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 June 30,
2014
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 o
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 o
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 o
Accelerated filer o
Non-accelerated filer o
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 o No x
As of March 3, 2015, issuer had 2,868,077,366
outstanding shares of common stock, par value $0.001.
TABLE OF CONTENTS
|
Page |
PART I – FINANCIAL INFORMATION |
|
|
|
Item 1. Financial Statements |
4 |
|
|
Condensed Consolidated Balance Sheets (Unaudited) |
4 |
|
|
Condensed Consolidated Statements of Operations (Unaudited) |
5 |
|
|
Condensed Consolidated Statements of Stockholders’ Deficiency (Unaudited) |
6 |
|
|
Condensed Consolidated Statements of Cash Flows (Unaudited) |
7 |
|
|
Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 |
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
26 |
|
|
Item 4. Controls and Procedures |
26 |
|
|
PART II – OTHER INFORMATION |
|
|
|
Item 1. Legal Proceedings |
27 |
|
|
Item 1A. Risk Factors |
28 |
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
29 |
|
|
Item 3. Defaults Upon Senior Securities |
30 |
|
|
Item 4. Mine Safety Disclosures |
31 |
|
|
Item 5. Other Information |
31 |
|
|
Item 6. Exhibits |
31 |
|
|
Signatures |
32 |
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.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
ASSETS |
|
(unaudited) |
| |
| | |
| |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 265 | | |
$ | 166 | |
Total Current Assets | |
| 265 | | |
| 166 | |
| |
| | | |
| | |
Oil and gas properties, held for recession | |
| – | | |
| 5,698,563 | |
Oil and gas properties | |
| 762,941 | | |
| – | |
Property and equipment, net of accumulated depreciation | |
| 7,562 | | |
| 10,123 | |
Other assets | |
| 14,610 | | |
| 14,610 | |
| |
| | | |
| | |
Total Assets | |
$ | 785,378 | | |
$ | 5,723,462 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 620,892 | | |
$ | 863,702 | |
Accrued interest | |
| 122,756 | | |
| 1,340,122 | |
Accrued liabilities | |
| 351,708 | | |
| 442,863 | |
Payable to Tarpon Bay Partners, LLC | |
| 1,078,578 | | |
| – | |
Payable to Ironridge Global IV, Ltd. | |
| 140,876 | | |
| 241,046 | |
Payable to former officer | |
| 15,000 | | |
| 115,000 | |
Unsecured convertible promissory notes payable, net of discount, in default | |
| 996,520 | | |
| 929,964 | |
Secured notes payable, net of discount | |
| 533,040 | | |
| 620,512 | |
Convertible debentures in default | |
| – | | |
| 2,453,032 | |
Derivative liabilities | |
| 2,287,831 | | |
| 7,908,415 | |
Total Current Liabilities | |
| 6,147,201 | | |
| 14,914,656 | |
| |
| | | |
| | |
Long-Term Liabilities | |
| | | |
| | |
Long-term asset retirement obligation | |
| 190,705 | | |
| 37,288 | |
| |
| | | |
| | |
Total Liabilities | |
| 6,337,906 | | |
| 14,951,944 | |
| |
| | | |
| | |
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 shares issued and outstanding | |
| 1,000 | | |
| 1,000 | |
Common stock, $0.001 par value; 6,490,000,000 shares authorized, 2,530,877,041 and 47,476,293 shares issued and outstanding, respectively | |
| 2,530,876 | | |
| 47,476 | |
Additional paid-in capital | |
| 24,585,517 | | |
| 26,435,670 | |
Accumulated deficit | |
| (32,669,921 | ) | |
| (35,712,628 | ) |
Total Stockholders' Deficiency | |
| (5,552,528 | ) | |
| (9,228,482 | ) |
| |
| | | |
| | |
Total Liabilities and Stockholders' Deficiency | |
$ | 785,378 | | |
$ | 5,723,462 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
For the Three Months Ended
June 30, | | |
For the Six Months Ended
June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | | |
| | | |
| | | |
| | |
Oil and gas revenues, net | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Costs and Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Impairment loss on oil and gas properties | |
| – | | |
| – | | |
| – | | |
| 11,623 | |
General and administrative expense | |
| 716,153 | | |
| 448,637 | | |
| 1,039,720 | | |
| 890,492 | |
Total costs and operating expenses | |
| 716,153 | | |
| 448,637 | | |
| 1,039,720 | | |
| 902,115 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (716,153 | ) | |
| (448,637 | ) | |
| (1,039,720 | ) | |
| (902,115 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Change in fair value of derivative liabilities | |
| 413,924 | | |
| 1,238,545 | | |
| 1,117,306 | | |
| 1,402,514 | |
Gain on recession of oil and gas properties | |
| 3,915,707 | | |
| – | | |
| 3,915,707 | | |
| – | |
Interest expense | |
| (27,411 | ) | |
| (143,246 | ) | |
| (173,318 | ) | |
| (308,233 | ) |
Financing costs and penalty interest | |
| (199,460 | ) | |
| (271,945 | ) | |
| (484,931 | ) | |
| (597,758 | ) |
Amortization of debt discount | |
| (165,543 | ) | |
| (179,025 | ) | |
| (292,337 | ) | |
| (530,829 | ) |
Amortization of deferred financing costs | |
| – | | |
| (370,000 | ) | |
| – | | |
| (370,000 | ) |
Total other income (expense) | |
| 3,937,217 | | |
| 274,329 | | |
| 4,082,427 | | |
| (404,306 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | 3,221,064 | | |
$ | (174,308 | ) | |
$ | 3,042,707 | | |
$ | (1,306,421 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Earnings (loss) Common Share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.00 | | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.24 | ) |
Diluted | |
$ | 0.00 | | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.24 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and Diluted Weighted-Average Common Shares Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 1,271,345,644 | | |
| 8,393,391 | | |
| 679,844,247 | | |
| 5,409,600 | |
Diluted | |
| 32,636,478,657 | | |
| 8,393,391 | | |
| 32,044,977,260 | | |
| 5,409,600 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
| |
| | |
| | |
| | |
Additional | | |
| | |
Total | |
| |
Series A Preferred Stock | | |
Common Stock | | |
Paid in | | |
Accumulated | | |
Stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Deficit) | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance - January 1, 2014 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 47,476,293 | | |
$ | 47,476 | | |
$ | 26,435,670 | | |
$ | (35,712,628 | ) | |
$ | (9,228,482 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock upon conversion of notes payable and accrued interest | |
| | | |
| | | |
| 1,697,923,758 | | |
| 1,697,923 | | |
| (1,349,863 | ) | |
| | | |
| 348,060 | |
Issuance of common stock to Ironridge Global IV, Ltd. in settlement of liabilities | |
| | | |
| | | |
| 391,000,000 | | |
| 391,000 | | |
| (290,830 | ) | |
| | | |
| 100,170 | |
Issuance of common stock to Tarpon Bay Partners, LLC in settlement of liabilities | |
| | | |
| | | |
| 310,026,000 | | |
| 310,026 | | |
| (261,109 | ) | |
| | | |
| 48,917 | |
Issuance of common stock for acquisition of oil and gas properties | |
| | | |
| | | |
| 70,000,000 | | |
| 70,000 | | |
| 56,000 | | |
| | | |
| 126,000 | |
Issuance of common stock to La Jolla Cove Investors, Inc. upon conversion of convertible debentures | |
| | | |
| | | |
| 13,444,444 | | |
| 13,444 | | |
| (12,544 | ) | |
| | | |
| 900 | |
Issuance of common stock to La Jolla Cove Investors, Inc. under an equity investment agreement | |
| | | |
| | | |
| 6,546 | | |
| 7 | | |
| 8,993 | | |
| | | |
| 9,000 | |
Issuance of common stock to Caro Capital, Inc. under an equity investment agreement | |
| | | |
| | | |
| 1,000,000 | | |
| 1,000 | | |
| (800 | ) | |
| | | |
| 200 | |
Net Income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 3,042,707 | | |
| 3,042,707 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - June 30, 2014 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 2,530,877,041 | | |
$ | 2,530,876 | | |
$ | 24,585,517 | | |
$ | (32,669,921 | ) | |
$ | (5,552,528 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
WORTHINGTON ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
For the Six Months Ended
June 30, | |
| |
2014 | | |
2013 | |
Cash Flows From Operating Activities | |
| | | |
| | |
Net income (loss) | |
$ | 3,042,707 | | |
$ | (1,306,421 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
Impairment loss on oil and gas properties | |
| – | | |
| 11,623 | |
Share-based compensation for services | |
| – | | |
| 84,214 | |
Financing costs and penalty interest | |
| 484,931 | | |
| 597,758 | |
Amortization of debt discount | |
| 292,337 | | |
| 530,829 | |
Amortization of deferred financing costs | |
| – | | |
| 370,000 | |
Gain on recession of oil and gas properties | |
| (3,915,707 | ) | |
| – | |
Accretion of asset retirement obligation | |
| 3,764 | | |
| – | |
Depreciation expense | |
| 2,561 | | |
| 2,548 | |
Change in fair value of derivative liabilities | |
| (1,117,306 | ) | |
| (1,402,514 | ) |
Change in assets and liabilities: | |
