UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September
30, 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 |
|
|
|
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 |
28 |
|
|
Item 1A. Risk Factors |
29 |
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
29 |
|
|
Item 3. Defaults Upon Senior Securities |
29 |
|
|
Item 4. Mine Safety Disclosures |
30 |
|
|
Item 5. Other Information |
30 |
|
|
Item 6. Exhibits |
30 |
|
|
Signatures |
31 |
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
| |
| September 30,
2014 | | |
| December 31,
2013 | |
ASSETS | |
| (unaudited) | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | – | | |
$ | 166 | |
Other current assets | |
| 10,000 | | |
| – | |
Total Current Assets | |
| 10,000 | | |
| 166 | |
| |
| | | |
| | |
Oil and gas properties, held for recession | |
| – | | |
| 5,698,563 | |
Oil and gas properties | |
| 762,941 | | |
| – | |
Property and equipment, net of accumulated depreciation | |
| 6,412 | | |
| 10,123 | |
Other assets | |
| 14,610 | | |
| 14,610 | |
| |
| | | |
| | |
Total Assets | |
$ | 793,963 | | |
$ | 5,723,462 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 683,334 | | |
$ | 863,702 | |
Accrued interest | |
| 145,004 | | |
| 1,340,122 | |
Accrued liabilities | |
| 412,688 | | |
| 442,863 | |
Payable to Tarpon Bay Partners, LLC | |
| 1,078,578 | | |
| – | |
Payable to Ironridge Global IV, Ltd. | |
| 121,976 | | |
| 241,046 | |
Payable to former officer | |
| 15,000 | | |
| 115,000 | |
Unsecured convertible promissory notes payable, net of discount, in default | |
| 1,121,345 | | |
| 929,964 | |
Secured notes payable, net of discount | |
| 533,040 | | |
| 620,512 | |
Convertible debentures in default | |
| – | | |
| 2,453,032 | |
Derivative liabilities | |
| 2,316,353 | | |
| 7,908,415 | |
Total Current Liabilities | |
| 6,427,318 | | |
| 14,914,656 | |
| |
| | | |
| | |
Long-Term Liabilities | |
| | | |
| | |
Long-term asset retirement obligation | |
| 195,512 | | |
| 37,288 | |
| |
| | | |
| | |
Total Liabilities | |
| 6,622,830 | | |
| 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,
2,868,077,366 and 47,476,293 shares issued and outstanding, respectively | |
| 2,868,076 | | |
| 47,476 | |
Additional paid-in capital | |
| 24,270,577 | | |
| 26,435,670 | |
Accumulated deficit | |
| (32,968,520 | ) | |
| (35,712,628 | ) |
Total Stockholders' Deficiency | |
| (5,828,867 | ) | |
| (9,228,482 | ) |
| |
| | | |
| | |
Total Liabilities and Stockholders' Deficiency | |
$ | 793,963 | | |
$ | 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 | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 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 | |
| 207,145 | | |
| 209,277 | | |
| 1,246,865 | | |
| 1,099,769 | |
Total costs and operating expenses | |
| 207,145 | | |
| 209,277 | | |
| 1,246,865 | | |
| 1,111,392 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (207,145 | ) | |
| (209,277 | ) | |
| (1,246,865 | ) | |
| (1,111,392 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Change in fair value of derivative liabilities | |
| 113,780 | | |
| (185,515 | ) | |
| 1,231,086 | | |
| 1,216,999 | |
Gain on recession of oil and gas properties | |
| – | | |
| – | | |
| 3,915,707 | | |
| – | |
Interest expense | |
| (24,748 | ) | |
| (142,968 | ) | |
| (198,066 | ) | |
| (451,201 | ) |
Financing costs and penalty interest | |
| (67,301 | ) | |
| (18,067 | ) | |
| (552,232 | ) | |
| (615,825 | ) |
Amortization of debt discount | |
| (113,185 | ) | |
| (194,902 | ) | |
| (405,522 | ) | |
| (725,731 | ) |
Amortization of deferred financing costs | |
| – | | |
| – | | |
| – | | |
| (370,000 | ) |
Total other income (expense) | |
| (91,454 | ) | |
| (541,452 | ) | |
| 3,990,973 | | |
| (945,758 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (298,599 | ) | |
$ | (750,729 | ) | |
$ | 2,744,108 | | |
$ | (2,057,150 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings (loss) Common Share | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.00 | ) | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.13 | ) |
Diluted | |
$ | (0.00 | ) | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.13 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and Diluted Weighted-Average Common Shares Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 2,746,329,490 | | |
| 36,845,556 | | |
| 1,376,242,204 | | |
| 16,003,402 | |
Diluted | |
| 2,746,329,490 | | |
| 36,845,556 | | |
| 34,241,375,217 | | |
| 16,003,402 | |
The accompanying
notes are an integral part of these condensed consolidated financial statements.
