 50,000 | | |
| 29,772 | | |
| 20,228 | | |
| - | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
$ | 1,040,706 | | |
$ | 218,281 | | |
$ | 822,425 | | |
$ | 1,025,764 | | |
$ | 362,710 | | |
$ | 663,054 | |
Asher Enterprises, Inc.
At various dates commencing in April 2010
and continuing through September 2013, the Company has issued fourteen unsecured convertible promissory notes to Asher Enterprises,
Inc. (Asher), an unaffiliated entity. The convertible promissory notes bear interest at 8% per annum. The
principal and unpaid accrued interest are generally due approximately nine months after the issuance date. Certain of these notes
are currently in default. In general, the notes are convertible until maturity at a variable conversion price equal
to 50% of the average of the lowest three closing bid prices from the ten trading days prior to the date of the conversion notice. Additionally,
the notes have generally contained a reset provision that provides that if the Company issues or sells any shares of common stock
for consideration per share less than the conversion price of the notes, that the conversion price will be reduced to the amount
of consideration per share of the stock issuance. During the nine months ended September 30, 2013, the Company received notices
of conversion of notes totaling $120,350 and accrued interest of $5,500, which were converted into 4,997,164 shares of common stock,
or a weighted-average conversion price of $0.042 per share. This variable conversion price and the anti-dilution reset
provision constitute an embedded derivative under generally accepted accounting principles and are required to be recorded as liabilities
and valued at fair value. The fair value of these embedded conversion features is recorded as discounts to the carrying
amount of the convertible promissory notes. In the event the fair value of the embedded conversion feature exceeds the
face amount of the note, the excess is amortized immediately as interest expense. The remaining discounts are amortized
over the period from the issuance dates to the maturity dates or to the conversion dates, whichever is earlier. The
Company recognized interest expense from the amortization of the discounts in the amount of $251,828 and $284,047 for the nine
months ended September 30, 2013 and 2012, respectively. The carrying amount of these convertible promissory notes was
$82,600 at September 30, 2013, representing their unconverted face amount of $111,900 less the unamortized discount of $29,300. The
carrying amount of these convertible promissory notes was $63,179 at December 31, 2012, representing their unconverted face amount
of $133,000 less the unamortized discount of $69,821.
GEL Properties, LLC and Prolific
Group, LLC
At various dates commencing in August 2011
and continuing through September 30, 2013, the Company received proceeds pursuant to seven unsecured convertible promissory notes
to GEL Properties, LLC (“GEL”), an unaffiliated entity. Additionally, in August 2012, GEL purchased the
rights to $75,000 of principal of a secured bridge loan note held by a noteholder of the Company and in February 2013, GEL purchased
the rights to $37,500 of principal of a secured note held by What Happened LLC. These acquired rights were restated
to be consistent with other notes held by GEL. The convertible promissory notes bear interest at 6% per annum. The
principal and unpaid accrued interest are generally due approximately one year after the issuance date. Certain of these notes
are currently in default. The notes are convertible until maturity at a variable conversion price equal to 70% of the
lowest closing bid price from the five trading days prior to the date of the conversion notice. During the nine months
ended September 30, 2013, the Company received notices of conversion of notes totaling $181,262 and accrued interest of $7,451,
which were converted into 12,624,392 shares of common stock, or a weighted-average conversion price of $0.015 per share. This
variable conversion price constitutes an embedded derivative under generally accepted accounting principles and is required to
be recorded as liabilities and valued at fair value. The fair value of these embedded conversion features is recorded
as discounts to the carrying amount of the convertible promissory notes. In the event the fair value of the embedded
conversion feature exceeds the face amount of the note, the excess is amortized immediately as interest expense. The
remaining discounts are amortized over the period from the issuance dates to the maturity dates or to the conversion dates, whichever
is earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $363,675
and $225,380 for the nine months ended September 30, 2013 and 2012, respectively. The carrying amount of these convertible
promissory notes was $122,925 at September 30, 2013, representing their unconverted face amount of $149,000 less the unamortized
discount of $26,075. The carrying amount of these convertible promissory notes is $83,072 at December 31, 2012, representing
their unconverted face amount of $167,762 less the unamortized discount of $84,690.
In September 2012 and February 2013, the
Company received proceeds pursuant to two unsecured convertible promissory notes to Prolific Group, LLC (“Prolific”),
an unaffiliated entity. Additionally, 1) in July 2012 Prolific acquired the rights to three unsecured convertible promissory
notes from one of the Company’s noteholders, 2) in September 2012 Prolific purchased the rights to $40,000 of principal of
a secured bridge loan note held by another noteholder of the Company, and 3) in February 2013 Prolific purchased the rights to
$50,000 of principal of a secured note held What Happened LLC. These acquired rights were restated such that all notes
held by Prolific bear interest at 6% per annum and the principal and unpaid accrued interest are generally due approximately one
year after the issuance date. Certain of these notes are currently in default. The notes are convertible
until maturity at a variable conversion price equal to 70% of the lowest closing bid price from the five trading days prior to
the date of the conversion notice. During the nine months ended September 30, 2013, the Company received notices of
conversion of notes totaling $59,250 and accrued interest of $1,272, which were converted into 3,207,002 shares of common stock,
or a weighted-average conversion price of $0.019 per share. This variable conversion price constitutes an embedded derivative
under generally accepted accounting principles and is required to be recorded as liabilities and valued at fair value. The
fair value of these embedded conversion features are recorded as discounts to the carrying amount of the convertible promissory
notes. In the event the fair value of the embedded conversion feature exceeds the face amount of the note, the excess
is amortized immediately as interest expense. The remaining discounts are amortized over the period from the issuance
dates to the maturity dates or to the conversion dates, whichever is earlier. The Company recognized interest expense
from the amortization of the discounts in the amount of $170,964 for the nine months ended September 30, 2013. The carrying
amount of these convertible promissory notes was $49,146 at September 30, 2013, representing their unconverted face amount of $79,900
less the unamortized discount of $30,754. The carrying amount of these convertible promissory notes is $26,027 at December
31, 2012, representing their unconverted face amount of $64,150 less the unamortized discount of $38,123.
Various Other Individuals and Entities
Commencing in November 2011 and continuing
through April 2012, the Company issued thirteen additional unsecured convertible promissory notes to various unaffiliated entities
or individuals. Aggregate proceeds from these convertible promissory notes totaled $307,000. In connection
with twelve of these notes totaling $287,000, the Company also issued warrants to purchase 287,000 shares of common stock. The
warrants are exercisable at $1.50 per share and expire on December 31, 2016. The convertible promissory notes bear interest
at 8% per annum. The principal and unpaid accrued interest were due on dates ranging from August 1, 2012 to October
26, 2012. These notes are currently in default. In general, the notes were convertible until maturity at a variable
conversion price equal to 50% of the average of the lowest three closing bid prices from the ten trading days prior to the date
of the conversion notice. Prior to 2013, eleven of these unsecured convertible promissory notes had been converted into
common stock. During the nine months ended September 30, 2013, the Company received notices of conversion of the remaining
two notes totaling $45,000 and accrued interest of $3,124, which were converted into 214,530 shares of common stock, or a weighted-average
conversion price of $0.22 per share. This variable conversion price constituted an embedded derivative under generally accepted
accounting principles and was required to be recorded as liabilities and valued at fair value. The fair value of these
embedded conversion features was recorded as discounts to the carrying amount of the convertible promissory notes. In
the event the fair value of the embedded conversion feature exceeded the face amount of the note, the excess was amortized immediately
as interest expense. The remaining discounts were amortized over the period from the issuance dates to the maturity
dates or to the conversion dates, whichever was earlier. The Company recognized interest expense from the amortization
of the discounts in the amount of $0 and $490,964 for the nine months ended September 30, 2013 and 2012, respectively. The
principal balance these convertible promissory notes was $3,750 and $45,000 at September 30, 2013 and December 31, 2012, respectively.
Haverstock Master Fund, LTD and Common
Stock, LLC
Upon execution of an equity facility with
Haverstock Master Fund, LTD (“Haverstock”) in June 2012, the Company issued Haverstock a convertible note in the principal
amount of $295,000 for payment of an implementation fee of $250,000, legal fees of $35,000, and due diligence fees of $10,000 that
have been expensed. In July 2012, the Company received proceeds of $75,000 from Common Stock, LLC pursuant to a convertible
note. These convertible notes matured on March 22, 2013 and are in default. The notes bear interest at the
rate of 8% per annum. These noteholders are permitted, at any time after 180 days from the issue dates, to
convert the outstanding principal into common stock at a conversion price per share equal to 50% of the average of the three lowest
daily intraday trading prices of the common stock during the ten trading days immediately preceding the conversion date. The
noteholders agreed to restrict their ability to convert the notes and receive shares of our common stock such that the number of
shares of common stock held by the noteholder and its affiliates after such conversion does not exceed 4.99% of the then issued
and outstanding shares of the Company’s common stock. During the nine months ended September 30, 2013, the Company
received a notice of conversion from Haverstock of $54,196 of its convertible note, which was converted into 3,634,856 shares of
common stock, or $0.015 per share. The variable conversion price constitutes an embedded derivative under generally
accepted accounting principles and is required to be recorded as liabilities and valued at fair value. The fair value
of these embedded conversion features is recorded as discounts to the carrying amount of the convertible promissory notes. In
the event the fair value of the embedded conversion feature exceeds the face amount of the note, the excess is amortized immediately
as interest expense. The remaining discounts are amortized over the period from the issuance dates to the maturity dates
or to the conversion dates, whichever is earlier. The Company recognized interest expense from the amortization of the
discounts in the amount of $107,591 for the nine months ended September 30, 2013. The carrying amount of these convertible
promissory notes was $289,906 at September 30, 2013, representing their unconverted face amount. The carrying amount
of these convertible promissory notes is $236,511 at December 31, 2012, representing their unconverted face amount of $344,102
less the unamortized discount of $107,591.
Magna Group, LLC and Hanover Holdings
I, LLC
In December 2012, Magna Group, LLC (“Magna”)
purchased the rights to $40,000 of principal of a secured bridge loan note held by a noteholder of the Company and these acquired
rights were restated such that the note held by Magna bears interest at 12% per annum and the principal and unpaid accrued interest
are due one year after the issuance date. This note is currently in default. The note is convertible until
maturity at a variable conversion price equal to 55% of the lowest daily volume weighted average price of the Company’s common
stock in the three days prior to the date of the conversion notice. During the nine months ended September 30, 2013,
the Company received notices of conversion of the entire note of $40,000, which was converted into 107,881 shares of common stock,
or a weighted-average conversion price of $0.37 per share. This variable conversion price constitutes an embedded derivative
under generally accepted accounting principles and is required to be recorded as a liability and valued at fair value. The
fair value of these embedded conversion features is recorded as discounts to the carrying amount of the convertible promissory
notes. In the event the fair value of the embedded conversion feature exceeds the face amount of the note, the excess
is amortized immediately as interest expense. The remaining discounts are amortized over the period from the issuance
dates to the maturity dates or to the conversion dates, whichever is earlier. The Company recognized interest expense
from the amortization of the discounts in the amount of $37,808 for the nine months ended September 30, 2013.
In November and December 2012, the Company
received proceeds pursuant to two unsecured convertible promissory notes to Hanover Holdings I, LLC (“Hanover”), an
unaffiliated entity. Proceeds from the convertible promissory note were $25,500. The convertible promissory
notes bear interest at 12% per annum. The principal and unpaid accrued interest are due one year after the issuance
date. This note is currently in default. The first note is convertible until maturity at a variable conversion
price equal to 55% of the lowest daily volume weighted average price of the Company’s common stock in the three days prior
to the date of the conversion notice. The second note is convertible until maturity at a variable conversion price equal
to 57% of the lowest trading price from the ten trading days prior to the date of the conversion notice. During the
nine months ended September 30, 2013, the Company received notices of conversion of the entire note of $25,500, which was converted
into 8,408,177 shares of common stock, or a weighted-average conversion price of $0.003 per share. This variable conversion price
constitutes an embedded derivative under generally accepted accounting principles and is required to be recorded as liabilities
and valued at fair value. The fair value of these embedded conversion feature is recorded as discounts to the carrying
amount of the convertible promissory notes. In the event the fair value of the embedded conversion feature exceeds the
face amount of the note, the excess is amortized immediately as interest expense. The remaining discounts are amortized
over the period from the issuance dates to the maturity dates or to the conversion dates, whichever is earlier. The
Company recognized interest expense from the amortization of the discounts in the amount of $23,716 for the nine months ended September
30, 2013. The carrying amount of these convertible promissory notes is $0 at September 30, 2013. The carrying
amount of these convertible promissory notes is $1,783 at December 31, 2012, representing their unconverted face amount of $25,500
less the unamortized discount of $23,717.
Five Individuals
On July 31, 2012, the Company received
proceeds of $100,000 pursuant to an unsecured promissory note and issued a warrant to purchase 2,000 shares of common stock of
the Company to two individuals. The promissory note requires the repayment of $115,000 of principal (including interest
of $15,000) by October 31, 2012. The warrant has an exercise price of $5.00 per share and expires on July 31, 2015. Proceeds
from the note were paid on the Bridge Loan Note that is discussed in further detail in Note 6 to these condensed consolidated financial
statements. As of September 30, 2013, this note is in default.
On August 9, 2012, the Company received
proceeds of $25,000 pursuant to an unsecured promissory note and issued a warrant to purchase 500 shares of common stock of the
Company to an individual. The promissory note requires the repayment of $28,750 of principal (including interest of
$3,750) by November 9, 2012. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable
until October 9, 2015. As of September 30, 2013, this note is in default.
On October 8, 2012, the Company received
proceeds of $50,000 pursuant to an unsecured promissory note and issued a warrant to purchase 1,000 shares of common stock of the
Company to two individuals. The promissory note requires the repayment of $62,500 of principal (including interest of
$12,500) by January 7, 2013. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable
until October 8, 2015. As of September 30, 2013, this note is in default.
The fair value of the warrants and the
amounts of stated interest were recorded as discounts to these notes and are amortized over the terms of the notes. The
Company recognized interest expense from the amortization of the discounts in the amount of $960 for the nine months ended September
30, 2013. The aggregate carrying amount of these promissory notes is $206,250 at September 30, 2013, representing their
face amount. The carrying amount of these promissory notes is $205,290 at December 31, 2012, representing their face
amount of $206,250 less the unamortized discount of $960.
JMJ Financial
On September 12, 2013, the Company issued
an unsecured convertible promissory note to JMJ Financial (“JMJ”), an unaffiliated entity. The convertible
promissory bear no interest for the first 90 days, but contains a 10% original issue discount. The principal and unpaid accrued
interest are generally due approximately one year after the issuance date. In general, this note is convertible until
maturity at a variable conversion price equal to 60% of the average of the lowest two trading prices in the 20 trading days prior
to conversion. This variable conversion price constitute an embedded derivative under generally accepted accounting principles
and are required to be recorded as a liability and valued at fair value. The fair value of these embedded conversion
features is recorded as discounts to the carrying amount of the convertible promissory note. In the event the fair value
of the embedded conversion feature exceeds the face amount of the note, the excess is amortized immediately as interest expense. The
remaining discounts are amortized over the period from the issuance dates to the maturity dates or to the conversion dates, whichever
is earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $20,328
for the nine months ended September 30, 2013. The carrying amount of these convertible promissory notes was $7,466 at
September 30, 2013, representing their unconverted face amount of $25,000 less the unamortized discount of $17,534.
Charles Volk (Related Party)
On June 4, 2013, the Company issued an
unsecured convertible promissory notes to Charles Volk, the Company’s CEO, (“Volk”). The convertible
promissory bear at 10% per annum and contains a $25,000 original issue discount. The convertible note was issued in exchange
for $100,000 of accrued compensation due to Volk. The principal and unpaid accrued interest due one year after the issuance date. The
notes are convertible at a variable conversion price equal to 50% of the current market price of the Company’s common stock.
In addition, the conversion price also included an anti-dilution provision that allows for the automatic reset of the conversion
price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked
securities at an issuance, exercise or conversion price below the current conversion price of the convertible promissory note.
The Company determined that the variable conversion price and the anti-dilution reset provision caused the conversion feature to
be bifurcated from the convertible promissory notes, and are required to be recorded as a liability and valued at fair value.
The fair value of these embedded conversion features and the original issue discount are recorded as discounts to the
carrying amount of the convertible promissory note. In addition to the issuance of the convertible note, in the same
transaction, the Company issued to Volk a warrant to purchase 1,250,000 shares of the Company’s common stock at $0.05 per
share. The fair value of the warrant at the date of issuance was $37,116 and is considered a discount to the note. The fair value
was calculated using the Black-Scholes model with the following assumptions: volatility - 307%; terms – 3 years; dividend
yield – 0% and risk free interest rate – 0.14%. In the event the discount to the note exceed the face amount of the
note, the excess is amortized immediately as interest expense. The remaining discounts are amortized over the period
from the issuance dates to the maturity dates or to the conversion dates, whichever is earlier. The Company recognized
interest expense from the amortization of the discounts in the amount of $205,573 for the nine months ended September 30, 2013. The
carrying amount of this convertible promissory note was $40,154 at September 30, 2013, representing their unconverted face amount
of $125,000 less the unamortized discount of $84,846.