| | | |
| | |
Prepaid expense and other current assets | |
| – | | |
| 36,308 | |
Other assets | |
| – | | |
| 100,000 | |
Accounts payable and accrued liabilities | |
| 864,848 | | |
| 572,043 | |
Net Cash Used In Operating Activities | |
| (341,865 | ) | |
| (403,612 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities | |
| | | |
| | |
Purchase of property and equipment | |
| – | | |
| (866 | ) |
Net Cash Used in Investing Activities | |
| – | | |
| (866 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities | |
| | | |
| | |
Proceeds from the issuance of common stock and warrants, net of registration and offering costs | |
| 9,200 | | |
| 144,000 | |
Proceeds from issuance of convertible notes and other debt, less amount held in attorney's trust accounts | |
| 332,764 | | |
| 260,500 | |
Payment on principal on notes payable | |
| – | | |
| (3,750 | ) |
Net Cash Provided By Financing Activities | |
| 341,964 | | |
| 400,750 | |
| |
| | | |
| | |
Net Increase (Decrease) In Cash and Cash Equivalents | |
| 99 | | |
| (3,728 | ) |
Cash and Cash Equivalents At Beginning Of Period | |
| 166 | | |
| 8,065 | |
Cash and Cash Equivalents At End Of Period | |
$ | 265 | | |
$ | 4,337 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |
| | | |
| | |
Cash paid during the period for interest | |
$ | – | | |
| 13,650 | |
Cash paid during the period for taxes | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
NON CASH INVESTING AND FINANCING ACTIVITIES | |
| | | |
| | |
Derivative liabilities recorded as valuation discounts | |
$ | 372,764 | | |
$ | 1,078,258 | |
Common stock issued for conversion of notes and accrued interest | |
$ | 348,960 | | |
$ | 1,645,725 | |
Common stock issued for Ironridge Global IV Ltd settlement | |
$ | 100,170 | | |
$ | 1,405,495 | |
Common stock issued for Tarpon Bay Partners LLC settlement | |
$ | 48,917 | | |
$ | – | |
Acquisition of oil and gas properties with common stock and secured notes | |
$ | 762,941 | | |
$ | – | |
Common and preferred stock issued for executive compensation | |
$ | – | | |
$ | 25,000 | |
Cancelation of common stock in connection with Black Cat Exploration & Production, LLC settlement | |
$ | – | | |
$ | 54,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements. |
WORTHINGTON ENERGY, INC.
Notes to Condensed Consolidated Financial
Statements (unaudited)
Three and Six months Ended June 30, 2014
and 2013
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. On January 27, 2012, Paxton
Energy, Inc. changed its name to Worthington Energy, Inc. (the “Company”). On October 2, 2013 the Company
effected a 1-for-50 reverse common stock split. All references in these 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.
Nature of Operations –
As further described in Note 2 to these consolidated financial statements, the Company commenced acquiring working interests in
oil and gas properties in June 2005. We are in the business of acquiring, exploring and developing oil and gas-related assets.
The Company was considered to be in the exploration stage through March 31, 2014. In June 2014, as discussed in Note, 2, the Financial
Accounting Standards Board (FASB) issued new guidance that removed incremental financial reporting requirements from generally
accepted accounting principles in the United States for development and exploration stage entities. The Company early adopted this
new guidance effective June 30, 2014, as a result of which all inception-to-date financial information and disclosures have been
omitted from this report.
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. 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 June 30, 2014, and its consolidated results of operations and cash flows for the three and six months ended June 30, 2014
and 2013. The results of operations for the six months ended June 30, 2014, may not be indicative of the results that may
be expected for the year ending December 31, 2014. 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, 2013, included in its annual report on Form 10-K filed with the SEC on April 16, 2014.
Going Concern –
The accompanying 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. At June 30, 2014, the
Company has a working capital deficit of $6,146,936 and a stockholders’ deficiency of $5,552,528 and a significant portion
of the Company’s debt is in default. The Company also used cash of $341,865 in its operating activities during the
six months ended June 30, 2014 and $228,024 during the year ended December 31, 2013. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going concern. The Company’s independent registered
public accounting firm, in its report on the Company’s December 31, 2013 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. There can be no assurance that such funds, if available, can be
obtained, or if obtained, on terms reasonable to the Company. The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome
of this uncertainty.
Principles of Consolidation
– The accompanying consolidated financial statements present the financial position, results of operations, and cash flows
of Worthington Energy, Inc. and of PaxAcq Inc., a wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates –
In preparing these 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 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 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.
Oil and Gas Properties –
The Company follows the full cost method of accounting for oil and gas properties. Under this method, all costs
associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs
and related asset retirement costs, are capitalized. Costs capitalized include acquisition costs, geological and geophysical
expenditures, lease rentals on undeveloped properties, and costs of drilling and equipping productive and nonproductive
wells. Drilling costs include directly related overhead costs. Capitalized costs are categorized either as being subject
to amortization or not subject to amortization.
All capitalized costs of oil and gas
properties, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production
method using estimates of proved reserves. At June 30, 2014 and December 31, 2013, there were no capitalized costs subject to
amortization. Investments in unproved properties and major development projects are not amortized until proved reserves
associated with the projects can be determined. If the results of an assessment indicate that the properties are
impaired, the amount of the impairment is charged to operations. The Company has not yet obtained a reserve report on
its producing properties in Kansas because the properties are considered to be in the exploration stage.
In addition, properties subject to amortization
will be subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present
value,” based on the projected future net revenues from proved reserves, discounted at 10% per annum to present value of
future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market
value of unproved properties.
Sales of proved and unproved properties
are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly
alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized
in the results of operations. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss
recognized.
Asset
Retirement Obligation – The Company accounts for its future asset retirement obligations (“ARO”) by
recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property
associated with the capitalization of an ARO is included in oil and gas properties in the balance sheets. The ARO consists of
costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas
properties. The asset retirement liability is accreted to operating expense over the useful life of the related asset. As of
June 30, 2014 and December 31, 2013, the Company had an ARO of $190,705 and $37,288, respectively.
Revenue Recognition –
All revenues are 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. Normally, 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.
Stock-Based Compensation
– The Company recognizes compensation expense for stock-based awards to employees expected to vest on a straight-line basis
over the requisite service period of the award based on their grant date fair value. The Company estimates the fair value
of stock options using a Black-Scholes option pricing model which requires management to make estimates for certain assumptions
regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.
The Company accounts for equity
instruments issued in exchange for the receipt of goods or services from other than employees and non-employee directors in
accordance with Accounting Standards Codification (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 for
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.
