See notes to consolidated financial statements
F-5
SAVOY ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
December 31,
|
|
|
2011
|
|
2010
|
Cash flows from operating activities:
|
|
|
|
(restated)
|
|
Net loss
|
$
|
(419,164)
|
$
|
(1,166,921)
|
Adjustments to reconcile net loss to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation, amortization and impairment
|
|
65
|
|
2,763
|
|
|
Accretion expense
|
|
108
|
|
2,061
|
|
|
Stock-based compensation
|
|
2,500
|
|
672,590
|
|
|
Non cash interest expense
|
|
36,357
|
|
4,781
|
|
|
Note payable issued for services
|
|
112,750
|
|
-
|
|
|
Beneficial conversion feature
|
|
37,500
|
|
-
|
|
|
Gain on extinguishment of debt
|
|
|
(108,505)
|
|
-
|
|
|
Loss on settlement of debt
|
|
|
9,758
|
|
185,433
|
|
|
Gain on sale of working interest
|
|
(213,827)
|
|
(310,264)
|
|
|
Amortization of debt discount
|
|
123,384
|
|
16,370
|
|
|
Change in market value of derivative liability
|
|
(9,503)
|
|
(6,653)
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
-
|
|
2,372
|
|
|
Prepaid and other current assets
|
|
(10,000)
|
|
-
|
|
|
Accounts payable and accrued liabilities
|
|
23,620
|
|
68,188
|
|
|
Accounts payable and accrued liabilities, related
|
|
|
151,166
|
|
|
|
|
Deferred revenue
|
|
|
7,000
|
|
-
|
Net cash used in operating activities
|
|
(256,891)
|
|
(529,280)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from sale of oil and gas properties
|
|
219,100
|
|
409,048
|
|
Capital expenditures for development of oil and gas properties
|
|
(158)
|
|
(40,043)
|
|
Purchase of oil and gas properties
|
|
-
|
|
(28,900)
|
Net cash provided by investment activities
|
|
218,942
|
|
340,105
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
55,500
|
|
235,500
|
|
Repayment of debt
|
|
(20,000)
|
|
(97,500)
|
|
Repayment of advances and loans from related party
|
|
(25,500)
|
|
-
|
|
Advances from unrelated parties
|
|
3,000
|
|
-
|
|
Advances from related party
|
|
23,930
|
|
-
|
Net cash provided by financing activities
|
|
36,930
|
|
138,000
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(1,019)
|
|
(51,175)
|
Cash and cash equivalents, at beginning of year
|
|
9,170
|
|
60,345
|
Cash and cash equivalents, at end of year
|
$
|
8,151
|
$
|
9,170
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Beneficial conversion feature
|
$
|
37,500
|
$
|
-
|
|
Common stock issued for debt
|
$
|
116,775
|
$
|
67,500
|
|
Common stock issued for accrued expenses
|
$
|
-
|
$
|
178,500
|
|
Forgiveness of debt on sale of oil and gas properties
|
$
|
-
|
$
|
10,327
|
|
Related party payable converted to debt
|
$
|
96,499
|
$
|
-
|
|
Debt issued as consideration for services
|
$
|
112,750
|
$
|
-
|
|
Debt discount for derivative liability
|
$
|
-
|
$
|
95,500
|
See notes to consolidated financial statements
F-6
SAVOY ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 RESTATEMENT
The Company has restated its financial statements as at December 31, 2010 and for the year then ended to reflect:
1) an adjustment to record the initial derivative liability of $100,281 with the corresponding note discount of $95,500 and interest expense of $4,781;
2) an adjustment to record the fair value change of the derivative liability from the issuance dates of the 2010 Notes to December 31, 2010, resulting in a decrease in the derivative liability and a credit to other expense of $6,653;
3) an adjustment to record the amortization of the note discount of $16,370; and
4) a reclassification of $35,000 to reduce additional paid-in capital and increase general and administrative expense. See Note 6.
The effect of the adjustments increased total liabilities by $14,498, increased additional paid in capital by $35,000 and increased the net loss for the year ended December 31, 2010 by $49,498.
a) Balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Notes payable,
net of discount
|
|
$
|
518,000
|
$
|
(79,130 )
|
|
(1)(3)
|
$
|
438,870
|
Derivative liability
|
|
|
-
|
|
93,628
|
|
(1)(2)
|
|
93,628
|
Total current liabilities
|
|
|
903,781
|
|
14,498
|
|
|
|
918,279
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
912,336
|
|
14,498
|
|
|
|
926,834
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
Additional paid-in-capital
|
|
|
1,797,657
|
|
35,000
|
|
(4)
|
|
1,832,657
|
Accumulated deficit
|
|
|
(2,699,415)
|
|
(49,498)
|
|
(1)(2)(3)
|
|
(2,748,913)
|
Total stockholders deficit
|
|
|
(838,112)
|
|
(14,498)
|
|
|
|
(852,610)
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
$
|
74,224
|
$
|
-
|
|
|
$
|
74,224
|
|
|
|
|
|
|
|
|
|
|
F-7
b) Statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
$
|
1,252,698
|
|
35,000
|
|
(4)
|
$
|
1,287,698
|
Total costs and expenses
|
|
|
984,661
|
|
35,000
|
|
|
|
1,019,661
|
Operating loss
|
|
|
(928,200)
|
|
(35,000)
|
|
|
|
(963,200)
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(11,385)
|
|
(21,151)
|
|
(1)(3)
|
|
(32,536)
|
Change in fair value of derivative liability
|
|
|
-
|
|
6,653
|
|
(2)
|
|
6,653
|
Total other expenses
|
|
|
(189,223)
|
|
(14,498)
|
|
|
|
(203,721)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,117,423)
|
|
(49,498)
|
|
|
|
(1,166,921)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.02)
|
|
(0.00)
|
|
|
|
(0.02)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
54,164,630
|
|
|
|
|
|
54,164,630
|
NOTE 2 ORGANIZATION OF BUSINESS AND BASIS OF PRESENTATION
Savoy Energy Corporation (the Company or we) was incorporated as Arthur Kaplan Cosmetics, Inc. on June 25, 2007, in the State of Nevada.
On March 31, 2009, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Plantation Exploration, Inc., a privately held Texas corporation (Plantation Exploration), and Plantation Exploration Acquisition, Inc. (Acquisition Sub), a newly formed wholly-owned Nevada subsidiary. In connection with the closing of this merger transaction, Acquisition Sub merged with and into Plantation Exploration (the Merger) on April 2, 2009, with the filing of articles of merger with the Texas Secretary of State. As a result of the Merger, Plantation Acquisition no longer exists and Plantation Exploration became our wholly-owned subsidiary.
On April 3, 2009, we merged with another wholly-owned subsidiary of our Company, known as Savoy Energy Corporation in a short-form merger transaction under Nevada law and, in connection with this short form merger, changed our name to Savoy Energy Corporation.
Effective June 2, 2009, the Companys board of directors approved a forward split of the Companys common stock on the basis of four shares for each share issued and outstanding (4:1 split). The total number of authorized shares was not changed. The Companys financial statements reflect the stock split on a retroactive basis.
