UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

FORM 10-Q

 

    (Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______   to    ______.

 

Commission File Number 000-52590

 

Worthington Energy, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

20-1399613

(I.R.S. Employer Identification No.)

 

145 Corte Madera Town Center #138

Corte Madera, California 94925

(Address of principal executive offices) (Zip code)

 

(775) 450-1515

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

As of March 3, 2015, issuer had 2,868,077,366 outstanding shares of common stock, par value $0.001.

 

 

TABLE OF CONTENTS

 

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)	4
Condensed Consolidated Statements of Operations (Unaudited)	5
Condensed Consolidated Statements of Stockholders’ Deficiency (Unaudited)	6
Condensed Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures about Market Risk	26
Item 4. Controls and Procedures	26
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Mine Safety Disclosures	30
Item 5. Other Information	30
Item 6. Exhibits	30
Signatures	31

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WORTHINGTON ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

			September 30, 2014				December 31, 2013
ASSETS			(unaudited)
Current Assets:
Cash and cash equivalents		$	–			$	166
Other current assets			10,000				–
Total Current Assets			10,000				166
Oil and gas properties, held for recession			–				5,698,563
Oil and gas properties			762,941				–
Property and equipment, net of accumulated depreciation			6,412				10,123
Other assets			14,610				14,610
Total Assets		$	793,963			$	5,723,462
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable		$	683,334			$	863,702
Accrued interest			145,004				1,340,122
Accrued liabilities			412,688				442,863
Payable to Tarpon Bay Partners, LLC			1,078,578				–
Payable to Ironridge Global IV, Ltd.			121,976				241,046
Payable to former officer			15,000				115,000
Unsecured convertible promissory notes payable, net of discount, in default			1,121,345				929,964
Secured notes payable, net of discount			533,040				620,512
Convertible debentures in default			–				2,453,032
Derivative liabilities			2,316,353				7,908,415
Total Current Liabilities			6,427,318				14,914,656
Long-Term Liabilities
Long-term asset retirement obligation			195,512				37,288
Total Liabilities			6,622,830				14,951,944
Stockholders' Deficiency:
Undesignated preferred stock, $0.001 par value; 9,000,000 share authorized, none issued and outstanding			–				–
Series A convertible preferred stock, $0.001 par value; 1,000,000 shares authorized, 1,000,000 shares issued and outstanding			1,000				1,000
Common stock, $0.001 par value; 6,490,000,000 shares authorized, 2,868,077,366 and 47,476,293 shares issued and outstanding, respectively			2,868,076				47,476
Additional paid-in capital			24,270,577				26,435,670
Accumulated deficit			(32,968,520	)			(35,712,628	)
Total Stockholders' Deficiency			(5,828,867	)			(9,228,482	)
Total Liabilities and Stockholders' Deficiency		$	793,963			$	5,723,462

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WORTHINGTON ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Oil and gas revenues, net		$	–			$	–			$	–			$	–
Costs and Operating Expenses
Impairment loss on oil and gas properties			–				–				–				11,623
General and administrative expense			207,145				209,277				1,246,865				1,099,769
Total costs and operating expenses			207,145				209,277				1,246,865				1,111,392
Loss from operations			(207,145	)			(209,277	)			(1,246,865	)			(1,111,392	)
Other income (expense)
Change in fair value of derivative liabilities			113,780				(185,515	)			1,231,086				1,216,999
Gain on recession of oil and gas properties			–				–				3,915,707				–
Interest expense			(24,748	)			(142,968	)			(198,066	)			(451,201	)
Financing costs and penalty interest			(67,301	)			(18,067	)			(552,232	)			(615,825	)
Amortization of debt discount			(113,185	)			(194,902	)			(405,522	)			(725,731	)
Amortization of deferred financing costs			–				–				–				(370,000	)
Total other income (expense)			(91,454	)			(541,452	)			3,990,973				(945,758	)
Net income (loss)		$	(298,599	)		$	(750,729	)		$	2,744,108			$	(2,057,150	)
Earnings (loss) Common Share
Basic		$	(0.00	)		$	(0.02	)		$	0.00			$	(0.13	)
Diluted		$	(0.00	)		$	(0.02	)		$	0.00			$	(0.13	)
Basic and Diluted Weighted-Average Common Shares Outstanding
Basic			2,746,329,490				36,845,556				1,376,242,204				16,003,402
Diluted			2,746,329,490				36,845,556				34,241,375,217				16,003,402

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WORTHINGTON ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY

(UNAUDITED)

 

		Series A Preferred Stock								Common Stock								Additional Paid in				Accumulated				Total Stockholders'
		Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance - January 1, 2014			1,000,000			$	1,000				47,476,293			$	47,476			$	26,435,670			$	(35,712,628	)		$	(9,228,482	)
Issuance of common stock upon conversion of notes payable and accrued interest											1,765,124,083				1,765,123				(1,413,703	)							351,420
Issuance of common stock to Ironridge Global Iv, Ltd. in settlement of liabilities											661,000,000				661,000				(541,930	)							119,070
Issuance of common stock to Tarpon Bay Partners, LLC in settlement of liabilities											310,026,000				310,026				(261,109	)							48,917
Issuance of common stock for acquisition of oil and gas properties											70,000,000				70,000				56,000								126,000
Issuance of common stock to La Jolla Cove Investors, Inc. upon conversion of convertible debentures											13,444,444				13,444				(12,544	)							900
Issuance of common stock to La Jolla Cove Investors, Inc. under an equity investment agreement											6,546				7				8,993								9,000
Issuance of common stock to Caro Capital, Inc. under an equity investment agreement											1,000,000				1,000				(800	)							200
Net Income																							2,744,108				2,744,108
Balance - September 30, 2014			1,000,000			$	1,000				2,868,077,366			$	2,868,076			$	24,270,577			$	(32,968,520	)		$	(5,828,867	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WORTHINGTON ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended
		September 30,
		2014				2013
Cash Flows From Operating Activities
Net income (loss)		$	2,744,108			$	(2,057,150	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Impairment loss on oil and gas properties			–				11,623
Share-based compensation for services			–				84,214
Financing costs and penalty interest			552,232				615,825
Amortization of debt discount			405,522				725,731
Amortization of deferred financing costs			–				370,000
Gain on recession of oil and gas properties			(3,915,707	)			–
Accretion of asset retirement obligation			8,571				–
Depreciation expense			3,711				3,822
Change in fair value of derivative liabilities			(1,231,086	)			(1,216,999	)
Convertible note payable issued for consulting fees			75,000				–
Change in assets and liabilities:
Prepaid expense and other current assets			(10,000	)			36,431
Other assets			–				100,000
Accounts payable and accrued liabilities			1,010,519				908,558
Net Cash Used In Operating Activities			(357,130	)			(417,945	)
Cash Flows From Investing Activities
Purchase of property and equipment			–				(866	)
Net Cash Used in Investing Activities			–				(866	)
Cash Flows From Financing Activities
Proceeds from the issuance of common stock and warrants, net of registration and offering costs			9,200				144,000
Proceeds from issuance of convertible notes and other debt, less amount held in attorney's trust accounts			347,764				265,500
Payment on principal on notes payable			–				(3,750	)
Net Cash Provided By Financing Activities			356,964				405,750
Net Decrease In Cash and Cash Equivalents			(166	)			(13,061	)
Cash and Cash Equivalents At Beginning Of Period			166				8,065
Cash and Cash Equivalents At End Of Period		$	–			$	(4,996	)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	–				13,650
Cash paid during the period for taxes		$	–			$	–
NON CASH INVESTING AND FINANCING ACTIVITIES
Derivative liabilities recorded as valuation discounts		$	447,763			$	1,085,227
Common stock issued for conversion of notes and accrued interest		$	352,320			$	671,100
Common stock issued for Ironridge Global IV Ltd settlement		$	119,070			$	1,421,595
Common stock issued for Tarpon Bay Partners LLC settlement		$	48,917			$	–
Acquisition of oil and gas properties with common stock and secured notes		$	762,941			$	–
Common and preferred stock issued for executive compensation		$	–			$	75,000
Cancelation of common stock in connection with Black Cat Exploration & Production, LLC settlement		$	–			$	54,000

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WORTHINGTON ENERGY, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

Three and Nine months Ended September 30, 2014 and 2013

 

 

Note 1 – Organization and Significant Accounting Policies

 

Organization – Paxton Energy, Inc. was organized under the laws of the State of Nevada on June 30, 2004. On January 27, 2012, Paxton Energy, Inc. changed its name to Worthington Energy, Inc. (the “Company”).  On October 2, 2013 the Company effected a 1-for-50 reverse common stock split. All references in these consolidated financial statements and related notes to numbers of shares of common stock, prices per share of common stock, and weighted average number of shares of common stock outstanding prior to the reverse stock splits have been adjusted to reflect the reverse stock splits on a retroactive basis for all periods presented, unless otherwise noted.

 

Nature of Operations – As further described in Note 2 to these consolidated financial statements, the Company commenced acquiring working interests in oil and gas properties in June 2005. We are in the business of acquiring, exploring and developing oil and gas-related assets. The Company was considered to be in the exploration stage through March 31, 2014. In June 2014, as discussed in Note, 2, the Financial Accounting Standards Board (FASB) issued new guidance that removed incremental financial reporting requirements from generally accepted accounting principles in the United States for development and exploration stage entities. The Company early adopted this new guidance effective June 30, 2014, as a result of which all inception-to-date financial information and disclosures have been omitted from this report.

