NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1 – RESTATEMENT
As
disclosed in our Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on September
4, 2012, the Board of Directors of Savoy Energy Corporation (“Savoy” or the “Company”) determined that
the consolidated financial statements for the three months ended March 31, 2011 included in our Quarterly Report on Form 10-Q
for the period ended March 31, 2011 could no longer be relied upon as a result of errors in such reports.
The
Company filed an Amendment on Form 10-Q/A (“Amendment”) on October 10, 2012 to amend its Quarterly Report on Form
10-Q for the three months ended March 31, 2011 (the “Form 10-Q”), as filed with the SEC on July 1, 2011,
The Amendment was filed solely for the purpose of restating the Consolidated Financial Statements to correct an error in accounting
for certain convertible promissory notes as explained more fully in Notes 1 and 6 of the accompanying notes to consolidated financial
statements as well as to expense $10,000 in fees as explained more fully in Note 5 of the accompanying notes to consolidated financial
statements, which were originally recorded as a reduction in additional paid-in capital.
The
Company has restated its financial statements as at March 31, 2011 and for the three months then ended to reflect:
1)
an adjustment to record the initial derivative liability of $37,634 with the corresponding note discount of $30,000 and interest
expense of $7,634 for the new convertible note issued on March 7, 2011(the 2011 Note),
2)
an adjustment to record the fair value change of the derivative liability from the issuance date of the 2011 Note to March 31,
2011, and the fair value change from December 31, 2010 to March 31, 2011 on the 2010 Notes, resulting in a decrease in the
derivative liability and a credit to other expenses of $9,818,
3)
an adjustment to record the amortization of the note discounts of $34,389 and
4)
a reclassification of $10,000 from reducing additional paid in capital to general and administrative expense. See Note 5.
5)
reversing the original entries made where the Company recorded the beneficial conversion feature at a discount to the market value
of the common stock. The discount related to the beneficial conversion feature was valued at $2,258 at inception. For
the period ended March 31, 2011, $251 was initially charged to interest expense associated with the amortization of the debt discount.
These entries have been reversed in the restated consolidated financial statements.
The
cumulative effect of the restatements increased total liabilities by $48,710, increased additional paid-in capital by $42,742
and increased the net loss for the three months ended March 31, 2011 by $41,954 and accumulated deficit by $91,452.
a)
Balance Sheet
|
|
As
of March 31, 2011
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Notes
payable,
net
of discount
|
|
$
|
497,493
|
$
|
(72,734
)
|
|
(1)(3)
|
$
|
424,759
|
Derivative
liability
|
|
|
-
|
|
121,444
|
|
(1)(2)
|
|
121,444
|
Total
current liabilities
|
|
|
852,689
|
|
48,710
|
|
|
|
901,399
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
854,746
|
|
48,710
|
|
|
|
903,456
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
Additional
paid-in-capital
|
|
|
1,866,315
|
|
42,742
|
|
(4)
|
|
1,909,057
|
Accumulated
deficit
|
|
|
(2,751,535)
|
|
(91,452)
|
|
(1)(2)(3)
|
|
(2,842,987)
|
Total
stockholders’ deficit
|
|
|
(818,474)
|
|
(48,710)
|
|
|
|
(867,184)
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
36,272
|
$
|
-
|
|
|
$
|
36,272
|
|
|
|
|
|
|
|
|
|
|
b)
Statement of Operations
|
|
For
the three months ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
As
Reported
|
|
Adjustments
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
General
and administrative expense
|
|
$
|
96,522
|
|
10,000
|
|
(4)
|
$
|
106,522
|
Total
costs and expenses
|
|
|
2,895
|
|
10,000
|
|
|
|
12,895
|
Operating
income (loss)
|
|
|
621
|
|
(10,000)
|
|
|
|
(9,379)
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(40,741)
|
|
(41,772)
|
|
(1)(3)
|
|
(82,513)
|
Change
in fair value of derivative liability
|
|
|
-
|
|
9,818
|
|
(2)
|
|
9,818
|
Total
other expenses
|
|
|
(52,741)
|
|
(31,954)
|
|
|
|
(84,695)
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(52,120)
|
|
(41,954)
|
|
|
|
(94,074)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.00)
|
|
(0.00)
|
|
|
|
(0.00)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
66,236,000
|
|
|
|
|
|
66,236,000
|
NOTE
2 - BASIS OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements of Savoy Energy Corporation ("the Company") have been
prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities
and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in
Savoy’s annual report filed with the SEC on Form 10-K for the year ended December 31, 2011, on April 16, 2013. In the opinion
of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which
would substantially duplicate the disclosures contained in the audited financial statements for the most recent year 2011 as reported
in Form 10-K have been omitted.