WORTHINGTON ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
| |
Series
A Preferred Stock | | |
Common
Stock | | |
Additional
Paid in | | |
Accumulated | | |
Total 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 | |
| | | |
| | | |
| 1,765,124,083 | | |
| 1,765,123 | | |
| (1,413,703 | ) | |
| | | |
| 351,420 | |
Issuance of common stock to Ironridge Global Iv, Ltd. in settlement
of liabilities | |
| | | |
| | | |
| 661,000,000 | | |
| 661,000 | | |
| (541,930 | ) | |
| | | |
| 119,070 | |
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 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,744,108 | | |
| 2,744,108 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - September 30, 2014 | |
| 1,000,000 | | |
$ | 1,000 | | |
| 2,868,077,366 | | |
$ | 2,868,076 | | |
$ | 24,270,577 | | |
$ | (32,968,520 | ) | |
$ | (5,828,867 | ) |
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 Nine Months Ended | |
| |
September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash Flows From Operating Activities | |
| | | |
| | |
Net income (loss) | |
$ | 2,744,108 | | |
$ | (2,057,150 | ) |
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 | |
| 552,232 | | |
| 615,825 | |
Amortization of debt discount | |
| 405,522 | | |
| 725,731 | |
Amortization of deferred financing costs | |
| – | | |
| 370,000 | |
Gain on recession of oil and gas properties | |
| (3,915,707 | ) | |
| – | |
Accretion of asset retirement obligation | |
| 8,571 | | |
| – | |
Depreciation expense | |
| 3,711 | | |
| 3,822 | |
Change in fair value of derivative liabilities | |
| (1,231,086 | ) | |
| (1,216,999 | ) |
Convertible note payable issued for consulting fees | |
| 75,000 | | |
| – | |
Change in assets and liabilities: | |
| | | |
| | |
Prepaid expense and other current assets | |
| (10,000 | ) | |
| 36,431 | |
Other assets | |
| – | | |
| 100,000 | |
Accounts payable and accrued liabilities | |
| 1,010,519 | | |
| 908,558 | |
Net Cash Used In Operating Activities | |
| (357,130 | ) | |
| (417,945 | ) |
| |
| | | |
| | |
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 | |
| 347,764 | | |
| 265,500 | |
Payment on principal on notes payable | |
| – | | |
| (3,750 | ) |
Net Cash Provided By Financing Activities | |
| 356,964 | | |
| 405,750 | |
| |
| | | |
| | |
Net Decrease In Cash and Cash Equivalents | |
| (166 | ) | |
| (13,061 | ) |
Cash and Cash Equivalents At Beginning Of Period | |
| 166 | | |
| 8,065 | |
Cash and Cash Equivalents At End Of Period | |
$ | – | | |
$ | (4,996 | ) |
| |
| | | |
| | |
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 | |
$ | 447,763 | | |
$ | 1,085,227 | |
Common stock issued for conversion of notes and accrued interest | |
$ | 352,320 | | |
$ | 671,100 | |
Common stock issued for Ironridge Global IV Ltd settlement | |
$ | 119,070 | | |
$ | 1,421,595 | |
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 | |
$ | – | | |
$ | 75,000 | |
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 Nine months Ended September 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 September 30, 2014, and its consolidated results of
operations and cash flows for the three and nine months ended September 30, 2014 and 2013. The results of operations for
the nine months ended September 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 September 30, 2014,