Tomer Tal
On September 4, 2013, the Company issued
an unsecured convertible promissory notes to Tomer Tal (“Tal”). The convertible promissory bear at 10% per
annum and contains a $10,000 original issue discount. The convertible note was issued in exchange for $40,000 of accounts
payable due to Tal. The principal and unpaid accrued interest due one year after the issuance date. The notes are convertible
at a variable conversion price equal to 50% of the current market price of the Company’s common stock. In addition, the conversion
price also included an anti-dilution provision that allows for the automatic reset of the conversion price upon any future sale
of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance,
exercise or conversion price below the current conversion price of the convertible promissory note. The Company determined that
the variable conversion price and the anti-dilution reset provision caused the conversion feature to be bifurcated from the convertible
promissory notes, and are required to be recorded as a liability and valued at fair value. The fair value of these embedded
conversion features and the original issue discount are recorded as discounts to the carrying amount of the convertible promissory
note. In addition to the issuance of the convertible note, in the same transaction, the Company issued to Tal a warrant
to purchase 500,000 shares of the Company’s common stock at $0.05 per share. The fair value of the warrant at the date of
issuance was $14,846 and is considered a discount to the note. The fair value was calculated using the Black-Scholes model with
the following assumptions: volatility - 307%; terms – 3 years; dividend yield – 0% and risk free interest rate –
0.14%. In the event the discount to the note exceed the face amount of the note, the excess is amortized immediately as interest
expense. The remaining discounts are amortized over the period from the issuance dates to the maturity dates or to the
conversion dates, whichever is earlier. The Company recognized interest expense from the amortization of the discounts
in the amount of $86,396 for the nine months ended September 30, 2013. The carrying amount of this convertible promissory
note was $20,228 at September 30, 2013, representing their unconverted face amount of $50,000 less the unamortized discount of
$29,772.
Note 6 - Secured Notes Payable
A summary of secured notes payable at September
30, 2013 and December 31, 2012:
| | |
September 30, 2013 | | |
December 31, 2012 | |
| | |
Unpaid | | |
Unamortized | | |
Carrying | | |
Unpaid | | |
Unamortized | | |
Carrying | |
| | |
Principal | | |
Discount | | |
Value | | |
Principal | | |
Discount | | |
Value | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Black Cat Exploration & Production LLC | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 850,000 | | |
$ | - | | |
$ | 850,000 | |
| Montecito Offshore, LLC | |
| 500,000 | | |
| - | | |
| 500,000 | | |
| 500,000 | | |
| - | | |
| 500,000 | |
| Bride Loan Settlement Note | |
| 40,000 | | |
| - | | |
| 40,000 | | |
| 40,000 | | |
| - | | |
| 40,000 | |
| What Happened LLC | |
| 21,575 | | |
| - | | |
| 21,575 | | |
| 125,000 | | |
| - | | |
| 125,000 | |
| La Jolla Cove Investors, Inc. | |
| 84,500 | | |
| 44,424 | | |
| 40,076 | | |
| 92,500 | | |
| 105,227 | | |
| (12,727 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
$ | 646,075 | | |
$ | 44,424 | | |
$ | 601,651 | | |
$ | 1,607,500 | | |
$ | 105,227 | | |
$ | 1,502,273 | |
Black Cat Exploration & Production,
LLC (Mustang Island)
As further described in Note 2 to these
condensed consolidated financial statements, on March 9, 2012, the Company acquired certain assets from Black Cat pursuant to the
Black Cat Agreement, as amended. Pursuant to the terms of the Black Cat Agreement the Company issued a junior secured
promissory note in the amount of $1,075,000 as partial consideration for the purchase. $100,000 of the junior secured
promissory note was due on May 31, 2012 and the balance was payable at the later of (i) June 25, 2012 or (ii) 30 days after production
commenced from the Mustang Island Well, which was deemed to have occurred on August 29, 2012 when the well was connected to the
main offshore pipeline of the Six Pigs Processing facility. The Company paid $25,000 toward the principal of this note
during the three months ended June 30, 2012 and paid an additional $200,000 in November 2012, resulting in a balance of $850,000
at December 31, 2012. The note accrued interest at 11% per annum, was secured by a second lien mortgage on the properties
acquired from Black Cat, and was subordinated to the bridge loan note described below.
As more fully described in Note 2 to these
condensed consolidated financial statements, on January 25, 2013, the Company and Black Cat entered into a Settlement Agreement
and Mutual Release of Claims with Mr. Mason and Black Cat which, among other things, released the Company from its obligation to
repay this promissory note and related accrued interest.
Montecito Offshore, L.L.C. (Vermillion
179)
As further described in Note 2, on May
6, 2011, the Company acquired a leasehold interest in oil and gas properties from Montecito Offshore, L.L.C. (Montecito). Pursuant
to the terms of the agreement, as amended, the Company issued a subordinated promissory note in the amount of $500,000 as partial
consideration for the purchase. The note is secured by a second lien mortgage, subordinated to the convertible debentures
issued in May 2011, as further described in Note 7 to these condensed consolidated financial statements. The note bears
interest at 9% per annum. The note and unpaid interest were originally due ninety days after the date of the promissory
note, but the due date was extended to August 15, 2011. The note came due on August 15, 2011 and has not been paid. The
Company’s failure to repay the note when due constitutes an event of default under the note. Upon the occurrence
of an event of default, the note holder has the right to exercise its rights under the security agreement associated with the note. These
rights include, among other things, the right to foreclose on the collateral if necessary. The Company is exploring
alternatives for a partial sale, a farm-in, or the refinancing of the Vermillion 179 tract in order to pay off this note, with
accrued interest.
In December 2011, Montecito filed a lawsuit
in the Civil District Court for the Parish of Orleans of the State of Louisiana against the Company by filing a Petition to Rescind
Sale. In this action, Montecito is seeking to rescind the asset sale transaction, as described in the previous paragraph.
The Company has entered into settlement discussions and has reached a preliminary settlement, but final document remain to be signed
as of the date of this Report.
Bridge Loan Note
On March 6, 2012, the Company received
proceeds of $250,000 under a secured bridge loan note. The Company agreed to pay the note holder $277,500 by the maturity
date of May 5, 2012. This note is currently in default. The bridge loan note was secured by a deed of trust on certain
oil and gas properties acquired from Black Cat as described in Note 2 to these condensed consolidated financial statements. In
the event of default, the note holder was entitled to 80% of the proceeds from the sale of production from the collateral property
and the principal amount due under the note was to be increased by $27,500. This note was not repaid by May 5, 2012
and was in default. Accordingly, the principal amount of the note was increased by $27,500 to $305,000. In
June 2012, the noteholder sold a 50% interest in this note to an entity related to the noteholder. As described in Note
5 to these condensed consolidated financial statements, proceeds from an unsecured promissory note were used to reduce the balance
by $100,000, resulting in a combined balance on the notes of $205,000. During the period from July to December 2012,
the noteholders sold the remaining principal balance of the notes to GEL ($75,000), Prolific ($40,000), and Magna ($90,000), all
as disclosed in Note 5 to these condensed consolidated financial statements.
Upon issuance, the Company determined the
fair value of the warrants was $8,639 and recorded a corresponding discount to the convertible debentures. The Company
also recorded $27,500 as the original issue discount on this note. The total discount of $36,139 has been amortized
over the sixty day term of the note. The Company recognized interest expense from the amortization of the discount in
the amount of $15,058 for the three months ended March 31, 2012.
On December 12, 2012, the Company and these
noteholders entered into a Settlement Agreement and Mutual Release of Claims in order to settle any and all claims that may have
existed between the parties. In connection with this settlement agreement, the Company issued an unsecured promissory
note in the amount of $40,000 to settle unpaid accrued interest, certain legal costs, and other unspecified amounts. The
note bears interest at 6% per annum and is due on or before June 12, 2013. This note is currently in default. Additionally,
the Company issued a warrant to acquire 20,000 shares of the Company’s common stock, exercisable until December 12, 2013. The
exercise price of the warrant varies from a low of $2.50 per share at December 12, 2012 to $10.00 per share at December 12, 2013.
What Happened LLC
On April 19, 2012, the Company issued a
secured promissory note in the principal face amount of $100,000 in exchange for $100,000 from What Happened LLC. Pursuant
to a deed of trust, security agreement and financing statement covering as extracted collateral, the Company granted the investor
a security interest in all of the Company’s prospective 6% working interest in the Alvey Lease. The Company agreed
to repay $125,000 on June 18, 2012, plus interest at the rate of 11% per annum. The secured promissory note was not
repaid by the due date and is in default. Proceeds from the secured promissory note were used to pay an earnest money
deposit under a Purchase and Sale Agreement with D Bar Leasing.
In lieu of repayment in cash, the investor
has the option of converting the obligation represented by the secured promissory note into a 3.75% carried working interest in
the Alvey Lease, which the investor was required to advise the Company of whether it intended to exercise such option on or prior
to the maturity of the secured note. Although the period for exercise of the option has expired, the Company and the
investor have had discussions to extend the date to exercise such option to any time prior to repayment. As disclosed
in Note 5 to these condensed consolidated financial statements, What Happened LLC has sold $87,500 of the secured promissory note
to GEL and Prolific, leaving a balance of $37,500 which is also expected to be sold. During the nine months ended September 30,
2013, the Company received notices of conversion of notes totaling $15,925, which were converted into 1,000,000 shares of common
stock, or a weighted-average conversion price of $0.016 per share. The carrying amount of this note payable was $21,575 and
$125,000 at September 30, 2013 and December 31, 2102, respectively. Upon completion of the sale of this note, the option will expire
and the Company will retain the 3.75% carried working interest in settlement of the earning money deposit.
La Jolla Cove Investors, Inc.
The Company and La Jolla Cove Investors,
Inc. (La Jolla) entered into a Securities Purchase Agreement (the SPA) dated as of April 30, 2012 (the Closing Date). Pursuant
to the SPA, the Company issued La Jolla a Convertible Debenture in the amount of $200,000 (the Convertible Debenture) and an Equity
Investment Agreement (the Equity Investment Agreement) in exchange for $100,000 in cash and a Secured Promissory Note (the Promissory
Note) from La Jolla in the amount of $100,000 which is due on demand by the Company at any time after April 30, 2013. La
Jolla was required to prepay the Promissory Note on January 25, 2013 if certain conditions were met at that date. However,
the conditions were not met.
Pursuant to the Convertible Debenture,
the Company agreed to pay La Jolla the principal sum of $200,000 (subject to adjustment as provided in the Convertible Debenture)
on April 30, 2014 or such earlier date as required by the Convertible Debenture. Interest on the outstanding Convertible Debenture
accrues at a rate of 4.75% per annum. The number of shares into which the Convertible Debenture can be converted is equal to the
dollar amount being converted, divided by the quotient of the Conversion Price divided by 10, plus the dollar amount of the Convertible
Debenture being converted divided by the Conversion Price. The Conversion Price is defined as equal to the lesser of
(i) $225.00 or (ii) 75% of the three lowest volume weighted average prices (“VWAPs”) during the 21 days prior to the
date of the conversion notice submitted by La Jolla. If on the date La Jolla delivers a conversion notice, the applicable conversion
is below $10.00 (the “Floor Price”), the Company shall have the right exercisable within two business days after the
Company’s receipt of the Conversion Notice to prepay that portion of the Convertible Debenture that La Jolla elected to convert. Any
such prepayment shall be made in an amount equal to 120% of the sum of (i) the principal amount to be converted as specified in
the applicable conversion notice plus (ii) any accrued and unpaid interest on any such principal amount.
Among the conditions that constitute an
event of default is the situation where the average VWAP per share of the Company’s common stock for any period of three
consecutive trading days during the term of the Convertible Debenture is less than $5.00 per share. This condition initially
occurred in early June 2012 and has continued through September 30, 2013. On June 14, 2012, La Jolla notified the Company
of the event of default and that it was accelerating the repayment of the Convertible Debenture (net of the $100,000 note receivable),
repayment premium, and accrued interest in the aggregate amount of $120,586. However, in July 2012, La Jolla withdrew
its notification. But, since an event of default has occurred, and has not been cured by the Company or the requirement
has not been waived by La Jolla, the Convertible Debenture continues to be callable by La Jolla. As such, the Convertible
Debenture is classified among the current liabilities of the Company and is presented net of the $100,000 note receivable.
Pursuant to the Equity Investment Agreement,
La Jolla has the right from time to time during the term of the agreement to purchase up to $2,000,000 of the Company’s Common
Stock in accordance with the terms of the agreement. Beginning October 27, 2012 and for each month thereafter, La Jolla
shall purchase from the Company at least $100,000 of common stock, at a price per share equal to 125% of the VWAP on the Closing
Date, provided, however, that La Jolla shall not be required to purchase common stock if (i) the VWAP for the five consecutive
trading days prior to the payment date is equal to or less than $10.00 per share or (ii) an event of default has occurred under
the SPA, the Convertible Debenture or the Equity Investment Agreement. Pursuant to the Equity Investment Agreement, La Jolla has
the right to purchase, at any time and in any amount, at La Jolla’s option, common stock from the Company at a price per
share equal to 125% of the VWAP on the Closing Date.
During the nine months ended September
30, 2013, La Jolla sent the Company notices of conversion of $8,000 of the Convertible Debenture and notices of purchase of $79,230
under the Equity Investment Agreement. Pursuant to these notifications, the Company issued 513,308 shares of common
stock at a weighted average price of $0.179 per share.
In connection with the issuance of the
Convertible Debenture, Charles F. Volk, Jr., Anthony Mason and Samuel J. Butero issued a Secured Continuing Personal Guaranty pursuant
to which they guaranteed the Company’s obligations under the Equity Investment Agreement and the Convertible Debenture, up
to a total of $100,000.
The variable conversion price constitutes
an embedded derivative under generally accepted accounting principles and is required to be valued at fair value. The
fair value of the embedded conversion feature has been recorded as a discount to the carrying amount of the Convertible Debenture. The
discount is being amortized over the period from the issuance date to the maturity date or to the conversion date, whichever is
earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $60,802 for
the nine months ended September 30, 2013. The carrying amount of this Convertible Debenture is $40,076 at September
30, 2013, representing the unconverted face amount of $184,500, less the unamortized discount of $44,424 and less the note receivable
due from La Jolla in the amount of $100,000. The carrying amount of this Convertible Debenture is $(12,727) at December
31, 2012, representing the unconverted face amount of $192,500, less the unamortized discount of $105,227 and less the note receivable
due from La Jolla in the amount of $100,000.
Note 7 - Convertible Debentures and Related Warrants (In
Default)
In May 2011 the Company sold units to certain
investors for aggregate cash proceeds of $2,550,000 at a price of $30,000 per unit. Each unit consisted of a secured convertible
debenture in the principal amount of $30,000 and a warrant to purchase 20,000 shares of the Company’s common stock. The
convertible debentures were issued in three tranches, matured one year after issuance on May 5, 2012, May 13, 2012, and May 19,
2012, and originally accrued interest at 9% per annum. The debentures were convertible at the holder’s option
at any time into common stock at a conversion price originally set at $1.50 per share. The debentures will automatically
be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the convertible debenture). Interest
on the debentures is payable quarterly in arrears in cash. The Company is in default under the convertible debentures
because it has not made the interest payments that were due on July 1, 2011, October 1, 2011, January 1, 2012, April 1, 2012, May
5, 2012, May 13, 2012, and May 19, 2012, and has not repaid the principal which matured on May 5, 2012, May 13, 2012, and May 19,
2012. As such, the Company is in default on all unpaid principal and total accrued interest of $1,010,271 as of September
30, 2013. The default interest rate is 18% per annum. Interest on the convertible debentures has been accrued
at 18% in the accompanying condensed consolidated financial statements commencing on July 1, 2011, the date when the Company first
defaulted on an interest payment. To date, such default has not been either cured by the Company or waived by the holders
of the convertible debentures. Upon the occurrence of an event of default, the debenture holders have the right to exercise
their rights under the Mineral Mortgage associated with the debentures. These rights include, among other things, the
right to foreclose on the collateral if necessary. The Company is currently working to resolve the default on these
debentures. The Company can provide no assurance that it will obtain a resolution, or that the secured creditors will
not eventually foreclose if not paid in the near term. The Company is exploring alternatives for a partial sale, a farm-in,
or the refinancing of the Vermillion 179 tract in order to pay off the debentures, with accrued interest.
The debentures contain price ratchet anti-dilution
protection. In addition, the conversion price shall be adjusted if the conversion price of securities in a subsequent
offering by the Company is adjusted pursuant to a make good provision. The shares of common stock issuable upon conversion
of the debentures are entitled to piggyback registration rights. The Company has determined that this anti-dilution
reset provision caused the conversion feature to be bifurcated from the debentures, treated as a derivative liability, and accounted
for at its fair value. Upon issuance, the Company recorded a corresponding discount to the convertible debentures. During
the nine months ended September 30, 2013 and during the year ended December 31, 2012, the conversion of certain unsecured convertible
promissory notes and related issuance of common stock triggered the reset of the conversion price of the convertible debentures
pursuant to the price ratchet anti-dilution protection provisions of these agreements. As of September 30, 2013 and
December 31, 2012, the reset conversion price of the debentures is $0.014 and $0.44 per share, respectively, based on the lowest
of the conversion prices. The conversion price of these debentures has been further adjusted subsequent to September
30, 2013 pursuant to the price ratchet anti-dilution protection provisions. During the nine months ended September 30,
2013, a debenture holder sent the Company notices of conversion of $96,968 of convertible debentures and $36,532 of the accrued
interest. Pursuant to these notices, the Company issued 2,239,181 shares of common stock at a weighted average price
of $0.06 per share.