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.
The
Company’s consolidated financial statements are based on a number of significant estimates, including oil and gas reserve
quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing
and costs associated with its retirement obligations.
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.
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.
As
at March 31, 2012, the fair value of cash, accounts receivable, accounts payable and notes payable approximate carrying values
because of the short-term maturity of these instruments.
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 management’s intention with regard to future exploration and development of individually
significant properties, and the Company’s 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.
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 Company’s 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
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 recently adopted to have a material impact on
the Company’s consolidated financial position, operations or cash flows.
Dividends
Dividends
declared on our common stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings will
exist after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions; such payments
constitute a return of contributed capital rather than earnings and are accounted for as a reduction to paid-in capital.
NOTE
4 - GOING CONCERN
The
Company’s 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 March 31, 2012, the Company has a working capital deficit of $3,071,982 has generated limited revenues and has an accumulated
deficit of $5,187,559. These factors raise substantial doubt regarding the Company’s 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 from the Company's 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
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 have not been issued as of the date of this filing. During the three months ended March 31, 2011, the Company paid $10,000
to the shareholder under the agreement which is included in general and administrative expenses for the three months ended March
31, 2011.
In
February 2011, the Company sold its 52.5% 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 assets. The proceeds associated with working and revenue interest totaling approximately $11,000 was accounted
for as a reduction of capitalized costs, with no gain or loss recognized.
In
March 2011, the Company sold a 25.75% 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 was recorded as a gain on sale of assets. The proceeds associated with working and revenue
interest totaling approximately $23,000 was accounted for as a reduction of capitalized costs, with no gain or loss recognized.
NOTE
6 – 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. 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).
On March 30, 2012 ASL assigned sold and transferred (the Assigned OIL Note) the OIL Note to Carebourn Partners, LLC (“Carebourn”).
As of March 31, 2012, the outstanding balance of the Assigned OIL Note was $282,500.
On
March 22, 2010 (the 1
st
March 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest
at 5% per annum. The loans are 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. The convertible promissory note bears interest at 5% per annum and matured April 10, 2011, at which date the $40,000
and any accrued interest is payable or convertible at a price of $0.01 per share. The outstanding principal balance of the convertible
promissory note at March 31, 2012 was $24,500, which is in default and classified as current debt. 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 at March 31, 2011 due to the short-term nature
of the Note. For the period ended March 31, 2011, $12,000 was charged to interest expense associated with the
amortization of the debt discount.
On
March 22, 2010 (the 2
nd
March 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest
at 5% per annum. The loans are 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 and increased the face amount to $41,500. The convertible promissory note bears interest at 5% per annum and matured
April 10, 2011, at which date the $41,500 and any accrued interest is payable or convertible at a price of $0.01 per share. The
outstanding balance of the convertible promissory note at March 31, 2012 was $12,182, which is in default and classified as current
debt. 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 at March 31,
2011 due to the short-term nature of the Note. For the period ended March 31, 2011, $12,000 was charged to interest
expense associated with the amortization of the debt discount.
On
April 21, 2010 (the April 2010 Note) the Company borrowed $40,000 from non-related third parties bearing interest at 5% per annum.
The loans are unsecured and the principal and accrued and unpaid interest matured 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. The convertible promissory
note bears interest at 5% per annum and matured April 10, 2011, at which date the $40,000 and any accrued interest is payable
or convertible at a price of $0.01 per share. The outstanding balance of the convertible promissory note at March 31, 2012 was
$30,000, which is in default and classified as current debt. 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 at based on the intrinsic value of the discount.