the Company has a working capital deficit of $6,417,318 and a stockholders’ deficiency of $5,828,867 and a significant portion
of the Company’s debt is in default. The Company also used cash of $357,130 in its operating activities during the
nine months ended September 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 September 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 September
30, 2014 and December 31, 2013, the Company had an ARO of $195,512 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 September 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 32,865,133,013 and 697,345,978 shares of common stock outstanding. The table
below shows the calculation of basic and diluted earnings (loss) per shares:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
Basic: | |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| 2,746,329,490 | | |
| 36,845,556 | | |
| 1,376,242,204 | | |
| 16,003,402 | |
Net income (loss) | |
$ | (298,599 | ) | |
$ | (750,729 | ) | |
$ | 2,744,108 | | |
$ | (2,057,150 | ) |
Earnings (loss) per common share, basic | |
$ | (0.00 | ) | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.13 | ) |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Diluted: | |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| 2,746,329,490 | | |
| 36,845,556 | | |
| 1,376,242,204 | | |
| 16,003,402 | |
Dilutive effect of conversion of convertible debt | |
| – | | |
| – | | |
| 32,865,133,013 | | |
| – | |
Assumed average common shares outstanding | |
| 2,746,329,490 | | |
| 36,845,556 | | |
| 34,241,375,217 | | |
| 16,003,402 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | (298,599 | ) | |
$ | (750,729 | ) | |
$ | 2,744,108 | | |
$ | (2,057,150 | ) |
Deduct change in fair value of derivative liabilities | |
| – | | |
| – | | |
| (1,231,086 | ) | |
| | |
Add interest and financing costs on convertible debentures | |
| – | | |
| – | | |
| 750,298 | | |
| – | |
Add amortization of discounts on convertible debentures | |
| – | | |
| – | | |
| 405,522 | | |
| – | |
Net income (loss) for diluted earnings (loss) per common shares | |
$ | (298,599 | ) | |
$ | (750,729 | ) | |
$ | 2,668,842 | | |
$ | (2,057,150 | ) |
Earnings (loss) per common share, diluted | |
$ | (0.00 | ) | |
$ | (0.02 | ) | |
$ | 0.00 | | |
$ | (0.13 | ) |
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 September 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 |
|
$ |
– |
|
|
$ |
2,316,353 |
|
|
$ |
– |
|
|
$ |
2,316,353 |
|
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 debt | |
| 5,259,769 | |
Gain on recession | |
$ | 3,915,707 | |
Note 3 – Oil and Gas Properties
Oil and gas properties consisted of the following:
| |
September 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 September 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 September
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 September 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 September 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 nine months ended September 30, 2014, the Company issued Ironridge an additional 661,000,000
shares of common stock valued at $119,070 and at September 30, 2014, the balance due to Ironridge was $121,976.
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 accounts assumed are current liabilities until
settled under the assignment agreement.