In connection with this placement of convertible debentures,
the Company issued warrants to acquire 34,000 shares of the Company’s common stock to the debenture holders. The
warrants were originally exercisable for a period of five years at an exercise price of $150.00 per share. The warrants
became exercisable on a cashless basis after issuance because there was not an effective registration statement registering for
resale the shares issuable upon exercise of the warrants. The shares of common stock issuable upon exercise of the warrants are
entitled to piggyback registration rights. The warrants contain price ratchet anti-dilution protection. The
Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and
is required to be accounted for at its fair value. Upon issuance, the Company determined the fair value of the warrants
and recorded a corresponding discount to the convertible debentures. During the nine months ended September 30, 2013
and during the year ended December 31, 2012, the conversion of certain unsecured convertible promissory notes and related issuance
of common stock triggered the reset of the exercise price of these warrants pursuant to the price ratchet anti-dilution protection
provisions of these agreements. As of September 30, 2013 and December 31, 2012, the reset exercise price of the warrants
is $0.014 and $0.44 per share, respectively, based on the lowest of the conversion prices. As further explained in Note
15 to these condensed consolidated financial statements, the exercise price of these warrants has been further adjusted subsequent
to September 30, 2013 pursuant to the price ratchet anti-dilution protection provisions.
The total discount to the debentures of
$2,367,194 has been amortized over the one year term of the debentures using the effective interest method. The
carrying amount of the convertible debentures is $2,453,032 at September 30, 2013 and $2,550,000 at December 31, 2012, representing
their unconverted face amount since the discount is now fully amortized.
In connection with this sale of convertible
debentures and warrants, the Company 1) incurred a placement fee with its placement agent of $356,000, 2) issued
five-year warrants to its placement agent to acquire 3,400 shares of common stock, which was 10% of the aggregate number of shares
of the Company’s common stock issuable upon conversion of the debentures, and 3) paid $50,000 for legal services in connection
with the issuance of these convertible debentures and warrants. The warrants issued to the placement agent were originally
exercisable at $150.00 per share, may be exercised on a cashless basis, and contain price ratchet anti-dilution protection. The
Company has determined that this anti-dilution reset provision of the warrants is subject to derivative liability treatment and
is required to be accounted for at its fair value. Upon issuance, the Company determined the fair value of the warrants
and recorded a corresponding charge to deferred financing costs. During the nine months ended September 30, 2013 and
during the year ended December 31, 2012, the conversion of certain unsecured convertible promissory notes and related issuance
of common stock triggered the reset of the exercise price of these warrants pursuant to the price ratchet anti-dilution protection
provisions of these agreements. As of September 30, 2013 and December 31, 2012, the reset exercise price of the warrants
is $0.014 and $0.44 per share, respectively, based on the lowest of the conversion prices. As further explained in Note
15 to these condensed consolidated financial statements, the exercise price of these warrants has been further adjusted subsequent
to September 30, 2013 pursuant to the price ratchet anti-dilution protection provisions.
Total deferred financing costs recorded
for the issuance of convertible debentures was $531,688. Deferred financing costs have been amortized over the one year
term of the debentures using the effective interest method, and therefore, no further interest expense was recognized on the amortization
of these costs during the period ended September 30, 2013.
Pursuant to the debentures and warrants,
no holder may convert or exercise such holder’s debenture or warrant if such conversion or exercise would result in the holder
beneficially owning in excess of 4.99% of our then issued and outstanding common stock. A holder may, however, increase or decrease
this limitation (but in no event exceed 9.99% of the number of shares of common stock issued and outstanding) by providing the
Company with 61 days’ notice that such holder wishes to increase or decrease this limitation.
Pursuant to a Mineral Mortgage between
the Company and the purchasers of the debentures and warrants, the Company granted a first priority lien on all assets acquired
from Montecito Offshore, LLC, as further discussed in Note 2 to these consolidated financial statements.
Note 8 - Derivative Liabilities
In September 2008, the FASB issued authoritative
guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative
guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.
The conversion feature of the Company’s Debentures (described in Note 7 and 10), and the related warrants, do not have fixed
settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities
at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the
Debentures from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the
conversion feature of the Debentures was separated from the host contract (i.e., the Debentures) and recognized as a derivative
instrument. Both the conversion feature of the Debentures and the related warrants have been characterized as derivative
liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
All of the notes described in Notes, 5, 6 and 7 that contain a reset provision or have a conversion price that is a percentage
of the market price contain embedded conversion features which are considered derivative liabilities. In addition, at September
30, 2013, the Company did not have sufficient authorized shares to satisfy all the conversion for the notes described in Notes
5, 6 and 7; therefore the warrants outstanding at September 30, 2013 are also considered derivative liabilities.
As of September 30, 2013 and December 31,
2012, the derivative liabilities were valued using a probability weighted average Black Scholes-Merton pricing model with the following
assumptions:
| | |
September 30, | | |
December 31, | |
| | |
2013 | | |
2012 | |
| Conversion feature: | |
| | | |
| | |
| Risk-free interest rate | |
| 0.10 | % | |
| 0.15 | % |
| Expected Volatility | |
| 395 | % | |
| 200 | % |
| Expected life (in years) | |
| .06 to .75 | | |
| .5 to 1 | |
| Expected dividend yield | |
| 0 | % | |
| 0 | % |
| | |
| | | |
| | |
| Warrants: | |
| | | |
| | |
| Risk-free interest rate | |
| 0.10 | % | |
| 0.20 | % |
| Expected Volatility | |
| 395 | % | |
| 200 | % |
| Expected life (in years) | |
| 1.9 to 3.5 | | |
| 2.6 to 4.2 | |
| Expected dividend yield | |
| 0 | % | |
| 0 | % |
| | |
| | | |
| | |
| Fair Value | |
| | | |
| | |
| Conversion feature | |
| 7,644,393 | | |
| 7,768,138 | |
| Warrants | |
| 19,018 | | |
| 27,197 | |
| | |
$ | 7,663,411 | | |
$ | 7,795,335 | |
The risk-free interest rate was based on
rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future
volatility for its common stock. The expected life of the convertible debentures and notes was determined by the maturity date
of the notes. The expected life of the warrants was determined by their expiration dates. The expected dividend yield was based
on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends
to its common stockholders in the future.
At December 31, 2012, the fair value of
the aggregate derivative liability of the conversion feature and warrants was $7,795,335. During the nine months ended September
30, 2013, we recognized an additional derivative liability of $1,085,227 related to the issuances of unsecured convertible promissory
notes payable and warrants as described under Note 5. As of September 30, 2013 the aggregate derivative liability of all outstanding
convertible debentures and notes, and warrants was $7,663,411. For the nine months ended September 30, 2013, the Company recorded
a change in fair value of the derivative liability of $1,216,999.
Note 9 – Preferred and Common
Stock
Issuance of Series A Preferred Stock
On April 10, 2013, the board of directors authorized the Company
to file a certificate of designation authorizing one million shares of Series A Preferred Stock and authorized the sale and issuance
of one million shares of Series A Preferred Stock to Charles Volk, the Company’s chief executive officer in exchange for
the conversion of $50,000 of accrued salary owing to Mr. Volk. On April 17, 2013, the certificate of designation was
filed with the Secretary of State of Nevada. Among the designations are that 1) one share of Series A Preferred Stock
is convertible into one share of common stock and 2) each share of Series A Preferred Stock is entitled to 750 votes for each share
of common stock.
Issuance of Common Stock for Services
In connection with a consulting agreement
dated February 1, 2013 with David Pinkman, a newly-appointed member of the board of directors, the Company issued 20,000 shares
of common stock to Mr. Pinkman for consulting services to the Company. For accounting purposes, this issuance has been
recorded at $5,200, or $0.26 per share, the closing price of the common stock on the date the issuance was made.
On February 6, 2013, the Company issued
10,000 shares of common stock to an employee as bonus compensation for services rendered. For accounting purposes,
this issuance has been recorded at $15,000, or $1.50 per share, as valued by the Company
Issuance of Common Stock to Chief
Executive Officer
On February 6, 2013, the board of directors
authorized the issuance of common stock to the chief executive officer in satisfaction of certain amounts owed to him. Pursuant
to this authorization, the Company issued 100,000 shares of common stock to the chief executive officer. The stock
was valued at $25,000, or $0.25 per share, the amount stated in the unanimous consent of the board of directors.
Issuance of Common Stock and Warrants
for Cash
On February 13 and 25, 2013, the Company
entered into Common Stock and Warrant Purchase Agreements with two individuals and sold 100,000 shares of common stock at $0.50
per share and issued warrants to purchase 100,000 shares of common stock. Proceeds from the sale were $50,000, which
were allocated $37,420 to the common stock and $12,580 to the warrants based on their relative fair values. The warrants
are exercisable at $2.50 per shares and expire in February 2016.
On April 5, 2013, the Company entered
into a Common Stock Purchase Agreements with a trust and sold 41,600 shares of common stock at $0.87 per share. Proceeds
from the sale were $36,000.
On July 19, 2013, the Company entered into a Common Stock Purchase
Agreements with a trust and sold 500,000 shares of common stock at $0.01 per share and a three year warrant to purchase 500,000
shares of common stock at a strike price of $0.025 per share. Proceeds from the sale were $5,000.
Note 10 - Stock Options and Warrants
Stock Options and Compensation-Based
Warrants
On September 29, 2010, the stockholders
of the Company approved the adoption of the 2010 Stock Option Plan. The Plan provides for the granting of incentive
and nonqualified stock options to employees and consultants of the Company. Generally, options granted under the plan
may not have a term in excess of ten years. Upon adoption, the Plan reserved 40,000 shares of the Company’s common
stock for issuance there under.
Generally accepted accounting principles
for stock options and compensation-based warrants require the recognition of the cost of services received in exchange for an award
of equity instruments in the financial statements, is measured based on the grant date fair value of the award, and requires the
compensation expense to be recognized over the period during which an employee or other service provider is required to provide
service in exchange for the award (the vesting period). No income tax benefit has been recognized for share-based compensation
arrangements and no compensation cost has been capitalized in the accompanying condensed consolidated balance sheet.
A summary of stock option and compensation-based
warrant activity for the three-month period ended September 30, 2013 is presented below:
| | |
| | |
| | |
Weighted | | |
| |
| | |
Shares | | |
Weighted | | |
Average | | |
| |
| | |
Under | | |
Average | | |
Remaining | | |
Aggregate | |
| | |
Option or | | |
Exercise | | |
Contractual | | |
Intrinsic | |
| | |
Warrant | | |
Price | | |
Life | | |
Value | |
| | |
| | |
| | |
| | |
| |
| Outstanding at December 31, 2012 | |
| 74,300 | | |
$ | 40.50 | | |
| 2.7 years | | |
$ | 7,910 | |
| Granted or issued | |
| 38,000 | | |
| 3.50 | | |
| | | |
| | |
| Expired or forfeited | |
| - | | |
| - | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Outstanding at September 30, 2013 | |
| 112,300 | | |
| 28.14 | | |
| 2.6 years | | |
$ | - | |
| | |
| | | |
| | | |
| | | |
| | |
| Exercisable at September 30, 2013 | |
| 112,300 | | |
$ | 28.14 | | |
| 2.6 years | | |
$ | - | |
During the nine months ended September
30, 2013, the Company granted options and issued compensation-based warrants to certain consultants and individuals to acquire
an aggregate of 38,000 shares of common stock at exercise prices ranging from $2.50 to $5.00 per share. All of these
options and compensation-based warrants vested immediately.
During the nine months ended September
30, 2012, the Company granted options and issued compensation-based warrants certain consultants to acquire an aggregate of 59,000
shares of common stock at exercise prices ranging from $7.50 to $12.50 per share. Of these options and compensation-based
warrants, 47,000 vested immediately and 12,000 vest over twelve months.
The fair value of these stock options and
compensation-based warrants was estimated on the date of grant or issuance using the Black-Scholes option pricing model. The
weighted-average fair value of the stock options granted and compensation based warrants issued during the nine months ended September
30, 2013 was $1.01 per share. The weighted-average assumptions used for the options granted and compensation-based warrants
issued during the nine months ended September 30, 2013 were risk-free interest rate of 0.27%, volatility of 229%, expected life
of 2.0 years, and dividend yield of zero. The weighted-average fair value of the stock options granted and compensation
based warrants issued during the nine months ended September 30, 2012 was $1.41 per share. The weighted-average assumptions
used for the options granted and compensation-based warrants issued during the nine months ended September 30, 2012 were risk-free
interest rate of 0.31%, volatility of 219%, expected life of 2.0 years, and dividend yield of zero.
For the three-month periods ended September
30, 2013 and 2012, the Company reported compensation expense related to stock options, compensation-based warrants, and stock awards
of $64,014 and $115,054, respectively. As of September 30, 2013, there was approximately $0 of unrecognized compensation
cost related to stock options and compensation-based warrants that will be recognized over a weighted average period of approximately
0.2 years. The intrinsic values at September 30, 2013 are based on a closing price of $0.75 per share.
Other Stock Warrants
A summary of other stock warrant activity
for the three-month period ended September 30, 2013 is presented below:
| | |
| | |
| | |
Weighted | | |
| |
| | |
| | |
Weighted | | |
Average | | |
| |
| | |
Shares | | |
Average | | |
Remaining | | |
Aggregate | |
| | |
Under | | |
Exercise | | |
Contractual | | |
Intrinsic | |
| | |
Warrant | | |
Price | | |
Life | | |
Value | |
| | |
| | |
| | |
| | |
| |
| Outstanding at December 31, 2012 | |
| 67,294 | | |
$ | 37.00 | | |
| 3.1 years | | |
$ | 21,261 | |
| Issued | |
| 2,350,000 | | |
| 0.10 | | |
| | | |
| | |
| Expired | |
| - | | |
| - | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Outstanding at September 30, 2013 | |
| 2,417,294 | | |
$ | 1.12 | | |
| 2.7 years | | |
$ | - | |
As discussed more fully in Note 7 to these
condensed consolidated financial statements, the Company issued warrants to purchase 37,630 shares of common stock at $150.00 per
share principally during May 2011 in connection with the issuance of convertible debentures, plus the Company issued compensation-based
warrants in September 2011 to purchase 14,000 shares of common stock at $90.00 per share that contain price ratchet anti-dilution
protection. During the nine months ended September 30, 2013 and during the year ended December 31, 2012, the conversion
of certain unsecured convertible promissory notes and related issuance of common stock triggered the reset of the exercise price
of these warrants pursuant to the price ratchet anti-dilution protection provisions of these agreements. As of September
30, 2013 and December 31, 2012, the reset exercise price of the warrants is $0.014 and $0.44 per share, respectively, based on
the lowest of the conversion prices. As further explained in Note 15 to these condensed consolidated financial statements,
the exercise price of these warrants has been further adjusted subsequent to September 30, 2013 pursuant to the price ratchet anti-dilution
protection provisions.
Note 11 - Fair Value Measurements
For assets and liabilities measured at
fair value, the Company uses the following hierarchy of inputs:
| |
● |
|
Level one — Quoted market prices in active markets for identical assets or liabilities; |
| |
|
|
|
| |
● |
|
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and |
| |
|
|
|
| |
● |
|
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use. |
Liabilities measured at fair value on a
recurring basis at September 30, 2013 are summarized as follows:
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Derivative liability - conversion feature of debentures and related warrants | |
$ | - | | |
$ | 5,254,147 | | |
$ | - | | |
$ | 5,254,147 | |
| | |
| | | |
| | | |
| | | |
| | |
| Derivative liability - embedded conversion feature and reset provisions of notes | |
$ | - | | |
$ | 2,409,264 | | |
$ | - | | |
$ | 2,409,264 | |
Liabilities measured at fair value on a
recurring basis at December 31, 2012 are summarized as follows:
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Derivative liability - conversion feature of debentures and related warrants | |
$ | - | | |
$ | 5,460,914 | | |
$ | - | | |
$ | 5,460,914 | |
| | |
| | | |
| | | |
| | | |
| | |
| Derivative liability - embedded conversion feature and reset provisions of notes | |
$ | - | | |
$ | 2,334,421 | | |
$ | - | | |
$ | 2,334,421 | |
As further described in Note 8 to these
condensed consolidated financial statements, the fair value of the derivative liabilities for the embedded conversion features
of the convertible notes, convertible debentures and related warrants is measured using multinomial lattice models.