Certain amounts in prior periods have been reclassified to conform to current period presentation.
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Planation Exploration. Intercompany transactions and balances have been eliminated upon consolidation.
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and financial instruments which mature within three months of the date of purchase.
F-8
Fair Value of Financial Instruments
As defined in FASB ASC Topic 820 10, Fair Value Measurements and Disclosures, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Oil and Gas Properties
The Company follows the full cost method of accounting for its oil and natural gas properties, whereby all costs incurred in connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing and equipping of oil and gas wells and administrative costs directly attributable to those activities and asset retirement costs. Disposition of oil and gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized unless such adjustment would significantly alter the relationship between capital costs and proved reserves of oil and gas, in which case the gain or loss is recognized to income.
Depletion and depreciation of proved oil and gas properties is calculated on the units-of-production method based upon estimates of proved reserves. Such calculations include the estimated future costs to developed proved reserves. Oil and gas reserves are converted to a common unit of measure based on the energy content of 6,000 cubic feet of gas to one barrel of oil. Costs of undeveloped properties are not included in the costs subject to depletion. These costs are assessed periodically for impairment.
The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For the Company, asset retirement obligations (ARO) relate to the plugging and abandonment of drilled oil and gas properties. The amounts recognized are based upon numerous estimates, including future retirement costs; future recoverable reserve quantities and reserve lives; and the credit-adjusted risk-free interest rate.
Ceiling test
In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the value of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties.
Oil and gas properties, not subject to amortization
The amortization of the oil and gas properties not classified as proved begins when the oil and gas properties become proved, or their values become impaired. The Company assesses the realizability of its properties not characterized as proved on at least an annual basis or when there is or has been an indication that an impairment in value may have occurred. The impairment of properties not classified as proved is assessed based on managements intention with regard to future exploration and development of individually significant properties, and the Companys ability to secure capital funding to finance such exploration and development. If the result of an assessment indicates that a property is impaired, the amount of the impairment is added to the capitalized costs in its full cost pool and they are amortized over production from proved reserves.
Revenue Recognition
Revenues from the sale of oil and natural gas are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured and evidenced by a contract. For oil sales, this occurs when the customer's truck takes delivery of oil from the operators storage tanks.
The Company follows the sales method of accounting for oil and natural gas revenue, so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to its ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than its share of the expected remaining proved reserves.
Costs associated with production are expensed in the period incurred.
F-9
Stock-Based Compensation
Stock-based compensation expense includes the estimated fair value of equity awards vested during the reporting period. The expense for equity awards vested during the reporting period is determined based upon the grant date fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
Deferred Taxes
The Company provides for income taxes under Statement ASC 740 Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. The Companys predecessor operated as entity-exempt from Federal and State income taxes.
ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Earnings (Loss) per Share of Common Stock
Basic net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income per share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During the reporting period when they are anti-dilutive, common share equivalents, if any, are not considered in the computation.
Recent Accounting Pronouncements
The Company does not expect recent accounting standards or interpretations issued or those recently adopted to have a material impact on the Companys consolidated financial position, operations or cash flows.
NOTE 4 GOING CONCERN
The Companys consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of December 31, 2011, the Company has a working capital deficit of $1,092,042 has generated limited revenues, and has an accumulated deficit of $3,168,077 These factors raise substantial doubt regarding the Companys ability to continue as a going concern.
In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues sufficient to meet operating expenses. The continuation of the Company as a going concern is dependent upon the ability to raise equity or debt financing, and the attainment of profitable operations.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 5 OIL AND GAS PROPERTIES
On March 31, 2010, the Company acquired a 2.75% working interest in the Glass 59 #2 well in Sterling County, Texas for approximately $13,000, which is operated by Bright & Company.
In June 2010, the Company acquired the Davis-Cornell oil and gas lease for $28,900. The lease acreage is located in Gonzales County, Texas, and is comprised of 144 acres. The Company acquired a 75% undivided working interest in the unproven reserves, and the sellers retained a 25% undivided working interest. In July 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation deep rights located in Gonzales County, Texas to Lucas Energy, Inc. for $123,228. The deep rights sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended December 31, 2010, the Company recognized a gain of $94,381 on sale of assets.
F-10
During June 2010, the Company entered into an option agreement with a shareholder and working interest participant in certain oil and gas properties located in Gonzales County, Texas, to allow the shareholder to put their interest in the properties to the Company. Pursuant to the option agreement, Savoy agreed to issue 2,640,000 shares of common stock to the shareholder, together with future monthly payments of $5,000 per month to the shareholder until the holding period lapses and the restrictive legend can be removed from the face of the share certificate. Upon the restriction removal, the monthly payment will cease and the shareholder has the option to assign their interest in the oil and gas properties to Savoy. The 2,640,000 shares of common stock granted to the shareholder were valued at $52,800, based on fair market value using quoted market prices on the date of grant and was recorded as a return of capital to the shareholder. During the years ended December 31, 2011 and 2010, the Company paid $20,000 and $35,000, respectively, to the shareholder under the agreement, which is included in general and administrative expenses.
In May 2010, the Company sold certain overriding royalty interests to Lucas Energy, Inc. for $92,568. The overriding royalty interests are associated with the Companys producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $92,568 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $92,558 recognized in the three months ended June 30, 2010 and determined that a gain of $68,902 was the gain on sale of assets.
In June 2010, the Company sold a 92.5% undivided interest in its Eagle Ford formation deep rights located in Gonzales County, Texas to Lucas Energy, Inc. for $140,752. The deep rights sold are unevaluated oil and gas properties associated with the Companys producing wells in the Austin Chalk formation. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended June 30, 2010, the proceeds of $140,752 were recognized as a gain on sale of assets. During the three months ended September 30, 2010, management re-assessed its initial accounting for the gain of $140,752 recognized in the three months ended June 30, 2010 and determined that a gain of $104,104 was the gain on sale of assets. Management evaluated the impact of recording the adjustment to the gain during the three months ended September 30, 2010 as opposed to the three months ended June 30, 2010 and concluded that it did not have a material impact on the financial statements.
In September 2010, the Company sold its 51.5% working and revenue interest and the support equipment on the Ali-O No. 1 well in Gonzales County, Texas to Lucas Energy, Inc. for cash proceeds of $52,500 and forgiveness of payables in the amount of $10,327. The proceeds associated with the support equipment and forgiveness of payable totaling $42,877 was recorded as a gain on sale of assets. The proceeds associated with working and revenue interest totaling $19,950 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
In February 2011, the Company sold its 52.500% working and revenue interest and the support equipment on the Zavadil No. 1 well in Gonzales County, Texas, to Lucas Energy, Inc., for cash proceeds of $65,000 and forgiveness of payables in the amount of approximately $25,000. The proceeds associated with the support equipment and forgiveness of payable totaling approximately $79,000 was recorded as a gain on sale of working interest. The proceeds associated with working and revenue interest totaling approximately $11,000 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
In March 2011, the Company sold a 25.750% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas, to Lucas Energy, Inc., for cash proceeds of approximately $37,000. The proceeds associated with the support equipment totaling approximately $14,000 were recorded as a gain on sale of working interest. The proceeds associated with working and revenue interest totaling approximately $23,000 were accounted for as a reduction of capitalized costs, with no gain or loss recognized.