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. As of June 30, 2014 and 2013 there were
options, warrants, and stock awards to acquire 2,493,270 and 2,029,594 shares of common stock outstanding and promissory
notes and debentures convertible into an aggregate of 31,365,133,013 and 545,676,610 shares of common stock outstanding. The
table below shows the calculation of basic and diluted earnings (loss) per shares:
| |
Three Months Ended June 30, | | |
Nine Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Basic: | |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| 1,271,345,644 | | |
| 8,393,391 | | |
| 679,844,247 | | |
| 5,409,600 | |
Net income (loss) | |
$ | 3,221,064 | | |
$ | (174,308 | ) | |
$ | 3,042,707 | | |
$ | (1,306,421 | ) |
Earnings (loss) per common share, basic | |
$ | 0.00 | | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.24 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| 1,271,345,644 | | |
| 8,393,391 | | |
| 679,844,247 | | |
| 5,409,600 | |
Dilutive effect of conversion of convertible debt | |
| 31,365,133,013 | | |
| – | | |
| 31,365,133,013 | | |
| – | |
Assumed average common shares outstanding | |
| 32,636,478,657 | | |
| 8,393,391 | | |
| 32,044,977,260 | | |
| 5,409,600 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | 3,221,064 | | |
$ | (174,308 | ) | |
$ | 3,042,707 | | |
$ | (1,306,421 | ) |
Deduct Change in fair value of derivative | |
| (413,924 | ) | |
| – | | |
| (1,117,306 | ) | |
| – | |
Add interest and financing costs on convertible debentures | |
| 226,871 | | |
| – | | |
| 658,249 | | |
| – | |
Add amortization of discounts on convertible debentures | |
| 165,543 | | |
| – | | |
| 292,337 | | |
| – | |
Net income (loss) for diluted earnings (loss) per common shares | |
$ | 3,199,554 | | |
$ | (174,308 | ) | |
$ | 2,875,987 | | |
$ | (1,306,421 | ) |
Earnings (loss) per common share, diluted | |
$ | 0.00 | | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.24 | ) |
Fair Values of Financial Instruments
– The carrying amounts reported in the consolidated balance sheets for cash, accounts payable, accrued liabilities, 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 a probability weighted average
Black Scholes-Merton pricing model.
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 June 30, 2014 are summarized as follows:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Derivative liability - conversion feature of debentures and related warrants | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Derivative liability - embedded conversion feature and reset provisions of notes | |
$ | – | | |
$ | 2,287,831 | | |
$ | – | | |
$ | 2,287,831 | |
Liabilities measured at fair value on a
recurring basis at December 31, 2013 are summarized as follows:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Derivative liability - conversion feature of debentures and related warrants | |
$ | – | | |
$ | 5,467,223 | | |
$ | – | | |
$ | 5,467,223 | |
| |
| | | |
| | | |
| | | |
| | |
Derivative liability - embedded conversion feature and reset provisions of notes | |
$ | – | | |
$ | 2,441,192 | | |
$ | – | | |
$ | 2,441,192 | |
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. 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 Accounting Pronouncements
In April 2014, the FASB issued Accounting
Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment
(Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures
about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have
a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting
guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting
ASU 2014-08 on the Company's results of operations or financial condition.
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09
will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle
based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value
of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature,
amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes
in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting
periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the
adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.
In June 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update No. 2014-10 (ASU 2014-10), Development Stage Entities (Topic 915):
Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic
810, Consolidation. ASU 2014-10 eliminates the requirement to present inception-to-date information about income statement
line items, cash flows, and equity transactions, and clarifies how entities should disclosure the risks and uncertainties related
to their activities. ASU 2014-10 also eliminates an exception provided to development stage entities in Consolidations (ASC Topic
810) for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at
risk. The presentation and disclosure requirements in Topic 915 will no longer be required for interim and annual reporting periods
beginning after December 15, 2014, and the revised consolidation standards will take effect in annual periods beginning after December
15, 2015. Early adoption is permitted. The Company adopted the provisions of ASU 2014-10 effective for its financial statements
for the interim period ended June 30, 2014, and will no longer present the inception-to-date information formally required.
In August 2014, the FASB issued Accounting
Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements.
The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going
concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions
or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all
entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption
permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statement
presentation and disclosures.
In November 2014, the FASB issued Accounting
Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in
the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S.
GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The
amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being
evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of,
or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.
In January 2015, the FASB issued Accounting
Standards Update (ASU) No. 2015-01 (Subtopic 225-20) - Income Statement - Extraordinary and Unusual Items. ASU 2015-01 eliminates
the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items
from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after
income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item.
However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur
infrequently. ASU 2015-01 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected
to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.
In February, 2015, the FASB issued Accounting
Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides
guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate
certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized
debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods
beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s
consolidated financial statements. Early adoption is permitted
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.
Note 2 – Oil and Gas Properties,
Held for Recession
On May 6, 2011, the Company acquired a
70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases from Montecito Offshore,
L.L.C. (Montecito) located in the Vermillion 179 tract in the Gulf of Mexico offshore from Louisiana, 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 was capitalized
in the amount of $5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000 for 30,000 shares of the Company’s
common stock based on a closing price of $122.50 per share on the closing date, and $23,563 in acquisition costs. In conjunction
with the acquisition, the Company issued $2,550,000 of convertible debentures secured by the leases (see Note 7). In December 2011,
Montecito filed a lawsuit to rescind the asset sale transaction. No drilling or production activities was ever commenced in the
Vermillion 179 tract by the Company.
On May 27, 2014, the parties entered into
a Joint Motion to Dismiss to close the case whereby the sale was rescinded, the leasehold interests were returned to Montecito,
and the Company’s secured note payable of $500,000 to Montecito (see Note 6) and convertible debentures of $2,453,032 (see
Note 7) were extinguished. The Company accounted for the transaction as an exchange of the oil and gas asset for the debt and an
extinguishment of a debt related derivative liability (see Note 8). The Company recorded a gain on the recession of $3,915,707
by removing the following balances of assets and liabilities from its books as of May 27, 2014:
Assets | |
| | |
Oil and gas properties | |
$ | 5,698,563 | |
Total assets rescinded | |
| 5,698,563 | |
| |
| | |
Liabilities | |
| | |
Accrued interest | |
| 1,364,181 | |
Secured note payable | |
| 500,000 | |
Convertible debentures | |
| 2,453,032 | |
Long-term asset retirement obligation | |
| 37,288 | |
Total Liabilities extinguished | |
| 4,354,501 | |
| |
| | |
Subtotal-loss on exchange of oil and gas properties for debt | |
| (1,344,062 | ) |
| |
| | |
Extinguishment of derivative liabilities related to convertible debentures | |
| 5,259,769 | |
| |
| | |
Gain on recession | |
$ | 3,915,707 | |
Note 3 – Oil and Gas Properties
Oil and gas properties consisted of the
following:
| |
June 30, 2014 | | |
December 31, 2013 | |
ADR leases | |
$ | 344,470 | | |
| – | |
Sunwest leases | |
| 418,471 | | |
| – | |
Total | |
$ | 762,941 | | |
| – | |
On April 17, 2014, the Company completed
the acquisition of the oil and gas assets of American Dynamic Resources, Inc. (ADR). The assets of ADR consist of multiple non-operating
leases in Montgomery, Labette and Wilson Counties in Kansas. The combined leases contain 140 oil wells and 17 gas wells within
3,527 acres, none of which are currently operating. We also acquired ADR's patents related to enhanced oil recovery. The ADR acquisition
has been capitalized in the amount of $344,470, representing a $125,000 note payable (See Note 6), $126,000 for the fair value
of the issuance of 70,000,000 shares of the Company’s common stock based on the closing price of $0.0018 per share on the
closing date, and $93,470, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company.
All capitalized costs of the ADR oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized,
on the unit-of-production method using estimates of proved reserves once the wells become operating. At June 30, 2014, there was
no production at the ADR oil and gas leases and the capitalized costs of the ADR oil and gas leases at June 30, 2014 were not subject
to amortization.
On April 18,
2014, the Company purchased certain assets from Sunwest Group, LLC (Sunwest) consisting of 18 non-operating leases in Montgomery,
Labette and Wilson Counties in Kansas. The Sunwest acquisition has been capitalized in the amount of $418,471, representing a $325,000
note payable (see Note 6), and $93,471, the present value of an abandonment obligations up to the amount of $250,000 assumed by
the Company. All capitalized costs of the Sunwest oil and gas leases, including the estimated future costs to develop proved reserves,
will be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At June
30, 2014, there was no production at the Sunwest oil and gas leases and the capitalized costs of the Sunwest oil and gas assets
at June 30, 2014 were not subject to amortization.
Note 4 – Payable to Ironridge
Global IV, Ltd. and Payable to Tarpon Bay Partners, LLC
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 200 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.
Since the issuance of the Initial Shares,
the Company issued an additional 194,200 shares of common stock during the year ended December 31, 2012 (for an aggregate value
of $531,689) which has been accounted for as the reduction of a proportionate amount of the calculated fair value of the original
liability to Ironridge. During the year ended December 31, 2013 the Company issued an additional 6,550,000 shares of common stock
to Ironridge with an aggregate value of $1,421,595. At that time, the Company believed it had a remaining obligation to Ironridge
of $68,028. However, on February 24, 2014, Ironridge claimed that the Company’s failure to comply with prior order and stipulation
has caused them harm and claimed that it was still owed $241,046. A judge awarded Ironridge a third order enforcing a prior order
for approval of stipulation for settlement claim by requiring the Company to reserve 1,095,950,732 shares of the Company’s
common stock until the balance of the claim is paid. On February 26, 2014, the Company issued to Ironridge 5,000,000 shares of
common stock valued at $4,550. During the three months ended June 30, 2014, the Company issued Ironridge an additional 386,000,000
shares of common stock valued at $95,620 and at June 30, 2014, the balance due to Ironridge was $140,876.
Tarpon Bay Partners LLC
In 2014, Tarpon Bay Partners LLC (Tarpon)
assumed $1.1 million of past due accounts payable and accrued compensation of the Company from various creditors of the Company.
Tarpon then commenced an action against the Company to recover the aggregate of the past due accounts. On April 21, 2014, the Circuit
Court of the Second Judicial Circuit for Leon County, Florida approved an agreement between the Company and Tarpon, in which the
Company agreed to issue shares of the Company’s common stock to Tarpon sufficient to generate proceeds equal to the aggregate
of the past due accounts. In addition, Tarpon will receive a fee of approximately 43% based on the proceeds. The Company will record
the fees as the shares are issued and the past due accounts are paid. The past due amounts assumed are current liabilities until
settled under the assignment agreement.
In connection with the settlement, during
the six months ended June 30, 2014, the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917 and at June
30, 2014, the balance due to Tarpon was $1,078,578.
Note 5 – Unsecured Convertible Promissory Notes Payable
A summary of unsecured convertible promissory
notes at June 30, 2014 and December 31, 2013 is as follows:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | | |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | | |
Principal | | |
Discount | | |
Value | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Asher Enterprises, Inc. | |
$ | 110,160 | | |
$ | 59,273 | | |
$ | 50,887 | | |
$ | 111,900 | | |
$ | 7,473 | | |
$ | 104,427 | |
GEL Properties, LLC | |
| 126,280 | | |
| 1,288 | | |
| 124,992 | | |
| 149,000 | | |
| 13,486 | | |
| 135,514 | |
Prolific Group, LLC | |
| 77,900 | | |
| – | | |
| 77,900 | | |
| 79,900 | | |
| 11,849 | | |
| 68,051 | |
Haverstock Master Fund, LTD and Common Stock, LLC | |
| 317,476 | | |
| – | | |
| 317,476 | | |
| 289,906 | | |
| – | | |
| 289,906 | |
Redwood Management LLC | |
| 193,115 | | |
| 31,833 | | |
| 161,282 | | |
| – | | |
| – | | |
| – | |
AGS Capital Group | |
| 25,000 | | |
| 13,542 | | |
| 11,458 | | |
| – | | |
| – | | |
| – | |
Hanover Holdings | |
| 31,500 | | |
| 23,625 | | |
| 7,875 | | |
| – | | |
| – | | |
| – | |
LG Group | |
| 70,669 | | |
| 53,625 | | |
| 17,044 | | |
| – | | |
| – | | |
| – | |
IBC | |
| 51,614 | | |
| 32,986 | | |
| 18,629 | | |
| – | | |
| – | | |
| – | |
Magna Group | |
| 10,000 | | |
| – | | |
| 10,000 | | |
| – | | |
| – | | |
| – | |
Charles Volk (related party) | |
| 125,000 | | |
| – | | |
| 125,000 | | |
| 125,000 | | |
| 53,596 | | |
| 71,404 | |
Various Other Individuals and Entities | |
| 73,977 | | |
| – | | |
| 73,977 | | |
| 285,000 | | |
| 24,338 | | |
| 260,662 | |
| |
$ | 1,212,691 | | |
$ | 216,172 | | |
$ | 996,520 | | |
$ | 1,040,706 | | |
$ | 110,742 | | |
$ | 929,964 | |
At December 31, 2013, the unsecured convertible
promissory notes payable totaled $1,040,706 and are generally due within one year from the date of issuance, bear interest at rates
ranging from 8% to 12% and are convertible into shares of our common stock at discounts ranging from 30% to 70% of the Company’s
common stock market price during a certain time period, as defined in the agreements. 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 six months ended June 30, 2014,
the Company issued $332,764 of unsecured convertible promissory notes to various entities. The convertible promissory notes bear
interest from 8% to 12% per annum, are convertible into shares of our common stock at discounts ranging from 49% to 70%, contain
reset provisions, and are due from six months to 12 months after the issuance date. Approximately $163,000 of the notes were not
paid when due, and are currently in default. Under authoritative guidance of the FASB, due to the variable conversion prices and
reset provisions, the Company accounted for the conversion features of these notes as instruments which do not have fixed settlement
provisions and are deemed to be derivative instruments (see Note 7). The Company determined the aggregate fair value of the derivative
liabilities related to these notes was $756,492, of which $372,764 was recorded as note discount (up to the face amount of the
notes) to be amortized over the term of the related notes, and the balance of $383,728 is recorded in current period financing
costs and penalty interest expense.
During the six months ended June 30, 2014,
notes payable and accrued interest and fees in the aggregate balance of $80,881 previously classified as secured notes were added
to unsecured convertible notes after the holders of the notes sold their interests in the notes to Magna Group (see Note 6). Also
during the six months ended June 30, 2014, the Company increased certain notes by $101,203 to reflect an increase in the principal
amount due to an event of default occurring, which was included in financing costs and penalty interest expense.
During the six months ended June 30, 2014,
$342,863 of notes payables and $5,197 of accrued interest were converted into 1,697,923,758 shares of the Company’s common
stock.
Most of our unsecured convertible promissory
notes payable are in default at June 30, 2014. During the six months ended June 30, 2014 and 2013, the Company recognized interest
expense from the amortization of discounts in the amount of $267,334 and $308,233, respectively.