Note 12 - Supplemental Cash Flow Information
During the nine months ended September
30, 2013, the Company had the following noncash investing and financing activities:
| · |
The Company recorded a valuation discount
of $1,085,227related to the derivative liabilities of instruments issued.
|
| · |
The Company issued 36,942,373 shares of common stock as a result of the conversion of principal of $671,100 convertible promissory notes and $5,500 of related accrued interest. |
| |
|
| · |
The Company issued 513,308 shares of common stock to La Jolla as a result of the conversion of $8,000 of principal of the 4.75% convertible debenture and common stock purchase of $79,230 under the Equity Investment Agreement. |
| · | The Company issued 6,550,000 shares of
common stock to Ironridge Global IV, Ltd. in settlement of $1,421,595 of the liability that it had acquired from the Company’s
creditors. |
| · | The Company issued 100,000 shares of common
stock to the chief executive officer in satisfaction of $25,000 of the liability owed to him by the Company. |
| · | The Company issued 1,000,000 shares of
Series A preferred stock to the chief executive officer in satisfaction of $50,000 of the liability owed to him by the Company. |
| · | In connection with the Settlement Agreement
with Mr. Anthony Mason and Black Cat, the Company transferred to Black Cat all title and interest the Company owned in the I-1
well, Mustang Island 818-L lease and other assets acquired from Black Cat pursuant to the Black Cat Agreement, which had a carrying
value of $1,055,987, net of impairment recognized, and agreed to pay $125,000 to Mr. Mason. In return, Black Cat returned
to the Company for cancellation 90,000 shares of the Company’s common stock with a current value of $54,000 and released
the Company from all of its claims having a recorded value of $1,115,364, which included the balance of the $850,000 promissory
note, $95,852 accrued interest and $169,782 unpaid compensation and other miscellaneous amounts. |
During the nine months ended September
30, 2012, the Company had the following noncash investing and financing activities:
| — | The Company issued 59,237 shares of common stock to Asher as a result of the conversion of $150,000 of principal of 8% convertible
promissory notes and $6,000 of related accrued interest. |
| — | The Company issued 92,551 shares of common stock to GEL as a result of the conversion of $241,750 of principal of 6% convertible
promissory notes and $4,826 of related accrued interest. |
| — | The Company issued 7,519 shares of common stock to Prolific as a result of the conversion of $15,000 of principal of 6% convertible
promissory notes. |
| — | The Company issued 3,421 shares of common stock as a result of the conversion of $25,000 of principal of 8% convertible promissory
notes and $211 of related accrued interest. |
| — | The Company issued 20,000 shares of common stock to La Jolla as a result of the conversion of $5,000 of principal of 4.75%
convertible debentures in connection with La Jolla debenture conversion and common stock purchase under the Equity Investment Agreement. |
| — | The Company issued 11,111 shares of common stock to a debenture holder as a result of the conversion of $14,389 of principal
of convertible debentures. |
| — | The Company issued 90,000 shares of common stock and a junior secured promissory note in the amount of $1,075,000 in connection
with its acquisition of certain oil and gas properties from Black Cat Exploration & Production LLC. |
| — | Ironridge Global IV, Ltd. purchased approximately $1.4 million of outstanding liabilities from certain of the Company’s
creditors, including notes payable, accrued compensation and interest, and other accounts payable. |
| — | The Company issued 172,500 shares of common stock to Ironridge Global IV, Ltd. in settlement of approximately $281,348 of the
liability that it had acquired from the Company’s creditors. |
| — | The Company issued 7,778 shares of common stock to certain officers and directors in satisfaction of $17,500 of the liability
owed to them by the Company. |
| — | The Company issued a convertible promissory note to Haverstock in payment of deferred financing costs totaling $295,000, which
are recorded in the accompanying condensed consolidated balance sheet. |
The Company paid $13,650 and $15,000 for
interest during the nine months ended September 30, 2013 and 2012, respectively.
Note 13 – Related Party Transactions
Warren Rothouse was appointed to be a director
of the Company in October 2012. Mr. Rothouse is Senior Partner of Surety Financial Group, LLC (Surety). Surety
has provided investor relations services to the Company in recent years. On November 7, 2012, the Company entered into
a new agreement with Surety to provide investor relations services for the fifteen month period commencing December 1, 2012 and
continuing through February 28, 2014. The agreement provided for monthly payments of $6,500 for Surety’s services. In
addition, Surety was issued 10,000 shares of restricted common stock of the Company’s common stock and warrants to purchase
15,000 shares of the Company’s common stock. The exercise price of the warrants is $5.00 per share and the warrants
are exercisable on a cashless basis. The term of the warrants is three years. On February 27, 2013, the Company
amended the November 7, 2012 agreement. Under the amended agreement, Surety will provide investor relations services
for the fifteen month period commencing March 1, 2013 and continuing through May 31, 2014 and Surety will receive monthly payments
of $10,000 for its services. Compensation to Surety under the agreements was $23,000 for the nine months ended September 30, 2013.
Effective January 31, 2013, David Pinkman
was appointed to the Board of Directors of the Company. On February 1, 2013, the Company entered into a consulting agreement
with Mr. Pinkman. The term of the agreement is for twelve months and provides for monthly compensation of $8,330. As
additional compensation, the Company issued 20,000 shares of restricted common stock to Mr. Pinkman and issued him a warrant to
acquire 20,000 shares of the Company’s common stock at $2.50 per share. Compensation earned by Mr. Pinkman under
the consulting agreement was $16,660 for the nine months ended September 30, 2013.
Note 14 - Subsequent Events
Issuance of Common Stock for Cash
On October 4, 2013 La Jolla Cove Investors
converted $560 under their agreement for issuance of 1,642,667 shares of common stock and invested $5,600 for issuance of 4,073
shares of common stock.
Stock split
On October 2, 2013 the Company affected a 1-for-50 reverse common
stock split. All references in these condensed consolidated financial statements and related notes to numbers of shares of common
stock, prices per share of common stock, and weighted average number of shares of common stock outstanding prior to the reverse
stock split have been adjusted to reflect the reverse stock splits on a retroactive basis for all periods presented, unless otherwise
noted.
Item 2. Management ’ s Discussion and Analysis
of Financial Condition and Results of Operations
Company Overview
Worthington Energy, Inc. (the “Company”)
is an oil and gas exploration and production company with assets in Texas and recently acquired properties in the Gulf of Mexico.
Our assets in Texas consist of a minority working interest in limited production and drilling prospects in the Cooke
Ranch area of La Salle County, Texas, and Jefferson County, Texas, all operated by Bayshore Exploration L.L.C. The
Texas asset had limited revenues and substantial losses, which we expect for the foreseeable future. We have recently determined
to expand our operations. In May 2011, we acquired our assets in the Gulf of Mexico referred to as Vermilion 179 (
“ VM 179 ” ) consisting of a leasehold working interest in certain oil and gas leases located offshore from Louisiana,
upon which no drilling or production has commenced as of yet. We recently completed the acquisition of a 10.35% interest
in the I-1 well and a 2% overriding royalty interest ( “ ORRI ” ) in 1,400 acres in the 818-L Mustang Island lease
In Texas, we have working interests ranging
from 4% to 31.75% (net revenue interests ranging from 3% to 23.8125%) in the various wells in which we have participated.
In the Gulf of Mexico, we have a 70% leasehold working interest, with a net revenue interest of 51.975% of certain oil and gas
leases in the Vermillion 179 tract. VM 179 is adjacent to Exxon's VM 164 #A9 well.
We are seeking to make additional acquisitions
that are currently producing oil in the United States as a way to increase our cash flow. Other than as disclosed
herein, we currently do not have any contracts or agreements to acquire additional companies and/or working interests in existing
wells, and no assurances can be given that we will identify or acquire such additional acquisitions on terms acceptable to us,
if at all. Additional acquisitions will likely require the issuance of equity or debt securities, either directly
or indirectly to raise funds for such acquisitions.
Organization
We were organized under the laws of the
State of Nevada on June 30, 2004 under the name Paxton Energy, Inc. During August 2004, shareholder control of our company was
transferred, a new board of directors was elected and new officers were appointed. These officers and directors managed us until
March 17, 2010 when a new board of directors was elected and new officers were appointed. Effective January 27, 2012, we changed
our name to Worthington Energy, Inc.
Background
Black Cat Acquisition
On March 9, 2012, the Company acquired
certain assets from Black Cat Exploration & Production LLC (“Black Cat”) pursuant to an amended Purchase and Sale
Agreement for Oil & Gas Properties and Related Assets (the “Black Cat Agreement”). The Company acquired
a 2% override interest in the Mustang Island 818-L lease, covering 1,400 acres in the Gulf of Mexico, with a 10.35% carried interest
in the recently drilled I-1 well, located on the lease. The Company paid $175,000 in cash, issued a note for $1,075,000 and agreed
to issue 90,000 shares of common stock, of which 45,000 shares were issued to Black Cat at the time of closing and the remaining
45,000 shares were issued on August 30, 2012 pursuant to when the well was connected to the main offshore pipeline of the Six Pigs
Processing facility. The leasehold interest was capitalized in the amount of $2,305,987, representing $1,250,000 in
cash and promissory note, $855,000 for the initial common stock issued in March 2012 (based on a closing price of $19.00 per share
on the closing date), $157,500 for the second issuance of common stock in August 2012 (based on the most recent closing price of
$3.50 per share at the time of connecting the well), and $43,487 in acquisition and well costs.
On November 1, 2012, the Company sold its
2% overriding royalty interest in the Mustang Island 818-L lease for $500,000. The sale reduced the carrying cost of
the lease and well to $1,805,987. Proceeds from the sale were used to reduce the principal balance of the junior secured
promissory note with Black Cat by $200,000 and the remaining $300,000 was used by the Company for working capital purposes.
In connection with its accounting for the
year ended December 31, 2012, the Company evaluated the accounting effects of the Settlement Agreement and concluded that estimated
impairment in the approximate amount of $750,000 should be recorded as of December 31, 2012 by further reducing the carrying cost
of the properties to $1,055,987. In January 2013, the Company accounted for the Settlement Agreement by removing the
carrying value of the property; removed the released liabilities for the promissory note in the amount of $850,000; removed current
liabilities for amounts owed to Mr. Mason, Black Cat, and others for accrued interest, accrued compensation, lease operating expenses,
and other expenses in the aggregate amount of $265,364; recorded the fair value of the common stock returned to the Company for
cancelation in the amount of $54,000; recorded a liability to Mr. Mason of $125,000; and recognized additional impairment expense
of $11,623.
Black Cat Disposition
On January 25, 2013, we entered into a
settlement agreement and mutual release of claims (the “Settlement Agreement”) with Anthony Mason (“Mason”)
and Black Cat Exploration & Productions, LLC (“Black Cat”). Pursuant to the terms of the Settlement
Agreement, we agreed to pay Black Cat and/or Mason $125,000 in 10 equal payments, with the first payment due March 11, 2013 and
the remaining payments every 30 days thereafter until paid in full (the “Settlement Payment”). We made a
payment of $10,000 on March 20, 2013 but we are currently delinquent, as we did not make the entire first payment due and we did
not make the second payment, which was due on or before April 10, 2013. In the event that we obtain a credit facility in an amount
equal to or greater than $3,500,000, the full amount of the Settlement Payment then outstanding will become immediately due and
payable. In addition, we agreed to transfer to Black Cat all title and interest we owned in the I-1 well, Mustang Island
818-L lease and other assets acquired from Black Cat pursuant to the Purchase and Sale Agreement between us and Black Cat, dated
November 14, 2011, as amended by the First Amendment to Purchase and Sale Agreement dated March 5, 2012 (the “Purchase Agreement”). Furthermore,
all production from the I-1 well, from the date the well went online (approximately August 30, 2012) was transferred to Black Cat
in connection with the Settlement Agreement.
Black Cat agreed to return to us for cancellation
the 90,000 shares of our common stock it received in connection with the Purchase Agreement as well as all studies and engineering
information related to the VM 179 seismic acquisition. Further, in connection with the Settlement Agreement, Mason agreed
to resign as our President, Chief Executive Officer and a Director.
VM 179
The oil and gas leases are located in the
VM 179, which is in the shallow waters of the Gulf of Mexico offshore from Louisiana, adjacent to Exxon's VM 164 #A9 well. No drilling
or production has commenced as of yet, and we have the option of being the operator at VM 179 or engaging another party as operator.
VM 179 is at 85’ water depth approximately
46 miles offshore Louisiana in the Gulf of Mexico. Virgin Offshore USA acquired the 547 acre lease in May 2004. Much
of VM 179 is impacted by a large regional salt dome. Salt domes are geologic features that are commonly associated with
the presence of oil and gas reserves in the U.S. Gulf Coast and Gulf of Mexico, and production in the blocks adjacent to VM 179
is largely from the flanks of that same regional salt dome. Cumulative production from VM Block 178, to
the east of VM 179, totals approximately 56.1 Bcfe and 232 MBoe. Cumulative production from VM Block 164, to the north
of VM 179, totals approximately 19 MMBoe and 91 Bcfe.
We are proposing a single well on VM 179
to capture reserves in (i) the Lentic K-2 Sand, which is currently being produced by the Exxon VM Block 164 and (ii) the 7400’
Sand, which was encountered by a previously drilled well in the area. Exxon drilled the VM Block 164 #A9ST2, adjacent
to our proposed lease line well location, in September 2005, completing the well in the K2 Sand in November 2005. It
is believed that the Exxon well will be limited in its capacity to capture all of the reserves in the K-2 Sand because of its structural
location in the reservoir, which is below, or “down dip,” of the proposed lease line well in the K-2 Sand.
In December 2011, Montecito filed a lawsuit
in the Civil District Court for the Parish of Orleans of the State of Louisiana against the Company by filing a Petition to Rescind
Sale. In this action, Montecito is seeking to rescind the asset sale transaction, as described in the previous paragraph.
The Company has entered into settlement discussions and has reached a preliminary settlement, but final document remain to be signed
as of the date of this Report. Pursuant to the anticipated settlement, the Company will return its leasehold interests in Vermillion
179 to Montecito, and would be released from all liabilities related to a subordinated promissory note due Montecito (see Note
6), Convertible Debentures (see Note 7), and accrued interest thereon, and any related derivative liabilities will be extinguished.
The Company currently estimates this will result in a net increase to equity to the Company but there is no assurance that such
settlement will be finalized as contemplated by the Company.
D Bar Leasing Agreement
On April 26, 2012, we entered into a Purchase
and Sale Agreement (the “D Bar Agreement”) with D Bar Leasing Inc. (“D Bar”). Pursuant to the terms of
the Agreement, at closing, the Company was to purchase from D Bar, all rights, title and interest that D Bar owns in certain wells
in the State of Texas (the “ Assets ” ) in exchange for $3,500,000 and the issuance of 50,000 shares of our common
stock. In addition, D Bar was to retain a 15% carried interest in the Assets and we shall be committed to spending
approximately $1.1 million on work-over operations on the Assets, commencing with a nine well work over program of proven behind
pipe reserves. As of the date of this Report, the D Bar Agreement has been cancelled.
Change in Management
Appointment of David Pinkman
Effective January 31, 2013, we appointed Mr.
David E. T. Pinkman to the board of directors of the Company (the “Board of Directors”) to fill a vacancy created by
the resignation of Anthony Mason. Mr. Pinkman is Chief Financial Officer (“CFO”) and a director of Saccharum Energy
Corp., a TSX Venture Exchange-listed junior oil and gas exploration company, and has held these positions since October 2009. He
is also currently a director of Red Rock Energy Inc., a TSX Venture Exchange-listed junior uranium exploration and oil and gas
exploration company, and has held that position since April, 2005. Previously, he was CFO and a director of PanWestern
Energy Inc., a listed junior oil and gas company, and served in those roles from November, 2001 to April, 2010. He was
also President and a director of Explorator Resources Inc., a CPC company, and held those positions from September 2005 to January,
2007. Prior to that, he was Vice President and a director of Powermax Energy Inc., a TSXV-listed oil and gas issuer, from
January 2002 until September, 2005. He was also a director of Renewable Power & Light Plc., an AIM-listed independent
power production company, from June 2006 to October 2007. From January 2001 to November 2001, Mr. Pinkman was Vice President,
International, of Maxim Power Corp. (formerly Jupiter Power International Inc.) (TSXV listed). He was executive Chairman
and a director of Jupiter Power International Inc. prior thereto and from August 1993 until December 2000.
Mr. Pinkman was a partner at the law firm
Pinkman, McArdle, Barristers and Solicitors from 1991 until December 2000. Called to the bar in 1985, as a lawyer he
has practiced primarily in the areas of corporate and securities law. He has served on the boards of a number of public
and private companies carrying on business in the resource and other industries. In addition, Mr. Pinkman has served
on the boards of a variety of local volunteer organizations, and continues to serve as a director and Vice-President of Wild Rose
Motocross Association, a non-profit association registered under the Societies Act (RSA 1980, as amended). Mr. Pinkman
obtained a BA degree from the University of Calgary in 1980, and an LLB degree from the University of British Columbia in 1984.
There are no arrangements or understandings
between Mr. Pinkman and any other person pursuant to which he was selected to serve on the Board. There are no relationships between
Mr. Pinkman and the Company that would require disclosure under Item 404(a) of Regulation S-K.
Reappointment of Charles Volk
Effective January 31, 2013, we reappointed
Mr. Charles F. Volk as the Company’s Chief Executive Officer “(CEO”)and President. Mr. Volk currently serves
as the Company’s Chairman of the Board of Directors.