In April 2011, the Company sold a 12.875% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas, to Lucas Energy, Inc., for cash proceeds of $20,000. The full amount was recorded as a gain on sale of working interest.
In April 2011, the Company sold its remaining 12.875% working and revenue interest and the support equipment on the Rozella Kifer No. 1 well in Gonzales County, Texas, to Lucas Energy, Inc., for cash proceeds of $20,000. The full amount was recorded as a gain on sale of working interest.
In October 2011, the Company sold a 7.5% interest in its Davis-Cornell oil and gas lease deep rights located in Gonzales County, Texas to Lucas Energy, Inc. for $32,000. The deep rights sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended December 31, 2011, the Company recognized a gain of $32,000 on sale of assets.
In November 2011, the Company sold a 25% interest in its Davis-Cornell oil and gas lease shallow rights located in Gonzales County, Texas to Lucas Energy, Inc. for $15,000. The shallow rights sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended December 31, 2011, the Company recognized a gain of $15,000 on sale of assets.
F-11
In December 2011, the Company sold a 50% interest in its Davis-Cornell oil and gas lease shallow rights located in Gonzales County, Texas to Lucas Energy, Inc. for $30,000. The shallow rights sold are unevaluated oil and gas properties. The Company retained its existing working interests in the Austin Chalk producing formation. During the three months ended December 31, 2011, the Company recognized a gain of $30,000 on sale of assets.
NOTE 6 ASSET RETIREMENT OBLIGATIONS
In accordance with ASC 410, Accounting for Asset Retirement Obligations, Savoy records the fair value of a liability for asset retirement obligations (ARO) in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. The present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and is depreciated over the useful life of the asset. Savoy accrues an abandonment liability associated with its oil and gas wells when those assets are placed in service. The ARO is recorded at its estimated fair value and accretion is recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at Savoy's credit-adjusted risk-free interest rate. No market risk premium has been included in Savoy's calculation of the ARO balance.
The following is a description of the changes to the Company's asset retirement obligations for the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Asset retirement obligations at beginning of year
|
|
$
|
8,555
|
|
|
$
|
9,683
|
|
|
|
|
|
|
|
|
|
|
Acquisition of properties
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Sale of properties
|
|
|
(8,663)
|
|
|
|
(3,189
|
)
|
|
|
|
|
|
|
|
|
|
Accretion expense
|
|
|
108
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations at end of year
|
|
$
|
-
|
|
|
$
|
8,555
|
|
NOTE 7 NOTES PAYABLE
On September 24, 2008, Plantation Exploration, Inc. entered into a financing agreement with Oil Investment Leases, Inc. (OIL) for cash advances totaling $290,000. On January 27, 2009 and May 4, 2009, the Company amended the September 24, 2008 agreement with OIL for advance cash payments under the demand loan and to assign the debt from Plantation Exploration to Savoy. The amended agreements provided for total borrowings of $335,000 and $360,000, respectively, due on demand. The interest is payable in-kind at 5,000 shares of common stock of the Company for each month the debt remains unpaid. During the year ended December 31, 2010, the Company made payment reductions totaling $77,500 and issued 7,350,000 shares of common stock with a fair value of $309,600 based on the quoted market value on the grant date.
On December 22, 2011, the outstanding balance of advances from OIL of $282,500 was sold, transferred and assigned by OIL to ASL Energy Corp. (ASL). As of December 31, 2011, the outstanding balance owed OIL was $282,500.
On March 22, 2010, (the 1
st
March 2010 Note) the Company borrowed $40,000 from a non-related third party bearing interest at 5% per annum. The loan is unsecured and the principal and accrued and unpaid interest was payable at maturity on November 30, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature, whereby the first $10,000 of the note was convertible at $0.01 per share and the remainder of the note and principal is convertible at 80% of the five day average closing price immediately preceding conversion and increased the face amount to $41,500. The convertible promissory note bears interest at 5% per annum and matured on April 10, 2011, at which date the $41,500 and any accrued interest was payable. During the year ended December 31, 2011 the holder converted $17,500 of the principal into 4,000,000 shares of the Companys common stock. The outstanding principal balance of the convertible promissory note at December 31, 2011 was $24,000, and is in default.
The Company evaluated the terms of the amendment to the note and concluded that the amended note did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since the amended note was convertible into shares of common stock at a discount to the market value of the common stock.
F-12
.On March 22, 2010, (the 2
nd
March 2010 Note) the Company borrowed an additional $40,000 also from a non-related third party bearing interest at 5% per annum. The loan is unsecured and the principal and accrued and unpaid interest was payable at maturity on November 30, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature whereby the first $10,000 of the note was convertible at $0.01 per share and the remainder of the note and principal is convertible at 80% of the five day average closing price immediately preceding conversion and increased the face amount to $41,500. The convertible promissory note bears interest at 5% per annum and matured on April 10, 2011, at which date the $41,500 and any accrued interest was payable. During the year ended December 31, 2011 the holder converted $28,818 of principal into 7,721,130 shares of the Companys common stock. The outstanding principal balance of the convertible promissory note at December 31, 2011 was $12,182, and is in default.
The Company evaluated the terms of the amendment to the 1
st
and 2
nd
March 2010 Notes and concluded that the amended notes did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since each of the amended notes were convertible into shares of common stock at a discount to the market value of the common stock. The discount of the 1
st
March 2010 Note related to the beneficial conversion feature was valued at $12,000 based on the intrinsic value of the discount. The discount was fully amortized during 2011 due to the short-term nature of the note. For the period ended December 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount for the 1
st
March 2010 Note. The discount of the 2
nd
March 2010 Note related to the beneficial conversion feature was valued at $12,000 based on the intrinsic value of the discount. The discount was fully amortized during 2011 due to the short-term nature of the note. For the period ended December 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount for the 2
nd
March 2010 Note.
On April 21, 2010 (the April 2010 Note) the Company borrowed $40,000 from a non-related third party bearing interest at 5% per annum. The loan is unsecured and the principal and accrued and unpaid interest is payable at maturity on December 31, 2010. The Company used the proceeds for working capital. On January 12, 2011, the Company amended this note to create a conversion feature whereby the first $10,000 of the note was convertible at $0.01 per share and the remainder of the note and principal is convertible at 80% of the five day average closing price immediately preceding conversion. The convertible promissory note bears interest at 5% per annum and matured on April 10, 2011, at which date the $40,000 and any accrued interest was payable. During the year ended December 31, 2011 the holder converted $10,000 of principal into 1,000,000 shares of the Companys common stock. The outstanding principal balance of the convertible promissory note at December 31, 2011 was $30,000 and is in default.
The Company evaluated the terms of the amendment to the note and concluded that the amended note did not result in a derivative; however, the Company concluded that there was a beneficial conversion feature since the amended note was convertible into shares of common stock at a discount to the market value of the common stock. The discount related to the beneficial conversion feature was valued at $12,000 based on the intrinsic value of the discount. The discount was fully amortized during 2011 due to the short-term nature of the note. For the period ended December 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount.