In connection with the settlement, during the
nine months ended September 30, 2014, the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917 and at
September 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 September 30, 2014 and December 31, 2013 is as follows:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | | |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | | |
Principal | | |
Discount | | |
Value | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Asher Enterprises, Inc. | |
$ | 110,160 | | |
$ | 30,455 | | |
$ | 79,705 | | |
$ | 111,900 | | |
$ | 7,473 | | |
$ | 104,427 | |
GEL Properties, LLC | |
| 126,280 | | |
| – | | |
| 126,280 | | |
| 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 | |
| 189,755 | | |
| 5,500 | | |
| 184,255 | | |
| – | | |
| – | | |
| – | |
AGS Capital Group | |
| 25,000 | | |
| 7,291 | | |
| 17,709 | | |
| – | | |
| – | | |
| – | |
Hanover Holdings | |
| 31,500 | | |
| 15,750 | | |
| 15,750 | | |
| – | | |
| – | | |
| – | |
LG Group | |
| 70,669 | | |
| 35,750 | | |
| 34,919 | | |
| – | | |
| – | | |
| – | |
IBC | |
| 51,614 | | |
| 20,082 | | |
| 31,532 | | |
| – | | |
| – | | |
| – | |
Revolution Investment Management | |
| 75,000 | | |
| 63,158 | | |
| 11,842 | | |
| – | | |
| – | | |
| – | |
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 | |
| 88,977 | | |
| – | | |
| 88,977 | | |
| 285,000 | | |
| 24,338 | | |
| 260,662 | |
| |
$ | 1,299,331 | | |
$ | 177,986 | | |
$ | 1,121,345 | | |
$ | 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 nine months ended September 30,
2014, the Company issued $422,764 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 $178,000 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 $898,793, of which $447,764 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 $451,029 is recorded in current period financing
costs and penalty interest expense.
During the nine months ended September 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 nine months ended September 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 nine months ended September 30,
2014, $346,223 of notes payables and $5,197 of accrued interest were converted into 1,765,124,083 shares of the Company’s
common stock.
Most of our unsecured convertible promissory
notes payable are in default at September 30, 2014. During the nine months ended September 30, 2014 and 2013, the Company recognized
interest expense from the amortization of discounts in the amount of $405,522 and $725,731, respectively.
Note 6 – Secured Notes Payable
A summary of secured notes payable at September
30, 2014 and December 31, 2013:
| |
September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 September 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 | | |
| |
| |
| | |
Nine months Ended | | |
| |
| |
September 30, | | |
September 30, | | |
December 31, | |
| |
2014 | | |
2014 | | |
2013 | |
Conversion feature: | |
| | | |
| | | |
| | |
Risk-free interest rate | |
| 0.13 | % | |
| 0.11% to 0.13% | | |
| 0.13 | % |
Expected Volatility | |
| 390 | % | |
| 421% to 469% | | |
| 425 | % |
Expected life (in years) | |
| .12 to .69 | | |
| .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 | |
| 390 | % | |
| N/A | | |
| 425 | % |
Expected life (in years) | |
| .83 to 2.43 | | |
| N/A | | |
| 1.6 to 3.6 | |
Expected dividend yield | |
| 0 | % | |
| N/A | | |
| 0 | % |
| |
| | | |
| | | |
| | |
Fair Value | |
| | | |
| | | |
| | |
Conversion feature | |
| 2,316,144 | | |
| 898,793 | | |
| 7,896,892 | |
Warrants | |
| 235 | | |
| – | | |
| 11,523 | |
| |
$ | 2,316,353 | | |
$ | 898,793 | | |
$ | 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 September 30, 2014 and December 31, 2013,
the fair value of the aggregate derivative liability of the conversion features and warrants was $2,316,353 and $7,908,415, respectively.