Mr. Volk has been our Chairman of the Board
of Directors since March 2010. Mr. Volk has been the Chairman of Bermuda Segregated Funds, Ltd. an open end Mutual Fund in
Bermuda since March 2008. Mr. Volk has also served as the Chairman and President of Osage Energy Corporation from 2004 to 2007,
as the Managing Director of Cyril Petrochemical Corporation, as the Managing Director of Norman Capital, Inc. from 1992 to 1997,
as a business development consultant to Asset Growth Partners, Inc. from 1991 to 1992, as President of Gold Circle Mines, Inc.
from 1983 to 1991, and as General Partner of Oil & Gas Partnerships from 1981 to 1993. In addition, Mr. Volk participated in
the management and marketing of Esilux Corporation, an international marketer and distributor of specialized industrial safety
systems. Mr. Volk received his B.S. degree in Business Administration from the Menlo School of Business Administration in Menlo
Park, CA in 1981.
Designation of Preferred Stock
On April 10, 2013, the Board of Directors
approved a Certificate of Designation to the Company’s Articles of Incorporation (the “Certificate of Designation”),
specifying the rights, privileges, preferences, and restrictions of the Series A Preferred Stock. On April 17, 2013, the Company
filed the Certificate of Designation with the Secretary of State of Nevada designating one million shares of Series A Preferred
Stock.
The Series A Preferred Stock
shall be convertible and for every share of Series A Preferred Stock converted, the holder shall be entitled to receive one (1)
share of the Company’s common stock. Shares of Series A Preferred Stock shall be entitled to voting rights with respect to
any vote to be held by the holders of the Company’s Common Stock. Every share of Series A Preferred Stock shall be entitled
to 750 votes for each share of common stock that each share of Series A Preferred Stock is convertible into.
Issuance of Preferred Stock
On April 10, 2013, the Company’s
Board of Directors authorized the sale and issuance of one million shares of Series A Preferred Stock to Charles Volk, the Company’s
chief executive officer in exchange for the conversion of $50,000 of accrued salary owing to Mr. Volk. Subsequently,
on April 17, 2013, the Company sold one million shares of Series A Preferred Stock to Mr. Volk on the terms authorized by the board
of directors.
Amendments to Articles of Incorporation
On April 17, 2013, the Company filed a
Certificate of Amendment to its Articles of Incorporation (the “First Amendment”) to increase the authorized shares
of common stock from 500 million to 1.49 billion. The increase of authorized shares was approved by the Board of Directors
on April 17, 2013 and by stockholders holding a majority of the voting rights of the Common Stock of the Company.
On May 8, 2013, the Company filed a Certificate
of Amendment to its Articles of Incorporation (the “Second Amendment” and, together with the First Amendment, the “Amendments”)
to increase the authorized common stock from 1.49 billion to 2.49 billion. The increase of authorized shares was approved
by the Board of Directors on April 17, 2013 and by stockholders holding a majority of the voting rights of the Common Stock of
the Company.
On June 24, 2013, the Company filed a Certificate
of Amendment to its Articles of Incorporation (the “Third Amendment” and, together with the First and Second Amendment,
the “Amendments”) to increase the authorized common stock from 2.49 billion to 6.49 billion. The increase of authorized
shares was approved by the Board of Directors on June 25, 2013 and by stockholders holding a majority of the voting rights of the
Common Stock of the Company.
Issuance of Common Stock and Warrants for Cash
On April 5, 2013, the Company entered into a Common Stock Purchase
Agreements with a trust and sold 41,600 shares of common stock at $0.87 per share. Proceeds from the sale were $36,000.
On July 19, 2013, the Company entered into
a Common Stock Purchase Agreements with a trust and sold 500,000 shares of common stock at $0.01 per share and a three year warrant
to purchase 500,000 shares of common stock at a strike price of $0.025 per share. Proceeds from the sale were $5,000.
Results of Operations
Comparison of the three and nine
months ended September 30, 2013 and 2012
Oil and Gas Revenues
Our oil and gas revenue was $0 for the
nine months ended September 30, 2013, and for the nine months ended September 30, 2012 and our oil and gas revenue was $0 for the
three months ended September 30, 2013, and for the three months ended September 30, 2012 Bayshore has ceased to report to us the
amounts of our respective share in oil and gas revenues and we understand that the oil wells are shut in and not producing. The
historical level of oil and gas production has not been significant. Because the level of oil and gas production has
not been significant in the past, we continue to be characterized as an exploration-stage company.
Cost and Operating Expenses
Our costs and operating expenses were $1,111,392
for the nine months ended September 30, 2013, compared to $1,732,185 for the nine months ended September 30, 2012, representing
a decrease of $620,793 and our costs and operating expenses were $209,277 for the three months ended September 30, 2013, compared
to $494,865 for the nine months ended September 30, 2012, representing a decrease of $285,588. The decrease in our costs
and operating expenses are primarily a result of decreases in general and administrative expenses as well as in share-based compensation
charges, as discussed below.
Lease Operating Expenses –
Lease operating expenses were $0 for the three and nine months ended September 30, 2013, and $3,583 for the three and nine months
ended September 30, 2012. Bayshore has ceased to report to us the amounts of our respective share of lease operating
expenses and we understand that the oil wells are shut in and not producing.
General and Administrative Expense
– General and administrative expense was $1,015,555 for the nine months ended September 30, 2013, as compared to $1,449,866
for the nine months ended September 30, 2012, representing a decrease of $434,311, and general and administrative expense was $209,277
for the three months ended September 30, 2013, as compared to $402,457 for the three months ended September 30, 2012, representing
a decrease of $40,691. The decrease in general and administrative expense during the nine months ended September
30, 2013, is principally related to decreases of: (1) $68,818 for consulting services; (2) $33,731 for legal services; (3)
$73,455 for outside services; and (4) $179,932 in salaries and wages; offset by a writeoff of an earnest deposit of $100,000 during
the nine months ended September 30, 2013. The reduction in consulting services represents a decrease in payments related
to investor relations, energy, financing, and general business services as a result of a general decreased need for such consulting
services. The decrease in legal services principally relates to approximately $65,000 of costs incurred in 2012 in connection
with the debt settlement with Ironridge Global IV, Ltd. (“Ironridge”) for the payment of Ironridge’s legal costs
as well as payment of certain noteholder’s claimed legal costs when their notes were settled through Ironridge. The
decrease in the costs of outside services principally relates to the decreased use temporary office personnel.
Share-Based Compensation –
We have entered into various transactions that have resulted in the recording of share-based compensation during the nine months
ended September 30, 2013 and 2012. Share-based compensation for the three and nine months ended September 30, 2013 was
$0 and 84,214, respectively.
Although the net changes with respect to
our revenues and our costs and operating expenses for the nine months ended September 30, 2013 and 2012, are summarized
above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
Other Income (Expense)
Change in fair value of derivative liabilities
– As more fully discussed in Notes 5, 6 and 8 to the accompanying condensed consolidated financial statements, we issued
convertible promissory notes commencing in April 2010 which contain a variable conversion price and anti-dilution reset provisions. In
addition, as more fully discussed in Notes 7, 8 and 10 to the accompanying condensed consolidated financial statements, during
the quarter ended June 30, 2011, we issued convertible debentures and warrants that contain price ratchet anti-dilution protection. These
embedded conversion features are treated as embedded derivatives under generally accepted accounting principles and are required
to be accounted for at fair value. We have estimated the fair value of the embedded conversion features of the convertible promissory
notes, the convertible debentures, and the related warrants using multinomial lattice models. The fair value of these
derivative liabilities was estimated to be $7,663,411 and $7,795,335 as of September 30, 2013 and December 31, 2012, respectively.
We recognized a gain (loss) from the change in fair value of these derivative liabilities of $(185,515) and $1,216,999
for the three and nine months ended September 30, 2013, respectively, and a loss from the change in fair value of these derivative
liabilities of $3,094,402and $3,162,483 for the three and nine months ended September 30, 2012, respectively.
Interest Expense – We incurred
interest expense of $142,968 and $451,201 for the three and nine months ended September 30, 2013, respectively, as compared to
$215,643 and $628,819 for the three and nine months ended September 30, 2012, respectively representing a decrease of $104,943
and $113,934. The decrease in interest expense is primarily due to the decrease in the amount of our unsecured convertible debt
through September 30, 2013 as compared to September 30, 2012.
Amortization of discount on convertible
notes and other debt – As more fully discussed in Notes 5, 6, 7 and 8 to the accompanying condensed consolidated financial
statements, we have issued convertible promissory notes and debentures to several individuals or entities, commencing in April
2010. In each case, the notes and debentures have a favorable conversion price in comparison to the market price of our common
stock on the date of the issuance of the notes. Additionally, the convertible debentures and certain of the convertible promissory
notes contain price ratchet anti-dilution reset provisions. The fair value of these embedded conversion features is
measured on the issue date of the notes. Generally, a discount is recorded for these embedded conversion features and amortized
over the term of the note or debenture as a non-cash charge to the statement of operations. We have amortized $212,969 and $1,341,556
of discount on convertible notes and debentures for the three and nine months ended September 30, 2013, respectively, compared
to $25,000 and $224,451for the three nine months ended September 30, 2012. As of September 30, 2013, there is $262,705 of recorded,
but unamortized, discount on the convertible promissory notes that will be amortized and recorded as a non-cash expense over
the remaining terms of the respective notes.
Amortization of deferred financing costs
– In connection with the sale of convertible debentures and warrants, we 1) incurred a placement fee with our placement agent
of $356,000, 2) issued five-year warrants to our placement agent to acquire 34,000 shares of common stock, and 3)
paid $50,000 for legal services. We determined the fair value of the warrants was $125,688. Total deferred
financing costs recorded for the issuance of convertible debentures was $531,688. These deferred financing costs were
amortized over the one year term of the debentures using the effective interest method. We amortized deferred financing costs in
the amount of $370,000 and $3,002,567 for the nine months ended September 30, 2013 and 2012, respectively, and $0 and $470,322
for the three months ended September 30, 2013 and 2012, respectively.
Liquidity and Capital Resources
During the year ended December 31, 2012,
and the nine months ended September 30, 2013, our principal sources of liquidity consisted of proceeds from the sale of unsecured
convertible promissory notes, common stock and warrants. During the year ended December 31, 2012, and the nine months ended September
30, 2013, our sources of capital resources were 1) the issuance of unsecured convertible promissory notes totaling an aggregate
of $1,148,500, 2) the private placement of common stock and warrants in the aggregate amount of $75,000, 3) the issuance of a bridge
loan note of $250,000, 4) the issuance of a secured convertible debenture of $100,000, 5) the issuance of a secured promissory
note of $100,000, 6) proceeds from the issuance of common stock under an equity investment agreement of $169,000, and 7) the issuance
of unsecured promissory notes for $175,000. At September 30, 2013, we had $4 in cash. At September 30, 2013, we had
a working capital deficit of $13,953,034, as compared to a deficit of $15,800,966 as of December 31, 2012. The working capital
deficit is principally the result of historical losses with operations and oil and gas property acquisitions financed through trade
creditors and through the use of short-term debt. The decrease in the working capital deficit for the nine months ended
September 30, 2013, is principally due to 1) the issuance of new short-term debt, 2) net decrease in debt discounts, 3) increases
in accounts payable and accrued liabilities, 4) decrease in payable to Ironridge from issuance of common stock, 5) less debt conversions,
6) net liabilities released under the settlement agreement with Black Cat, and 7) decrease in current assets. In addition,
we have total stockholders’ deficit of $8,165,535 at September 30, 2013, compared to total stockholders’ deficit of
$8,484,524 at December 31, 2012, a decrease in the stockholders’ deficit of $318,989. The decrease in the
stockholders’ deficit for the nine months ended September 30, 2013, is principally due to 1) aggregate amount of debt, accrued
interest, and derivative liability converted into stockholders’ equity by the issuance of common stock related to debt conversions;
2) the reduction of the payable to Ironridge Global IV, Ltd. that was converted into stockholders’ equity through the issuance
of common stock; and 3) less the amount of our net loss of $2,057,150.
Our operations used net cash of $417,945
during the nine months ended September 30, 2013, compared to $944,941 of net cash used during the nine months ended September 30,
2012. Net cash used in operating activities during the nine months ended September 30, 2013, consisted of our net loss of
$2,057,150, less non-cash expenses for the impairment loss on oil and gas properties, share-based compensation, amortization of
deferred financing costs and discount on convertible notes, and depreciation expense, and further reduced by non-cash changes in
working capital, plus the non-cash gain for the change in fair value of derivative liabilities.
We had minimal investing activities that
used cash during the nine months ended September 30, 2013, compared to cash used in investing activity of $318,746 for the nine
months ended September 30, 2012. Investing activities during the nine months ended September 30, 2012 included cash
paid totaling $214,425 toward the acquisition of oil and gas properties from Black Cat, a deposit of $100,000 and the purchase
of office equipment with a total cost of $4,321.
Financing activities provided $410,750
of cash during the nine months ended September 30, 2013, compared to $1,275,668 during the nine months ended September 30, 2012. Cash
flows from financing activities during the nine months ended September 30, 2013, relate to 1) the receipt of proceeds from the
placement of unsecured convertible promissory notes in the amount of $260,500 and 2) proceeds from issuance of common stock and
warrants for $144,000. Cash flows from financing activities during the nine months ended September 30, 2012, relate
to 1) the receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $1,150,668 and 2) proceeds
of $250,000 from the issuance of a bridge loan promissory note.
We are currently seeking debt and equity
financing to fund potential acquisitions and other expenditures, although we do not have any contracts or commitments for either
at this time. We will have to raise additional funds to continue operations and, while we have been successful in doing so in the
past, there can be no assurance that we will be able to do so in the future. Our continuation as a going concern is dependent upon
our ability to obtain necessary additional funds to continue operations and the attainment of profitable operations. We
hope that working capital will become available via financing activities currently contemplated with regards to VM 179. In
January 2013, we received a preliminary commitment letter from an interested funding group for an $8,500,000 secured loan. The
proposed term of the loan is $3,500,000 initially and the balance to be drawn down within 90 days thereafter. The loan
would have a three year repayment schedule based on a 48 month amortization, with an annual interest rate of 14.95%. The
lender would be entitled to overriding intrests in all oil and gas production and certain other customary fees and expenses. The
loan is subject to final approval of the lender’s credit committee and numerous conditions to closing, including, among others,
additional equity from farm-in partners or other shareholders and a third-party review and verification of the reserves. We
can provide no assurances that this loan will be completed or that we can obtain other working capital on terms acceptable to us,
if at all.
May 2011 Private Placement
In May 2011, we completed a financing which
generated aggregate gross cash proceeds of $2,550,000 through the sale of the convertible secured debentures and common stock purchase
warrants. The convertible debentures matured in May 2012 and bear interest at 9% per annum and are convertible at the
holder’s option at any time into common stock at the original conversion price of $75.00 per share. The convertible debentures
will automatically be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the Note). Interest
on the convertible debentures is payable quarterly in arrears in cash. The convertible debentures contain price ratchet anti-dilution
protection. In addition the conversion price shall be adjusted if the conversion price of securities in a subsequent offering by
us is adjusted pursuant to a make good provision. The shares of common stock issuable upon conversion of the convertible debentures
are entitled to piggyback registration rights. As of May 20, 2013, debentures totaling $70,424 and accrued interest
totaling $71,965 have been converted into common stock.
As of May 20, 2013, all of the outstanding
debentures have matured. We are in default under the convertible debentures because we have not (i) repaid the debentures
in the aggregate principal face amount of $2,479,576 or (ii) made the interest payments that were due starting on July 1, 2011,
and continuing through the maturity dates. As of September 30, 2013, the total interest that was due is $1,010,271 with
interest continuing to accrue at the default interest rate of 18% per annum. Furthermore, as a result of stock issuances
between February 2012 and May 2013, the conversion price of the debentures has been reset to $0.02 per share, which would result
in the issuance of approximately 130,000,000 shares of common stock upon conversion of the principal amount, not including accrued
interest. We currently do not have a sufficient number of authorized but unissued shares of common stock available for
issuance upon conversion of these debentures.
The common stock purchase warrants are
exercisable for a period of five years at an original exercise price of $3.00 per share. The warrants contain price ratchet anti-dilution
protection. The warrants are exercisable on a cashless basis because there is not an effective registration statement registering
for resale the shares issuable upon exercise of the warrants. The shares of common stock issuable upon exercise of the warrants
are entitled to piggyback registration rights. As a result of share issuances between February 2012 and May 2013, the
exercise price of the warrants has been reset to $0.02 per share.
Pursuant to the convertible debentures
and related warrants, no holder may convert or exercise such holder’s debenture or warrant if such conversion or exercise
would result in the holder beneficially owning in excess of 4.99% of our then issued and outstanding common stock. A holder may,
however, increase or decrease this limitation (but in no event exceed 9.99% of the number of shares of common stock issued and
outstanding) by providing the Company with 61 days’ notice that such holder wishes to increase or decrease this limitation.
Pursuant to the security agreement, between
ourselves and the investors, we granted the investors a first priority lien on all assets acquired from Montecito pursuant to the
Montecito Agreement.
Montecito Promissory Note
On May 6, 2011, in connection with our
acquisition of certain assets from Montecito Offshore LLC (“Montecito”), we issued Montecito a subordinated promissory
note in the amount of $500,000. The subordinated promissory note is subordinated to the secured convertible notes we
issued in the private placement that closed on May 5, 2011. The Montecito Note was due in August 2011 and accrued interest
at the rate of 9% per annum until maturity and continues to accrues interest at the highest legal rate allowed since maturity since
the Montecito Note is in default for failure to pay principal and interest when due.