On October 25, 2010 (the October 2010 Note) an unrelated third party (the Party) advanced $63,000 to the Company under the terms of a convertible promissory note. The convertible promissory note (as amended) bears interest at 8% per annum and matured on July 27, 2011, at which date the $63,000 and any accrued interest was payable. The convertible promissory note (as amended) has a conversion price equal to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 60% of the quoted market price for the Companys common stock using the average of the lowest three (3) trading prices for the Companys common stock during the ten (10) trading days prior to the conversion date. The Company is required at all times to have authorized and reserved three times the number of shares that are actually issuable upon full conversion of the convertible promissory note. So long as the Company is not in default, the lender cannot exercise its conversion right for 180 days following the issuance date of the convertible promissory note. The Company has the right to prepay the convertible promissory note under certain specified terms and conditions. The terms and conditions to prepay the convertible promissory note are as follows: (i) the Company has not received a notice of conversion from the lender; (ii) from the date of issuance of the convertible promissory note up to one hundred twenty (120) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 140% of the sum of the outstanding principal plus accrued and unpaid interest; (iii) from one hundred twenty-one (121) days following the issuance date up to one hundred eighty (180) days following the issuance date, the Company has the right, after giving the lender three days prior written notice, to prepay the outstanding principal and accrued interest, in full, in cash equal to 150% of the sum of the outstanding principal amount plus accrued and unpaid interest; (iv) after one hundred eighty (180) days following issuance date, the Company does not have right of prepayment.
During the year ended December 31, 2011, the holder converted $50,700 face amount of the note. Pursuant to the Conversion Price, the Company issued 51,531,563 shares of the Companys common stock at $0.001.The outstanding principal balance of the convertible promissory note at December 31, 2011 was $12,300, and is in default.
F-13
On December 21, 2010 (the December 2010 Note) the same Party advanced $32,500 to the Company under the same terms and conditions (as amended) of the October 2010 Note. The October 2010 Note and the December 2010 Note are referred to as the 2010 Notes. The Company evaluated the conversion options of the 2010 Notes under FASB ASC 815-40 for derivative treatment and determined that the conversion options are required to be accounted for as a derivative. The outstanding principal balance of the convertible promissory note at December 31, 2011 was $32,500, and is in default.
The fair value of the derivative on the 2010 Notes on their date of their respective issuances and combined as of December 31, 2010 and December 31, 2011 was determined using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 25, 2010
|
|
December 21, 2010
|
|
|
December 31,
2010
|
|
|
December 31,
2011
|
Common stock issuable upon conversion
|
|
|
13,125,000
|
|
|
3,465,558
|
|
|
13,375,350
|
|
|
196,491,228
|
Estimated market value of common stock on measurement date (1)
|
|
$
|
0.008
|
|
$
|
0.015
|
|
$
|
0.012
|
|
$
|
0.002
|
Conversion price (2)
|
|
$
|
0.0048
|
|
$
|
0.00937
|
|
$
|
0.0071
|
|
$
|
0.0002
|
Risk free interest rate (3)
|
|
|
0.18
|
%
|
|
|
0.19
|
%
|
|
|
0.19%
|
|
|
0.01 (3)
|
Time to maturity (4)
|
|
0.75 years
|
|
0.75 years
|
|
|
0.75 years
|
|
|
Various (4)
|
Expected volatility (5)
|
|
|
165
|
%
|
|
|
197
|
%
|
|
|
195%
|
|
|
302%
|
Expected dividends (6)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0%
|
|
|
0%
|
On March 7, 2011 (the March 2011 Note), June 22, 2011 (the June 2011 Note) and August 23, 2011 (the August 2011 Note) the Company issued convertible promissory notes of $30,000, $11,000 and $14,500, respectively, to the same Party, under the same terms and conditions as the 2010 Notes (as amended), other than the August 2011 Note defines the Variable Conversion Price as 45% of the average of the three (3) lowest trading prices for the Companys common stock during the ten (10) trading days prior to the conversion date. On July 1, 2011 the Party advanced the proceeds of the June 2011 Note directly to various creditors of the Company. In August 2011, the Party advanced $14,000 directly to creditors of the Company and $500 to the Company. The March 2011 Note, June 2011 Note and August 2011 Note are referred to as the 2011 Notes. The Company evaluated the conversion options of the 2010 Notes under FASB ASC 815-40 for derivative treatment and determined that the conversion options are required to be accounted for as a derivative.
On December 9, 2011, the March 2011 Note in the original face amount of $30,000 went into default as a result of the Companys non-payment.
The outstanding principal balance at December 31, 2011 of the March 2011 Note, the June 2011 Note and the August 2011 Note was $30,000, $11,000 and $14,500 respectively.
On the date of issuance, the fair value of the derivative of the March 2011 Note was $37,633. As a result, a discount of $32,500 on the March 2011 Note, a derivative liability of $37,633, and a resulting loss on the fair value of the derivative liability were recorded on March 7, 2011. As of December 31, 2011, the fair value of the derivatives of the March 2011 Note was $34,200, which resulted in a recorded net gain on the fair value of derivative liability of $3,434 in the accompanying consolidated statements of operations. The Company also amortized the discount (included in interest expense) on the March 2011 Note in the amount of $30,000 for the year ended December 31, 2011.
On the date of issuance, the fair value of the derivative of the June 2011 Note was $13,945. As a result, a discount of $11,000 on the June 2011 Note, a derivative liability of $13,945, and a resulting loss on the fair value of the derivative liability were recorded on July 1, 2011 (the date the June 2011 Note was funded). As of December 31, 2011, the fair value of the derivatives of the June 2011 Note was $15,290, which resulted in a recorded net loss on the fair value of derivative liability of $1,345 in the accompanying consolidated statements of operations. The Company also amortized the discount (included in interest expense) on the June 2011 Note in the amount of $7,334 for the year ended December 31, 2011. The unamortized discount on the June 2011 Note as of December 31, 2011 is $3,666.
On the date of issuance, the fair value of the derivative of the August 2011 Note was $40,278. As a result, a discount of $14,500 on the August 2011 Note, a derivative liability of $40,278, and a resulting loss on the fair value of the derivative liability were recorded on August 23, 2011. As of December 31, 2011, the fair value of the derivatives of the August 2011 Note was $25,133, which resulted in a recorded net gain on the fair value of derivative liability of $15,145 in the accompanying consolidated statements of operations. The Company also amortized the discount (included in interest expense) on the August 2011 Note in the amount of $6,820 for the year ended December 31, 2011. The unamortized discount on the August 2011 Note as of December 31, 2011 is $7,680.
