NOTES TO FINANCIAL STATEMENTS
April 30, 2014
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Liberty Energy Corp. (f/k/a DMA Minerals Inc., the “Company”) was incorporated on June 6, 2006 under the laws of the State of Nevada. The Company is currently an exploration stage company under the provisions of Accounting Standards Codification (ASC) No. 915,
Development Stage Entities
. Since inception, the Company has produced almost no revenues and will continue to report as an exploration stage company until significant revenues are produced. The Company’s principal activity is the exploration and development of oil and gas properties. Properties are located in the United States of America.
The Company’s success will depend in large part on its ability to obtain and develop oil and gas interests within the United States. There can be no assurance that oil and gas properties obtained by the Company will contain reserves or that properties with reserves will be profitable to extract. The Company is subject to local and national laws and regulations which could impact the Company’s ability to execute its business plan.
NOTE 2 – GOING CONCERN
The financial statements of the Company have been prepared assuming that future issuances of the Company’s equity or debt securities will be required in order for the Company to continue to finance its operations and continue as a going concern. The Company has no revenues or cash flow to meet operating expenses. Continuing as a going concern, the Company contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses since its inception and requires capital for its future operational activities. The Company's ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s plan of operations, and its transition to profitable operations is necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted
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accounting principles for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended April 30, 2014 are not necessarily indicative of the results for the full years. While management of the Company believes that the disclosures presented herein are adequate and not misleading, these interim financial statements should be read in conjunction with the audited financial statements and the footnotes thereto for the year ended July 31, 2013 detailed in our Annual Report on Form 10-K filed on November 21, 2013.
Recent Accounting Pronouncements
Recently issued accounting pronouncements will have no significant impact on the Company and its reporting methods.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. As the Company is in a net loss position, there are no outstanding potentially dilutive securities that would cause diluted earnings per share to differ from basic earnings per share.
Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and natural gas properties. Under this method, all costs incurred in the exploration, acquisition and development, including unproductive wells, are capitalized in separate cost centers for each country. Such capitalized costs include contract and concessions acquisition, geological, geophysical, and other exploration work, drilling, completing and equipping oil and gas wells, constructing production facilities and pipelines, and other related costs.
The capitalized costs of oil and gas properties in each cost center are amortized on a composite unit of production method based on future gross revenues from proved reserves. Sales or other dispositions of oil and gas properties are normally accounted for as adjustments of capitalized costs. A gain or loss is not recognized in income unless a significant portion of a cost center’s reserves is involved. Capitalized costs associated with acquisition and evaluation of unproved properties are excluded from amortization until it is determined whether proved reserves can be
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assigned to such properties or until the value of the properties is impaired. If the net capitalized costs of oil and gas properties in a cost center exceed an amount equal to the sum of the present value of estimated future net revenues from proved oil and gas reserves in the cost center and the lower of cost or fair value of properties not being amortized, both adjusted for income tax effects, such excess is charged to expense.
Capitalized costs associated with acquisition and evaluation of unproved properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. Our policy is consistent with ASC 932.
Revenue and Cost Recognition
The Company uses the sales method of accounting for natural gas and oil revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes to which the Company is entitled based on our interest in the properties. Costs associated with production are expensed in the period incurred.
Income Taxes
The Company accounts for its income taxes in accordance with ASC No. 740, "Income Taxes". Under Statement 740, a liability method is used whereby deferred tax assets and liabilities are determined based on temporary differences between basis used for financial reporting and income tax reporting purposes. Income taxes are provided based on tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not, that the Company will not realize the tax assets through future operations.
The Company’s federal tax returns for the years subsequent to 2010 are open to examination. At April 30, 2014, the Company evaluated its open tax years in all known jurisdictions. Based on this evaluation, the Company did not identify any uncertain tax positions. The Company accounts for interest and penalties relating to uncertain tax positions in the current period statement of operations as necessary.
Fair Value of Financial Instruments
GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s financial instruments consist primarily of cash, accounts payables, loan payable and accrued interest. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates that approximate market rates. The Company evaluates its embedded conversion features contained within their convertible notes for derivative treatment.
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The Company’s derivative liabilities recognized since August 1, 2012 were considered Level 3 financial instruments.
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The embedded conversion option in connection with our convertible debt could not be exercised unless and until we completed a Qualifying Financing transaction. Accordingly, we determined based on authoritative guidance that the embedded conversion option is deemed to be a contingent conversion rather than active conversion option that did not require accounting recognition at the commitment dates of the issuances of the Notes.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation. No reclassification had any impact on the Company’s previously reported net income (loss).
NOTE 4 - UNEVALUATED OIL AND GAS PROPERTIES
Baylor County Acquisition
In March 2014, the Company entered into a series of agreements to acquire $431,292 of certain oil and gas leases located in Baylor County, Texas (the “Baylor County Acquisition”) from certain non-related third parties. In connection therewith, the Company entered into (1) an agreement whereby certain mineral rights were released by their current lessee; (2) the purchase of certain oil and gas leases with respect to four properties (Macha, Ptacek, Motl, Butler) from their prior operator and (3) the reservation of a 5% Overriding Royalty Interest in the seller.
Consideration for the acquisition price of $431,292 of the oil and gas leases included the
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following: (1) The Company’s non-interest bearing promissory note in the face amount of $65,000. (2) The issuance of $50,000 original issue value of a new series of Company preferred stock (upon the filing of a Certificate of Designations for such stock with the Nevada Secretary of State). As of April 30, 2014, no preferred stock has been issued and this commitment has been recorded as other liability in the financial statements. (3) The Company’s promissory note in the face amount of $316,292 (see Note 7 for further notes payable detail).
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company may from time to time be involved in legal proceedings arising from the normal course of business. There are no pending or threatened legal proceedings as of April 30, 2014.
NOTE 6 – RELATED PARTY TRANSACTIONS
Effective October 25, 2013, the Company entered into two separate agreements with Buchanan Ventures, Inc. to engage Carlos Buchanan as a consultant. Under the first agreement (“Contractor Agreement”), it was agreed that Mr. Buchanan would, among other things, (a) assist with the development of the Company’s business, (b) assist with the financial and investment structuring of the Company and (c) assist with evaluating acquisition prospects. As consideration for such consulting services, the Company agreed to pay Mr. Buchanan an aggregate of $150,000, payable every 90 days over a term of 24 months, payable in either cash or Company stock at the Company’s discretion and based on income threshold of above $25,000 achieved by the Company. As of April 30, 2014, the income threshold has not yet met; thus, no payment was due to Mr. Buchanan. Under the second agreement (“Finder Fee Agreement”) Mr. Buchanan agreed, among other things, to introduce a mezzanine lender to advance to the Company over a period of 12 months up to $7,500,000 to support development and acquisition plans. In consideration of such services, the Company agreed to issue to Mr. Buchanan a total of 10,000,000 shares of Company common stock, subject to adjustment and clawback of all or a portion of the shares based upon Mr. Buchanan’s performance under the Finder Fee Agreement. As of April 30, 2014, no part of the consideration payable on account of either of the agreements has been earned. Mr. Buchanan is the brother of Armando Rafael Buchanan, the Company’s Chief Financial Officer.
At April 30, 2014, the Company owed $52,425 to current officers and directors and $90,000 to two former officers and directors in non-interest bearing notes. Because the former officers each own approximately 16% of the Company’s outstanding stock, we have reported the liability as owing to related parties. All amounts owing to related parties relate to fees for services provided.
Subsequent to October 31, 2013, the Company received free rent from a related party without a written agreement.
In connection with the Baylor County Leases acquired by the Company (see Note 4, above), on May 30, 2014, the Company entered into an Operating Agreement with BEP Operating, LLC as the successor operator of the properties described in the Baylor County Leases. Pursuant to this agreement, BEP Operating, LLC will hold the license to operate these leases. BEP Operating, LLC is licensed by the Texas Railroad Commission and is bonded to undertake these operations.
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The Company anticipates that in the future when it has satisfied all requirements of the Texas Railroad Commission and is duly bonded, it will directly operate these leases. The Operating Agreement calls for the Company to reimburse all of BEP Operating, LLC’s operating expenses incurred in connection with the work and to pay an additional amount on account of the operator’s overhead. BEP Operating, LLC is controlled by Carlos E. Buchanan II, the brother of Armando Rafael Buchanan, the Company’s Chief Financial Officer.
NOTE 7 – CONVERTIBLE NOTES PAYABLE
The April 10, 2013 Convertible Note
On April 10, 2013, the Company entered into a Securities Purchase Agreement with Asher Enterprises (“Asher”). Pursuant to the Agreement, Asher has agreed to purchase an 8% convertible note (the “April Note”) in the aggregate principal amount of $32,500, $30,000 was funded to the Company with the remaining $2,500 recorded as interest expense for financing costs charged by Asher’s legal counsel. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at a variable conversion price calculated as 61% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with no floor stated in the conversion feature. The convertible note, issued on April 16, 2013, was due on January 15, 2014 at an interest rate of 8% per annum.
In light of the fact that some of the debt would be converted before it was extinguished and that there would be a high prepayment penalty, the Company recorded the cost of the discount on conversion and the prepayment penalty at July 31, 2013, resulting in a liability of $58,064 and total related interest of $25,564.
On October 16, 2013, Asher converted $15,000 of the face amount of the April Note into 898,204 shares of common stock.
On October 28, 2013, the Company settled the amount due on the April Note in full for $31,118, which included all accrued interest and prepayment penalties, and as of April 30, 2014 there is no balance due.
Baylor County Acquisition
In March 2014, the Company entered into a series of agreements to acquire certain oil and gas leases located in Baylor County, Texas (see Note 4 for further detail) from certain non-related third parties. In connection therewith, the Company entered into several note payable agreements as follows:
The Company entered into a non-interest bearing promissory note in the face amount of $65,000 payable in ten equal monthly installments of $6,500 commencing April 15, 2014 with a final maturity date of January 15, 2015. The Company has the option of making the payments by payment of certain specifically enumerated obligations of the seller. The note is secured by a
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mortgage on the leasehold interest.
The Company entered into another promissory note in the face amount of $316,292 payable in 117 equal monthly installments of $3,715.47 commencing March 1, 2014 with a final maturity date of December 1, 2023. The note bears interest at a rate of seven percent (7%) per annum. The note is secured by a mortgage on the leasehold interest.
The future minimum payments of the long-term note payable are as follows as of April 30, 2014:
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|
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Year ending April 30,
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Amount
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2014
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$ 24,321
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2015
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23,714
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2016
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26,652
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2017
|
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28,579
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2018
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30,645
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Thereafter
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182,381
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_$__316,292
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NOTE 8 – STOCK AND WARRANT TRANSACTIONS
On April 10, 2013, the Company entered into the April Note (see Note 7 for further detail). The face amount of the April Note, together with any unpaid accrued interest was convertible into shares of common stock at the holder’s option 180 days from inception at a variable conversion price calculated as 61% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with no floor stated in the conversion feature. The April Note, issued on April 16, 2013, was due on January 15, 2014 at an interest rate of 8% per annum. On October 16, 2013, Asher converted $15,000 of the face amount of the April Note. On October 28, 2013, the Company settled the note in full for $31,118, which included all accrued interest and prepayment penalties.
On April 11, 2013, the Company entered into a stock purchase agreement with Petro Fund 1 (“PF1”), a Houston, Texas-based upstream oil and gas fund, pursuant to which the investor agreed to advance up to $3,650,000 to the Company in multiple installments in exchange for units of the Company at unit price. The unit price means a price equal to the higher of either $0.05, or 95% of the volume-weighted average of the closing price of common stock, for the 10 days immediately preceding the date of receipt of notice from the Company for the advance of funds from the investor. Each unit shall consist of one share (restricted) of the common stock of the Company. The Company shall use up to $150,000 of Advances to extinguish existing debts, fund operating expenses, working capital and general corporate activities. Subject to the foregoing, the Company may use any balance of the Advances up to $3,500,000 to fund mergers and acquisitions (including related legal and, accounting expenses) or the purchase of capital assets, with any such Advances to be approved by PF1. All advances made shall be converted into shares.
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The Company agreed to issue Petro Fund 548,921 shares of common stock for $43,000 in cash on May 23, 2013. The Company received the cash on May 24, 2013. The Company received an additional $41,118 in advances from PF1 in relation to this stock purchase agreement during the quarter ended October 31, 2013. The Company used these advances to settle the remaining April Note with Asher and to pay off certain payables. The Company received an additional $8,000 advances from PF1 in relation to this stock purchase agreement during the quarter ended April 30, 2014. The Company issued shares to PF1 for the advances received as of April 30, 2014 in the amount 548,921 common shares.
On July 31, 2013, the day of their resignation, the Company issued the former officers 2,000,000 shares of common stock, which it valued at $110,000. As part of the separation agreement, the Company accelerated the 500,000 shares that each were to have earned over the first six months (including 150,000 that each had not yet earned) and further awarded each an additional 500,000 shares when they left the Company.
Armando Buchanan became Chief Financial Officer of the Company on November 7, 2013, pursuant to an agreement whereby he will earn an aggregate of 1,000,000 shares of Company stock over the following twelve months as compensation (See note 9 – subsequent events for further detail).
Richard Steve Williamson became Chief Operating Officer of the Company on October 21, 2013, pursuant to an agreement whereby he will earn an aggregate of 1,000,000 shares of Company stock over the following twelve months as compensation. (See note 9 – subsequent events for further detail).
Effective as of April 23, 2014, the Company increased its authorized capital to one hundred sixty million (160,000,000) shares comprising one hundred fifty million (150,000,000) shares of Common Stock par value $0.001 and ten million (10,000,000) shares of Preferred Stock par value $0.001. Additional shares of Common and/or Preferred Stock may be issued by the Company from time to time for such considerations as may be fixed from time to time by the Company’s Board of Directors.
As of February 1, 2014, the Company accrued additional compensation payable to its two directors for $7,500 per director, which comprises the first installment of agreed compensation as a director of the Company at a rate of $15,000 per fiscal year.
In connection with the Baylor County Acquisition (see Note 4, above) the Company committed to issue $50,000 original issue value of a new series of Company preferred stock (upon the filing of a Certificate of Designations for such stock with the Nevada Secretary of State). As of April 30, 2014, no preferred stock has been issued.
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NOTE 9 – SUBSEQUENT EVENTS
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The management of the Company determined that the following were certain reportable subsequent events to be disclosed as follows:
BEP Operating Agreement
.
In connection with the Baylor County Leases acquired by the Company, on May 30, 2014, the Company entered into an Operating Agreement with BEP Operating, LLC as the successor operator of the properties described in the Baylor County Leases. Pursuant to this agreement, BEP Operating, LLC will hold the license to operate these leases. BEP Operating, LLC is licensed by the Texas Railroad Commission and is bonded to undertake these operations. The Company anticipates that in the future when it has satisfied all requirements of the Texas Railroad Commission and is duly bonded, it will directly operate these leases. The Operating Agreement calls for the Company to reimburse all of BEP Operating, LLC’s operating expenses incurred in connection with the work and to pay an additional amount on account of the operator’s overhead. BEP Operating, LLC is controlled by Carlos E. Buchanan II, the brother of Armando Rafael Buchanan, the Company’s Chief Financial Officer.
Officer and Director Compensation
On June 11, 2014, the Company’s Board of Directors approved compensation to the Company’s sole independent director, Richard Webb as follows: (a) $6,300 cash payable on May 1, 2014 for services provided as a director of the Company through May 1, 2014 and (b) additional compensation as an independent director of the Company at a rate of $15,000 per fiscal year, payable in two (2) semi-annual installments of $7,500 each on February 1 and May 1 of each year. The fees are payable in cash or in shares of the Company’s Common Stock, at the option of the Company.
Also on June 11, 2014, the Company’s Board of Directors approved the vesting of certain restricted stock grants to the following employees of the Company as follows:
Name
Shares
Vesting Date
Share Price
Value
Arthur Roy
1,500,000
May 1, 2014
$0.02
$30,000
Armando Buchanan
1,000,000
May 1, 2014
$0.02
$20,000
Steve Williamson
1,000,000
May 1, 2014
$0.02
$20,000
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