During the nine months ended September 30, 2014, we recognized additional derivative liabilities of $898,793, related to the issuances
of convertible promissory notes payable (see Note 5). For the three and nine months ended September 30, 2014 and 2013 the Company
recorded a change in fair value of the derivative liability of $1,231,086 and $1,216,999, 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 nine months ended September 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 nine months ended September 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 nine
months ended September 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 nine months ended September 30,
2014, the Company issued:
| · | 1,765,124,083 shares of its common stock to the holders of certain unsecured convertible promissory
notes payable in exchange for $351,420 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, |
| · | 661,000,000 shares of its common stock to Ironridge Global IV, Ltd. in exchange for $119,070 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 nine months ended September 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 September 30, 2014 | |
| 83,900 | | |
$ | 24.72 | | |
| 1.9 | | |
$ | – | |
Other Stock Warrants
A summary of other stock warrant activity for
the three-month period ended September 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 September 30, 2014 | |
| 2,371,970 | | |
$ | 0.38 | | |
| 1.7 | | |
$ | – | |
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 $90,000 for
the nine months ended September 30, 2014. The balance due to Surety at September 30, 2014 and December 31, 2013 was $140,602
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 September 30, 2014,
of which approximately $7,000 remained outstanding and included on the Company’s Accounts payable balance at December
31, 2013 and September 30, 2014.
Note 12 – Income Taxes
For the nine months ended September 30, 2014,
net income was $2,744,108 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 nine months ended September 30, 2013,
the net loss was $2,057,150 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 September 30, 2014, the Company does not have any liabilities for unrecognized tax uncertainties.
Note 13 – Subsequent Events
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 | |
| (1,344,062 | ) |
| |
| | |
Extinguishment of derivative liabilities related to convertible notes | |
| 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 September 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 September 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 September 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 September 30, 2014 were not subject to amortization.
Results of Operations
Comparison of the Three and Nine months
Ended September 30, 2014 and 2013
Oil and Gas Revenues
Our oil and gas revenue was $0 for the three
months and nine months ended September 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 $1,246,865
for the nine months ended September 30, 2014, compared to $1,111,392 for the nine months ended September 30, 2013, representing
an increase of $135,473 and our costs and operating expenses were $209,145 for the three months ended September 30, 2014, compared
to $209,277 for the three months ended September 30, 2012, representing a decrease of $2,132. The increase in our costs
and operating expenses for the nine months ended September 30, 2014 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 nine months ended September 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 nine months ended September 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 September 30, 2013.
General and Administrative Expense –
General and administrative expense was $1,246,865 for the nine months ended September 30, 2014 as compared to $1,099,769 for the
nine months ended September 30, 2013, representing an increase of $147,096. The increase in general and administrative expense
during the nine months ended September 30, 2014 is principally related to increases of: (1) $409,576 for legal and consulting
fees; offset by a decrease of $100,000 in write down of asset and a decrease of $84,104 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 $2,316,353 and $7,908,415 as of September 30, 2014 and December 31, 2013,
respectively. We recognized a gain from the change in fair value of these derivative liabilities of $1,246,865 and $1,216,999
for the nine months ended September 30, 2014 and 2013, respectively and we recognized a gain of $113,780 and a loss of
$185,515 for the three months ended September 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 nine months ended September 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 nine months ended September 30, 2013.
Interest Expense – We incurred interest expense of
$198,066 and $451,201 for the nine months ended September 30, 2014 and 2013, respectively and we incurred interest expense of $24,748
and $142,968 for the three months ended September 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 nine months ended September 30, 2014 as compared to
September 30, 2013.
Financing costs and penalty
interest – We incurred financing costs and penalty interest expense of $552,232 and $615,825 for the nine months
ended September 30, 2014 and 2013, respectively and we incurred financing costs and penalty interest expense of $67,301 and
$18,067 for the three months ended September 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 $405,522 and $725,731 of discount on convertible notes and debentures for the nine months
ended September 30, 2014 and 2013, respectively and we have amortized $113,185 and $194,902 of discount on convertible notes
and debentures for the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there is
$177,986 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 nine months ended September 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 nine months ended September 30, 2014, we received $347,764 and $9,200 from the proceeds from the sale
convertible notes and common stock, respectively, and during the nine months ended September 30, 2013, we received $265,500 and
$144,000 from the proceeds from the sale convertible notes and common stock, respectively.