 

Condensed Interim Consolidated Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, these condensed consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to fairly present the Company’s consolidated financial position as of September 30, 2014, and its consolidated results of operations and cash flows for the three and nine months ended September 30, 2014 and 2013. The results of operations for the nine months ended September 30, 2014, may not be indicative of the results that may be expected for the year ending December 31, 2014. The condensed consolidated financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of Worthington Energy, Inc., and the notes thereto for the year ended December 31, 2013, included in its annual report on Form 10-K filed with the SEC on April 16, 2014.

 

Going Concern – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has not had significant revenue and is still considered to be in the exploration stage. At September 30, 2014, the Company has a working capital deficit of $6,417,318 and a stockholders’ deficiency of $5,828,867 and a significant portion of the Company’s debt is in default. The Company also used cash of $357,130 in its operating activities during the nine months ended September 30, 2014 and $228,024 during the year ended December 31, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2013 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is currently seeking debt and equity financing to fund potential acquisitions and other expenditures, although it does not have any contracts or commitments for either at this time. The Company will have to raise additional funds to continue operations and, while it has been successful in doing so in the past, there can be no assurance that it will be able to do so in the future. The Company’s continuation as a going concern is dependent upon its ability to obtain necessary additional funds to continue operations and the attainment of profitable operations. The Company hopes that working capital will become available via financing activities currently contemplated with regards to its intended operating activities. There can be no assurance that such funds, if available, can be obtained, or if obtained, on terms reasonable to the Company. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty.

 

Principles of Consolidation – The accompanying consolidated financial statements present the financial position, results of operations, and cash flows of Worthington Energy, Inc. and of PaxAcq Inc., a wholly-owned subsidiary. Intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates – In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s consolidated financial statements relate to the valuation of long-lived assets, accrued other liabilities, and valuation assumptions related to share-based payments and derivative liability.

 

 

Oil and Gas Properties – The Company follows the full cost method of accounting for oil and gas properties. Under this method, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs and related asset retirement costs, are capitalized. Costs capitalized include acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, and costs of drilling and equipping productive and nonproductive wells. Drilling costs include directly related overhead costs. Capitalized costs are categorized either as being subject to amortization or not subject to amortization.

 

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production method using estimates of proved reserves. At September 30, 2014 and December 31, 2013, there were no capitalized costs subject to amortization. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is charged to operations. The Company has not yet obtained a reserve report on its producing properties in Kansas because the properties are considered to be in the exploration stage.

 

In addition, properties subject to amortization will be subject to a “ceiling test,” which basically limits such costs to the aggregate of the “estimated present value,” based on the projected future net revenues from proved reserves, discounted at 10% per annum to present value of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.

 

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in the results of operations. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.

 

Asset Retirement Obligation – The Company accounts for its future asset retirement obligations (“ARO”) by recording the fair value of the liability during the period in which it was incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The increase in carrying value of a property associated with the capitalization of an ARO is included in oil and gas properties in the balance sheets. The ARO consists of costs related to the plugging of wells, removal of facilities and equipment, and site restoration on its oil and gas properties. The asset retirement liability is accreted to operating expense over the useful life of the related asset. As of September 30, 2014 and December 31, 2013, the Company had an ARO of $195,512 and $37,288, respectively.

 

Revenue Recognition – All revenues are derived from the sale of produced crude oil and natural gas. Revenue and related production taxes and lease operating expenses are recorded in the month the product is delivered to the purchaser. Normally, payment for the revenue, net of related taxes and lease operating expenses, is received from the operator of the well approximately 45 days after the month of delivery.

 

Stock-Based Compensation – The Company recognizes compensation expense for stock-based awards to employees expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value. The Company estimates the fair value of stock options using a Black-Scholes option pricing model which requires management to make estimates for certain assumptions regarding risk-free interest rate, expected life of options, expected volatility of stock and expected dividend yield of stock.

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees and non-employee directors in accordance with Accounting Standards Codification (ASC) 505-50, Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration for other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. The fair value of the equity instrument is charged directly to share-based compensation expense and credited to paid-in capital.

 

 

Basic and Diluted Loss per Common Share – Basic loss per common share amounts are computed by dividing net loss by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share amounts are computed assuming the issuance of common stock for potentially dilutive common stock equivalents. As of September 30, 2014 and 2013 there were options, warrants, and stock awards to acquire 2,493,270 and 2,029,594 shares of common stock outstanding and promissory notes and debentures convertible into an aggregate of 32,865,133,013 and 697,345,978 shares of common stock outstanding. The table below shows the calculation of basic and diluted earnings (loss) per shares:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Basic:
Weighted average common shares outstanding			2,746,329,490				36,845,556				1,376,242,204				16,003,402
Net income (loss)		$	(298,599	)		$	(750,729	)		$	2,744,108			$	(2,057,150	)
Earnings (loss) per common share, basic		$	(0.00	)		$	(0.02	)		$	0.00			$	(0.13	)
Diluted:
Weighted average common shares outstanding			2,746,329,490				36,845,556				1,376,242,204				16,003,402
Dilutive effect of conversion of convertible debt			–				–				32,865,133,013				–
Assumed average common shares outstanding			2,746,329,490				36,845,556				34,241,375,217				16,003,402
Net income (loss)		$	(298,599	)		$	(750,729	)		$	2,744,108			$	(2,057,150	)
Deduct change in fair value of derivative liabilities			–				–				(1,231,086	)
Add interest and financing costs on convertible debentures			–				–				750,298				–
Add amortization of discounts on convertible debentures			–				–				405,522				–
Net income (loss) for diluted earnings (loss) per common shares		$	(298,599	)		$	(750,729	)		$	2,668,842			$	(2,057,150	)
Earnings (loss) per common share, diluted		$	(0.00	)		$	(0.02	)		$	0.00			$	(0.13	)

 

Fair Values of Financial Instruments – The carrying amounts reported in the consolidated balance sheets for cash, accounts payable, accrued liabilities, payable to Ironridge Global IV, Ltd., and payable to former officer approximate fair value because of the immediate or, short-term maturity of these financial instruments. The carrying amounts reported for unsecured convertible promissory notes payable, secured notes payable, and convertible debentures approximate fair value because the underlying instruments are at interest rates which approximate current market rates. The fair value of derivative liabilities are estimated based on a probability weighted average Black Scholes-Merton pricing model.

 

For assets and liabilities measured at fair value, the Company uses the following hierarchy of inputs:

 

·

Level one – Quoted market prices in active markets for identical assets or liabilities;

·

Level two – Inputs other than level one inputs that are either directly or indirectly observable; and

·

Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

Liabilities measured at fair value on a recurring basis at September 30, 2014 are summarized as follows:

 

		Level 1				Level 2				Level 3				Total
Derivative liability - conversion feature of debentures and related warrants		$	–			$	–			$	–			$	–
Derivative liability - embedded conversion feature and reset provisions of notes		$	–			$	2,316,353			$	–			$	2,316,353

 

Liabilities measured at fair value on a recurring basis at December 31, 2013 are summarized as follows:

 

		Level 1				Level 2				Level 3				Total
Derivative liability - conversion feature of debentures and related warrants		$	–			$	5,467,223			$	–			$	5,467,223
Derivative liability - embedded conversion feature and reset provisions of notes		$	–			$	2,441,192			$	–			$	2,441,192

 

 

Derivative Financial Instruments – The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton pricing model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Recently Accounting Pronouncements

 

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

 

In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-10 (ASU 2014-10), Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU 2014-10 eliminates the requirement to present inception-to-date information about income statement line items, cash flows, and equity transactions, and clarifies how entities should disclosure the risks and uncertainties related to their activities. ASU 2014-10 also eliminates an exception provided to development stage entities in Consolidations (ASC Topic 810) for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The presentation and disclosure requirements in Topic 915 will no longer be required for interim and annual reporting periods beginning after December 15, 2014, and the revised consolidation standards will take effect in annual periods beginning after December 15, 2015. Early adoption is permitted. The Company adopted the provisions of ASU 2014-10 effective for its financial statements for the interim period ended June 30, 2014, and will no longer present the inception-to-date information formally required.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.  The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statement presentation and disclosures.

 

In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.

 

In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) - Income Statement - Extraordinary and Unusual Items. ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.

 

 

In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

 

Note 2 – Oil and Gas Properties, Held for Recession

 

On May 6, 2011, the Company acquired a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases from Montecito Offshore, L.L.C. (Montecito) located in the Vermillion 179 tract in the Gulf of Mexico offshore from Louisiana, for $1,500,000 in cash, a subordinated promissory note in the amount of $500,000, and 30,000 shares of common stock. The leasehold interest was capitalized in the amount of $5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000 for 30,000 shares of the Company’s common stock based on a closing price of $122.50 per share on the closing date, and $23,563 in acquisition costs. In conjunction with the acquisition, the Company issued $2,550,000 of convertible debentures secured by the leases (see Note 7). In December 2011, Montecito filed a lawsuit to rescind the asset sale transaction. No drilling or production activities was ever commenced in the Vermillion 179 tract by the Company.

 

On May 27, 2014, the parties entered into a Joint Motion to Dismiss to close the case whereby the sale was rescinded, the leasehold interests were returned to Montecito, and the Company’s secured note payable of $500,000 to Montecito (see Note 6) and convertible debentures of $2,453,032 (see Note 7) were extinguished. The Company accounted for the transaction as an exchange of the oil and gas asset for the debt and an extinguishment of a debt related derivative liability (see Note 8). The Company recorded a gain on the recession of $3,915,707 by removing the following balances of assets and liabilities from its books as of May 27, 2014:

 

Assets
Oil and gas properties		$	5,698,563
Total assets rescinded			5,698,563
Liabilities
Accrued interest			1,364,181
Secured note payable			500,000
Convertible debentures			2,453,032
Long-term asset retirement obligation			37,288
Total Liabilities extinguished			4,354,501
Subtotal-loss on exchange of oil and gas properties for debt			(1,344,062	)
Extinguishment of derivative liabilities related to convertible debt			5,259,769
Gain on recession		$	3,915,707

 

Note 3 – Oil and Gas Properties

 

Oil and gas properties consisted of the following:

 

		September 30, 2014				December 31, 2013
ADR leases		$	344,470				–
Sunwest leases			418,471				–
Total		$	762,941				–

 

 

On April 17, 2014, the Company completed the acquisition of the oil and gas assets of American Dynamic Resources, Inc. (ADR). The assets of ADR consist of multiple non-operating leases in Montgomery, Labette and Wilson Counties in Kansas. The combined leases contain 140 oil wells and 17 gas wells within 3,527 acres, none of which are currently operating. We also acquired ADR's patents related to enhanced oil recovery. The ADR acquisition has been capitalized in the amount of $344,470, representing a $125,000 note payable (See Note 6), $126,000 for the fair value of the issuance of 70,000,000 shares of the Company’s common stock based on the closing price of $0.0018 per share on the closing date, and $93,470, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company. All capitalized costs of the ADR oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At September 30, 2014, there was no production at the ADR oil and gas leases and the capitalized costs of the ADR oil and gas leases at September 30, 2014 were not subject to amortization.

 

On April 18, 2014, the Company purchased certain assets from Sunwest Group, LLC (Sunwest) consisting of 18 non-operating leases in Montgomery, Labette and Wilson Counties in Kansas. The Sunwest acquisition has been capitalized in the amount of $418,471, representing a $325,000 note payable (see Note 6), and $93,471, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company. All capitalized costs of the Sunwest oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At September 30, 2014, there was no production at the Sunwest oil and gas leases and the capitalized costs of the Sunwest oil and gas assets at September 30, 2014 were not subject to amortization.

 

Note 4 – Payable to Ironridge Global IV, Ltd. and Payable to Tarpon Bay Partners, LLC

 

Ironridge Global IV, Ltd.

 

In March 2012, Ironridge Global IV, Ltd. (“Ironridge”) filed a complaint against the Company for the payment of $1,388,407 in outstanding accounts payable, accrued compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Ironridge had purchased from various creditors of the Company. The lawsuit was filed in the Superior Court of the State of California for the County of Los Angeles Central District, and the case was Ironridge Global IV, Ltd. v. Worthington Energy, Inc., Case No. BC 480184. On March 22, 2012, the court approved an Order for Approval of Stipulation for Settlement of Claims (the "Order").

 

The Order provided for the immediate issuance by the Company of 20,300 shares of common stock (the “Initial Shares”) to Ironridge towards settlement of the Claim Amount. The Order also provided for an adjustment in the total number of shares which may be issuable to Ironridge based on a calculation period for the transaction, defined as that number of consecutive trading days following the date on which the Initial Shares were issued (the “Issuance Date”) required for the aggregate trading volume of the common stock, as reported by Bloomberg LP, to exceed $4.2 million (the "Calculation Period"). Pursuant to the Order, Ironridge would retain 200 shares of the Company's common stock as a fee, plus that number of shares (the “Final Amount”) with an aggregate value equal to (a) the $1,358,135 plus reasonable attorney fees through the end of the Calculation Period, (b) divided by 70% of the following: the volume weighted average price ("VWAP") of the Common Stock over the length of the Calculation Period, as reported by Bloomberg, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the Calculation Period. The Company has calculated that the Calculation Period ended during the year ended December 31, 2012 and calculated that the Final Amount to be issued under the Order is 856,291 shares of common stock. Additionally, during the year ended December 31, 2012 when the Final Amount was determined, the Company calculated the fair value of the original liability to Ironridge Global IV, Ltd to be $1,981,312, that amount which when discounted to 70% of the VWAP and multiplied by the Final Amount, would equal $1,358,135 plus reasonable attorney fees. In so doing, the Company recognized an expense for the excess of the fair value of the resultant liability to Ironridge Global IV, Ltd. in excess of the original carrying amount of the liabilities acquired by Ironridge and adjusted the liability to Ironridge Global IV, Ltd. for the fair value adjustment.

 

Since the issuance of the Initial Shares, the Company issued an additional 194,200 shares of common stock during the year ended December 31, 2012 (for an aggregate value of $531,689) which has been accounted for as the reduction of a proportionate amount of the calculated fair value of the original liability to Ironridge. During the year ended December 31, 2013 the Company issued an additional 6,550,000 shares of common stock to Ironridge with an aggregate value of $1,421,595. At that time, the Company believed it had a remaining obligation to Ironridge of $68,028. However, on February 24, 2014, Ironridge claimed that the Company’s failure to comply with prior order and stipulation has caused them harm and claimed that it was still owed $241,046. A judge awarded Ironridge a third order enforcing a prior order for approval of stipulation for settlement claim by requiring the Company to reserve 1,095,950,732 shares of the Company’s common stock until the balance of the claim is paid. On February 26, 2014, the Company issued to Ironridge 5,000,000 shares of common stock valued at $4,550. During the nine months ended September 30, 2014, the Company issued Ironridge an additional 661,000,000 shares of common stock valued at $119,070 and at September 30, 2014, the balance due to Ironridge was $121,976.

 

 

Tarpon Bay Partners LLC

 

In 2014, Tarpon Bay Partners LLC (Tarpon) assumed $1.1 million of past due accounts payable and accrued compensation of the Company from various creditors of the Company. Tarpon then commenced an action against the Company to recover the aggregate of the past due accounts. On April 21, 2014, the Circuit Court of the Second Judicial Circuit for Leon County, Florida approved an agreement between the Company and Tarpon, in which the Company agreed to issue shares of the Company’s common stock to Tarpon sufficient to generate proceeds equal to the aggregate of the past due accounts. In addition, Tarpon will receive a fee of approximately 43% based on the proceeds. The Company will record the fees as the shares are issued and the past due accounts are paid. The past due accounts assumed are current liabilities until settled under the assignment agreement.

 

In connection with the settlement, during the nine months ended September 30, 2014, the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917 and at September 30, 2014, the balance due to Tarpon was $1,078,578.

 

Note 5 – Unsecured Convertible Promissory Notes Payable

 

A summary of unsecured convertible promissory notes at September 30, 2014 and December 31, 2013 is as follows:

 

		September 30, 2014												December 31, 2013
		Unpaid				Unamortized				Carrying				Unpaid				Unamortized				Carrying
		Principal				Discount				Value				Principal				Discount				Value
Asher Enterprises, Inc.		$	110,160			$	30,455			$	79,705			$	111,900			$	7,473			$	104,427
GEL Properties, LLC			126,280				–				126,280				149,000				13,486				135,514
Prolific Group, LLC			77,900				–				77,900				79,900				11,849				68,051
Haverstock Master Fund, LTD and Common Stock, LLC			317,476				–				317,476				289,906				–				289,906
Redwood Management LLC			189,755				5,500				184,255				–				–				–
AGS Capital Group			25,000				7,291				17,709				–				–				–
Hanover Holdings			31,500				15,750				15,750				–				–				–
LG Group			70,669				35,750				34,919				–				–				–
IBC			51,614				20,082				31,532				–				–				–
Revolution Investment Management			75,000				63,158				11,842				–				–				–
Magna Group			10,000				–				10,000				–				–				–
Charles Volk (related party)			125,000				–				125,000				125,000				53,596				71,404
Various Other Individuals and Entities			88,977				–				88,977				285,000				24,338				260,662
		$	1,299,331			$	177,986			$	1,121,345			$	1,040,706			$	110,742			$	929,964

 

At December 31, 2013, the unsecured convertible promissory notes payable totaled $1,040,706 and are generally due within one year from the date of issuance, bear interest at rates ranging from 8% to 12% and are convertible into shares of our common stock at discounts ranging from 30% to 70% of the Company’s common stock market price during a certain time period, as defined in the agreements. Additionally, the notes have generally contained a reset provision that provides that if the Company issues or sells any shares of common stock for consideration per share less than the conversion price of the notes, that the conversion price will be reduced to the amount of consideration per share of the stock issuance.

 

During the nine months ended September 30, 2014, the Company issued $422,764 of unsecured convertible promissory notes to various entities. The convertible promissory notes bear interest from 8% to 12% per annum, are convertible into shares of our common stock at discounts ranging from 49% to 70%, contain reset provisions, and are due from six months to 12 months after the issuance date. Approximately $178,000 of the notes were not paid when due, and are currently in default. Under authoritative guidance of the FASB, due to the variable conversion prices and reset provisions, the Company accounted for the conversion features of these notes as instruments which do not have fixed settlement provisions and are deemed to be derivative instruments (see Note 7). The Company determined the aggregate fair value of the derivative liabilities related to these notes was $898,793, of which $447,764 was recorded as note discount (up to the face amount of the notes) to be amortized over the term of the related notes, and the balance of $451,029 is recorded in current period financing costs and penalty interest expense.

 

 

During the nine months ended September 30, 2014, notes payable and accrued interest and fees in the aggregate balance of $80,881 previously classified as secured notes were added to unsecured convertible notes after the holders of the notes sold their interests in the notes to Magna Group (see Note 6). Also during the nine months ended September 30, 2014, the Company increased certain notes by $101,203 to reflect an increase in the principal amount due to an event of default occurring, which was included in financing costs and penalty interest expense.

 

During the nine months ended September 30, 2014, $346,223 of notes payables and $5,197 of accrued interest were converted into 1,765,124,083 shares of the Company’s common stock.

 

Most of our unsecured convertible promissory notes payable are in default at September 30, 2014. During the nine months ended September 30, 2014 and 2013, the Company recognized interest expense from the amortization of discounts in the amount of $405,522 and $725,731, respectively.

 

Note 6 – Secured Notes Payable

 

A summary of secured notes payable at September 30, 2014 and December 31, 2013:

 

		September 30, 2014												December 31, 2013
		Unpaid				Unamortized				Carrying				Unpaid				Unamortized				Carrying
		Principal				Discount				Value				Principal				Discount				Value
Montecito Offshore, LLC		$	–			$	–			$	–			$	500,000			$	–			$	500,000
Bridge Loan Settlement Note			–				–				–				40,000				–				40,000
What Happened LLC			–				–				–				21,575				–				21,575
La Jolla Cove Investors, Inc.			83,040				–				83,040				83,940				25,003				58,937
ADR Acquisition Note			125,000				–				125,000				–				–				–
Sunwest Group LLC			325,000				–				325,000				–				–				–
		$	533,040			$	–			$	533,040			$	645,515			$	25,003			$	620,512

 

The secured notes payable are generally secured with oil and gas properties, bear interest at rates ranging from 4.75% to 9% and some are convertible into shares of our common stock at discount up to 93%. The Montecito Offshore LLC note was secured by a second lien mortgage, and was extinguished on May 27, 2014 (see Note 2). During the nine months ended September 30, 2014, the notes payable for the Bridge Loan Settlement Note and to La Jolla Cove Investors, Inc. were sold by their holders to Magna Group and the aggregate principal balance of $61,575 was transferred to unsecured convertible promissory notes (See Note 5). The note payable to La Jolla Cove Investors was due April 30, 2013, is currently in default, and contains a variable conversion feature which is deemed to be a derivative instrument (see Note 7). In April 2014, the ADR Acquisition note and Sunwest Group LLC note were issued in conjunction with the acquisition of oil and gas properties (see Note 3). The ADR Acquisition note bears interest at 6% per annum, is secured by the property acquired and was due on August 15, 2014. This note has not been repaid and is currently in default. The Sunwest Group, LLC note bears interest at 6% per annum is secured by the property acquired and was due on October 14, 2014. This note has not been repaid and is currently in default.

 

During the nine months ended September 30, 2014, $900 of notes payables to La Jolla Cove Investors were converted into 13,444,444 shares of the Company’s common stock.

 

During the nine months ended September 30, 2014 and 2013, the Company recognized interest expense from the amortization of discounts in the amount of $25,003 and $41,380, respectively.

 

Note 7 – Convertible Debentures

 

In May 2011 the Company sold units to certain investors for aggregate cash proceeds of $2,550,000 at a price of $30,000 per unit, consisting of a secured convertible debenture of $30,000 and a warrant to purchase 400 shares of the Company’s common stock.  The debentures were secured by certain oil and gas leases (see Note 2). The convertible debentures matured in May, 2012 and originally accrued interest at 9% per annum. The debentures were convertible at the holder’s option at any time into common stock at a conversion price originally set at $150.00 per share. The Company was in default under the convertible debentures beginning in July 2011, and the Company accrued interest at the default interest rate is 18% per annum commencing on July 1, 2011.

 

On May 27, 2014, the Company’s obligations under the secured debentures of $2,453,032 was extinguished in conjunction with the recession of the secured oil and gas leases by the Company (see Note 2).

 

The debentures contained price ratchet anti-dilution protection. The Company has determined that this anti-dilution reset provision caused the conversion feature to be bifurcated from the debentures, treated as a derivative liability, and accounted for as a valuation discount at its fair value. On May 27, 2014, the derivative liability related to the convertible debentures was $5,259,769 and was extinguished due to the recession and recorded as part of the gain on recession (see Notes 2 and 8).

 

 

Note 8 – Derivative Liabilities

 

Under the authoritative guidance of the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. All of the notes described in Notes 4 and 5 that contain a reset provision or have a conversion price that is a percentage of the market price contain embedded conversion features which are considered derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations. The conversion feature of the Company’s Debentures (described in Note 6), and the related warrants, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the Debentures from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the Debentures was separated from the host contract (i.e., the Debentures) and recognized as a derivative instrument. 

 

As of September 30, 2014 and December 31, 2013, the derivative liabilities were valued using a probability weighted average Black Scholes-Merton pricing model with the following assumptions:

 

						New Derivatives
						Issued During
						Nine months Ended
		September 30,				September 30,				December 31,
		2014				2014				2013
Conversion feature:
Risk-free interest rate			0.13	%			0.11% to 0.13%				0.13	%
Expected Volatility			390	%			421% to 469%				425	%
Expected life (in years)			.12 to .69				.50 to 1.0				.04 to .62
Expected dividend yield			0	%			0	%			0	%
Warrants:
Risk-free interest rate			0.13	%			N/A				0.13	%
Expected Volatility			390	%			N/A				425	%
Expected life (in years)			.83 to 2.43				N/A				1.6 to 3.6
Expected dividend yield			0	%			N/A				0	%
Fair Value
Conversion feature			2,316,144				898,793				7,896,892
Warrants			235				–				11,523
		$	2,316,353			$	898,793			$	7,908,415

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the convertible debentures and notes was determined by the maturity date of the notes. The expected life of the warrants was determined by their expiration dates. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

 

At September 30, 2014 and December 31, 2013, the fair value of the aggregate derivative liability of the conversion features and warrants was $2,316,353 and $7,908,415, respectively. During the nine months ended September 30, 2014, we recognized additional derivative liabilities of $898,793, related to the issuances of convertible promissory notes payable (see Note 5). For the three and nine months ended September 30, 2014 and 2013 the Company recorded a change in fair value of the derivative liability of $1,231,086 and $1,216,999, respectively. For the three months ended June 30, 2014, a derivative liability of $5,259,769 related to convertible debentures was extinguished and recorded as part of the recession of notes related to oil and gas properties (see Notes 2 and 7).

 

 

Note 9 – Preferred and Common Stock

 

Issuance of Common Stock for Cash

 

During the nine months ended September 30, 2014, the Company sold 1,006,546 shares of common stock at an average price of $0.009 per share for total proceeds of $9,200.

 

Equity Investment Agreements

 

Pursuant to the Equity Investment Agreement, La Jolla Cove Investors, Inc., has the right from time to time during the term of the agreement to purchase up to $2,000,000 of the Company’s Common Stock in accordance with the terms of the agreement. Beginning October 27, 2012 and for each month thereafter, La Jolla shall purchase from the Company at least $100,000 of common stock, at a price per share equal to 125% of the VWAP on the Closing Date, provided, however, that La Jolla shall not be required to purchase common stock if (i) the VWAP for the five consecutive trading days prior to the payment date is equal to or less than $10.00 per share or (ii) an event of default has occurred under the SPA, the Convertible Debenture or the Equity Investment Agreement. Pursuant to the Equity Investment Agreement, La Jolla has the right to purchase, at any time and in any amount, at La Jolla’s option, common stock from the Company at a price per share equal to 125% of the VWAP on the Closing Date.

 

During the nine months ended September 30, 2014, the Company received notices of purchase from La Jolla under the Equity Investment Agreement totaling $9,000, pursuant to which the Company issued 6,546 shares of common stock at a weighted average price of $1.37 per share. In addition, during the nine months ended September 30, 2014, the Company issued 1,000,000 shares of common stock to Caro Capital Inc. under an equity investment agreement at a weighted average price of $0.0002 per share.

 

Issuance of Common Stock for Debt

 

During the nine months ended September 30, 2014, the Company issued:

 

·

1,765,124,083 shares of its common stock to the holders of certain unsecured convertible promissory notes payable in exchange for $351,420 of notes payable and accrued interest,

 

·

13,444,444 shares of its common stock to La Jolla Cover Investors, Inc. in exchange for $900 of secured notes payable,

 

·

661,000,000 shares of its common stock to Ironridge Global IV, Ltd. in exchange for $119,070 of debt, and

 

·

310,026,000 shares of its common stock to Tarpon Bay Partners LLC. in exchange for $48,917 of debt.

 

Issuance of Common Stock for acquisition

 

In April 2014, the Company issued 70,000,000 shares of its common stock to American Dynamic Resources, Inc. (ADR) related to the acquisition of certain oil and gas properties from ADR (see Note 3).

 

Note 10 – Stock Options and Warrants

 

Stock Options and Compensation-Based Warrants

 

On September 29, 2010, the stockholders of the Company approved the adoption of the 2010 Stock Option Plan. The Plan provides for the granting of incentive and nonqualified stock options to employees and consultants of the Company. Generally, options granted under the plan may not have a term in excess of ten years. Upon adoption, the Plan reserved 40,000 shares of the Company’s common stock for issuance there under.

 

Generally accepted accounting principles for stock options and compensation-based warrants require the recognition of the cost of services received in exchange for an award of equity instruments in the financial statements, is measured based on the grant date fair value of the award, and requires the compensation expense to be recognized over the period during which an employee or other service provider is required to provide service in exchange for the award (the vesting period). No income tax benefit has been recognized for share-based compensation arrangements and no compensation cost has been capitalized in the accompanying consolidated balance sheet.

 

 

A summary of stock option and compensation-based warrant activity for the nine months ended September 30, 2014 is presented below:

 

Weighted

Shares

Weighted

Average

Under

Average

Remaining

Aggregate

Option or

Exercise

Contractual

Intrinsic

Warrant

Price

Life (in years)

Value

Outstanding at December 31, 2013

92,300

$

33.52

2.7

$

–

Granted or issued

–

Expired or forfeited

(8,400

)

121.43

Exercisable at September 30, 2014

83,900

$

24.72

1.9

$

–

 

Other Stock Warrants

 

A summary of other stock warrant activity for the three-month period ended September 30, 2014 is presented below:

 

 

Weighted

Weighted

Average

Shares

Average

Remaining

Aggregate

Under

Exercise

Contractual

Intrinsic

Warrant

Price

Life (in years)

Value

Outstanding at December 31, 2013

2,409,370

$

0.38

2.4

$

–

Granted or issued

–

Expired or forfeited

(37,400

)

Outstanding at September 30, 2014

2,371,970

$

0.38

1.7

$

–

 

Note 11 – Related Party Transactions

 

Payable to Related Parties

 

Warren Rothouse was appointed to be a director of the Company in October 2012. Mr. Rothouse is Senior Partner of Surety Financial Group, LLC (Surety). Surety has provided investor relations services to the Company in recent years. On November 7, 2012, the Company entered into a new agreement with Surety to provide investor relations services for the fifteen month period commencing December 1, 2012 and continuing through February 28, 2014. The agreement provided for monthly payments of $6,500 for Surety’s services. In addition, Surety was issued 10,000 shares of restricted common stock of the Company’s common stock and warrants to purchase 15,000 shares of the Company’s common stock. The exercise price of the warrants is $5.00 per share and the warrants are exercisable on a cashless basis. The term of the warrants is three years. On February 27, 2013, the Company amended the November 7, 2012 agreement. Under the amended agreement, Surety will provide investor relations services for the fifteen month period commencing March 1, 2013 and continuing through May 31, 2014 and Surety will receive monthly payments of $10,000 for its services. Compensation to Surety under the agreements was $90,000 for the nine months ended September 30, 2014. The balance due to Surety at September 30, 2014 and December 31, 2013 was $140,602 and $113,300, respectively, included on the Company’s accounts payable balance.

 

Effective January 31, 2013, David Pinkman was appointed to the Board of Directors of the Company. On February 1, 2013, the Company entered into a consulting agreement with Mr. Pinkman. The term of the agreement is for twelve months and provides for monthly compensation of $8,330. As additional compensation, the Company issued 20,000 shares of restricted common stock to Mr. Pinkman and issued him a warrant to acquire 20,000 shares of the Company’s common stock at $2.50 per share. Compensation earned by Mr. Pinkman under the consulting agreement was $17,121 for the year ended December 31, 2013 and September 30, 2014, of which approximately $7,000 remained outstanding and included on the Company’s Accounts payable balance at December 31, 2013 and September 30, 2014.

 

Note 12 – Income Taxes

 

For the nine months ended September 30, 2014, net income was $2,744,108 and the Company did not record any provision for income taxes primarily because the income in 2014 is a result of the extinguishment of a derivative liability due to the recession of the property discussed in Note 2. The income from the removal of the derivative liability is not considered income for tax purposes. For the nine months ended September 30, 2013, the net loss was $2,057,150 and the Company did not record any provisions for income taxes.

 

 

In accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for operating losses and tax credit carryovers; and available tax planning alternatives. Our deferred tax assets are composed primarily of U.S. federal net operating loss carryforwards and temporary differences related to stock based compensation. Based on available objective evidence, management believes it is more likely than not that these deferred tax assets are not recognizable and will not be recognizable until its determined that we have sufficient taxable income. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods, and disclosures. As of September 30, 2014, the Company does not have any liabilities for unrecognized tax uncertainties.

 

Note 13 – Subsequent Events

 

In January 2015, the Company issued two convertible notes in the aggregate of $47,500. The notes are unsecured, due in one year, bear interest at 8% per annum, and contain a $9,500 original issue discount. The notes may be converted after 180 days of issuance at a 45% discount to the price of the Company’s common stock over a period of trading days, as defined. The notes contains certain covenants and events of default, and increases in principal amount and interest rates in the event of defaults.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.

 

Company Overview

 

Worthington Energy, Inc. is an oil and gas exploration and production company with assets in Texas and properties in the Gulf of Mexico. Our assets in Texas consist of a minority working interest in limited production and drilling prospects in the Cooke Ranch area of La Salle County, Texas, and Jefferson County, Texas, all operated by Bayshore Exploration L.L.C. The Texas asset had limited revenues and substantial losses, which we expect for the foreseeable future and are shut in and not producing. In May 2011, we acquired our assets in the Gulf of Mexico referred to as Vermilion 179 (“VM 179”) consisting of a leasehold working interest in certain oil and gas leases located offshore from Louisiana, upon which no drilling or production has commenced as of yet.

 

In Texas, we had working interests ranging from 4% to 31.75% (net revenue interests ranging from 3% to 23.8125%) in the various wells in which we had participated. In the Gulf of Mexico, we had a 70% leasehold working interest, with a net revenue interest of 51.975% of certain oil and gas leases in the Vermillion 179 tract. VM 179 is adjacent to Exxon's VM 164 #A9 well. In May 2014, we agreed to rescind our interest in VM 179 in exchange for the extinguishment of certain debt. The transaction was recorded in May 2014.

 

We are seeking to make additional acquisitions that are currently producing oil in the United States as a way to increase our cash flow. Other than as disclosed herein, we currently do not have any contracts or agreements to acquire additional companies and/or working interests in existing wells, and no assurances can be given that we will identify or acquire such additional acquisitions on terms acceptable to us, if at all. Additional acquisitions will likely require the issuance of equity or debt securities, either directly or indirectly to raise funds for such acquisitions.

 

Organization

 

We were organized under the laws of the State of Nevada on June 30, 2004 under the name Paxton Energy, Inc. During August 2004, shareholder control of our company was transferred, a new board of directors was elected and new officers were appointed. These officers and directors managed us until March 17, 2010 when a new board of directors was elected and new officers were appointed. Effective January 27, 2012, we changed our name to Worthington Energy, Inc.

 

Background

 

VM 179

 

On May 6, 2011, we acquired a 70% leasehold working interest, with a net revenue interest of 51.975%, of certain oil and gas leases from Montecito Offshore, L.L.C. (Montecito) located in the Vermillion 179 tract in the Gulf of Mexico offshore from Louisiana, for $1,500,000 in cash, a subordinated promissory note in the amount of $500,000, and 30,000 shares of common stock. The leasehold interest was capitalized in the amount of $5,698,563, representing $2,000,000 in cash and promissory note, $3,675,000 for 30,000 shares of our common stock based on a closing price of $122.50 per share on the closing date, and $23,563 in acquisition costs. In conjunction with the acquisition, we issued $2,550,000 of convertible debentures secured by the leases. In December 2011, Montecito filed a lawsuit to rescind the asset sale transaction. No drilling or production activities was ever commenced in the Vermillion 179 tract by us.

 

 

On May 27, 2014, the parties entered into a Joint Motion to Dismiss to close the case whereby the sale was rescinded, the leasehold interests were returned to Montecito, and our secured note payable of $500,000 to Montecito and convertible debentures of $2,453,032 were extinguished. We accounted for the transaction as an exchange of the oil and gas asset for the debt and an extinguishment of a debt related derivative liability. We recorded a gain on the recession of $3,915,707 by removing the following balances of assets and liabilities from its books as of May 27, 2014:

 

Assets
Oil and gas properties		$	5,698,563
Total assets rescinded			5,698,563
Liabilities
Accrued interest			1,364,181
Secured note payable			500,000
Convertible debentures			2,453,032
Long-term asset retirement obligation			37,288
Total Liabilities extinguished			4,354,501
Subtotal-loss on exchange of oil and gas properties for debt			(1,344,062	)
Extinguishment of derivative liabilities related to convertible notes			5,259,769
Gain on recession		$	3,915,707

 

Kansas Properties

 

On April 17, 2014, the Company completed the acquisition of the oil and gas assets of American Dynamic Resources, Inc. (ADR). The assets of ADR consist of multiple non-operating leases in Montgomery, Labette and Wilson Counties in Kansas. The combined leases contain 140 oil wells and 17 gas wells within 3,527 acres, none of which are currently operating. We also acquired ADR's patents related to enhanced oil recovery. The ADR acquisition has been capitalized in the amount of $344,470, representing a $125,000 note payable, $126,000 for the fair value of the issuance of 70,000,000 shares of the Company’s common stock based on the closing price of $0.0018 per share on the closing date, and $93,470, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company. All capitalized costs of the ADR oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At September 30, 2014, there was no production at the ADR oil and gas leases and the capitalized costs of the ADR oil and gas leases at September 30, 2014 were not subject to amortization.

 

On April 18, 2014, the Company purchased certain assets from Sunwest Group, LLC (Sunwest) consisting of 18 non-operating leases in Montgomery, Labette and Wilson Counties in Kansas. The Sunwest acquisition has been capitalized in the amount of $418,471, representing a $325,000 note payable, and $93,471, the present value of an abandonment obligations up to the amount of $250,000 assumed by the Company. All capitalized costs of the Sunwest oil and gas leases, including the estimated future costs to develop proved reserves, will be amortized, on the unit-of-production method using estimates of proved reserves once the wells become operating. At September 30, 2014, there was no production at the Sunwest oil and gas leases and the capitalized costs of the Sunwest oil and gas assets at September 30, 2014 were not subject to amortization.

  

Results of Operations

 

Comparison of the Three and Nine months Ended September 30, 2014 and 2013

 

Oil and Gas Revenues

 

Our oil and gas revenue was $0 for the three months and nine months ended September 30, 2014 and 2013. The historical level of oil and gas production has not been significant. Because the level of oil and gas production has not been significant in the past, we continue to be characterized as an exploration-stage company.

 

Cost and Operating Expenses

 

Our costs and operating expenses were $1,246,865 for the nine months ended September 30, 2014, compared to $1,111,392 for the nine months ended September 30, 2013, representing an increase of $135,473 and our costs and operating expenses were $209,145 for the three months ended September 30, 2014, compared to $209,277 for the three months ended September 30, 2012, representing a decrease of $2,132. The increase in our costs and operating expenses for the nine months ended September 30, 2014 are primarily a result of increases in general and administrative expenses as well as in share-based compensation charges, as discussed below.

 

 

Lease Operating Expenses – Lease operating expenses were $0 for the three and nine months ended September 30, 2014 and 2013. Bayshore has ceased to report to us the amounts of our respective share of lease operating expenses and the oil wells are shut in and not producing.

 

Impairment loss on oil and gas properties – During the nine months ended September 30, 2013, we recognized an impairment loss of $11,623 on our Mustang Island 818-L lease. As part of a Settlement Agreement, we transferred to Black Cat all of the title and interest that we owned in the Mustang Island 818-L lease well. We have evaluated the accounting effects of the settlement agreement and concluded that impairment in the approximate amount of $11,623 should be recorded, which has been reflected in the accompanying consolidated financial statements as of September 30, 2013.

 

General and Administrative Expense – General and administrative expense was $1,246,865 for the nine months ended September 30, 2014 as compared to $1,099,769 for the nine months ended September 30, 2013, representing an increase of $147,096. The increase in general and administrative expense during the nine months ended September 30, 2014 is principally related to increases of: (1) $409,576 for legal and consulting fees; offset by a decrease of $100,000 in write down of asset and a decrease of $84,104 in stocks issued for services. The increase in consulting services represents an increase in payments related to investor relations, energy, financing, and general business services as a result of a general increased need for such consulting services.

 

Other Income (Expense)

 

Change in fair value of derivative liabilities – We issued convertible promissory notes commencing in April 2010 which contain a variable conversion price and anti-dilution reset provisions. In addition, during the quarter ended June 30, 2011, we issued convertible debentures and warrants that contain price ratchet anti-dilution protection. These embedded conversion features are treated as embedded derivatives under generally accepted accounting principles and are required to be accounted for at fair value. We have estimated the fair value of the embedded conversion features of the convertible promissory notes, the convertible debentures, and the related warrants using a probability weighted average Black Scholes-Merton pricing model. The fair value of these derivative liabilities was estimated to be $2,316,353 and $7,908,415 as of September 30, 2014 and December 31, 2013, respectively. We recognized a gain from the change in fair value of these derivative liabilities of $1,246,865 and $1,216,999 for the nine months ended September 30, 2014 and 2013, respectively and we recognized a gain of $113,780 and a loss of $185,515 for the three months ended September 30, 2014 and 2013. For the three months ended June 30, 2014, a derivative liability of $5,259,769 related to convertible debentures was extinguished and recorded as part of the gain on recession of oil and gas properties.

 

Gain on recession of oil and gas properties – We recognized a gain on the recession of oil and gas properties during the nine months ended September 30, 2014 of $3,915,707. As discussed above, on May 27, 2014, we entered into an agreement with Montecito whereby the sale was rescinded, the leasehold interests were returned to Montecito, and our secured note payable of $500,000 to Montecito and convertible debentures of $2,453,032 were extinguished. We accounted for the transaction as an exchange of the oil and gas asset for the debt and an extinguishment of a debt related derivative liability. We recorded a gain on the recession of $3,915,707 by removing the assets and liabilities from its books as of May 27, 2014. There was no such gain during the nine months ended September 30, 2013.

 

Interest Expense – We incurred interest expense of $198,066 and $451,201 for the nine months ended September 30, 2014 and 2013, respectively and we incurred interest expense of $24,748 and $142,968 for the three months ended September 30, 2014 and 2013, respectively. The decrease in interest expense is primarily due to the decrease in the amount of our unsecured convertible debt in the nine months ended September 30, 2014 as compared to September 30, 2013.

 

Financing costs and penalty interest – We incurred financing costs and penalty interest expense of $552,232 and $615,825 for the nine months ended September 30, 2014 and 2013, respectively and we incurred financing costs and penalty interest expense of $67,301 and $18,067 for the three months ended September 30, 2014 and 2013, respectively.

 

Amortization of discount on convertible notes and other debt – We have issued convertible promissory notes and debentures to several individuals or entities, commencing in April 2010. In each case, the notes and debentures have a favorable conversion price in comparison to the market price of our common stock on the date of the issuance of the notes. Additionally, the convertible debentures and certain of the convertible promissory notes contain price ratchet anti-dilution reset provisions. The fair value of these embedded conversion features is measured on the issue date of the notes. Generally, a discount is recorded for these embedded conversion features and amortized over the term of the note or debenture as a non-cash charge to the statement of operations. We have amortized $405,522 and $725,731 of discount on convertible notes and debentures for the nine months ended September 30, 2014 and 2013, respectively and we have amortized $113,185 and $194,902 of discount on convertible notes and debentures for the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there is $177,986 of recorded, but unamortized, discount on the convertible promissory notes that will be amortized and recorded as a non-cash expense over the remaining terms of the respective notes.

 

Although the net changes with respect to our revenues and our costs and operating expenses for the three and nine months ended September 30, 2014 and 2013, are summarized above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

 

 

Liquidity and Capital Resources

 

From our inception our principal sources of liquidity consisted of proceeds from the sale of unsecured convertible promissory notes and proceeds from the sale of common stock and warrants. During the nine months ended September 30, 2014, we received $347,764 and $9,200 from the proceeds from the sale convertible notes and common stock, respectively, and during the nine months ended September 30, 2013, we received $265,500 and $144,000 from the proceeds from the sale convertible notes and common stock, respectively.

 

At September 30, 2014, we had $0 in cash and we had a working capital deficit of $6,417,318, as compared to a deficit of $14,914,490 as of December 31, 2013. The working capital deficit is principally the result of historical losses with operations and oil and gas property acquisitions financed through trade creditors and through the use of short-term debt. The increase in the working capital deficit for the period ended September 30, 2014, is principally due to new unsecured convertible promissory notes payable issued. In addition, we have total stockholders’ deficiency of $5,828,867 at September 30, 2014 compared to total stockholders’ deficiency of $9,228,482 at December 31, 2013, a decrease in the stockholders’ deficiency of $3,399,615. The decrease in the stockholders’ deficiency for the nine months ended September 30, 2014, is principally due to net gain generated by settlement with investors incurred during the year

 

Our operations used net cash of $357,130 during the nine months ended September 30, 2014, compared to $417,945 of net cash used during the nine months ended September 30, 2013. Net cash used in operating activities during the nine months ended September 30, 2014, consisted of our net gain of $3,915,707, less, amortization of deferred financing costs and discount on convertible notes, and depreciation expense, and further reduced by non-cash changes in working capital, plus the non-cash gain for the change in fair value of derivative liabilities.

 

Our investing activities that used cash of $0 and $866 during the nine months ended September 30, 2014 and 2013.

 

Financing activities provided $356,964 of cash during the nine months ended September 30, 2014, compared to $405,750 during the nine months ended September 30, 2013. Cash flows from financing activities during the nine months ended September 30, 2014, relate to 1) the receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $347,764,and 2) proceeds from issuance of common stock and warrants for $9,200 Cash flows from financing activities during the nine months ended September 30, 2013, relate to 1) the receipt of proceeds from the placement of unsecured convertible promissory notes in the amount of $265,500, 2) proceeds from issuance of common stock and warrants for $144,000 and 3) payment on principal on note payable of $3,750. 

 

We are currently seeking debt and equity financing to fund potential acquisitions and other expenditures, although we do not have any contracts or commitments for either at this time. We will have to raise additional funds to continue operations and, while we have been successful in doing so in the past, there can be no assurance that we will be able to do so in the future. Our continuation as a going concern is dependent upon our ability to obtain necessary additional funds to continue operations and the attainment of profitable operations.

 

We have historically financed our operations from the issuance of unsecured convertible promissory notes payable, secured notes payable and convertible debentures.

 

Below is a summary of our unsecured convertible promissory notes payable, secured notes payable and convertible debentures at September 30, 2014:

 

		September 30, 2014
		Unpaid				Unamortized				Carrying
		Principal				Discount				Value
Asher Enterprises, Inc.		$	110,160			$	30,455			$	79,705
GEL Properties, LLC			126,280				–				126,280
Prolific Group, LLC			77,900				–				77,900
Haverstock Master Fund, LTD and Common Stock, LLC			317,476				–				317,476
Redwood Management LLC			189,755				5,500				184,255
AGS Capital Group			25,000				7,291				17,709
Hanover Holdings			31,500				15,750				15,750
LG Group			70,669				35,750				34,919
IBC			51,614				20,082				31,532
Revolution Investment Management			75,000				63,158				11,842
Magna Group			10,000				–				10,000
Charles Volk (related party)			125,000				–				125,000
Various Other Individuals and Entities			88,977				–				88,977
		$	1,299,331			$	177,986			$	1,121,345

 

 

At December 31, 2013, the unsecured convertible promissory notes payable are generally due within one year from the date of issuance bear interest at rates ranging from 8% to 12% and are convertible into shares of our common stock at discounts ranging from 30% to 70%. Additionally, the notes have generally contained a reset provision that provides that if the Company issues or sells any shares of common stock for consideration per share less than the conversion price of the notes, then the conversion price will be reduced to the amount of consideration per share of the stock issuance.

 

During the nine months ended September 30, 2014, the Company issued $466,858 of unsecured convertible promissory notes to various entities and received net proceeds of $347,764. The convertible promissory notes bear interest from 8% to 12% per annum. The principal and unpaid accrued interest are due from nine months to twelve months after the issuance date. Most of our unsecured convertible promissory notes payable are in default at September 30, 2014.

 

Secured Notes Payable outstanding at September 30, 2014:

 

September 30, 2014

Unpaid

Unamortized

Carrying

Principal

Discount

Value

Montecito Offshore, LLC

$

–

$

–

$

–

Bridge Loan Settlement Note

–

–

–

What Happened LLC

–

–

–

La Jolla Cove Investors, Inc.

83,040

–

83,040

ADR Acquisition Note

125,000

–

125,000

Sunwest Group LLC

325,000

–

325,000

$

533,040

$

–

$

533,040

 

The secured notes payable are generally secured with oil and gas properties, bear interest at rates ranging from 4.75% to 9% and some are convertible into shares of our common stock at discount of 93%. The secured note payable to La Jolla Cove Investors was in default at September 30, 2014. Subsequent to September 30, 2014, the secured notes payable for the ADR Acquisition Note and Sunwest Group LLC, which were due August 15, 2014 and October 14, 2014, respectively, were not paid at maturity and are currently in default.

 

Critical Accounting Policies

 

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Notes to the December 31, 2013 Financial Statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

 

Stock-based Compensation

 

We calculate the fair value of all share-based payments to employees and non-employee directors, including grants of stock options and stock awards and amortize these fair values to share-based compensation in the statement of operations over the respective vesting periods of the underlying awards. Share-based compensation related to stock options is computed using the Black-Scholes option pricing model. We estimate the fair value of stock option awards using assumptions about volatility, expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock. The risk-free interest rate is based on the U.S. Treasury constant maturities rate for the expected life of the related options. The expected life of the options granted is equal to the average of the vesting period and the term of the option, as allowed for under the simplified method prescribed by Staff Accounting Bulletin 107. The expected dividend rate takes into account the absence of any historical payments and management’s intention to retain all earnings for future operations and expansion. We estimate the fair value of restricted stock awards based upon the closing market price of our common stock at the date of grant. We charge the fair value of non-restricted awards to share-based compensation upon grant.

 

 

We account for equity instruments issued in exchange for the receipt of goods or services from other than employees and non-employee directors in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration for other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services. The fair value of the equity instrument is charged directly to share-based compensation expense and credited to paid-in capital.

 

Convertible Debt and Derivative Accounting

 

For convertible debt that is issued with embedded conversion features, we perform an allocation of the proceeds of the convertible note between the principal amount of the note and the fair value of the embedded conversion feature. The fair value of the embedded conversion feature is recorded as a discount to the principal amount of the note, but not in excess of the principal amount of the note. The discount is amortized over the period from the issuance date to the maturity date or the date of conversion, whichever occurs earlier, as a non-cash charge to the statement of operations. Upon the issuance of the note, an assessment is made of the embedded conversion feature to determine whether the embedded conversion feature should be accounted for as equity or liability. In the case of a variable conversion price or anti-dilution reset provisions, the features are accounted for as a derivative liability and carried at fair value on the balance sheet. The fair value of the derivative liability is remeasured each reporting period and the change in fair value to recorded in the statement of operations.

 

For convertible debentures and various warrants which contain price ratchet anti-dilution protection, we have determined that the convertible debentures and warrants are subject to derivative liability treatment and are required to be accounted for at their fair value. We estimated the fair value of the price ratchet anti-dilution protection of the convertible debentures and the warrants using a probability weighted average Black-Scholes-Merton pricing model. Accordingly, the fair value of the price ratchet anti-dilution protection of the convertible debentures and warrants is affected by our stock price on the date of issuance as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the debentures and warrants. Expected volatility is based primarily on the historical volatility of other comparable oil and gas companies.

 

We evaluate our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton pricing model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Revenue Recognition

 

Historically, all revenues have been derived from the sale of produced crude oil and natural gas. Revenue and related production taxes and lease operating expenses are recorded in the month the product is delivered to the purchaser. Typically, payment for the revenue, net of related taxes and lease operating expenses, is received from the operator of the well approximately 45 days after the month of delivery.

 

Income Taxes

 

Provisions for income taxes are based on taxes payable or refundable and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and tax operating loss carryforwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

 

Impairment of Long-Lived Assets

 

Long-lived assets, including oil and gas properties, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change.

 

Recent Accounting Pronouncements

 

See Recent Accounting Pronouncements in Note 1 of the Company’s September 30, 2014 Condensed Consolidated Financial Statements.

 

Inflation

 

We do not believe that inflation has had a material effect on our Company’s results of operations.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required under Regulation S-K for “smaller reporting companies.”

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of September 30, 2014, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:  

 

a)	We did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis;
b)	We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles (“U.S. GAAP”) commensurate with our complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result;

 

 

c)	We lack a system to administratively review, audit or verify the reporting of revenues and expenditures in connection with the oil and gas properties on which we conduct activities. Similarly, we have not obtained units of production or similar third-party purchaser confirmation of the details of our oil and gas production. There is a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis without the ability to independently review and verify the results of our revenue and expenses related to our operations, and
d)	We lack a system to review agreements that are executed and actions taken by the Company to determine if such events trigger obligations with the Securities and Exchange Commission to disclose such events on a Current Report on Form 8-K. There have been numerous instances of events that have occurred that were required to be filed on a Form 8-K that were either not timely reported on a Form 8-K or were reported as part of our annual report on Form 10-K or quarterly reports on Form 10-Q. Many of these events are not determined until our outside legal and accounting personnel are involved in the preparation and review of the annual or quarterly reports.

 

The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.

 

We are committed to improving our financial organization. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of fiscal 2014 to resolve non-routine or complex accounting matters. In addition, when funds are available to us, which we expect to occur by the end of fiscal 2014, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $75,000 per annum. We have in the past, and will continue to engage outside consultants in the future as necessary in order to ensure proper treatment of non-routine or complex accounting matters.

 

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with our complexity and our financial accounting and reporting requirements.

 

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer working with other members of management, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in internal controls over financial reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as disclosed below, we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Montecito Offshore Litigation

 

On or about December 5, 2011, Montecito Offshore, LLC filed a lawsuit in the Civil District Court for the Parish of Orleans of the State of Louisiana against the Company by filing a Petition to Rescind Sale. The case is Montecito Offshore, LLC v. Paxton Energy, Inc. and Paxacq, Inc., Case No. 2011-12640. In this action, the plaintiff sought to rescind the asset sale transaction, whereby Montecito sold us interests in certain oil and gas leases in exchange for a $500,000 promissory note and 30,000 shares of the Company’s common stock. The Company filed a motion to dismiss the case on the grounds that plaintiff’s petition states no cause of action for contractual rescission of the asset sale transaction. In conjunction with the acquisition, the Company issued $2,550,000 of convertible debentures secured by mortgages.

 

In May 2014, the debt holders cancelled the outstanding mortgages and UCC-1’s along with recording the documents conveying the various interests into the public records and on May 27, 2014, the parties entered into a Joint Motion to Dismiss to close the case whereby the sale was rescinded, the leasehold interests were returned to Montecito, and our secured note payable of $500,000 to Montecito and convertible debentures of $2,453,032 were extinguished.

 

Ironridge Global IV, Ltd. v. Worthington Energy, Inc.,

 

In March 2012, Ironridge Global IV, Ltd. (“Ironridge”) filed a complaint against the Company for the payment of $1,388,407 in outstanding accounts payable, accrued compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Ironridge had purchased from various creditors of the Company. The lawsuit was filed in the Superior Court of the State of California for the County of Los Angeles Central District, and the case was Ironridge Global IV, Ltd. v. Worthington Energy, Inc., Case No. BC 480184 . On March 22, 2012, the court approved an Order for Approval of Stipulation for Settlement of Claims (the "Order").

 

The Order provided for the immediate issuance by the Company of 20,300 shares of common stock (the “Initial Shares”) to Ironridge towards settlement of the Claim Amount. The Order also provided for an adjustment in the total number of shares which may be issuable to Ironridge based on a calculation period for the transaction, defined as that number of consecutive trading days following the date on which the Initial Shares were issued (the "Issuance Date") required for the aggregate trading volume of the common stock, as reported by Bloomberg LP, to exceed $4.2 million (the "Calculation Period"). Pursuant to the Order, Ironridge would retain 2,000 shares of the Company's common stock as a fee, plus that number of shares (the "Final Amount") with an aggregate value equal to (a) the $1,358,135 plus reasonable attorney fees through the end of the Calculation Period, (b) divided by 70% of the following: the volume weighted average price ("VWAP") of the Common Stock over the length of the Calculation Period, as reported by Bloomberg, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the Calculation Period. The Company has calculated that the Calculation Period ended during the year ended December 31, 2012 and calculated that the Final Amount to be issued under the Order is 856,291 shares of common stock. Additionally, during the year ended December 31, 2012 when the Final Amount was determined, the Company calculated the fair value of the original liability to Ironridge Global IV, Ltd to be $1,981,312, that amount which when discounted to 70% of the VWAP and multiplied by the Final Amount, would equal $1,358,135 plus reasonable attorney fees. In so doing, the Company recognized an expense for the excess of the fair value of the resultant liability to Ironridge Global IV, Ltd. in excess of the original carrying amount of the liabilities acquired by Ironridge and adjusted the liability to Ironridge Global IV, Ltd. for the fair value adjustment.

 

Pursuant to the Order, for every 8,400 shares of the Company's common stock that traded during the Calculation Period, or if at any time during the Calculation Period a daily VWAP is below 90% of the closing price on the day before the Issuance Date, the Company was to immediately issue additional shares (each, an "Additional Issuance"), subject to the limitation in the paragraph below. At the end of the Calculation Period, (a) if the sum of the Initial Shares and any Additional Issuance is less than the Final Amount, the Company shall immediately issue additional shares to Ironridge, up to the Final Amount, and (b) if the sum of the Initial Shares and any Additional Issuance is greater than the Final Amount, Ironridge shall promptly return any remaining shares to the Company and its transfer agent for cancellation. However, the Order also provides that under no circumstances shall the Company issue to Ironridge a number of shares of common stock in connection with the settlement of claims which, when aggregated with all shares of common stock then owned or beneficially owned or controlled by Ironridge and its affiliates, at any one time exceed 9.99% of the total number of shares of common stock of the Company then issued and outstanding.

 

The Company had issued a total of 6,764,500 shares to Ironridge and had reduced the original liability of $1,388,407 to $68,028. However, on February 24, 2014 a judge awarded Ironridge a third order enforcing prior order for approval of stipulation for settlement claim by requiring the Company to reserve 1,095,950,732 shares of the Company’s common stock until the balance of the claim in paid. Ironridge claimed that the Company’s failure to comply with prior order and stipulation has caused them harm. Ironridge claims that it is still owed $241,046. The Company has increased the balance due to Ironridge to $241,046 at December 31, 2013. During the nine months ended September 30, 2014, the Company issued to Ironridge 661,000,000 shares of common stock valued at $119,070. The balance due to Ironridge at September 30, 2014 was $121,976.

 

 

Tarpon Bay Partners LLC v. Worthington Energy, Inc.,

 

In April 2014, Tarpon Bay Partners LLC (“Tarpon”) filed a complaint against the Company for the payment of $1,127,495 in outstanding accounts payable, accrued compensation, accrued interest, and notes payable of the Company (the “Claim Amount”) that Tarpon had purchased from various creditors of the Company. The lawsuit was filed in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida, and the case was Tarpon Bay Partners, LLC. v. Worthington Energy, Inc., Case No. 20147-CA-488 . On April 3, 2014, the court approved an Order for Approval of Stipulation for Settlement of Claims (the "Order").

 

During the nine months ended September 30, 2014, the Company issued to Tarpon 310,026,000 shares of common stock valued at $48,917. The balance due to Tarpon at September 30, 2014 was $1,078,578.

 

Item 1A. Risk Factors

 

Not required under Regulation S-K for “smaller reporting companies.”

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Stock Issuances

 

During the three months ended September 30, 2014, the Company issued 270,000,000 shares to Ironridge Global IV Ltd for the conversion of $18,900 of debentures, pursuant to an Order of Approval of Stipulation for Settlement. The securities were issued in a transaction pursuant to Regulation D under Securities Act of 1933, as amended.

 

During the three months ended September 30, 2014, the Company issued 67,200,325 shares to Redwood for the conversion of $3,360 of debentures.

 

The above issuances of shares are exempt from registration, pursuant to Section 4(2) of the Securities Act. These securities qualified for exemption under Section 4(2) of the Securities Act since the issuance securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these stockholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.

 

Item 3. Defaults Upon Senior Securities

 

Commencing in November 2011 and continuing through April 2012, the Company issued thirteen additional unsecured convertible promissory notes to various unaffiliated entities or individuals. Aggregate proceeds from these convertible promissory notes totaled $307,000. In connection with twelve of these notes totaling $287,000, the Company also issued warrants to purchase 287,000 shares of common stock. The warrants are exercisable at $1.50 per share and expire on December 31, 2016. The convertible promissory notes bear interest at 8% per annum.  The principal and unpaid accrued interest were due on dates ranging from August 1, 2012 to October 26, 2012. These notes are currently in default.

 

On April 19, 2012, we issued a secured promissory note in the principal face amount of $100,000 in exchange for $100,000 from WH LLC. We agreed to repay $125,000 on June 18, 2012, plus interest at the rate of 11% per annum. On February 28, 2013, WH LLC sold $50,000 of this note to Prolific and $37,500 of the secured promissory note to GEL. As of September 30, 2014 this note is in default.

 

At various dates commencing in August 2011 and continuing through September 30, 2013, the Company received proceeds pursuant to seven unsecured convertible promissory notes to GEL Properties, LLC (GEL), an unaffiliated entity. Additionally, in August 2012, GEL purchased the rights to $75,000 of principal of a secured bridge loan note held by a noteholder of the Company and in February 2013, GEL purchased the rights to $37,500 of principal of a secured note held by What Happened LLC. These acquired rights were restated to be consistent with other notes held by GEL.  The convertible promissory notes bear interest at 6% per annum. The principal and unpaid accrued interest are generally due approximately one year after the issuance date. Certain of these notes are currently in default.

 

Upon execution of an equity facility with Haverstock Master Fund, LTD (Haverstock) in June 2012, the Company issued Haverstock a convertible note in the principal amount of $295,000 for payment of an implementation fee of $250,000, legal fees of $35,000, and due diligence fees of $10,000. In July 2012, the Company received proceeds of $75,000 from Common Stock, LLC pursuant to a convertible note. These convertible notes matured on March 22, 2013 and are in default.

 

 

On July 31, 2012, the Company received proceeds of $100,000 pursuant to an unsecured promissory note and issued a warrant to purchase 2,000 shares of common stock of the Company to two individuals. The promissory note requires the repayment of $115,000 of principal (including interest of $15,000) by October 31, 2012. The warrant has an exercise price of $5.00 per share and expires on July 31, 2015. Proceeds from the note were paid on the Bridge Loan Note that is discussed in further detail in Note 6 to these condensed consolidated financial statements. As of September 30, 2014, this note is in default.

 

On August 9, 2012, the Company received proceeds of $25,000 pursuant to an unsecured promissory note and issued a warrant to purchase 500 shares of common stock of the Company to an individual. The promissory note requires the repayment of $28,750 of principal (including interest of $3,750) by November 9, 2012. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable until October 9, 2015. As of September 30, 2013, this note is in default.

 

On October 8, 2012, the Company received proceeds of $50,000 pursuant to an unsecured promissory note and issued a warrant to purchase 1,000 shares of common stock of the Company to two individuals. The promissory note requires the repayment of $62,500 of principal (including interest of $12,500) by January 7, 2013. The warrant has an exercise price of $5.00 per share of common stock and will be exercisable until October 8, 2015. As of September 30, 2014, this note is in default.

 

In September 2012 and February 2013, the Company received proceeds pursuant to two unsecured convertible promissory notes to Prolific, an unaffiliated entity. Additionally, 1) in July 2012 Prolific acquired the rights to three unsecured convertible promissory notes from one of the Company’s noteholders, 2) in September 2012 Prolific purchased the rights to $40,000 of principal of a secured bridge loan note held by another noteholder of the Company, and 3) in February 2013 Prolific purchased the rights to $50,000 of principal of a secured note held What Happened LLC. These acquired rights were restated such that all notes held by Prolific bear interest at 6% per annum and the principal and unpaid accrued interest are generally due approximately one year after the issuance date. September 30, 2014, all of these notes are currently in default.

 

In November and December 2012, the Company received proceeds pursuant to two unsecured convertible promissory notes to Hanover Holdings I, LLC (Hanover), an unaffiliated entity. Proceeds from the convertible promissory note were $25,500. The convertible promissory notes bear interest at 12% per annum. The principal and unpaid accrued interest are due one year after the issuance date. This note is currently in default.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

 

Exhibit Number	Exhibit Title
31.1	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002
101. INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema
101.CAL	XBRL Taxonomy Calculation Linkbase
101.DEF	XBRL Taxonomy Definition Linkbase
101.LAB	XBRL Taxonomy Label Linkbase
101.PRE	XBRL Taxonomy Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WORTHINGTON ENERGY, INC.

 

Date: March 5, 2015

 

By: /s/ CHARLES VOLK

Charles Volk

Chief Executive Officer

(Duly Authorized, Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)