Note 6 – Secured Notes Payable
A summary of secured notes payable at June
30, 2014 and December 31, 2013:
| |
June 30, 2014 | | |
December 31, 2013 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | | |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | | |
Principal | | |
Discount | | |
Value | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Montecito Offshore, LLC | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 500,000 | | |
$ | – | | |
$ | 500,000 | |
Bridge Loan Settlement Note | |
| – | | |
| – | | |
| – | | |
| 40,000 | | |
| – | | |
| 40,000 | |
What Happened LLC | |
| – | | |
| – | | |
| – | | |
| 21,575 | | |
| – | | |
| 21,575 | |
La Jolla Cove Investors, Inc. | |
| 83,040 | | |
| – | | |
| 83,040 | | |
| 83,940 | | |
| 25,003 | | |
| 58,937 | |
ADR Acquisition Note | |
| 125,000 | | |
| – | | |
| 125,000 | | |
| – | | |
| – | | |
| – | |
Sunwest Group LLC | |
| 325,000 | | |
| – | | |
| 325,000 | | |
| – | | |
| – | | |
| – | |
| |
$ | 533,040 | | |
$ | – | | |
$ | 533,040 | | |
$ | 645,515 | | |
$ | 25,003 | | |
$ | 620,512 | |
The secured notes payable are generally
secured with oil and gas properties, bear interest at rates ranging from 4.75% to 9% and some are convertible into shares of our
common stock at discount up to 93%. The Montecito Offshore LLC note was secured by a second lien mortgage, and was extinguished
on May 27, 2014 (see Note 2). During the six months ended June 30, 2014, the notes payable for the Bridge Loan Settlement Note
and to La Jolla Cove Investors, Inc. were sold by their holders to Magna Group and the aggregate principal balance of $61,575 was
transferred to unsecured convertible promissory notes (See Note 5). The note payable to La Jolla Cove Investors was due April 30,
2013, is currently in default, and contains a variable conversion feature which is deemed to be a derivative instrument (see Note
7). In April 2014, the ADR Acquisition note and Sunwest Group LLC note were issued in conjunction with the acquisition of oil and
gas properties (see Note 3). The ADR Acquisition note bears interest at 6% per annum, is secured by the property acquired and was
due on August 15, 2014. This note has not been repaid and is currently in default. The Sunwest Group, LLC note bears interest at
6% per annum is secured by the property acquired and was due on October 14, 2014. This note has not been repaid and is currently
in default.
During the six months ended June 30, 2014,
$900 of notes payables to La Jolla Cove Investors were converted into 13,444,444 shares of the Company’s common stock.
During the six months ended June 30, 2014
and 2013, the Company recognized interest expense from the amortization of discounts in the amount of $25,003 and $41,380, respectively.
Note 7 - Convertible Debentures
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, consisting of a secured convertible debenture
of $30,000 and a warrant to purchase 400 shares of the Company’s common stock. The debentures were secured by
certain oil and gas leases (see Note 2). The convertible debentures matured in May, 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 $150.00 per share. The Company was in default under the convertible debentures beginning in
July 2011, and the Company accrued interest at the default interest rate is 18% per annum commencing on July 1, 2011.
On May 27, 2014, the Company’s obligations
under the secured debentures of $2,453,032 was extinguished in conjunction with the recession of the secured oil and gas leases
by the Company (see Note 2).
The debentures contained price ratchet
anti-dilution protection. 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 as a valuation discount at its fair
value. On May 27, 2014, the derivative liability related to the convertible debentures was $5,259,769 and was extinguished
due to the recession and recorded as part of the gain on recession (see Notes 2 and 8).
Note 8 – Derivative Liabilities
Under the authoritative guidance of the
FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do
not have fixed settlement provisions are deemed to be derivative instruments. All of the notes described in Notes 4 and 5 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 to be re-measured at the end of every reporting period with the change in value reported
in the statement of operations. The conversion feature of the Company’s Debentures (described in Note 6), 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.
As of June 30, 2014 and December 31, 2013, the derivative liabilities
were valued using a probability weighted average Black Scholes-Merton pricing model with the following assumptions:
| |
| | |
New Derivatives | | |
| |
| |
| | |
Issued During | | |
| |
| |
| | |
Six Months Ended | | |
| |
| |
June 30, | | |
June 30, | | |
December 31, | |
| |
2014 | | |
2014 | | |
2013 | |
Conversion feature: | |
| | | |
| | | |
| | |
Risk-free interest rate | |
| 0.13% | | |
| 0.11% to 0.13% | | |
| 0.13% | |
Expected Volatility | |
| 462% | | |
| 421% to 469% | | |
| 425% | |
Expected life (in years) | |
| .12 to .95 | | |
| .50 to 1.0 | | |
| .04 to .62 | |
Expected dividend yield | |
| 0% | | |
| 0% | | |
| 0% | |
| |
| | | |
| | | |
| | |
Warrants: | |
| | | |
| | | |
| | |
Risk-free interest rate | |
| 0.13% | | |
| N/A | | |
| 0.13% | |
Expected Volatility | |
| 462% | | |
| N/A | | |
| 425% | |
Expected life (in years) | |
| 1.08 to 2.68 | | |
| N/A | | |
| 1.6 to 3.6 | |
Expected dividend yield | |
| 0% | | |
| N/A | | |
| 0% | |
| |
| | | |
| | | |
| | |
Fair Value | |
| | | |
| | | |
| | |
Conversion feature | |
| 2,287,596 | | |
| 756,491 | | |
| 7,896,892 | |
Warrants | |
| 235 | | |
| – | | |
| 11,523 | |
| |
$ | 2,287,831 | | |
$ | 756,491 | | |
$ | 7,908,415 | |
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 June 30, 2014 and December 31, 2013,
the fair value of the aggregate derivative liability of the conversion features and warrants was $2,287,831 and $7,908,415, respectively.
During the six months ended June 30, 2014, we recognized additional derivative liabilities of $756,491, related to the issuances
of convertible promissory notes payable (see Note 5). For the three and six months ended June 30, 2014 and 2013 the Company recorded
a change in fair value of the derivative liability of $1,117,306 and $1,402,514, respectively. For the three months ended June
30, 2014, a derivative liability of $5,259,769 related to convertible debentures was extinguished and recorded as part of the recession
of notes related to oil and gas properties (see Notes 2 and 7).
Note 9 – Preferred and Common
Stock
Issuance of Common Stock for Cash
During the six months ended June 30, 2014,
the Company sold 1,006,546 shares of common stock at an average price of $0.009 per share for total proceeds of $9,200.
Equity Investment Agreements
Pursuant to the Equity Investment Agreement,
La Jolla Cove Investors, Inc., 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 six months ended June 30, 2014,
the Company received notices of purchase from La Jolla under the Equity Investment Agreement totaling $9,000, pursuant to which
the Company issued 6,546 shares of common stock at a weighted average price of $1.37 per share. In addition, during the six months
ended June 30, 2014, the Company issued 1,000,000 shares of common stock to Caro Capital Inc. under an equity investment agreement
at a weighted average price of $0.0002 per share.
Issuance of Common Stock for Debt
During the six months ended June 30, 2014,
the Company issued:
| · | 1,697,923,758 shares of its common stock to the holders of certain unsecured convertible promissory
notes payable in exchange for $348,060 of notes payable and accrued interest, |
| · | 13,444,444 shares of its common stock to La Jolla Cover Investors, Inc. in exchange for $900 of
secured notes payable, |
| · | 391,000,000 shares of its common stock to Ironridge Global IV, Ltd. in exchange for $100,170 of
debt, and |
| · | 310,026,000 shares of its common stock to Tarpon Bay Partners LLC. in exchange for $48,917 of debt. |
Issuance of Common Stock for acquisition
In April 2014, the Company issued 70,000,000
shares of its common stock to American Dynamic Resources, Inc. (ADR) related to the acquisition of certain oil and gas properties
from ADR (see Note 3).
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 consolidated balance sheet.
A summary of stock option and compensation-based
warrant activity for the six months ended June 30, 2014 is presented below:
| |
| | |
| | |
Weighted | | |
| |
| |
Shares | | |
Weighted | | |
Average | | |
| |
| |
Under | | |
Average | | |
Remaining | | |
Aggregate | |
| |
Option or | | |
Exercise | | |
Contractual | | |
Intrinsic | |
| |
Warrant | | |
Price | | |
Life (in years) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2013 | |
| 92,300 | | |
$ | 33.52 | | |
| 2.7 | | |
$ | – | |
Granted or issued | |
| – | | |
| | | |
| | | |
| | |
Expired or forfeited | |
| (8,400 | ) | |
| 121.43 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June 30, 2014 | |
| 83,900 | | |
$ | 24.72 | | |
| 2.7 | | |
$ | – | |
Other Stock Warrants
A summary of other stock warrant activity
for the three-month period ended June 30, 2014 is presented below:
| |
| | |
| | |
Weighted | | |
| |
| |
| | |
Weighted | | |
Average | | |
| |
| |
Shares | | |
Average | | |
Remaining | | |
Aggregate | |
| |
Under | | |
Exercise | | |
Contractual | | |
Intrinsic | |
| |
Warrant | | |
Price | | |
Life (in years) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2013 | |
| 2,409,370 | | |
$ | 0.38 | | |
| 2.4 | | |
$ | – | |
Granted or issued | |
| – | | |
| | | |
| | | |
| | |
Expired or forfeited | |
| (37,400 | ) | |
| | | |
| | | |
| | |
Outstanding at June 30, 2014 | |
| 2,371,970 | | |
$ | 0.38 | | |
| 1.9 | | |
$ | – | |
Note 11 – Related Party Transactions
Payable to Related Parties
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 $30,000 for
the six months ended June 30, 2014. The balance due to Surety at June 30, 2014 and December 31, 2013 was $110,602 and
$113,300, respectively, included on the Company’s accounts payable balance.
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 $17,121 for the year ended December 31, 2013 and June 30, 2014, of which approximately $7,000 remained
outstanding and included on the Company’s Accounts payable balance at December 31, 2013 and June 30, 2014.
Note 12 – Income Taxes
For the three and six months ended June
30, 2014, net income was $3,221,064 and $3,042,707, respectively, and the Company did not record any provision for income taxes
primarily because the income in 2014 is a result of the extinguishment of a derivative liability due to the recession of the property
discussed in Note 2. The income from the removal of the derivative liability is not considered income for tax purposes. For the
three and six months ended June 30, 2013, the net loss was $174,308 and $1,306,451 respectively, and the Company did not record
any provisions for income taxes.
In accordance with Accounting Standards
Codification (“ASC”) 740, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance
is required based on the consideration of all available evidence using a “more likely than not” standard, with significant
weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency
and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for
operating losses and tax credit carryovers; and available tax planning alternatives. Our deferred tax assets are composed primarily
of U.S. federal net operating loss carryforwards and temporary differences related to stock based compensation. Based on available
objective evidence, management believes it is more likely than not that these deferred tax assets are not recognizable and will
not be recognizable until its determined that we have sufficient taxable income. We may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim
periods, and disclosures. As of June 30, 2014, the Company does not have any liabilities for unrecognized tax uncertainties.
Note 13 – Subsequent Events
Subsequent to June 30, 2014, the Company
issued:
| · | 67,200,325 shares of its common stock to the holders of certain unsecured convertible promissory
notes payable in exchange for $3,360 of notes payable, |
| · | 270,000,000 shares of its common stock to Ironridge Global IV, Ltd. in exchange for $18,900 of
debt |
| · | In August 2015, the Company issued a convertible note for consulting services in the amount of
$75,000. The note is unsecured, due on June 1, 2015, bear interest at 6% per annum, and may be converted after 180 days of issuance
at a 50% discount to the price of the Company’s common stock, |
| · | In September 2015, the Company issued a note payable in the amount of $15,000. The note is unsecured,
due 90 days after issuance, and bear interest at 10% per annum, |
| · | In January 2015, the Company issued two convertible notes in the aggregate of $47,500. The notes
are unsecured, due in one year, bear interest at 8% per annum, and contain a $9,500 original issue discount. The notes may be converted
after 180 days of issuance at a 45% discount to the price of the Company’s common stock over a period of trading days, as
defined. The notes contains certain covenants and events of default, and increases in principal amount and interest rates in the
event of defaults. |
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This Management's Discussion and Analysis
of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current
views with respect to future events and financial performance. You can identify these statements by forward-looking words such
as “may” “will,” “expect,” “anticipate,” “believe,” “estimate”
and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations
of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties,
and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review
and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange
Commission. Important factors currently known to us could cause actual results to differ materially from those in forward-looking statements.
We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived
from and known about our business and operations and the business and operations of the Company. No assurances are made that
actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations
in pricing for materials, and competition.
Company Overview
Worthington Energy, Inc. is an oil and
gas exploration and production company with assets in Texas and 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 and are shut in and not producing. 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.
In Texas, we had working interests ranging
from 4% to 31.75% (net revenue interests ranging from 3% to 23.8125%) in the various wells in which we had participated. In the
Gulf of Mexico, we had 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. In May 2014, we agreed to rescind our interest in VM 179
in exchange for the extinguishment of certain debt. The transaction was recorded in May 2014.
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
VM 179
On May 6, 2011, we acquired a 70% leasehold
working interest, with a net revenue interest of 51.975%, of certain oil and gas leases from Montecito Offshore, L.L.C. (Montecito)
located in the Vermillion 179 tract in the Gulf of Mexico offshore from Louisiana, 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 was capitalized in the amount of
$5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000 for 30,000 shares of our common stock based on a closing
price of $122.50 per share on the closing date, and $23,563 in acquisition costs. In conjunction with the acquisition, we
issued $2,550,000 of convertible debentures secured by the leases. In December 2011, Montecito filed a lawsuit to rescind the asset
sale transaction. No drilling or production activities was ever commenced in the Vermillion 179 tract by us.
On May 27, 2014, the parties entered into
a Joint Motion to Dismiss to close the case whereby the sale was rescinded, the leasehold interests were returned to Montecito,
and our secured note payable of $500,000 to Montecito and convertible debentures of $2,453,032 were extinguished. We accounted
for the transaction as an exchange of the oil and gas asset for the debt and an extinguishment of a debt related derivative liability.
We recorded a gain on the recession of $3,915,707 by removing the following balances of assets and liabilities from its books as
of May 27, 2014:
Assets | |
| | |
Oil and gas properties | |
$ | 5,698,563 | |
Total assets rescinded | |
| 5,698,563 | |
| |
| | |
Liabilities | |
| | |
Accrued interest | |
| 1,364,181 | |
Secured note payable | |
| 500,000 | |
Convertible debentures | |
| 2,453,032 | |
Long-term asset retirement obligation | |
| 37,288 | |
Total Liabilities extinguished | |
| 4,354,501 | |
| |
| | |
Subtotal-loss on exchange of oil and gas properties for debt | |
| (1,344,063 | ) |
| |
| | |
Extinguishment of derivative liabilities related to convertible debentures | |
| 5,259,769 | |
| |
| | |
Gain on recession | |
$ | 3,915,707 | |
Kansas Properties
On April 17, 2014, the Company completed
the acquisition of the oil and gas assets of American Dynamic Resources, Inc. (ADR). The assets of ADR consist of multiple non-operating
leases in Montgomery, Labette and Wilson Counties in Kansas. The combined leases contain 140 oil wells and 17 gas wells within
3,527 acres, none of which are currently operating. We also acquired ADR's patents related to enhanced oil recovery. The ADR acquisition
has been capitalized in the amount of $344,470, representing a $125,000 note payable, $126,000 for the fair value of the issuance
of 70,000,000 shares of the Company’s common stock based on the closing price of $0.0018 per share on the closing date, and
$93,470, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company. All capitalized costs
of the ADR oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production
method using estimates of proved reserves once the wells become operating. At June 30, 2014, there was no production at the ADR
oil and gas leases and the capitalized costs of the ADR oil and gas leases at June 30, 2014 were not subject to amortization.
On April 18, 2014,
the Company purchased certain assets from Sunwest Group, LLC (Sunwest) consisting of 18 non-operating leases in Montgomery, Labette
and Wilson Counties in Kansas. The Sunwest acquisition has been capitalized in the amount of $418,471, representing a $325,000
note payable, and $93,471, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company.
All capitalized costs of the Sunwest oil and gas leases, including the estimated future costs to develop proved reserves, will
be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At June 30,
2014, there was no production at the Sunwest oil and gas leases and the capitalized costs of the Sunwest oil and gas assets at
June 30, 2014 were not subject to amortization.
Results of Operations
Comparison of the Three and Six months
Ended June 30, 2014 and 2013
Oil and Gas Revenues
Our oil and gas revenue was $0 for the
three months and six months ended June 30, 2014 and 2013. 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 $1,039,720
for the six months ended June 30, 2014, compared to $902,115 for the six months ended June 30, 2013, representing an increase of
$137,605 and our costs and operating expenses were $716,153 for the three months ended June 30, 2014, compared to $448,637 for
the three months ended June 30, 2012, representing an increase of $267,516. The increase in our costs and operating
expenses are primarily a result of increases 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 six months ended June 30, 2014 and 2013. Bayshore has ceased to report
to us the amounts of our respective share of lease operating expenses and the oil wells are shut in and not producing.
Impairment loss on oil and gas
properties – During the six months ended June 30, 2013, we recognized an impairment loss of $11,623 on our Mustang
Island 818-L lease. As part of a Settlement Agreement, we transferred to Black Cat all of the title and interest that we
owned in the Mustang Island 818-L lease well. We have evaluated the accounting effects of the settlement agreement and
concluded that impairment in the approximate amount of $11,623 should be recorded, which has been reflected in the
accompanying consolidated financial statements as of June 30, 2013.
General and Administrative Expense
– General and administrative expense was $1,039,720 for the six months ended June 30, 2014 as compared to $890,492 for the
six months ended June 30, 2013, representing an increase of $149,228. The increase in general and administrative expense during
the six months ended June 30, 2014 is principally related to increases of: (1) $470,884 for legal and consulting fees; offset
by a decrease of $198,018 in penalties and a decrease of $200,000 in stocks issued for services. The increase in consulting
services represents an increase in payments related to investor relations, energy, financing, and general business services as
a result of a general increased need for such consulting services.
Other Income (Expense)
Change in fair value of derivative
liabilities – We issued convertible promissory notes commencing in April 2010 which contain a variable conversion
price and anti-dilution reset provisions. In addition, 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 a probability weighted average Black Scholes-Merton pricing model. The
fair value of these derivative liabilities was estimated to be $2,287,831 and $7,908,415 as of June 30, 2014 and December 31,
2013, respectively. We recognized a gain from the change in fair value of these derivative liabilities of
$1,117,306 and $1,402,514 for the six months ended June 30, 2014 and 2013, respectively and we recognized $413,924 and
$1,238,545 for the three months ended June 30, 2014 and 2013. For the three months ended June 30, 2014, a derivative
liability of $5,259,769 related to convertible debentures was extinguished and recorded as part of the gain on recession of
oil and gas properties.
Gain on recession of oil and gas properties – We
recognized a gain on the recession of oil and gas properties during the six months ended June 30, 2014 of $3,915,707. As discussed
above, on May 27, 2014, we entered into an agreement with Montecito whereby the sale was rescinded, the leasehold interests were
returned to Montecito, and our secured note payable of $500,000 to Montecito and convertible debentures of $2,453,032 were extinguished.
We accounted for the transaction as an exchange of the oil and gas asset for the debt and an extinguishment of a debt related derivative
liability. We recorded a gain on the recession of $3,915,707 by removing the assets and liabilities from its books as of May 27,
2014. There was no such gain during the six months ended June 30, 2013.
Interest Expense – We incurred interest expense
of $173,318 and $308,233 for the six months ended June 30, 2014 and 2013, respectively and we incurred interest expense of $27,411
and $143,246 for the three months ended June 30, 2014 and 2013, respectively. The decrease in interest expense is primarily due
to the decrease in the amount of our unsecured convertible debt in the six months ended June 30, 2014 as compared to June 30, 2013.
Financing costs and penalty interest – We incurred
financing costs and penalty interest expense of $484,931 and $597,758 for the six months ended June 30, 2014 and 2013, respectively
and we incurred financing costs and penalty interest expense of $199,460 and $271,945 for the three months ended June 30, 2014
and 2013, respectively.
Amortization of discount on
convertible notes and other debt – 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 $ 292,337 and $530,829 of discount on convertible notes and debentures for the six months
ended June 30, 2014 and 2013, respectively and we have amortized $165,543 and $179,025 of discount on convertible notes and
debentures for the three months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there is $216,172 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.
Although the net changes with respect to
our revenues and our costs and operating expenses for the three and six months ended June 30, 2014 and 2013, are summarized above,
the trends contained therein are limited and should not be viewed as a definitive indication of our future results.
Liquidity and Capital Resources
From our inception our principal sources
of liquidity consisted of proceeds from the sale of unsecured convertible promissory notes and proceeds from the sale of common
stock and warrants. During the six months ended June 30, 2014, we received $332,764 and $9,200 from the proceeds from the sale
convertible notes and common stock, respectively, and during the six months ended June 30, 2013, we received $260,500 and $144,000
from the proceeds from the sale convertible notes and common stock, respectively.
At June 30, 2014, we had $265 in cash and
we had a working capital deficit of $6,146,936, as compared to a deficit of $14,914,490 as of December 31, 2013. 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 increase in the working capital deficit for the period ended June 30,
2014, is principally due to new unsecured convertible promissory notes payable issued. In addition, we have total stockholders’
deficiency of $5,552,528 at June 30, 2014 compared to total stockholders’ deficiency of $9,228,482 at December 31, 2013,
a decrease in the stockholders’ deficiency of $3,675 954. The decrease in the stockholders’ deficiency for the six
months ended June 30, 2014, is principally due to net gain generated by settlement with investors incurred during the year
Our operations used net cash of $341,865
during the six months ended June 30, 2014, compared to $403,612 of net cash used during the six months ended June 30, 2013. Net
cash used in operating activities during the six months ended June 30, 2014, consisted of our net gain of $3,915,707, less, 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.
Our investing activities that used cash
of $0 and $866 during the six months ended June 30, 2014 and 2013.
Financing activities provided
$341,964 of cash during the six months ended June 30, 2014, compared to $400,750 during the six months ended June 30,
2013. Cash flows from financing activities during the six months ended June 30, 2014, relate to 1) the receipt of
proceeds from the placement of unsecured convertible promissory notes in the amount of $332,764,and 2) proceeds from issuance
of common stock and warrants for $9,200 Cash flows from financing activities during the six months ended June 30, 2013,
relate to 1) the receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $260,500,
2) proceeds from issuance of common stock and warrants for $144,000 and 3) payment on principal on note payable of
$3,750.
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 have historically financed our operations
from the issuance of unsecured convertible promissory notes payable, secured notes payable and convertible debentures.
Below is a summary of our unsecured convertible
promissory notes payable, secured notes payable and convertible debentures at June 30, 2014:
| |
June 30, 2014 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | |
| |
| | |
| | |
| |
Asher Enterprises, Inc. | |
$ | 110,160 | | |
$ | 59,273 | | |
$ | 50,887 | |
GEL Properties, LLC | |
| 126,280 | | |
| 1,288 | | |
| 124,992 | |
Prolific Group, LLC | |
| 77,900 | | |
| – | | |
| 77,900 | |
Haverstock Master Fund, LTD and Common Stock, LLC | |
| 317,476 | | |
| – | | |
| 317,476 | |
Redwood Management LLC | |
| 193,115 | | |
| 31,833 | | |
| 161,282 | |
AGS Capital Group | |
| 25,000 | | |
| 13,542 | | |
| 11,458 | |
Hanover Holdings | |
| 31,500 | | |
| 23,625 | | |
| 7,875 | |
LG Group | |
| 70,669 | | |
| 53,625 | | |
| 17,044 | |
Magna Group | |
| 10,000 | | |
| – | | |
| 10,000 | |
IBC | |
| 51,614 | | |
| 32,986 | | |
| 18,629 | |
Charles Volk (related party) | |
| 125,000 | | |
| – | | |
| 125,000 | |
Various Other Individuals and Entities | |
| 73,977 | | |
| – | | |
| 73,977 | |
| |
$ | 1,212,691 | | |
$ | 216,172 | | |
$ | 996,520 | |
At December 31, 2013, the unsecured convertible
promissory notes payable are generally due within one year from the date of issuance bear interest at rates ranging from 8% to
12% and are convertible into shares of our common stock at discounts ranging from 30% to 70%. 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, then the conversion price will be reduced to the amount of consideration per
share of the stock issuance.
During the six months ended June 30, 2014,
the Company issued $376,858 of unsecured convertible promissory notes to various entities and received net proceeds of $332,764.
The convertible promissory notes bear interest from 8% to 12% per annum. The principal and unpaid accrued interest are due
from six months to twelve months after the issuance date. Most of our unsecured convertible promissory notes payable are in default
at June 30, 2014.
Secured Notes Payable outstanding at June
30, 2014:
| |
June 30, 2014 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | |
| |
| | |
| | |
| |
Montecito Offshore, LLC | |
$ | – | | |
$ | – | | |
$ | – | |
Bridge Loan Settlement Note | |
| – | | |
| – | | |
| – | |
What Happened LLC | |
| – | | |
| – | | |
| – | |
La Jolla Cove Investors, Inc. | |
| 83,040 | | |
| – | | |
| 83,040 | |
ADR Acquisition Note | |
| 125,000 | | |
| – | | |
| 125,000 | |
Sunwest Group LLC | |
| 325,000 | | |
| – | | |
| 325,000 | |
| |
$ | 533,040 | | |
$ | – | | |
$ | 533,040 | |
The secured notes payable are generally
secured with oil and gas properties, bear interest at rates ranging from 4.75% to 9% and some are convertible into shares of our
common stock at discount of 93%. The secured note payable to La Jolla Cove Investors was in default at June 30, 2014. Subsequent
to June 30, 2014, the secured notes payable for the ADR Acquisition Note and Sunwest Group LLC, which were due August 15, 2014
and October 14, 2014, respectively, were not paid at maturity and are currently in default.
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, 2013 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 for 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 a
probability weighted average Black-Scholes-Merton pricing model. Accordingly, the fair value of the price ratchet
anti-dilution protection of the convertible debentures and warrants 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. Expected volatility is based primarily on
the historical volatility of other comparable oil and gas companies.
We evaluate our 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. 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.
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.
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.
Recent Accounting Pronouncements
See Recent Accounting Pronouncements in
Note 1 of the Company’s June 30, 2014 Condensed Consolidated Financial Statements.
Inflation
We do not believe that inflation has had
a material effect on our Company’s results of operations.
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 June 30, 2014,
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 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 2014
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 2014, 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 June 30, 2014 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 sought 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
30,000 shares of the Company’s common stock. The Company 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. In conjunction
with the acquisition, the Company issued $2,550,000 of convertible debentures secured by mortgages.
In May 2014, the debt holders cancelled
the outstanding mortgages and UCC-1’s along with recording the documents conveying the various interests into the public
records and on May 27, 2014, the parties entered into a Joint Motion to Dismiss to close the case whereby the sale was rescinded,
the leasehold interests were returned to Montecito, and our secured note payable of $500,000 to Montecito and convertible debentures
of $2,453,032 were extinguished.
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. 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 Company had issued a total of 6,764,500
shares to Ironridge and had reduced the original liability of $1,388,407 to $68,028. However, on February 24, 2014 a judge awarded
Ironridge a third order enforcing prior order for approval of stipulation for settlement claim by requiring the Company to reserve
1,095,950,732 shares of the Company’s common stock until the balance of the claim in paid. Ironridge claimed that the Company’s
failure to comply with prior order and stipulation has caused them harm. Ironridge claims that it is still owed $241,046. The Company
has increased the balance due to Ironridge to $241,046 at December 31, 2013. During the six months ended June 30, 2014, the Company
issued to Ironridge 391,000,000 shares of common stock valued at $100,170. The balance due to Ironridge at June 30, 2014 was $140,876.
Tarpon Bay Partners LLC v. Worthington
Energy, Inc.,
In April 2014, Tarpon Bay Partners LLC
(“Tarpon”) filed a complaint against the Company for the payment of $1,127,495 in outstanding accounts payable, accrued
compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Tarpon had purchased from
various creditors of the Company. The lawsuit was filed in the Circuit Court of the Second Judicial Circuit in and for Leon
County, Florida, and the case was Tarpon Bay Partners, LLC. v. Worthington Energy, Inc., Case No. 20147-CA-488 . On
April 3, 2014, the court approved an Order for Approval of Stipulation for Settlement of Claims (the "Order").
During the six months ended June 30, 2014,
the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917. The balance due to Tarpon at June 30, 2014 was
$1,078,578.
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 June 30,
2014, the Company issued 27,075,000 shares to ASC Recap LLC (Leblanc) for the conversion of $10,280 of debentures and $550 of bank
fees.
During the three months ended June 30,
2014, the Company issued 243,400,000 shares to GEL for the conversion of $22,720 of debentures.
During the three months ended June 30,
2014, the Company issued 300,000,000 shares to Magna Group LLC for the conversion of $52,500 of debentures.
During the three months ended June 30,
2014, the Company issued 378,912,815 shares to Asher Enterprise for the conversion of $105,510 of debentures and $2,120 of accrued
interest.
During the three months ended June 30,
2014, the Company issued 28,333,333 shares to Haverstock Manager LLC for the conversion of $11,500 of debentures.
During the three months ended June 30,
2014, the Company issued 386,000,000 shares to Ironridge Global IV Ltd for the conversion of $95,620 of debentures, pursuant to
an Order of Approval of Stipulation for Settlement. The securities were issued in a transaction pursuant to Regulation D under
Securities Act of 1933, as amended.
During the three months ended June 30,
2014, the Company issued 1,000,000 shares to Caro Capital LLC for the cash proceeds of $200.
During the three months ended June 30,
2014, the Company issued 25,166,666 shares to LG Capital Funding LLC for the conversion of $4,000 of debenture and $27 of accrued
interest.
During the three months ended June 30,
2014, the Company issued 9,777,778 shares to La Jolla Cove Investors for the conversion of $400 of debentures.
During the three months ended June 30,
2014, the Company issued 2,909 shares to La Jolla Cove Investors for cash proceeds of $4,000.
During the three months ended June 30,
2014, the Company issued 25,545,397 shares to Redwood for the conversion of $25,864 of debentures.
During the three months ended June 30,
2014, the Company issued 234,000,000 shares to IBC Funds LLC for the conversion of $22,900 of debentures.
During the three months ended June 30,
2014, the Company issued 310,026,000 shares to Tarpon Bay Partners LLC for the conversion of $48,917 of debentures.
During the three months ended June 30,
2014, the Company issued 49,275,000 shares to Prolific Group LLC for the conversion of $2,000 of debentures.
During the three months ended June 30,
2014, the Company issued 70,000,000 shares to American Dynamic LLC for the purchase of assets in the value of $126,000.
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
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. As of June 30, 2014 this note 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 June 30, 2014, 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 June 30, 2014, 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. June 30, 2014, all of these notes are 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 |
|
|
31.1 |
Certifications of Principal Executive Officer
and Principal Financial Officer pursuant to 18 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 to 18 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 |
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: March 5, 2015
By: /s/ CHARLES VOLK
Charles Volk
Chief Executive Officer (Duly Authorized, Principal Executive
Officer,
Principal Financial Officer and Principal Accounting Officer)
EXHIBIT 31.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Charles Volk, certify that:
1. I have reviewed
this report on Form 10-Q of Worthington Energy, Inc.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such
disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such
internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the
effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this
report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 5, 2015
/s/ CHARLES VOLK
Charles Volk
Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In connection with this Quarterly Report
of Worthington Energy, Inc. (the “Company” ) on Form 10-Q for the period ended June 30, 2014, as filed with the Securities
and Exchange Commission on the date hereof (the “Report” ), I, Charles Volk, Principal Executive Officer and Principal
Financial Officer of the Company, certifies to the best of his knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant
to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
1. Such Quarterly Report on Form 10-Q for
the period ended June 30, 2014, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in such Quarterly
Report on Form 10-Q for the period ended June 30, 2014, fairly presents, in all material respects, the financial condition and
results of operations of Worthington Energy, Inc..
By: /s/ CHARLES VOLK
Name: Charles Volk
Title: Chief Executive Officer,
(Principal Executive Officer and Principal
Financial Officer)
Date: March 5, 2015