GEL Properties Financing
On July 24, 2012, we entered into an agreement
with GEL pursuant to which we issued GEL five convertible notes. The first note, due July 24, 2013 in the principal amount of $100,000
(the “GEL I Note”), was issued in exchange for $100,000. Between February 8, 2013, and May 20, 2013, GEL
has converted all of the GEL I Note into common stock.
The second note, due July 24, 2013, in
the principal amount of $75,000 (the “GEL II Note”), was issued in exchange for a promissory note from GEL also in
the amount of $75,000 (the “GEL II Payment Note”). The third note, due July 24, 2013, in the principal amount
of $75,000 (the “GEL III Note”), was issued in exchange for a promissory note from GEL also in the amount of $75,000
(the “GEL III Payment Note”). The fourth note, due July 24, 2013, in the principal amount of $75,000
(the “GEL IV Note”), was issued in exchange for a promissory note from GEL also in the amount of $75,000 (the “GEL
IV Payment Note”). The fifth note, due July 24, 2013, in the principal amount of $75,000 (the “GEL
V Note”), was issued in exchange for a promissory note from GEL also in the amount of $75,000 (the “GEL V Payment Note”).
The GEL II Payment Note was due on March
24, 2013, and was repaid in full on February 28, 2013.
The GEL III Payment Note was due on April
24, 2013, and was extended to August 24, 2013 because we did not meet the current information requirements pursuant to Rule 144
on April 24, 2013. The GEL III Payment Note is secured by a $75,000 debt obligation owed to GEL by Silver Dragon Resources,
Inc. Commencing on February 28, 2013, payments totaling $45,000 have been received on the GEL III Payment Note, leaving a
balance of $30,000 at May 20, 2013.
The GEL IV Payment Note was due on May
24, 2013, and was extended to September 24, 2013 because we did not meet the current information requirements pursuant to Rule
144 on May 24, 2013. The GEL IV Payment Note is secured by a $75,000 debt obligation owed to GEL by Savwatt usa, Inc.
The GEL V Payment Note is due on June 24,
2013, or October 24, 2013 in the event that we do not meet the current information requirements pursuant to Rule 144 on June 24,
2013. The GEL V Payment Note is secured by a $75,000 debt obligation owed to GEL by Savwatt usa, Inc.
On September 5, 2012, we entered into an
agreement with GEL, pursuant to which we issued GEL two additional convertible notes. The first note, due September 5, 2013 in
the principal amount of $50,000 (the “GEL VI Note”), was issued in exchange for $50,000. The second note,
due September 5, 2013 in the principal amount of $50,000 (the “GEL VII Note”), was issued in exchange for a promissory
note from GEL in the amount of $50,000 (the “GEL VII Payment Note”).
The GEL VII Payment Note is due on June
5, 2013, unless we do not meet the current information requirements pursuant to Rule 144, at which time the note will come due
at the time that we meet the current information requirements. The GEL VII Payment Note is secured by the $50,000 GEL
VII Note, and such collateral can be exchanged by GEL for other collateral.
Interest on the notes with accrues at the
rate of 6% per annum and must be paid in shares of our common stock at the conversion price. We are not required to
make any payments on the notes with GEL until maturity. We have the ability to repay the notes to GEL at any time at
150% of the unpaid principal amount upon five days prior written notice to the Investor.
GEL may convert the outstanding principal
on the notes into shares of our common stock at a conversion price per share equal to seventy percent (70%) of the lowest
closing bid price of the common stock during the five trading days immediately preceding and including the date of conversion,
subject to a floor conversion price of $0.001 per share.
As of May 20, 2013, the notes payable to
GEL remain outstanding in the amounts disclosed above.
Asher Financings
On September 13, 2012, October 19, 2012,
and February 27, 2013, we entered into securities purchase agreements with Asher Enterprises, Inc., an accredited investor (“Asher”),
providing for the sale by us to Asher of 8% convertible debentures in the aggregate principal amount of $128,000 (the “Asher
Debentures”). The outstanding balance on the Asher Debentures is $87,500 as of May 20, 2013.
The Asher Debentures mature on June 19,
2013, July 23, 2013, and December 1, 2013, respectively, (the “Asher Maturity Dates”) and bear interest at the annual
rate of 8%. We are not required to make any payments until the Asher Maturity Dates.
Asher is permitted to convert, starting
on the 180th day following issuance of such Asher Debenture, the outstanding principal and accrued interest on such Asher Debenture
into shares of our common stock at a conversion price per share equal to fifty percent (50%) of the average of the three (3)
lowest closing bid prices of the common stock during the 10 trading days immediately preceding the conversion date.
Asher agreed to restrict its ability to
convert the Asher Debentures and receive shares of common stock such that the number of shares of common stock held by Asher in
the aggregate and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares
of our common stock.
Prolific Group, LLC
On September 27, 2012 and February 28,
2013, we entered into agreements with Prolific Group, LLC, an accredited investor (“Prolific”), pursuant to which we
issued Prolific convertible notes in the aggregate principal amount of $45,000. Interest on these notes accrues at the
rate of 6% per annum and must be paid in shares of our common stock at the conversion price. The convertible notes with
Prolific mature on September 27, 2013 and February 28, 2014, respectively. We are not required to make any payments
on these notes until maturity. We have the ability to repay this note at any time at 150% of the unpaid principal amount upon five
days prior written notice to Prolific. Prolific may convert the outstanding principal on the note into shares of our
common stock at a conversion price per share equal to seventy percent (70%) of the lowest closing bid price of the common
stock during the five trading days immediately preceding and including the date of conversion, subject to a floor conversion price
of $.005 per share. The outstanding balance on these notes with Prolific is $44,750 as of May 20, 2013.
Hanover Holdings I, LLC
In November and December 2012, the Company
received proceeds pursuant to two unsecured convertible promissory notes to Hanover Holdings I, LLC (“Hanover”), an
unaffiliated entity. Proceeds from the convertible promissory note were $25,500. The convertible promissory
notes bear interest at 12% per annum. The principal and unpaid accrued interest are due one year after the issuance
date. This note is currently in default. The first note is convertible until maturity at a variable conversion
price equal to 55% of the lowest daily volume weighted average price of the Company’s common stock in the three days prior
to the date of the conversion notice. The second note is convertible until maturity at a variable conversion price equal
to 57% of the lowest trading price from the ten trading days prior to the date of the conversion notice. During the
nine months ended September 30, 2013, the Company received notices of conversion of the entire note of $25,500, which was converted
into 8,408,177 shares of common stock, or a weighted-average conversion price of $0.003 per share. This variable conversion price
constitutes an embedded derivative under generally accepted accounting principles and is required to be valued at fair value. The
fair value of these embedded conversion features is recorded as discounts to the carrying amount of the convertible promissory
notes. In the event the fair value of the embedded conversion feature exceeds the face amount of the note, the excess
is amortized immediately as interest expense. The remaining discounts are amortized over the period from the issuance
dates to the maturity dates or to the conversion dates, whichever is earlier. The Company recognized interest expense
from the amortization of the discounts in the amount of $23,716 for the nine months ended September 30, 2013. The carrying
amount of these convertible promissory notes is $0 at September 30, 2013. The carrying amount of these convertible promissory notes
is $1,783 at December 31, 2012, representing their unconverted face amount of $25,500 less the unamortized discount of $23,717.
Magna Group, LLC
In December 2012, Magna Group, LLC purchased
the rights to $40,000 of principal of a secured bridge loan note held by a noteholder of the Company and these acquired rights
were restated such that the note held by Magna bears interest at 12% per annum and the principal and unpaid accrued interest are
due one year after the issuance date. This note is currently in default. The note is convertible until maturity
at a variable conversion price equal to 55% of the lowest daily volume weighted average price of the Company’s common stock
in the three days prior to the date of the conversion notice. During the nine months ended September 30, 2013, the Company
received notices of conversion of the entire note of $40,000, which was converted into 107,881 shares of common stock, or a weighted-average
conversion price of $0.37 per share. This variable conversion price constitutes an embedded derivative under generally
accepted accounting principles and is required to be valued at fair value. The fair value of these embedded conversion
features is recorded as discounts to the carrying amount of the convertible promissory notes. In the event the fair
value of the embedded conversion feature exceeds the face amount of the note, the excess is amortized immediately as interest expense. The
remaining discounts are amortized over the period from the issuance dates to the maturity dates or to the conversion dates, whichever
is earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $37,808
for the nine months ended September 30, 2013.
What Happened LLC
On April 19, 2012, we issued a secured
promissory note in the principal face amount of $100,000 (the “Secured Note”) in exchange for $100,000 from What Happened
LLC, an accredited investor (“WH LLC”). Pursuant to a deed of trust, security agreement and financing statement
covering as extracted collateral, we granted WH LLC a security interest in all of our prospective 6% working interest in the Alvey
Lease. We agreed to repay $125,000 on June 18, 2012, plus interest at the rate of 11% per annum. The Secured Note was
not repaid by the due date and is in default.
In lieu of repayment in cash, WH LLC had
the option of converting the obligation represented by the Secured Note into a 3.75% carried working interest in the Alvey Lease,
which WH LLC was required to advise us of whether it intended to exercise such option on or prior to the maturity of the Secured
Note. On February 28, 2013, WH LLC sold $50,000 of this note to Prolific and $37,500 of the secured promissory note
to GEL, and on May 8, 2013 WH LLC sold $25,000 of this note to Magna Group, LLC (“Magna”), leaving a balance of $12,500
which is also expected to be sold. The notes sold to Prolific and GEL were amended to accrue interest at 6% per annum,
to mature on February 28, 2014, and to be convertible at a conversion price per share equal to seventy percent (70%) of the
lowest closing bid price of the common stock during the five trading days immediately preceding and including the date of conversion. The
note sold to Magna was amended to accrue interest at 12% per annum, to mature on May 8, 2014, and to be convertible at a conversion
price per share equal to fifty percent (50%) of the lowest daily volume weighted average price of the common stock during
the three days prior to the date of conversion. Magna has converted $15,000 of the note that it acquired, leaving a
balance of $10,000 as of May 20, 2013.
Al Kau Financing
On February 25, 2013, we entered into a
purchase agreement with Al Kau, an existing investor in our company, pursuant to which we sold Mr. Kau (i) 50,000 shares of common
stock and (ii) a warrant to purchase 50,000 shares of common stock for $25,000. The warrants are exercisable for three
years from the date of issuance at an exercise price of $0.25 per share.
Aaron Shrira Financing
On February 25, 2013, we entered into a
purchase agreement with Aaron Shrira, an existing investor in our company, pursuant to which we sold Mr. Shrira (i) 50,000 shares
of common stock and (ii) a warrant to purchase 50,000 shares of common stock for $25,000. The warrants are exercisable
for three years from the date of issuance at an exercise price of $2.50 per share.
Sanjay Kapoor - Settlement Agreement
and Mutual Release of Claims
On December 12, 2012, the Company, Sanjay
Kapoor and the SAM Group entered into a Settlement Agreement and Mutual Release of Claims in order to settle any and all claims
that may have existed between the parties in connection with a secured debt financing entered into on March 6, 2012. In
connection with this settlement agreement, we issued an unsecured promissory note in the amount of $40,000 to settle unpaid accrued
interest, certain legal costs, and other unspecified amounts. The note bears interest at 6% per annum and is due on
or before June 12, 2013. Additionally, we issued a warrant to acquire 20,000 shares of our common stock, exercisable
until December 12, 2013. The exercise price of the warrant is $5.00 through June 12, 2013, $0.15 from June 13, 2013
through September 12, 2013, and $10.00 from September 13, 2013 through December 12, 2013.
La Jolla Cove Investors, Inc.
We entered into a Securities Purchase Agreement
(the “SPA”) with La Jolla Cove Investors, Inc. (“La Jolla”) dated as of April 30, 2012 (the “Closing
Date”). Pursuant to the SPA, we issued La Jolla a Convertible Debenture in the amount of $200,000 (the “Convertible
Debenture”) and an Equity Investment Agreement (the “Equity Investment Agreement”) in exchange for $100,000 in
cash and a Secured Promissory Note (the “Promissory Note”) from La Jolla in the amount of $100,000 which is due on
demand by the Company at any time after April 30, 2013.
Pursuant to the Convertible Debenture,
we agreed to pay La Jolla the principal sum of $200,000 (subject to adjustment as provided in the Convertible Debenture) on April
30, 2014 or such earlier date as required by the Convertible Debenture. Interest on the outstanding Convertible Debenture accrues
at a rate of 4.75% per annum. The number of shares issuable upon conversion of the Convertible Debenture is equal to
the dollar amount being converted, divided by the quotient of the Conversion Price divided by 10, plus the dollar amount of the
Convertible Debenture being converted divided by the Conversion Price. The Conversion Price is defined as equal to the
lesser of (i) $4.50 or (ii) 75% of the three lowest volume weighted average prices (“VWAPs”) during the 21 days prior
to the date of the conversion notice submitted by La Jolla. If on the date La Jolla delivers a conversion notice, the
applicable conversion is below $10.0.0 (the “Floor Price”), the Company shall have the right exercisable within two
business days after the Company’s receipt of the Conversion Notice to prepay that portion of the Convertible Debenture that
La Jolla elected to convert. Any such prepayment shall be made in an amount equal to 120% of the sum of (i) the principal
amount to be converted as specified in the applicable conversion notice plus (ii) any accrued and unpaid interest on any such principal
amount.
Among the conditions that constitute an
event of default is the situation where the average volume weighted average price per share of the Company’s common stock
for any period of three consecutive trading days during the term of the Convertible Debenture is less than $0.10 per share. This
condition initially occurred in early June 2012 and has continued since that date. On June 14, 2012, La Jolla notified
the Company of the event of default and that it was accelerating the repayment of the Convertible Debenture (net of the $100,000
note receivable), repayment premium, and accrued interest in the aggregate amount of $120,586. However, in July 2012,
La Jolla withdrew its notification. But, since an event of default has occurred, and has not been cured by the Company or the requirement
has not been waived by La Jolla, the Convertible Debenture continues to be callable by La Jolla. As such, the Convertible Debenture
is classified among the current liabilities of the Company and is presented net of the $100,000 note receivable.
Pursuant to the Equity Investment Agreement,
La Jolla has the right from time to time during the term of the agreement to purchase up to $2,000,000 of our Common Stock in accordance
with the terms of the agreement. Beginning October 27, 2012 and for each month thereafter, La Jolla shall purchase from
the Company at least $100,000 of common stock, at a price per share equal to 125% of the VWAP on the Closing Date, provided, however,
that La Jolla shall not be required to purchase common stock if (i) the VWAP for the five consecutive trading days prior to the
payment date is equal to or less than $10.00 per share or (ii) an event of default has occurred under the SPA, the Convertible
Debenture or the Equity Investment Agreement. Pursuant to the Equity Investment Agreement, La Jolla has the right to purchase,
at any time and in any amount, at La Jolla’s option, common stock from the Company at a price per share equal to 125% of
the VWAP on the Closing Date.
During the nine months ended September
30, 2013, La Jolla sent the Company notices of conversion of $8,000 of the Convertible Debenture and notices of purchase of $84,000
under the Equity Investment Agreement. Pursuant to these notifications, the Company issued 514,908 shares of common stock at a
weighted average price of $0.179 per share.
In connection with the issuance of the
Convertible Debenture, Charles F. Volk, Jr., Anthony Mason and Samuel J. Butero issued a Secured Continuing Personal Guaranty pursuant
to which they guaranteed the Company’s obligations under the Equity Investment Agreement and the Convertible Debenture, up
to a total of $100,000.
The variable conversion price constitutes
an embedded derivative under generally accepted accounting principles and is required to be valued at fair value. The fair value
of the embedded conversion feature has been recorded as a discount to the carrying amount of the Convertible Debenture. The discount
is being amortized over the period from the issuance date to the maturity date or to the conversion date, whichever is earlier.
The Company recognized interest expense from the amortization of the discounts in the amount of $60,802 for the nine months ended
September 30, 2013. The carrying amount of this Convertible Debenture is $40,076 at September 30, 2013, representing the unconverted
face amount of $184,500, less the unamortized discount of $44,424 and less the note receivable due from La Jolla in the amount
of $100,000. The carrying amount of this Convertible Debenture is $(12,727) at December 31, 2012, representing the unconverted
face amount of $192,500, less the unamortized discount of $105,227 and less the note receivable due from La Jolla in the amount
of $100,000.
Claudell and Nancy LeBlanc Financing
On July 31, 2012, we issued a promissory
note to Claudell and Nancy LeBlanc (the “LeBlancs”) in exchange for proceeds of $100,000. The promissory
note was due on or before October 31, 2012 by payment of $115,000, including interest of $15,000 for the three month term. As
of September 30, 2013, this note has not been paid and is in default. In addition, we issued the LeBlancs a common stock
purchase warrant to purchase 2,000 shares of common stock (the “LeBlanc Warrant”). The LeBlanc Warrant has
an exercise price of $5.00 per share of common stock and will be exercisable for a period of three years from issuance. The
LeBlanc Warrant can be exercised on a cashless basis.