The discount was fully amortized at March 31, 2011 due to the short-term nature of the Note. For the period
ended March 31, 2011, $12,000 was charged to interest expense associated with the amortization of the debt discount.
On
October 25, 2010, Asher Enterprises, Inc. (“Asher”) advanced $63,000 to the Company under the terms of a convertible
promissory note (the “October Note”). On December 21, 2010, Asher advanced $32,500 to the Company under
the terms of a convertible promissory note (the “December Note”). The October Note and the December Note together
are referred to as the 2010 Notes. The 2010 Notes bear interest at 10% per annum and matured on their nine month anniversary at
which date the principal amounts and any accrued interest is payable. The 2010 Notes have 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 Company’s
common stock using the average of the lowest three (3) trading prices for the Company’s 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 2010 Notes.
The
Company analyzed the conversion feature of the Asher Notes and the Carebourn Notes (see below) for derivative accounting consideration
under ASC 815-15 “
Derivatives and Hedging
” and determined that the embedded conversion feature should be classified
as a liability due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion
options. ASC 815-15 requires that the conversion features are bifurcated and separately accounted for as an embedded
derivative contained in convertible debt. The embedded derivative is carried on the Company’s balance sheet at
fair value. Any unrealized change in fair value, as determined at each measurement period, is recorded as a component
of the income statement and the associated carrying amount on the balance sheet is adjusted by the change. The Company
values the embedded derivative using the Black-Scholes pricing model.
Upon
issuance of the October Note, the fair value of $65,625 was recorded as a derivative liability. A discount to the convertible
debt principal was recorded in the amount of $63,000 and the difference between the initial recording of the derivative liability
and the debt discount in the amount of $2,625 was recorded as interest expense in October 2010. The debt discount was amortized
over the life of the note, and $15,167 and $47,833 was included in interest expense for the years ended December 31, 2010 and
2011, respectively. As of December 31, 2011, the balance of the October Note was $12,300 and the fair value of the derivative
related to the October Note was $14,022. During the three months ended March 31, 2012 Asher converted the remaining balance of
$12,300 and $2,520 of accrued and unpaid interest into 29,612,891 shares of common stock.
Upon
issuance of the December Note the fair value of $34,656 was recorded as a derivative liability. A discount to the convertible
debt principal was recorded in the amount of $32,500 and the difference between the initial recording of the derivative liability
and the debt discount in the amount of $2,156 was recorded as interest expense in December 2010. The debt discount is amortized
over the life of the note, and $1,204 and $31,296 was included in interest expense for the years ended December 31, 2010 and 2011,
respectively. As of December 31, 2011, the balance of the December Note was $32,500 and the fair value of the derivative related
to the December Note was $37,050. During the three months ended March 31, 2012 Asher converted $5,000 of principal of the December
Note into 7,462,687 shares of common stock. As of March 31, 2012 the balance of the December Note was $27,500 and the fair value
was $111,100 which resulted in a recorded net loss on the fair value of derivative liability of $79,750 in the accompanying consolidated
statements of operations.
The
fair value of the derivative on the 2010 Notes on their date of their respective issuances and combined as of December 31, 2011
and March 31, 2012 was determined using the Black-Scholes option pricing model with the following assumptions:
|
|
October
25, 2010
|
|
December
21, 2010
|
|
|
December
31,
2011
|
|
|
March
31, 2012
|
Estimated
market value of common stock on measurement date
|
|
$
|
0.008
|
|
$
|
0.015
|
|
$
|
0.0004
|
|
$
|
0.0035
|
Exercise price
|
|
$
|
0.0048
|
|
$
|
0.00937
|
|
$
|
0.0002
|
|
$
|
0.0007
|
Risk
free interest rate (1)
|
|
|
|
0.18%
|
|
|
|
0.19%
|
|
|
0.01%
|
|
|
0.05%
|
Term in years
|
|
0.75
years
|
|
0.75
years
|
|
|
0.083
years
|
|
|
.083
years
|
Expected volatility
|
|
|
|
165%
|
|
|
|
197%
|
|
|
302%
|
|
|
333%
|
Expected dividends
(2)
|
|
|
|
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 Asher, 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 Company’s common stock
during the ten (10) trading days prior to the conversion date. On July 1, 2011 Asher advanced the proceeds of the June 2011 Note
directly to various creditors of the Company. In August 2011, Asher 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
outstanding principal balance at December 31, 2011 and March 31, 2012 of the March 2011 Note, the June 2011 Note and the August
2011 Note was $30,000, $11,000 and $14,500 respectively.
Upon
issuance of the March 2011 Note the fair value of $37,634 was recorded as a derivative liability. A discount to the convertible
debt principal was recorded in the amount of $30,000 and the difference between the initial recording of the derivative liability
and the debt discount in the amount of $7,634 was recorded as interest expense in March 2011. The debt discount is amortized over
the life of the note, and $2,556 was included in interest expense for the three months ended March 31, 2011. As of December 31,
2011 the fair value of the derivative related to the March 2011 Note was $34,200. On March 31, 2012 the fair value of the derivative
related to the March 2011 Note was $121,200 which resulted in a recorded net loss on the fair value of derivative liability of
$87,000 in the accompanying consolidated statements of operations.
Upon
issuance of the June 2011 Note the fair value of $13,945 was recorded as a derivative liability. A discount to the convertible
debt principal was recorded in the amount of $11,000 and the difference between the initial recording of the derivative liability
and the debt discount in the amount of $2,945 was recorded as interest expense in June 2011. The debt discount is amortized over
the life of the note, and $3,666 was included in interest expense for the three months ended March 31, 2012. As of December 31,
2011 the fair value of the derivative related to the June 2011 Note was $15,290. On March 31, 2012 the fair value of the derivative
related to the June 2011 Note was $44,440 which resulted in a recorded net loss on the fair value of derivative liability of $29,150
in the accompanying consolidated statements of operations.
Upon
issuance of the August 2011 Note the fair value of $40,278 was recorded as a derivative liability. A discount to the convertible
debt principal was recorded in the amount of $14,500 and the difference between the initial recording of the derivative liability
and the debt discount in the amount of $25,778 was recorded as interest expense in August 2011. The debt discount is amortized
over the life of the note, and $4,833 was included in interest expense for the three months ended March 31, 2012, respectively.
As of December 31, 2011 the fair value of the derivative related to the August 2011 Note was $25,133. On March 31, 2012 the fair
value of the derivative related to the August 2011 Note was $67,989 which resulted in a recorded net loss on the fair value of
derivative liability of $42,856 in the accompanying consolidated statements of operations. The unamortized discount on the August
2011 Note as of March 31, 2012 is $2,846.
The
fair value of the derivative of the 2011 Notes on their respective dates of issuance, on December 31, 2011 and March 31, 2012
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
|
|
|
March
31,
2012
|
Estimated
market value of common stock on measurement date (1)
|
|
$
|
0.01
|
|
$
|
0.0042
|
|
$
|
0.0029
|
|
$
|
0.0004
|
|
$
|
.0035
|
Conversion price
(2)
|
|
$
|
0.00558
|
|
$
|
0.00237
|
|
$
|
0.0007
|
|
$
|
0.00018-0.0002
|
|
|
.00063-.0007
|
Risk
free interest rate (3)
|
|
|
|
0.11%
|
|
|
|
0.10%
|
|
|
0.06%
|
|
|
0.01-0.06
(3)
|
|
|
.01-.07
|
Time to maturity
(4)
|
|
0.75
years
|
|
0.75
years
|
|
|
0.75
years
|
|
|
Various
(4)
|
|
|
Various
|
Expected volatility
(5)
|
|
|
|
191%
|
|
|
|
242%
|
|
|
253%
|
|
|
302%
|
|
|
333%
|
Expected dividends
(6)
|
|
|
|
0%
|
|
|
|
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
Company’s
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.
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 Company’s
common stock using the average of the lowest three (3) trading prices for the Company’s 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.
On
September 9, 2011, 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 “Bertagnolli Note”). 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. During the three months ended
March 31, 2012 the Company agreed to increase the loan by $45,000 for services performed and also reclassified $45,000 from previously
accrued amounts due Bertagnolli to the Bertagnolli Note. On March 30, 2012 $135,000 of the Bertagnolli Note was assigned (the
Assigned Bertagnolli Note) sold and transferred to Carebourn pursuant to a Purchase and Assignment Agreement (the “PAA”).
The outstanding remaining principal balance of the Bertagnolli Note at March 31, 2012 was $31,499.
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 Company’s
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 Company’s 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 Company’s 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 initial 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 Company’s 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 Company’s 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. On March
30, 2012 $65,000 of the ASL Note (the Assigned ASL Note) was assigned, sold and transferred to Carebourn. The outstanding principal
balance of the ASL Note at March 31, 2012 was $44,750.
As
of March 31, 2012 the Company owed Carebourn $482, 500; comprised of $282,500 of the Assigned OIL Note, $135,000 of the Assigned
Bertagnolli Note and $65,000 of the Assigned ASL Note (together the Carebourn Notes). Upon transfer of the Carebourn Notes, the
Company determined the fair value of the Carebourn Notes was $2,188,138 and was recorded as a derivative liability. A discount
to the convertible debt principal was recorded in the amount of $482,500 and the difference between the initial recording of the
derivative liability and the debt discount in the amount of $1,705,638 was recorded as interest expense in the three months ended
March 31, 2012. The debt discount is amortized over the life of the note, and $2,681 was included in interest expense for the
three months ended March 31, 2012. As of March 31, 2012 there remains a discount on the Carebourn convertible Note of $479,819
that will be amortized over the remaining term of the Carebourn note.
A
summary of the derivative liability balance as of December 31, 2011 and March 31, 2012 is as follows:
Fair Value
|
|
Derivative
Liability Balance
12/31/11
|
|
Initial Derivative Liability
|
|
Fair value of convertible notes redeemed
|
|
Fair value change- three months ended 3/31/12
|
|
Derivative Liability Balance 3/31/12
|
2010 Notes
|
|
$
|
51,072
|
|
|
|
—
|
|
|
|
(19,722
|
)
|
|
$
|
79,750
|
|
|
$
|
111,100
|
|
2011 Notes
|
|
|
74,623
|
|
|
|
—
|
|
|
|
—
|
|
|
|
159,006
|
|
|
|
233,629
|
|
Carebourn Note
|
|
|
|
|
|
|
2,188,138
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,188,139
|
|
Total
|
|
$
|
125,695
|
|
|
|
2,188,138
|
|
|
|
(19,722
|
)
|
|
$
|
238,756
|
|
|
$
|
2,532,868
|
|
A
summary of notes payable balances as of December 31, 2011 and March 31, 2012 follows:
Note
|
|
December 31, 2011
|
|
Additions
|
|
Sold/
Transferred/Discount
|
|
Principal Conversions
|
|
Discount on Notes
|
|
March 31, 2012
|
OIL (A)
|
|
$
|
282,500
|
|
|
|
—
|
|
|
|
(282,500
|
)
|
|
|
—
|
|
|
|
|
|
|
$
|
—
|
|
1
st
March 2010 Note
|
|
|
24,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
24,500
|
|
2
nd
March 2010 Note
|
|
|
12,182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
12,182
|
|
April 2010
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
30,000
|
|
Bertagnolli Note (B)
|
|
|
76,499
|
|
|
|
90,000
|
|
|
|
(135,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
31,499
|
|
ASL Note (C)
|
|
|
109,750
|
|
|
|
—
|
|
|
|
(65,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
44,750
|
|
2010 Notes
|
|
|
44,800
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,300
|
)
|
|
|
|
|
|
|
27,500
|
|
2011 Notes
|
|
|
55,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
55,500
|
|
Carebourn
|
|
|
—
|
|
|
|
—
|
|
|
|
482,500
|
|
|
|
—
|
|
|
|
|
|
|
|
482,500
|
|
Sub-total
|
|
$
|
635,731
|
|
|
|
90,000
|
|
|
|
—
|
|
|
|
(17,300
|
)
|
|
|
|
|
|
$
|
708,431
|
|
Discount on notes
|
|
|
(11,346
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(471,320
|
)
|
|
|
(482,666
|
)
|
Balances
|
|
$
|
624,385
|
|
|
$
|
90,000
|
|
|
$
|
0
|
|
|
|
(17,300
|
)
|
|
$
|
(471,320
|
)
|
|
$
|
225,765
|
|
|
(A)
|
Note
sold
and
transferred
to
Carebourn
on
March
30,
2012.
|
|
(B)
|
$135,000
of
note
was
sold
and
transferred
to
Carebourn
on
March
30,
2012.
March
31,
2012
balance
of
$31,499
classified
as
Note
payable,
related
party
on
the
financial
statements
presented
herein.
|
|
(C)
|
$65,000
of
Note
was
sold
and
transferred
to
Carebourn
on
March
30,
2012.
|
NOTE
7 – 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 three months ended March 31, 2012, the Company
received cash advances of $200.
NOTE
8 -
COMMON STOCK
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.
On
March 22, 2012 the Company issued 7,462,687 shares of common stock in exchange for the conversion of $5,000 of the December 2010
Note.
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 Company’s 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
Company’s 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
9 – COMMITMENTS, CONTINGENCIES AND LITIGATION
On
July 27, 2010, the Company entered into a new Employment Agreement with Mr. Bertagnolli to serve as the Company’s 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
Company’s board of directors.
The
Company’s Employment Agreement with Arthur Bertagnolli provides for certain compensation and benefits based on the Company’s
achievement of specified milestones. As of March 31, 2012, none of those milestones have been achieved. Under
certain circumstances, Mr. Bertagnolli is also entitled to an additional payment upon sale of the Company.
NOTE
10- SETTLEMENT OF LAWSUIT
On
March 19, 2010, a lawsuit was filed against the Company by Panos Industries, LLC seeking damages “…in excess of $50,000”
based upon monies which the Plaintiff claims were advanced by Plaintiff on behalf of the Company. The Company filed an answer
to the complaint denying the allegations stated therein and a Counterclaim against the Plaintiff. On January 19, 2012, the parties
mutually agreed to dismiss the suit. The Company previously recorded a liability of $151,003 that has now been reversed in the
accompanying financial statements.
NOTE
11 – SUBSEQUENT EVENTS
In
accordance with ASC 855, the Company evaluated subsequent events through the date these financial statements were available to
be issued. With the exception of those matters discussed below, there were no material subsequent events that required recognition
or additional disclosure in these financial statements.
On
April 2, 2012, the Company issued a convertible promissory note of $20,000 to MM Visionary Consultants, LLC (“MM”).
The note carries an annual interest rate of 8%, matured on April 2, 2013, and is convertible at a 50% discount to the average
of the three lowest closing day prices for the ten days immediately preceding any conversion. MM also received a warrant to purchase
10,000,000 shares of common stock at an exercise price of $0.005 per share, expiring on April 2, 2015.
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.
On
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 officer’s 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 Asher, 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
November 29, 2012, the Company’s Board of Directors approved amending the articles of incorporation of the Company to increase
the number of authorized shares of the Company from 300,000,000 to 3,500,000,000. As of the date of this report, the Company has
not effectuated the increase with the Nevada Secretary of State.
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 Asher, under the same terms and conditions as the 2011 Notes (as amended).
On
December 3, 2012 Bertagnolli sued Carebourn (the Bertagnolli Suit”) for non-payment of amounts due pursuant to the Bertagnolli
PAA. On January 22, 2013 Carebourn filed an Original Answer, Counterclaim and Third Party Petition against the Company (“Carebourn’s
Claim”). Carebourn’s counterclaim, among other things, alleges fraud by both Bertagnolli and the Company. The Company
filed an answer to the claim in February 2013 denying all of Carebourn’s allegations and asserting various affirmative defenses.
The Company intends to vigorously defend its position and counsel for the Company believes that it is too early in the matter
to estimate damages, if any.
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 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 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 officer’s 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.
On
April 4, 2013, the Company issued two convertible promissory notes to Asher for $15,000 and $46,500, respectively, which were
funded by Asher on April 18, 2013.
Management
performed an evaluation of the Company’s 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.