F-14
The fair value of the derivative of the 2011 Notes on their respective dates of issuance and on December 31, 2011 was determined using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 7,
2011
|
|
June 22,
2011
|
|
|
August 23,
2011
|
|
|
December 31,
2011
|
Common stock issuable upon conversion
|
|
|
5,376,344
|
|
|
4,648,215
|
|
|
20,138,889
|
|
|
285,666,556
|
Estimated market value of common stock on measurement date (1)
|
|
$
|
0.01
|
|
$
|
0.0042
|
|
$
|
0.0029
|
|
$
|
0.004
|
Conversion price (2)
|
|
$
|
0.00558
|
|
$
|
0.00237
|
|
$
|
0.0007
|
|
$
|
0.00018-0.0002
|
Risk free interest rate (3)
|
|
|
0.11
|
%
|
|
|
0.10
|
%
|
|
|
0.06%
|
|
|
0.01-0.06 (3)
|
Time to maturity (4)
|
|
0.75 years
|
|
0.75 years
|
|
|
0.75 years
|
|
|
Various (4)
|
Expected volatility (5)
|
|
|
191
|
%
|
|
|
242
|
%
|
|
|
253%
|
|
|
302%
|
Expected dividends (6)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0%
|
|
|
0%
|
The Black-Scholes models were valued with the following inputs:
(1)
Stock Price - The Stock Price was based on the closing price of the Companys stock as of the Valuation Date.
(2)
Conversion Price - The conversion price was based on 50% (45% for the August 23, 2011 Note) of the average of the 3 lowest Stock Prices out of the last 10 trading days prior to the Valuation Date.
(3)
Risk Free Rate - The risk free rate was based on the Treasury Note rates as of the Valuation Dates with term commensurate with the remaining term of the debt.
(4)
Time to Maturity - The time to maturity was determined based on the length of time between the Valuation Date and the maturity of the debt.
(5)
Expected volatility - The expected volatility was based on the historical volatility of the Company.
(6)
Expected dividends - Management estimated the dividend yield at 0% based upon its expectation that there will not be earnings available to pay dividends in the near term.
A summary of the derivative liability balance as of December 31, 2010 and December 31, 2011 is as follows:
|
|
|
|
|
|
Fair Value
|
Derivative
Liability Balance
12/31/10
|
Initial Derivative Liability
|
Fair value of convertible notes redeemed
|
Fair value change- year ended 12/31/11
|
Derivative Liability Balance 12/31/11
|
2010 Notes
|
$93,628
|
-
|
(50,286)
|
$7,730
|
$51,072
|
2011 Notes
|
-
|
91,856
|
-
|
(17,233)
|
74,623
|
Total
|
$93,628
|
$91,856
|
(50,286)
|
$(9,503)
|
$125,695
|
On June 22, 2011, the Company agreed to amend the conversion price of the 2010 Notes, the March 2011 Note and the June 2011 Note to the greater of either (i) a fixed conversion price of $0.00009 or (ii) 50% of the quoted market price for the Companys common stock using the average of the lowest three (3) trading prices for the Companys common stock during the ten (10) trading days prior to the conversion date.
The Company evaluated the modification and concluded that the modification was not an extinguishment of the original debt; as a result, no gain or loss was recognized upon modification and there was not a significant difference between the carrying value of the debt prior to modification and the fair value of the debt after modification.
F-15
On September 9, 2011, (the Bertagnolli Note) the Company entered into a promissory note in the amount of $96,499 with its Chief Executive Officer and Director for amounts previously owed and accrued to Bertagnolli. The note bears interest at the rate of 8% per annum and is payable on demand. Any amounts not paid when due bear interest at the rate of 15% per annum until paid in full. During the year ended December 31, 2011, the Company made repayments totaling $20,000. The outstanding principal balance of the promissory note at December 31, 2011 was $76,499.
Also on September 9, 2011, the Company entered into a convertible promissory note in favor of a third party (the ASL Note) in the amount of $105,000, which evidenced a $100,000 bonus and $5,000 of expenses incurred by the third party in contemplation of a management agreement. The convertible note is payable on demand, accrues interest at the rate of 8% per annum (15% in the event of a default) and is convertible, together with accrued and unpaid interest thereon, at the option of the third party, into shares of the Companys common stock at a conversion price of $0.002 per share. The Company also agreed that the third party would earn an additional $100,000 bonus in the event that (a) the Company adopted an asset purchase agreement, share exchange agreement, plan of merger or consolidation, pursuant to which the Companys shareholders held less than 50% of the voting stock of the resulting entity post transaction, (b) the Board of Directors approved the sale of substantially all of the assets of the Company, or (c) voting control of the Company was acquired by any person other than the current control person of the Company ((a) through (c), a Restructuring); that the third party would be paid a bonus of $0.20 for every $1.00 of reduction of liabilities (including contingent liabilities) of the Company that the third party is able to affect during the term of a Management Agreement dated September 9, 2011, which has a term of 90 days and automatically renews for additional one-month periods thereafter; and to issue the third party 1% of the Companys fully-diluted shares of common stock following any Restructuring. The Company also agreed to indemnify the third party against any liability it may have in connection with the services rendered by the third party pursuant to the Management Agreement or the Company in general and to pay the third party liquidated damages of $50,000 in addition to such indemnification, in the event that the third party becomes party to any claim as a result of the services provided under the Management Agreement or the Company in general.
The Company evaluated the terms of the convertible promissory note and concluded that this convertible promissory note did not result in a derivative and that there was not a beneficial conversion feature.
In connection with the Companys entry into the convertible note, the Company entered into a security agreement with the third party and provided the third party a first priority security interest in all of the Companys assets to secure the repayment of the convertible note.
Effective November 28, 2011, the Company agreed to amend the aforementioned note to increase the principal amount to $109,750. The outstanding principal balance of the promissory note at December 31, 2011 was $109,750.
A summary of notes payable balances as of December 31, 2010 and 2011 follows:
|
|
|
|
|
|
|
|
|
Note
|
|
January 1, 2011
|
Additions
|
Payments
|
Principal Conversions
|
Common Stock Issued
|
|
December 31, 2011
|
OIL
|
$
|
282,500
|
-
|
-
|
-
|
-
|
$
|
282,500
|
1
st
March 2010 Note
|
|
40,000
|
1,500
|
-
|
17,500
|
4,000,000
|
|
24,500
|
2
nd
March 2010 Note
|
|
40,000
|
1,500
|
-
|
28,818
|
7,721,130
|
|
12,182
|
April 2010
|
|
40,000
|
-
|
-
|
10,000
|
1,000,000
|
|
30,000
|
Lucas Note
|
|
20,000
|
-
|
20,000
|
-
|
-
|
|
-
|
Bertagnolli Note (1)
|
|
-
|
96,499
|
20,000
|
-
|
-
|
|
76,499
|
ASL Note
|
|
-
|
109,750
|
-
|
-
|
-
|
|
109,750
|
2010 Notes
|
|
95,500
|
-
|
-
|
50,700
|
51,531,563
|
|
44,800
|
2011 Notes
|
|
-
|
55,500
|
-
|
-
|
-
|
|
55,500
|
Sub-total
|
$
|
518,000
|
264,749
|
40,000
|
107,018
|
64,252,693
|
$
|
635,731
|
Discount on notes
|
|
(79,130)
|
|
|
|
|
|
(11,346)
|
Balances
|
$
|
438,870
|
|
|
|
|
$
|
624,385
|
(1)
Classified as Note payable, related party on the financial statements presented herein.
F-16
NOTE 8 FAIR VALUE MEASUREMENTS
As defined in FASB ASC Topic 820 10, Fair Value Measurements and Disclosures, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
Level 3:
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Companys valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.
As required by FASB ASC Topic 820 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The estimated fair value of the derivative liability was calculated using the Black-Scholes option pricing model (See Note 8).
The following table sets forth, by level within the fair value hierarchy, the Companys financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2011
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total Carrying Value
|
Derivative liability
|
$
|
-
|
$
|
-
|
$
|
125,695
|
$
|
125,695
|
Total
|
$
|
-
|
$
|
-
|
$
|
125,695
|
$
|
125,695
|
NOTE 9 RELATED PARTY TRANSACTIONS
From time to time, the Company receives cash advances from related parties, including stockholders and their affiliates, to cover operating expenses. The advances do not bear interest and are due upon demand. During the twelve months ended December 31, 2011 and 2010, the Company received cash advances of $23,930 and $0, respectively.
F-17
NOTE 10 STOCK OPTIONS AND WARRANTS
Summary information regarding stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
Outstanding at January 1, 2010
|
|
|
8,000,000
|
|
|
$
|
1.00
|
Granted
|
|
|
-
|
|
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
Cancelled/Expired
|
|
|
(8,000,000)
|
|
|
|
(1.00)
|
Outstanding at December 31, 2010
|
|
|
-
|
|
|
|
-
|
Granted
|
|
|
-
|
|
|
|
-
|
Exercised
|
|
|
-
|
|
|
|
-
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
Outstanding at December 31, 2011
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
NOTE 11
COMMON STOCK
On January 26, 2010, the Company issued 1,000,000 common shares valued at $56,000, based on the fair market value using quoted market prices on the date of grant to Excelsus Capital Partners, LLC for services rendered.
On February 1, 2010, the Company issued 800,000 common shares valued at $44,800, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $32,300 on settlement of debt.
On February 1, 2010, the Company issued 800,000 common shares valued at $44,800, based on fair market value using quoted market prices on the date of grant to Barclay Lyons, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $32,300 on settlement of debt.
On February 1, 2010, the Company issued 1,250,000 common shares valued at $70,000, based on fair market value using quoted market prices on the date of grant to Tombstone Capital, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $12,500 and recorded a realized loss of $57,500 on settlement of debt.
On March 4, 2010, the Company issued 10,000,000 common shares valued at $330,000, based on fair market value using quoted market prices on the date of grant to Arthur Bertagnolli in satisfaction of accrued but unpaid employment compensation due to Arthur Bertagnolli of $43,500 and recorded compensation expense of $286,500 in exchange for services rendered.
On March 4, 2010, the Company issued 2,000,000 common shares valued at $70,000, based on fair market value using quoted market prices on the date of grant to for investment banking services rendered.
On March 4, 2010, the Company issued 3,000,000 common shares valued at $105,000, based on fair market value using quoted market prices on the date of grant for investment banking services rendered.
On March 4, 2010, the Company issued 500,000 common shares valued at $16,500, based on fair market value using quoted market prices on the date of grant for legal services rendered.
On March 18, 2010, the Company issued 1,500,000 common shares valued at $52,500, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $42,500 on settlement of debt.
On March 18, 2010, the Company issued 1,500,000 common shares valued at $52,500, based on fair market value using quoted market prices on the date of grant to Barclay Lyons, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $42,500 on settlement of debt.
On April 15, 2010, the Company issued 1,500,000 common shares valued at $45,000, based on fair market value using quoted market prices on the date of grant to Rio Sterling Holdings, LLC for payment on the Companys note payable with Oil Investment Leases, Inc. (OIL) in the amount of $10,000 and recorded a realized loss of $35,000 on settlement of debt.
F-18
On April 26 and May 26, 2010, the Company issued 2,350,000 common shares valued at $58,500, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
On May 26, 2010, the Company issued 1,700,000 common shares valued at $153,400, based on fair market value using quoted market prices on the date of grant to Directors in satisfaction of accrued but unpaid director fees of $133,726 and recorded an expense of $19,674, for the nine months ended September 30, 2010, in exchange for services rendered.
On May 26, 2010, the Company issued 500,000 common shares valued at $11,500, based on fair market value using quoted market prices on the date of grant for legal services rendered.
On December 14, 2010 the Company filed an Amendment to its Articles of Incorporation increasing its authorized capital to 310,000,000 shares comprising 300,000,000 shares of Common Stock par value $.001 per share and 10,000,000 shares of Preferred Stock par value $0.001 per share.
On December 15, 2010, the Company issued 1,500,000 common shares valued at $15,000, based on fair market value using quoted market prices on the date of grant for investment banking services rendered.
On December 31, 2010, the Company issued 1,850,000 common shares valued at $28,120, based on fair market value using quoted market prices on the date of grant to Directors in exchange for services rendered.
On December 31, 2010, the Company issued 600,000 common shares valued at $7,520, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
On January 12, 2011, the holder of two promissory notes, each in the original face amount of $40,000, elected to convert an aggregate of $20,000 into 2,000,000 shares of common stock.
On January 12, 2011, the holder of a promissory note in the original face amount of $40,000, elected to convert $10,000 of the face amount into 1,000,000 shares of common stock.
On February 2, 2011, the Company issued 100,000 common shares valued at $1,500, based on fair market value using quoted market prices on the date of grant for consulting services rendered.
On April 14, 2011, the holder of a promissory note dated March 22, 2010 in the original face amount of $40,000 converted $9,409 face amount of the note into 3,360,565 shares of the Companys common stock.
On April 28, 2011, the holder of a promissory note originally dated October 25, 2010 in the original face amount of $63,000 converted $6,000 face amount of the note into 3,333,333 shares of the Companys common stock.
On May 20, 2011, the holder of a promissory note dated March 22, 2010 in the original face amount of $40,000 converted $7,500 face amount of the note into 3,000,000 shares of the Companys common stock.
On May 20, 2011, the holder of a promissory note dated March 22, 2010 in the original face amount of $40,000 converted $9,409 face amount of the note into 3,360,565 shares of the Companys common stock.
The holder of the October 2010 Note converted the following:
On July 1, 2011, the holder converted $7,000 of the face amount of the note into 3,500,000 shares of the Companys common stock.
On July 22, 2011, the holder converted $4,000 face amount of the note into 2,222,222 shares of the Companys common stock.
On July 27, 2011, the holder converted $4,500 face amount of the note into 3,750,000 shares of the Companys common stock.
On August 3, 2011, the holder converted $4,000 face amount of the note into 4,000,000 shares of the Companys common stock.
On October 19, 2011, the holder converted $2,500 face amount of the note into 2,777,778 shares of the Companys common stock.
On October 25, 2011, the holder converted $3,000 face amount of the note into 3,333,333 shares of the Companys common stock.
On November 2, 2011, the holder converted $5,000 face amount of the note into 5,000,000 shares of the Companys common stock.
F-19
On November 8, 2011, the holder converted $4,500 face amount of the note into 5,000,000 shares of the Companys common stock.
On November 18, 2011, the holder converted $4,000 face amount of the note into 4,819,277 shares of the Companys common stock.
On November 28, 2011, the holder converted $2,500 face amount of the note into 3,676,471 shares of the Companys common stock.
On December 15, 2011, the holder converted $2,500 face amount of the note into 5,319,149 shares of the Companys common stock.
On December 30, 2011, the holder converted $1,200 face amount of the note into 4,800,000 shares of the Companys common stock.
PREFERRED STOCK
Effective December 5, 2011, the Board of Directors approved the filing of a Certificate of Designations establishing the designations, preferences, limitations and relative rights of the Companys Series A Preferred Stock (the
Designation
). The Designation allows the Board of Directors in its sole discretion to issue up to 1,000 shares of Series A Preferred Stock. On December 5, 2011 1,000 shares of Series A Preferred Stock Shares were issued Mr.
Bertagnolli, for services valued at $1,000. The preferred shares,
have the right to vote in aggregate, on all shareholder matters equal to 51% of the total vote. The Series A Preferred Stock will be entitled to this 51% voting right no matter how many shares of common stock or other voting stock of the Company are issued or outstanding in the future (the
Super Majority Voting Rights
). Additionally, the Company cannot adopt any amendments to the Companys Bylaws, Articles of Incorporation, as amended, make any changes to the Designation, or effect any reclassification of the Series A Preferred Stock, without the affirmative vote of at least 66-2/3% of the outstanding shares of Series A Preferred Stock; however, the Company may, by any means authorized by law and without any vote of the holders of shares of Series A Preferred Stock, make technical, corrective, administrative or similar changes to such Certificate of Designations that do not, individually or in the aggregate, adversely affect the rights or preferences of the holders of shares of Series A Preferred Stock.
NOTE 12 COMMITMENTS, CONTINGENCIES AND LITIGATION
Employment Agreement
Pursuant to the terms and conditions of an Employment Agreement entered into with Mr. Bertagnolli on March 31, 2009:
The Company agreed to issue Mr. Bertagnolli options to purchase 4,000,000 shares of our common stock at an exercise price of $1.00 per share that will vest in 2 years from the date of the agreement. The fair value of the options is $242,426 which was valued using the Black-Scholes pricing model at the date of grant. Variables used in the Black-Scholes pricing model include (1) discount rate of 1.35%, (2) expected term of 5 years, (3) expected volatility of 142% and (4) zero expected dividends.
The Company further agreed to issue Mr. Bertagnolli options to purchase up to 5% of our outstanding common stock at an exercise price of $1.00 per share that will vest in 2 years from the date of the agreement. The Company and Mr. Bertagnolli have since agreed that the number of options issuable under the agreement was to be 4,000,000 shares of our common stock under the same terms. The fair value of the options is $181,820 which was valued using the Black-Scholes pricing model at the date of grant. Variables used in the Black-Scholes pricing model include (1) discount rate of 1.35%, (2) expected term of 5 years, (3) expected volatility of 142% and (4) zero expected dividends.
Under the Employment Agreement, the Company is obligated to pay Mr. Bertagnolli a cash bonus of 5% of the net proceeds of any sale of the Company to any larger oil and gas company, with an additional 5% if Mr. Bertagnolli secures the purchaser.
On July 27, 2010, the Company entered into a new Employment Agreement with Mr. Bertagnolli to serve as the Companys President and Chief Executive Officer. The Agreement, which replaces and supersedes the prior Employment Agreement, is effective as of June 1, 2010 and has a term of two (2) years from the effective date. Unless terminated within one year of its expiration, the Agreement is automatically renewed for additional terms of one year each. It provides for a base salary of $15,000 per month together with certain prerequisites and annual grants of employee stock options at the discretion of the Companys board of directors.
F-20
During January 2010, the Company entered into a consulting agreement with an unrelated third party and paid the consultant for investment banking services a commitment fee of $5,000 and issued the consultant 1,000,000 fully vested shares of common stock (See Note 12). The Company amended the consulting agreement in March 2010, and extended the term for twelve months from the date of the amendment and issued the consultant 5,000,000 fully vested shares of common stock (2,000,000 shares on March 4, 2010 and 3,000,000 shares on March 4, 2010 See Note 12). As amended, the consulting agreement includes the following commitments:
|
|
i.
|
The consultant will receive $5,000 per month for twelve months;
|
ii.
|
The consultant will receive a referral fee of 10% cash and 10% equity of the aggregate amount of each successful equity financing;
|
iii.
|
The consultant will receive a referral fee of 5% cash and 5% equity of the aggregate amount of each successful debt financing.
|
During March 2010, the Company executed an investor relations agreement whereby the Company, agreed to pay $120,000 in cash and 600,000 shares in common stock with an initial payment of $15,000 and issue 100,000 shares of common stock to be paid upon execution of the agreement. As of September 30, 2010, the Company paid a total of $45,000 cash and issued 300,000 shares of the Companys common stock valued at $6,900, based on the fair market value using quoted market prices on the date of grant. During the three months ended September 30, 2010, the Company terminated the agreement. There was no unrecognized expense related to this agreement at December 31, 2010.
During October 2010, the Company executed an investor relations agreement, whereby the Company agreed to pay $90,000 in cash and 900,000 shares in common stock with an initial payment of $15,000 and an initial issuance of 400,000 shares of common stock to be paid upon execution of the agreement. As of December 31, 2010, the Company paid a total of $22,500 cash and issued 600,000 shares of the Companys common stock valued at $7,520, based on the fair market value using quoted market prices on the date of grant. During February 2011, the Company issued 700,000 shares of the Companys common stock valued at $8,400, based on the fair market value using quoted market prices on the date of grant.
The Companys Employment Agreement with Arthur Bertagnolli provides for certain compensation and benefits based on the Companys achievement of specified milestones. As of December 31, 2011, none of those milestones had been achieved. Under certain circumstances, Mr. Bertagnolli is also entitled to an additional payment upon sale of the Company.
Panos Industries, LLC v. Savoy Energy Corporation, et. al., District Court, Clark County, Nevada Case # A-10-612340-C.
On March 19, 2010, this action was filed in the above-entitled Court seeking damages
in excess of $50,000 based upon monies which the Plaintiff claims were advanced by Plaintiff on behalf of the Company. This action is in its very early stages and as of this date the Company has not been served with the Summons and Complaint, and has therefore not filed any Answer to the Complaint. While the outcome of this matter cannot be predicted, the Company specifically denies that it is indebted to Plaintiff and believes that any claims purportedly asserted in the lawsuit are without merit. The Company further believes that it has meritorious claims against Plaintiff which arose in connection with the merger of the Companys predecessor (Arthur Kaplan Cosmetics, Inc.) with Plantation Exploration, Inc. and in connection with the aftermath of the merger. The Company intends to vigorously defend any claims asserted by the Plaintiff and to aggressively prosecute its claims against the Plaintiff. Even if the Company is ultimately successful in defending this action, it will incur legal fees and other expenses in connection with such defense; the amount of which cannot be predicted at this time. Such expenses could have a material impact on the Companys future operating results and have an adverse impact on the Companys funds available for its operations. On January 19, 2012, the parties mutually agreed to dismiss the suit.
NOTE 13 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share.
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|
|
|
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|
|
|
|
|
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For the Year
Ended
December 31,
2011
|
|
|
For the Year
Ended
December 31,
2010
|
|
Net Loss (numerator)
|
|
$
|
(419,164)
|
|
|
$
|
(1,166,921
|
)
|
Shares (denominator)
|
|
|
85,068,158
|
|
|
|
54,164,630
|
|
Per share amount
|
|
$
|
(0.00)
|
|
|
$
|
(0.02
|
)
|
No computation for diluted earnings per share was prepared for the convertible promissory notes (See Note 7).
F-21
NOTE 14 INCOME TAXES
The Company provides for income taxes under Statement ASC 740 Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. The Companys predecessor operated as entity-exempt from Federal and State income taxes.
ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The provision for income taxes differs from the amounts which would be provided by applying the statutory federal income tax rate of 35% to the net loss before provision for income taxes for the following reasons:
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For the
Year Ended
December 31,
2011
|
|
|
For the
Year Ended
December 31,
2010
|
|
Income tax expense at statutory rate
|
|
$
|
(175,837
|
)
|
|
$
|
(455,109
|
)
|
Change in valuation allowance
|
|
|
175,837
|
|
|
|
455,109
|
|
Income tax expense per books
|
|
$
|
-
|
|
|
$
|
-
|
|
Net deferred tax assets consist of the following components as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
NOL carryover
|
|
$
|
(1,190,307)
|
|
|
$
|
(390,338)
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
(1,501)
|
|
|
|
(672,590)
|
|
Valuation allowance
|
|
|
1,191,808
|
|
|
|
1,062,928
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards of $64,266 for federal income tax reporting purposes are subject to annual limitations. When a change in ownership occurs, net operating loss carry forwards may be limited as to use in future years.
NOTE 15 SUBSEQUENT EVENTS
On January 30, 2012 the Company issued 5,263,158 shares of common stock in exchange for the conversion of $1,000 of the October 2010 Note.
On February 9, 2012 the Company issued 5,217,391 shares of common stock in exchange for the conversion of $1,200 of the October 2010 Note.
On February 28, 2012 the Company issued 5,400,000 shares of common stock in exchange for the conversion of $2,700 of the October 2010 Note.
On March 9, 2012 the Company issued 6,875,000 shares of common stock in exchange for the conversion of $4,600 of the October 2010 Note and $900 of accrued and unpaid interest on the October 2010 Note.
On March 22, 2012 the Company issued 6,857,342 shares of common stock in exchange for the conversion of $2,800 of the October 2010 Note and $1,620 of accrued and unpaid interest on the October 2010 Note.
In March 2012 ASL sold and transferred the outstanding balance of $282,500 acquired from OIL (See Note 8) to a third party (the Assigned OIL Note).
In March 2012, ASL the holder of a convertible promissory note (the ASL Note) in the initial face value of $105,000 sold and transferred $65,000 of the note to a third party(the Assigned ASL Note)
F-22
On March 25, 2012, the Company issued a convertible promissory note to an unrelated third party. The Company received the funds on April 2, 2012. The convertible promissory note bears interest at 8% per annum and matures on March 25, 2013, at which date the $20,000 and any accrued interest was payable. The convertible promissory note has a conversion price equal to 50% of the quoted market price for the Companys common stock using the average of the lowest three (3) trading prices for the Companys common stock during the ten (10) trading days prior to the conversion date. The note can be prepaid at any time without any premium or penalty. In addition, the Company agreed to issue to the note holder, warrants to purchase 10,000,000 shares of the Companys common stock at an exercise price of $0.005 per share. The warrants expire on the March 25, 2015.
During the three months ended March 31, 2012, the Company expensed an additional $45,000 of officers salary to Bertagnolli, reclassed $45,000 from accrued officers salary and increased the Bertagnolli note by $90,000. The balance of the Bertagnolli Note was $166,499 and on March 30, 2012 Mr. Bertagnolli sold and transferred $135,000 of the Bertagnolli Note to a third party.
On March 30, 2012 the Company signed a binding term sheet (the Term Sheet) with a third party, whereby under certain terms and conditions, the third party has the right to acquire form Mr. Bertagnolli the 1,000 shares of Series A Preferred Stock (see Note 11). As of the filing of this Report, the terms and conditions of the Term Sheet have not been satisfied.
On April 2, 2012 the Company issued 7,462,687 shares of common stock in exchange for the conversion of $5,000 of the December 2010 Note.
On May 10, 2012 the Company issued 8,010,175 shares of common stock in exchange for the conversion of $4,600 of the Assigned OIL Note.
On May 29, 2012 the Company issued 7,864,865 shares of common stock in exchange for the conversion of $15,730 of the ASL Note.
On June 25, 2012 the Company issued 6,000,000 shares of common stock in exchange for the conversion of $6,600 of the Assigned OIL Note.
One June 28, 2012, the Company issued a convertible note to ASL for $22,500 in exchange for consulting services from April 1, 2012 through June 30, 2012. The note is due on demand and carries an annual interest rate of 8%. The note is convertible at $0.0004 into shares of common stock of the Company. The Company also issued ASL a warrant to purchase 2,500,000 shares of common stock at an exercise price of $0.0004, expiring on June 28, 2015.
Also on June 28, 2012, the Company agreed to issue in exchange for $45,000 of accrued and unpaid officers fees for the period from April 1, 2012 to June 30, 2012, a convertible note to Bertagnolli for $45,000. The note is due on demand and carries an annual interest rate of 8%. The note is convertible at $0.0004 into shares of common stock of the Company. The Company also issued Bertagnolli a warrant to purchase 3,500,000 shares of common stock at an exercise price of $0.0004, expiring on June 28, 2015.
On July 26, 2012 the Company issued a convertible promissory note of $10,000 to the same Party, under the same terms and conditions as the 2011 Notes (as amended).
On November 6, 2012 the Company issued 5,639,275 shares of common stock in exchange for the conversion of $3,553 of the Assigned OIL Note.
On December 5, 2012 the Company issued 9,600,000 shares of common stock in exchange for the conversion of $5,120 of the Assigned OIL Note.
On December 19, 2012 the Company issued a convertible promissory note of $11,500 to the same Party, under the same terms and conditions as the 2011 Notes (as amended).
On December 31, 2012, the Company issued a convertible note to ASL for $45,000 in exchange for consulting services from July 1, 2012 through December 31, 2012. The note is due on demand and carries and annual interest rate of 8%. The note is convertible at $0.0004 into shares of common stock of the Company. The Company also issued ASL a warrant to purchase 25,000,000 shares of common stock at an exercise price of $0.0004, expiring on December 31, 2015.
Also on December 31, 2012, the Company agreed to issue in exchange for $45,000 of accrued and unpaid officers fees for the period from July 1, 2012 to December 31, 2012, a convertible secured note to Bertagnolli for $45,000. The note is due on demand and carries an annual interest rate of 8%. The note is convertible at $0.0004 into shares of common stock of the Company. The Company also issued Bertagnolli a warrant to purchase 25,000,000 shares of common stock at an exercise price of $0.0004, expiring on December 31, 2015.
Management performed an evaluation of the Companys activity through the date these financials were issued to determine if they must be reported. The Management of the Company determined that there were no other reportable subsequent events to be disclosed.
F-23