Haverstock Equity Facility Agreement
On June 22, 2012, we entered into a committed
equity facility agreement (the “Equity Facility”) with Haverstock Master Fund, Ltd. (“Haverstock”), pursuant
to which Haverstock has committed to purchasing up to 150,000 million of shares of our common stock, at our request, in accordance
with the Equity Facility. We will need to file and obtain effectiveness of a registration statement registering shares
of common stock available for sale to Haverstock pursuant to the Equity Facility. We intend to begin the registration
statement process shortly. After the registration statement is declared effective, we are allowed to deliver to Haverstock, once
every five trading days, an advance request, which shall be the greater of (i) $100,000, or (ii) the lower of (A) the average of
the daily value of our stock traded for the five trading days prior to the delivery of the advance request, or (B) the average
of the daily value of our stock traded for the 30 trading days prior to the delivery of the advance request.
On the sixth trading day after delivery
of an advance notice, we are required to deliver to Haverstock such number of shares of common stock equal to the amount of the
advance notice, divided by 90% of the lowest daily volume weighted average price of our common stock during the five trading days
following the delivery of the advance request and Haverstock will deliver us the amount of the advance request.
Upon execution of an Equity Facility with
Haverstock in June 2012, the Company issued Haverstock a convertible note in the principal amount of $295,000 for payment of an
implementation fee of $250,000, legal fees of $35,000, and due diligence fees of $10,000. In July 2012, the Company
received proceeds of $75,000 from Common Stock, LLC pursuant to a convertible note. These convertible notes matured
on March 22, 2013 and are in default. The notes bear interest at the rate of 8% per annum. These noteholders
are permitted, at any time after 180 days from the issue dates, to convert the outstanding principal into common stock at
a conversion price per share equal to 50% of the average of the three lowest daily intraday trading prices of the common stock
during the ten trading days immediately preceding the conversion date. The noteholders agreed to restrict their ability
to convert the notes and receive shares of our common stock such that the number of shares of common stock held by the noteholder
and its affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of the Company’s
common stock. During the nine months ended September 30, 2013, the Company received a notice of conversion from Haverstock
of $54,196 of its convertible note, which was converted into 3,634,856 shares of common stock, or $0.015 per share. The
variable conversion price constitutes an embedded derivative under generally accepted accounting principles and is required to
be valued at fair value. The fair value of these embedded conversion features is recorded as discounts to the carrying
amount of the convertible promissory notes. In the event the fair value of the embedded conversion feature exceeds the
face amount of the note, the excess is amortized immediately as interest expense. The remaining discounts are amortized
over the period from the issuance dates to the maturity dates or to the conversion dates, whichever is earlier. The
Company recognized interest expense from the amortization of the discounts in the amount of $107,591 for the nine months ended
September 30, 2013. The carrying amount of these convertible promissory notes was $289,906 at September 30, 2013, representing
their unconverted face amount. The carrying amount of these convertible promissory notes is $236,511 at December 31,
2012, representing their unconverted face amount of $344,102 less the unamortized discount of $107,591.
Common Stock, LLC Financing
On June 22, 2012, we entered into a subscription
agreement with Common Stock, LLC, an accredited investor (“CS LLC”), providing for the sale by us to CS LLC of an 8%
convertible note in the principal amount of $75,000 (the “CS Note”) and providing for a second funding of $35,000 upon
the filing of a registration statement on Form S-1 in accordance with the terms and conditions of the Equity Facility by and between
us and Haverstock. Proceeds from the CS Note were received by us in July 2012. The CS Note bears interest
at the annual rate of 8% and matured on March 22, 2013. Accordingly, the note is in default.
CS LLC is permitted to convert the outstanding
principal and accrued interest on the CS Note into common stock at a conversion price per share equal to fifty percent (50%)
of the average of the three (3) lowest intraday trading prices of the common stock during the 10 trading days immediately preceding
the conversion date. CS LLC has converted $4,574 of the convertible debenture into common stock, resulting in a balance
of $70,426 at May 20, 2013.
CS LLC agreed to restrict its ability to
convert the CS Note and receive shares of our common stock such that the number of shares of common stock held by CS LLC in the
aggregate and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares
of our common stock.
Ronald W. Moeckel Financing
On August 9, 2012, we issued a promissory
note to Ronald W. Moeckel (“Moeckel”) in exchange for proceeds of $25,000. The promissory note was due on
or before November 9, 2012 by payment of $28,750, including interest of $3,750 for the three month term. The note was sold
to Magna and was amended to accrue interest at 12% per annum, to mature on May 8, 2014, and to be convertible at a conversion price
per share equal to fifty percent (50%) of the lowest daily volume weighted average price of the common stock during the three
days prior to the date of conversion.
In addition, we issued Moeckel a common
stock purchase warrant to purchase 25,000 shares of common stock (the “Moeckel Warrant”). The Moeckel Warrant
has an exercise price of $0.10 per share of common stock and will be exercisable until October 9, 2015. The Moeckel
Warrant can be exercised on a cashless basis.
Stephen K. and Nancy B. Rush Financing
On October 8, 2012, we issued a promissory
note to Stephen K. and Nancy B. Rush (the “Rushes”) in exchange for proceeds of $50,000. The promissory
note was due on or before January 7, 2013 by payment of $62,500, including interest of $12,500 for the three month term. As of
May 20, 2013, this note has not been paid and is in default. In addition, we issued the Rushes a common stock purchase
warrant to purchase 1,000 shares of common stock (the “Rush Warrant”). The Rush Warrant has an exercise
price of $0.10 per share of common stock and will be exercisable until October 8, 2015. The Rush Warrant can be exercised
on a cashless basis.
Ironridge Debt Settlement
In March 2012, we entered into an Order
resolving a lawsuit with Ironridge relating to $1,388,407 in Accounts Payable that Ironridge purchased from various creditors of
ours. The Order provided for the issuance by us of 20,300 shares of common stock as the Initial Shares to Ironridge
in settlement of the Accounts Payable. The Order also provides for an adjustment in the total number of shares which
may be issuable to Ironridge based on a Calculation Period for the transaction, defined as that number of consecutive trading days
following the Issuance Date required for aggregate trading volume of our common stock to exceed $4.2 million. Pursuant to the Order,
Ironridge will retain 100,000 shares of our common stock as a fee, plus $1,388,407 with an aggregate value equal to (a) the sum
of the Accounts Payable plus reasonable attorney fees through the end of the Calculation Period, (b) divided by 70% of the VWAP
of the common stock over the length of the Calculation Period, as reported by Bloomberg, not to exceed the arithmetic average of
the individual daily VWAPs of any five trading days during the Calculation Period. In connection with preparing the
Annual Report for the year ended December 31, 2012, we determined that the Calculation Period ended during the three months ended
December 31, 2012 and calculated that the Final Amount to be issued under the Order is 856,291 shares of common stock. As
of April 5, 2013, we had issued all of the shares that we believe were due under the Order. However, between April 9,
2013 and May 6, 2013, the Company authorized the issuance of an additional 1,206,209 shares of the Company’s common stock
to Ironridge. Management believes the requests delivered to the Company by Ironridge were in error and resulted in an
issuance of common stock in excess of the Company’s obligation under the Order. The Company has had initial discussions with
Ironridge regarding the return of the additional shares that were issued in error, but Ironridge has refused. We
and Ironridge have different interpretations regarding several provisions of the Order used to determine the number of shares issuable. At
this time, we are considering all our available legal and equitable options in this matter.
Pursuant to the Order, for every 8,400
shares of our common stock that trade during the “Calculation Period”, or if at any time during the Calculation
Period a daily VWAP is below 90% of the closing price on the day before the Issuance Date, we were to immediately issue additional
shares (each, an "Additional Issuance"). At the end of the Calculation Period, (a) if the sum of the Initial Shares and
any Additional Issuance is less than the Final Amount, we were to issue additional shares to Ironridge, up to the Final Amount,
and (b) if the sum of the Initial Shares and any Additional Issuance is greater than the Final Amount, Ironridge was to promptly
return any remaining shares to us and our transfer agent for cancellation. However, the Order provides that under no
circumstances shall we issue to Ironridge a number of shares of common stock in connection with the settlement of claims which,
when aggregated with all shares of common stock then owned or beneficially owned or controlled by Ironridge and its affiliates,
at any one time exceed 9.99% of the total number of shares of our common stock then issued and outstanding.
The total issuances of 6,764,500 have been
accounted for as 1) the issuance of 2,000 shares for fees in connection with the settlement transaction and 2) the issuance of
6,762,500 shares as part of the Final Amount and issued in settlement of the fair value of the liability to Ironridge Global IV,
Ltd. The fee shares were valued at the closing price of the Company’s common stock of $0.40 per share on March
22, 2012, or $40,000, and recorded as share-based compensation for services. The issuance of 6,762,500 shares in settlement
of the fair value of the liability to Ironridge Global IV, Ltd. has been accounted for as the reduction of a proportionate amount
of the calculated fair value of the original liability to Ironridge, or $1,395,251 through December 31, 2012 and $1,897,184 through
September 30, 2013. Accordingly, the amount of the liability to Ironridge reported in the accompanying condensed consolidated
balance sheet is $1,489,623 at December 31, 2012 and $68,028 at September 30, 2013.
JMJ Financial
On June 12, 2013, the Company issued an
unsecured convertible promissory notes to JMJ Financial (JMJ), an unaffiliated entity. The convertible promissory bear
no interest for the first 90 days, but contains a 10% original issue discount. The principal and unpaid accrued interest are
generally due approximately one year after the issuance date. In general, the notes are convertible until maturity at
a variable conversion price equal to 60% of the average of the lowest two trading prices in the 20 trading days prior to conversion.
This variable conversion price and the anti-dilution reset provision constitute an embedded derivative under generally accepted
accounting principles and are required to be valued at fair value. The fair value of these embedded conversion features
is recorded as discounts to the carrying amount of the convertible promissory notes. In the event the fair value of
the embedded conversion feature exceeds the face amount of the note, the excess is amortized immediately as interest expense. The
remaining discounts are amortized over the period from the issuance dates to the maturity dates or to the conversion dates, whichever
is earlier. The Company recognized interest expense from the amortization of the discounts in the amount of $20,328
for the nine months ended September 30, 2013. The carrying amount of these convertible promissory notes was $7,466 at
September 30, 2013, representing their unconverted face amount of $25,000 less the unamortized discount of $17,534.
Charles Volk (Related Party)
On June 4, 2013, the Company issued an
unsecured convertible promissory notes to Charles Volk, the Company’s CEO, (“Volk”). The convertible
promissory bear at 10% per annum and contains a $25,000 original issue discount. The convertible note was issued in exchange
for $100,000 of accrued compensation due to Volk. The principal and unpaid accrued interest due one year after the issuance date. The
notes are convertible at a variable conversion price equal to 50% of the current market price of the Company’s common stock.
In addition, the conversion price also included an anti-dilution provision that allows for the automatic reset of the conversion
price upon any future sale of the Company’s common stock, warrants, options, convertible debt or any other equity-linked
securities at an issuance, exercise or conversion price below the current conversion price of the convertible promissory note.
In addition to the issuance of the convertible
note, in the same transaction, the Company issued to Volk a warrant to purchase 1,250,000 shares of the Company’s common
stock at $0.05 per share. The fair value of the warrant at the date of issuance was $37,116 and is considered a discount to the
note.
Tomer Tal
On June 4, 2013, the Company issued an
unsecured convertible promissory notes to Tomer Tal (“Tal”). The convertible promissory bear at 10% per
annum and contains a $10,000 original issue discount. The convertible note was issued in exchange for $40,000 of accounts
payable due to Tal. The principal and unpaid accrued interest due one year after the issuance date. The notes are convertible
at a variable conversion price equal to 50% of the current market price of the Company’s common stock. In addition, the conversion
price also included an anti-dilution provision that allows for the automatic reset of the conversion price upon any future sale
of the Company’s common stock, warrants, options, convertible debt or any other equity-linked securities at an issuance,
exercise or conversion price below the current conversion price of the convertible promissory note.
In addition to the issuance of the convertible
note, in the same transaction, the Company issued to Tal a warrant to purchase 500,000 shares of the Company’s common stock
at $0.05 per share. The fair value of the warrant at the date of issuance was $14,846 and is considered a discount to the note.
Critical Accounting Policies
We have identified the policies outlined
below as critical to our business operations and an understanding of our results of operations. The list is
not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment
of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no
need for management's judgment in their application. The impact and any associated risks related to these policies
on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results
of Operations where such policies affect our reported and expected financial results. For a detailed discussion
on the application of these and other accounting policies, see the Notes to the December 31, 2012 Financial Statements. Note that
our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount
of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and
the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates.
Stock-based Compensation
We calculate the fair value of all share-based
payments to employees and non-employee directors, including grants of stock options and stock awards and amortize these fair values
to share-based compensation in the statement of operations over the respective vesting periods of the underlying awards. Share-based
compensation related to stock options is computed using the Black-Scholes option pricing model. We estimate the
fair value of stock option awards using assumptions about volatility, expected life of the awards, risk-free interest rate, and
dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock. The risk-free
interest rate is based on the U.S. Treasury constant maturities rate for the expected life of the related options. The expected
life of the options granted is equal to the average of the vesting period and the term of the option, as allowed for under the
simplified method prescribed by Staff Accounting Bulletin 107. The expected dividend rate takes into account the absence
of any historical payments and management’s intention to retain all earnings for future operations and expansion. We
estimate the fair value of restricted stock awards based upon the closing market price of our common stock at the date of grant.
We charge the fair value of non-restricted awards to share-based compensation upon grant.
We account for equity instruments issued
in exchange for the receipt of goods or services from other than employees and non-employee directors in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration
received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of
equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment
or completion of performance by the provider of goods or services. The fair value of the equity instrument is charged directly
to share-based compensation expense and credited to paid-in capital.
Convertible Debt and Derivative Accounting
For convertible debt that is issued with
embedded conversion features, we perform an allocation of the proceeds of the convertible note between the principal amount of
the note and the fair value of the embedded conversion feature. The fair value of the embedded conversion feature is
recorded as a discount to the principal amount of the note, but not in excess of the principal amount of the note. The
discount is amortized over the period from the issuance date to the maturity date or the date of conversion, whichever occurs earlier,
as a non-cash charge to the statement of operations. Upon the issuance of the note, an assessment is made of the embedded
conversion feature to determine whether the embedded conversion feature should be accounted for as equity or liability. In
the case of a variable conversion price or anti-dilution reset provisions, the features are accounted for as a derivative liability
and carried at fair value on the balance sheet. The fair value of the derivative liability is remeasured each reporting
period and the change in fair value to recorded in the statement of operations.
For convertible debentures and various
warrants which contain price ratchet anti-dilution protection, we have determined that the convertible debentures and warrants
are subject to derivative liability treatment and are required to be accounted for at their fair value. We estimated
the fair value of the price ratchet anti-dilution protection of the convertible debentures and the warrants using multinomial lattice
models. Accordingly, the fair value of the price ratchet anti-dilution protection of the convertible debentures and warrants as
determined using the lattice models is affected by our stock price on the date of issuance as well as assumptions regarding a number
of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over
the term of the debentures and warrants, actual and projected redemptions and conversion price resets. Expected volatility
is based primarily on the historical volatility of other comparable oil and gas companies.
Revenue Recognition
Historically, all revenues have been derived
from the sale of produced crude oil and natural gas. Revenue and related production taxes and lease operating expenses
are recorded in the month the product is delivered to the purchaser. Typically, payment for the revenue, net of related
taxes and lease operating expenses, is received from the operator of the well approximately 45 days after the month of delivery. Accounts
receivable are stated at the amount management expects to collect. Management provides for probable uncollectible amounts
through a charge to earnings and a credit to an allowance based on its assessment of the collectability of the receivable.
Income Taxes
Provisions for income taxes are based on
taxes payable or refundable and deferred taxes. Deferred taxes are provided on differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements and tax operating loss carryforwards. Deferred
tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Impairment of Long-Lived Assets
Long-lived assets, including oil and gas
properties, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group
to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If
the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the
amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is
assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The
impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also
change.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
Not required under Regulation S-K for “smaller
reporting companies.”
Item 4. Controls and Procedures
Evaluation of disclosure controls and
procedures
Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management
is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as a result of the material weaknesses described below, as of September 30, 2013, our disclosure
controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that
information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified
are:
| a) | We did not have sufficient personnel in our accounting and financial reporting functions.
As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the
financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material
misstatements of the financial statements will not be prevented or detected on a timely basis; |
| b) | We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge,
experience, and training in the application of U.S. generally accepted accounting principles (“U.S. GAAP”) commensurate
with our complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further,
there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented
or detected on a timely basis as a result; |
| c) | We lack a system to administratively review, audit or verify the reporting by Bayshore of revenues
and expenditures in connection with the oil and gas properties on which we conduct activities. Similarly, we have not obtained
units of production or similar third-party purchaser confirmation of the details of our oil and gas production. There is
a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely
basis without the ability to independently review and verify the results of our revenue and expenses related to our operations,
and |
| d) | We lack a system to review agreements that are executed and actions taken by the Company to determine
if such events trigger obligations with the Securities and Exchange Commission to disclose such events on a Current Report on Form
8-K. There have been numerous instances of events that have occurred that were required to be filed on a Form 8-K
that were either not timely reported on a Form 8-K or were reported as part of our annual report on Form 10-K or quarterly reports
on Form 10-Q. Many of these events are not determined until our outside legal and accounting personnel are involved
in the preparation and review of the annual or quarterly reports. |
The material weaknesses identified did
not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management
does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting
period.