At September 30, 2014, we had $0 in cash and
we had a working capital deficit of $6,417,318, 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 September
30, 2014, is principally due to new unsecured convertible promissory notes payable issued. In addition, we have total stockholders’
deficiency of $5,828,867 at September 30, 2014 compared to total stockholders’ deficiency of $9,228,482 at December 31, 2013,
a decrease in the stockholders’ deficiency of $3,399,615. The decrease in the stockholders’ deficiency for the nine
months ended September 30, 2014, is principally due to net gain generated by settlement with investors incurred during the year
Our operations used net cash of $357,130 during
the nine months ended September 30, 2014, compared to $417,945 of net cash used during the nine months ended September 30, 2013.
Net cash used in operating activities during the nine months ended September 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 nine months ended September 30, 2014 and 2013.
Financing activities provided $356,964 of cash
during the nine months ended September 30, 2014, compared to $405,750 during the nine months ended September 30, 2013. Cash
flows from financing activities during the nine months ended September 30, 2014, relate to 1) the receipt of proceeds from the
placement of unsecured convertible promissory notes in the amount of $347,764,and 2) proceeds from issuance of common stock and
warrants for $9,200 Cash flows from financing activities during the nine months ended September 30, 2013, relate to 1) the
receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $265,500, 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 September 30, 2014:
| |
September 30, 2014 | |
| |
Unpaid | | |
Unamortized | | |
Carrying | |
| |
Principal | | |
Discount | | |
Value | |
| |
| | | |
| | | |
| | |
Asher Enterprises, Inc. | |
$ | 110,160 | | |
$ | 30,455 | | |
$ | 79,705 | |
GEL Properties, LLC | |
| 126,280 | | |
| – | | |
| 126,280 | |
Prolific Group, LLC | |
| 77,900 | | |
| – | | |
| 77,900 | |
Haverstock Master Fund, LTD and Common Stock, LLC | |
| 317,476 | | |
| – | | |
| 317,476 | |
Redwood Management LLC | |
| 189,755 | | |
| 5,500 | | |
| 184,255 | |
AGS Capital Group | |
| 25,000 | | |
| 7,291 | | |
| 17,709 | |
Hanover Holdings | |
| 31,500 | | |
| 15,750 | | |
| 15,750 | |
LG Group | |
| 70,669 | | |
| 35,750 | | |
| 34,919 | |
IBC | |
| 51,614 | | |
| 20,082 | | |
| 31,532 | |
Revolution Investment Management | |
| 75,000 | | |
| 63,158 | | |
| 11,842 | |
Magna Group | |
| 10,000 | | |
| – | | |
| 10,000 | |
Charles Volk (related party) | |
| 125,000 | | |
| – | | |
| 125,000 | |
Various Other Individuals and Entities | |
| 88,977 | | |
| – | | |
| 88,977 | |
| |
$ | 1,299,331 | | |
$ | 177,986 | | |
$ | 1,121,345 | |
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 nine months ended September 30,
2014, the Company issued $466,858 of unsecured convertible promissory notes to various entities and received net proceeds of $347,764.
The convertible promissory notes bear interest from 8% to 12% per annum. The principal and unpaid accrued interest are due
from nine months to twelve months after the issuance date. Most of our unsecured convertible promissory notes payable are in default
at September 30, 2014.
Secured Notes Payable outstanding at September
30, 2014:
| |
September 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 September 30, 2014. Subsequent
to September 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 September 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 September 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 September 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 nine months ended September 30, 2014, the
Company issued to Ironridge 661,000,000 shares of common stock valued at $119,070. The balance due to Ironridge at September 30,
2014 was $121,976.
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 nine months ended September 30,
2014, the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917. The balance due to Tarpon at September
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 September 30,
2014, the Company issued 270,000,000 shares to Ironridge Global IV Ltd for the conversion of $18,900 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 September 30,
2014, the Company issued 67,200,325 shares to Redwood for the conversion of $3,360 of debentures.
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 September 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 September 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 September 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. September 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 September 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 September 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 September 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