We are committed to improving our financial
organization. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look
to increase our personnel resources and technical accounting expertise within the accounting function by the end of fiscal 2013
to resolve non-routine or complex accounting matters. In addition, when funds are available to us, which we expect to occur by
the end of fiscal 2013, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel
with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately
$75,000 per annum. We have in the past, and will continue to engage outside consultants in the future as necessary in order to
ensure proper treatment of non-routine or complex accounting matters.
Management believes that hiring additional
knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient
personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel
with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate
with our complexity and our financial accounting and reporting requirements.
Management believes that the hiring of
additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered
in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole.
Due to the fact that our accounting staff consists of a Chief Financial Officer working with other members of management, additional
personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional
personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We
believe this will greatly decrease any control and procedure issues we may encounter in the future.
We will continue to monitor and evaluate
the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis
and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds
allow.
Changes in internal controls over financial
reporting
There were no changes in our internal control
over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved
in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that may harm our business. Except as disclosed below,
we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate,
a material adverse effect on our business, financial condition or operating results.
Montecito Offshore Litigation
On or about December 5, 2011, Montecito
Offshore, LLC filed a lawsuit in the Civil District Court for the Parish of Orleans of the State of Louisiana against the Company
by filing a Petition to Rescind Sale. The case is Montecito Offshore, LLC v. Paxton Energy, Inc. and Paxacq, Inc., Case
No. 2011-12640 . In this action, the plaintiff seeks to rescind the asset sale transaction, whereby Montecito sold
us interests in certain oil and gas leases in exchange for a $500,000 promissory note and 1,500,000 shares of the Company’s
common stock. The Company has filed a motion to dismiss the case on the grounds that plaintiff’s petition states
no cause of action for contractual rescission of the asset sale transaction.
The Company has entered into settlement
discussions and has reached a preliminary settlement, but final document remain to be signed as of the date of this Report.
Black Cat Settlement Agreement
On January 25, 2013, the Company entered
into a Settlement Agreement with Mr. Anthony Mason and Black Cat. Pursuant to the terms of the Settlement Agreement, the Company
agreed to pay Black Cat and/or Mr. Mason $125,000 in 10 equal payments, with the first payment due March 11, 2013 and the remaining
payments every 30 days thereafter until paid in full. The Company has paid $10,000 to Mr. Mason resulting in a remaining liability
of $115,000 at September 30, 2013. In the event that the Company obtains a credit facility in an amount equal to or
greater than $3,500,000, the full amount of the settlement payment then outstanding will become immediately due and payable. In
addition, the Company agreed to transfer to Black Cat all title and interest the Company owned in the I-1 well, Mustang Island
818-L lease and other assets acquired from Black Cat pursuant to the Black Cat Agreement. Furthermore, all production from the
I-1 well, from the date the well went online was transferred to Black Cat in connection with the Settlement Agreement. In
return, Black Cat agreed to return to the Company for cancellation the 4,500,000 shares of the Company ’ s common stock it
received in connection with the Black Cat Agreement and to release the Company from all of its claims, which included the balance
of the promissory note and accrued interest, unpaid compensation and other miscellaneous amounts . Further, in connection with
the Settlement Agreement, Mr. Mason agreed to resign as President, Chief Executive Officer and a Director of the Company.
Ironridge Global IV, Ltd. v. Worthington
Energy, Inc.,
In March 2012, Ironridge Global IV, Ltd.
(“Ironridge”) filed a complaint against the Company for the payment of $1,388,407 in outstanding accounts payable,
accrued compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Ironridge had purchased
from various creditors of the Company. The lawsuit was filed in the Superior Court of the State of California for the
County of Los Angeles Central District, and the case was Ironridge Global IV, Ltd. v. Worthington Energy, Inc., Case No. BC
480184 . On March 22, 2012, the court approved an Order for Approval of Stipulation for Settlement of Claims (the
"Order").
The Order provided for the immediate issuance
by the Company of 20,300 shares of common stock (the “Initial Shares”) to Ironridge towards settlement of the Claim
Amount. The Order also provided for an adjustment in the total number of shares which may be issuable to Ironridge based
on a calculation period for the transaction, defined as that number of consecutive trading days following the date on which the
Initial Shares were issued (the "Issuance Date") required for the aggregate trading volume of the common stock, as reported
by Bloomberg LP, to exceed $4.2 million (the "Calculation Period"). Pursuant to the Order, Ironridge would retain 2,000
shares of the Company's common stock as a fee, plus that number of shares (the "Final Amount") with an aggregate value
equal to (a) the $1,358,135 plus reasonable attorney fees through the end of the Calculation Period, (b) divided by 70% of the
following: the volume weighted average price ("VWAP") of the Common Stock over the length of the Calculation Period,
as reported by Bloomberg, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the
Calculation Period. The Company has calculated that the Calculation Period ended during the year ended December 31,
2012 and calculated that the Final Amount to be issued under the Order is 856,291 shares of common stock. Additionally,
during the year ended December 31, 2012 when the Final Amount was determined, the Company calculated the fair value of the original
liability to Ironridge Global IV, Ltd to be $1,981,312, that amount which when discounted to 70% of the VWAP and multiplied by
the Final Amount, would equal $1,358,135 plus reasonable attorney fees. In so doing, the Company recognized an expense
for the excess of the fair value of the resultant liability to Ironridge Global IV, Ltd. in excess of the original carrying amount
of the liabilities acquired by Ironridge and adjusted the liability to Ironridge Global IV, Ltd. for the fair value adjustment.
Pursuant to the Order, for every 8,400
shares of the Company's common stock that traded during the Calculation Period, or if at any time during the Calculation Period
a daily VWAP is below 90% of the closing price on the day before the Issuance Date, the Company was to immediately issue additional
shares (each, an "Additional Issuance"), subject to the limitation in the paragraph below. Since the issuance of the
Initial Shares, the Company has issued an additional 194,200 shares of common stock during the nine months ended December 31, 2012
plus an additional 510,000 shares of common stock during the nine months ended September 30, 2013. At the end of the
Calculation Period, (a) if the sum of the Initial Shares and any Additional Issuance is less than the Final Amount, the Company
shall immediately issue additional shares to Ironridge, up to the Final Amount, and (b) if the sum of the Initial Shares and any
Additional Issuance is greater than the Final Amount, Ironridge shall promptly return any remaining shares to the Company and its
transfer agent for cancellation. However, the Order also provides that under no circumstances shall the Company issue
to Ironridge a number of shares of common stock in connection with the settlement of claims which, when aggregated with all shares
of common stock then owned or beneficially owned or controlled by Ironridge and its affiliates, at any one time exceed 9.99% of
the total number of shares of common stock of the Company then issued and outstanding.
The total issuances of 6,764,500 have been
accounted for as 1) the issuance of 2,000 shares for fees in connection with the settlement transaction and 2) the issuance of
6,762,500 shares as part of the Final Amount and issued in settlement of the fair value of the liability to Ironridge Global IV,
Ltd. The fee shares were valued at the closing price of the Company’s common stock of $0.40 per share on March
22, 2012, or $40,000, and recorded as share-based compensation for services. The issuance of 6,762,500 shares in settlement
of the fair value of the liability to Ironridge Global IV, Ltd. has been accounted for as the reduction of a proportionate amount
of the calculated fair value of the original liability to Ironridge, or $1,395,251 through December 31, 2012 and $1,897,184 through
September 30, 2013. Accordingly, the amount of the liability to Ironridge reported in the accompanying condensed consolidated
balance sheet is $1,489,623 at December 31, 2012 and $68,028 at September 30, 2013.
Item 1A. Risk Factors
Not required under Regulation S-K for “smaller
reporting companies.”
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Stock Issuances
During the three months ended September
30, 2013, the Company issued 2,170,000 shares to Asher Enterprises for the conversion of $6,450 of debentures.
During the three months ended September
30, 2013, the Company issued 700,000 shares to Brio Capital LP for the conversion of $3,500 of debentures.
During the three months ended September
30, 2013, the Company issued 8,404,371 shares to GEL Properties LLC for the conversion of $29,846 of debentures and $2,572 of accrued
interest.
During the three months ended September
30, 2013, the Company issued 8,408,177shares to Hanover Holdings LLC for the conversion of $18,500 of debentures.
During the three months ended September
30, 2013, the Company issued 2,400,000 shares to Haverstock Manager LLC for the conversion of $6,000 of debentures.
During the three months ended September
30, 2013, the Company issued 2,642,857 shares to Prolific Group LLC for the conversion of $11,000 of debentures.
During the three months ended September
30, 2013, the Company issued 2,300,000 shares of common stock to Ironridge Global IV, Ltd. pursuant to an Order for Approval of
Stipulation for Settlement. The securities were issued in a transaction pursuant to Regulation D under the Securities
Act of 1933, as amended.
The above issuances
of shares are exempt from registration, pursuant to Section 4(2) of the Securities Act. These securities qualified for exemption
under Section 4(2) of the Securities Act since the issuance securities by us did not involve a public offering. The offering was
not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal,
size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold
a high number of securities to a high number of investors. In addition, these stockholders had the necessary investment intent
as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities
are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately
redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors,
we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
Item 3. Defaults
Upon Senior Securities
In May 2011, we completed a financing which
generated aggregate gross cash proceeds of $2,550,000 through the sale of the convertible secured debentures and common stock purchase
warrants. Pursuant to the security agreement, between ourselves and the investors, we granted the investors a first
priority lien on all assets acquired from Montecito pursuant to the Montecito Agreement. The convertible debentures
matured in May 2012 and bear interest at 9% per annum and are convertible at the holder’s option at any time into common
stock at a conversion price of $1.50 per share. The convertible debentures will automatically be redeemed with a 30% premium upon
a Change of Control or Listing Event (each as defined in the Note). Interest on the convertible debentures is payable quarterly
in arrears in cash. The convertible debentures contain price ratchet anti-dilution protection. In addition the conversion price
shall be adjusted if the conversion price of securities in a subsequent offering by us is adjusted pursuant to a make good provision.
The shares of common stock issuable upon conversion of the convertible debentures are entitled to piggyback registration rights.
Debentures totaling $70,424 have been converted into common stock. As of January __, 2014, all of the debentures have matured. We
are in default under the convertible debentures because we have not (i) repaid the debentures in the aggregate principal face amount
of $2,479,576 or (ii) made the interest payments that were due starting on July 1, 2011 and continuing through the maturity dates. As
of September 30, 2013, the total interest that is due is $1,010,271 with interest continuing to accrue at the default interest
rate of 18% per annum. Furthermore, as a result of the conversions of notes payable between February and May 2012, the
conversion price of the debentures has been reset to $0.00038 per share, which would result in the issuance of approximately 6.5
billion shares of common stock upon conversion of the principal amount, not including accrued interest.
On May 6, 2011, in connection with our
acquisition of certain assets from Montecito, we issued Montecito a subordinated promissory note in the amount of $500,000. The
subordinated promissory note is subordinated to the secured convertible notes we issued in the private placement that closed on
May 5, 2011. The Montecito Note was due in August 2011 and accrued interest at the rate of 9% per annum until maturity
and accrues interest at the highest legal rate allowed since maturity since the Montecito Note is in default for failure to pay
principal and interest when due.
Commencing in November 2011 and continuing
through April 2012, the Company issued thirteen additional unsecured convertible promissory notes to various unaffiliated entities
or individuals. Aggregate proceeds from these convertible promissory notes totaled $307,000. In connection
with twelve of these notes totaling $287,000, the Company also issued warrants to purchase 287,000 shares of common stock. The
warrants are exercisable at $1.50 per share and expire on December 31, 2016. The convertible promissory notes bear
interest at 8% per annum. The principal and unpaid accrued interest were due on dates ranging from August 1, 2012 to
October 26, 2012. These notes are currently in default.
On April 19, 2012, we issued a secured
promissory note in the principal face amount of $100,000 in exchange for $100,000 from WH LLC. We agreed to repay $125,000
on June 18, 2012, plus interest at the rate of 11% per annum. On February 28, 2013, WH LLC sold $50,000 of this note
to Prolific and $37,500 of the secured promissory note to GEL, and on May 8, 2013 WH LLC sold $25,000 of this note to Magna, leaving
a balance of $12,500 which is in default.
At various dates commencing in August 2011
and continuing through September 30, 2013, the Company received proceeds pursuant to seven unsecured convertible promissory notes
to GEL Properties, LLC (GEL), an unaffiliated entity. Additionally, in August 2012, GEL purchased the rights to $75,000
of principal of a secured bridge loan note held by a noteholder of the Company and in February 2013, GEL purchased the rights to
$37,500 of principal of a secured note held by What Happened LLC. These acquired rights were restated to be consistent
with other notes held by GEL. The convertible promissory notes bear interest at 6% per annum. The principal
and unpaid accrued interest are generally due approximately one year after the issuance date. Certain of these notes are currently
in default.
Upon execution of an equity facility with
Haverstock Master Fund, LTD (Haverstock) in June 2012, the Company issued Haverstock a convertible note in the principal amount
of $295,000 for payment of an implementation fee of $250,000, legal fees of $35,000, and due diligence fees of $10,000. In July
2012, the Company received proceeds of $75,000 from Common Stock, LLC pursuant to a convertible note. These convertible
notes matured on March 22, 2013 and are in default.
On July 31, 2012, the Company received
proceeds of $100,000 pursuant to an unsecured promissory note and issued a warrant to purchase 2,000 shares of common stock of
the Company to two individuals. The promissory note requires the repayment of $115,000 of principal (including interest
of $15,000) by October 31, 2012. The warrant has an exercise price of $5.00 per share and expires on July 31, 2015. Proceeds
from the note were paid on the Bridge Loan Note that is discussed in further detail in Note 6 to these condensed consolidated financial
statements. As of September 30, 2013, this note is in default.
On August 9, 2012, the Company received
proceeds of $25,000 pursuant to an unsecured promissory note and issued a warrant to purchase 500 shares of common stock of the
Company to an individual. The promissory note requires the repayment of $28,750 of principal (including interest of
$3,750) by November 9, 2012. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable
until October 9, 2015. As of September 30, 2013, this note is in default.
On October 8, 2012, the Company received
proceeds of $50,000 pursuant to an unsecured promissory note and issued a warrant to purchase 1,000 shares of common stock of the
Company to two individuals. The promissory note requires the repayment of $62,500 of principal (including interest of
$12,500) by January 7, 2013. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable
until October 8, 2015. As of September 30, 2013, this note is in default.
In September 2012 and February 2013, the
Company received proceeds pursuant to two unsecured convertible promissory notes to Prolific, an unaffiliated entity.
Additionally, 1) in July 2012 Prolific acquired the rights to three unsecured convertible promissory notes from one of the Company’s
noteholders, 2) in September 2012 Prolific purchased the rights to $40,000 of principal of a secured bridge loan note held by another
noteholder of the Company, and 3) in February 2013 Prolific purchased the rights to $50,000 of principal of a secured note held
What Happened LLC. These acquired rights were restated such that all notes held by Prolific bear interest at 6% per
annum and the principal and unpaid accrued interest are generally due approximately one year after the issuance date. Certain
of these notes are currently in default.
In December 2012, Magna Group, LLC (Magna)
purchased the rights to $40,000 of principal of a secured bridge loan note held by a noteholder of the Company and these acquired
rights were restated such that the note held by Magna bears interest at 12% per annum and the principal and unpaid accrued interest
are due one year after the issuance date. This note is currently in default.
In November and December 2012, the Company
received proceeds pursuant to two unsecured convertible promissory notes to Hanover Holdings I, LLC (Hanover), an unaffiliated
entity. Proceeds from the convertible promissory note were $25,500. The convertible promissory notes bear
interest at 12% per annum. The principal and unpaid accrued interest are due one year after the issuance date. This
note is currently in default.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit
Number |
Exhibit Title |
| |
|
| 3.1(i) (1) |
Certificate of Designations of Series A Preferred Stock dated April 17, 2013 |
| |
|
| 3.1(ii) (1) |
Certificate of Amendment of Articles of Incorporation dated April 18, 2013 |
| |
|
| 3.1(iii) (1) |
Certificate of Amendment of Articles of Incorporation dated May 8, 2013 |
| |
|
| 10.1 (1) |
Series A Preferred Stock Purchase Agreement dated April 17, 2013 between Charles Volk and the Company |
| |
|
| 31.1 |
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002 |
| |
|
| 32.1 |
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002 |
| |
|
| 101. INS |
XBRL Instance Document |
| |
|
| 101.SCH |
XBRL Taxonomy Schema |
| |
|
| 101.CAL |
XBRL Taxonomy Calculation Linkbase |
| |
|
| 101.DEF |
XBRL Taxonomy Definition Linkbase |
| |
|
| 101.LAB |
XBRL Taxonomy Label Linkbase |
| |
|
| 101.PRE |
XBRL Taxonomy Presentation Linkbase |
In accordance with SEC Release 33-8238,
Exhibit 32.1 is being furnished and not filed.
(1) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 30, 2013.
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.
WORTHINGTON ENERGY, INC.
| Date: January 24, 2014 |
| |
| By: |
/s/ CHARLES VOLK |
|
| Charles Volk |
| Chief Executive Officer (Duly Authorized, Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |