Notes
to Condensed Financial Statements
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”)
has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion,
include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance
sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for 2017 due to various factors. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
(“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed financial statements
should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial Statements
and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature
of Operations
The
Company is pursuing the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua
in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately
1.4 million acres. The Company sold its wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned
subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
The
Company has been pursuing exploration and development of the Nicaraguan Concessions, which represents its principal asset and
only exploration and development project. On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions.
Infinity has conducted activities to develop geological information from the processing and evaluation of 2-D seismic data that
was acquired for the Nicaraguan Concessions. The Company has identified multiple sites for exploratory drilling and will plan
the initial exploratory well on the Perlas Block in order to determine the existence of commercial hydrocarbon reserves, subject
to receipt from the Nicaraguan government of authorizations for the drilling of up to five wells, financing and satisfaction of
other conditions. In order to meet its obligations under the Perlas Block of the Nicaraguan Concession, the Company had to drill
its initial exploratory well during 2016 which did not occur. As a result of this and other defaults, the Company is in default
of the Perlas development plan and may lose its rights under the Nicaraguan Concessions. The work plan on the Tyra block now requires
the Company to shoot additional seismic prior to the commencement of exploratory drilling. The Company is seeking a waiver of
the additional seismic mapping on the Tyra Block and extension of time to complete its initial well from the Nicaraguan government.
The Company has not been able to pay the 2016 area fees and training fees for both the Perlas and Tyra blocks as required under
the Nicaraguan Concessions and is in technical default. The Company is attempting to negotiate extensions, waivers and/or new
Perlas and Tyra Concession agreements with the Nicaraguan government at March 31, 2017 to cure such defaults. There can be no
assurance whether it will be able to obtain such extensions, waivers and/or new agreements that will cure its various defaults
under the Nicaraguan Concessions. The current environment for oil and gas development projects, especially discoveries in otherwise
undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products and the resulting
industry-wide reduction in capital expenditure budgets for exploration and development projects. There can be no assurance whether
the Company will be able to cure its various defaults under the Nicaraguan Concessions and obtain adequate financing to fund the
exploration and development of its Nicaraguan Concessions.
On
May 7, 2015 the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal
amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the
Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing,
the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount
of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the Company under the Investor Note are paid,
the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement agent fees and other expenses associated
with the transaction, subject to the satisfaction of certain conditions. The Company will receive the remaining cash proceeds
upon each voluntary or mandatory prepayment of the Investor Note. The Investor may, at its option and at any time, voluntarily
prepay the Investor Note, in whole or in part. As of March 31, 2017 an additional $60,000 was funded under the Investor Note for
a total of $510,000 advanced to the Company.
The
Investor must prepay the Investor Note, in whole or in part, upon the occurrence of one or more mandatory prepayment events. These
include (i) the Investor’s conversion of the Note into shares of common stock upon which the Investor will be required to
prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Note and (ii) the Company’s
delivering a mandatory prepayment notice to the Investor after it has received governmental authorizations from the Nicaraguan
authorities necessary to commence drilling on at least five sites within the Concessions and the receipt of forbearance or similar
agreements relative to its general creditors, among other conditions.
The
Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at any time at
the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”).
As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to
an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable
commencing six months from the date of issuance for a period of seven years from the date of issuance. The Note ranks senior to
the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding the Concessions.
In
addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in
the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint
venture arrangement.
Going
Concern
As
reflected in the accompanying statements of operations, the Company has had a history of losses. In addition, the Company has
a significant working capital deficit, has notes payable that are in default and is currently experiencing substantial liquidity
issues. In addition, the Company’s most significant asset and its primary business plan is the exploration and development
of the Nicaraguan Concessions which are now in default and in risk of being terminated.
The
Company has relied on raising debt and equity capital in recent years in order to fund its ongoing maintenance/expenditure obligations
under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead because it has generated no operating
revenues or cash flows in recent history. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently
in technical default and two other notes payable with principal balances of $85,000 as of March 31, 2017 are now in default. The
Company is seeking extensions of the maturity date for these notes payable; however, there can be no assurance that it will be
able to obtain such extensions or what the final terms will be if the lenders agree to such extensions. The Company and its lenders
are assessing the status of the Nicaraguan Concessions and what effect that may have on the extension or renewal of these notes.
The
Company is in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2017, including
(1) the drilling of at least one exploratory well on the Perlas Block during 2016; (2) the shooting of additional seismic on the
Tyra Block during 2016; (3) the Company has not provided the Ministry of Energy with the required letters of credit in the amounts,
which total $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment
of the 2016 area fees required for both the Perlas and Tyra which total $55,566; and (5) payment of the 2016 training fees required
for both the Perlas and Tyra totaling $100,000. The Company is seeking to extend, renew and/or renegotiate the terms of the Nicaraguan
Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend,
renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. The Company is
currently pursuing meetings with Nicaraguan Government officials in order to address the pending defaults.
The
Company
must raise substantial
amounts of debt and equity capital from other sources in the immediate future in order to fund: (1) the annual training program
and area fees for 2016 and 2017; (2) required letters of credit to the Nicaraguan Government; (3) the drilling of at least one
exploratory well on the Perlas Block of the Nicaraguan Concessions during 2017; (4) the shooting of additional seismic on the
Tyra Block of the Nicaraguan Concessions should it be unable to negotiate a waiver of such requirement from the Nicaraguan government;
(5) normal day-to-day operations and corporate overhead; and (6) outstanding debt and other financial obligations as they become
due including the $1.0 million December 2013 Note, and the two notes payable totaling $85,000, which are in technical default.
These are substantial operational and financial issues that must be successfully addressed during 2017 or the Company’s
ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking new outside sources of debt and equity capital in order to fund the substantial needs enumerated above;
however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe
necessary to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to
drilling the exploratory wells. The current environment for oil and gas development projects, especially discoveries in otherwise
undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting
industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments
for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include
the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note
payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
Concentrations
The
Company’s business plan consists of developing the Nicaraguan Concessions and it expects to be active in Nicaragua for the
foreseeable future, given sufficient capital and curing the defaults under the Nicaraguan Concessions. The political climate in
Nicaragua could become unstable and subject to radical change over a short period of time. In the event of a significant negative
change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability of the Company to
obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under its Nicaraguan
Concessions.
Foreign
Currency
The
United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and
exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities
are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures
in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included
in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign
currencies.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the
Company had minimal cash as of March 31, 2017 and December 31, 2016, it is the Company’s policy that all highly liquid investments
with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash
and equivalents.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred
in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay
lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and
abandonment activities are capitalized. Overhead related to development activities is also capitalized during the acquisition
phase.
Depletion
of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit
of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and
estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties,
including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved
properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose
costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding
period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net
cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated
with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount
of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing
impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when
the impairment is recognized. All unproved property costs as of March 31, 2017 and December 31, 2016 relate to the Nicaraguan
Concessions. In assessing the unproved property costs for impairment, the Company takes into consideration various information
including: (i) the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’
requirements, (iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall
environment related to oil and gas exploration and development projects for unproven targets in unproven regions of the world,
(vi) the availability of financing for financial and strategic partners, and (vii) other factors that would impact the viability
of a significant long-term oil and gas exploration and development project.
The
current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world,
is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in
capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain
adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has performed its impairment
tests as of March 31, 2017 and December 31, 2016 and has concluded that a full impairment reserve should be provided on the costs
capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from January
1, 2016 through March 31, 2017 have been charged to operating expenses as incurred.
Pursuant
to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that
capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of
(1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the
arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative
instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement
obligations that have been accrued on the balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being
amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized,
if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized
costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of March 31, 2107
and December 31, 2016, the Company did not have any proved oil and gas properties, and all unproved property costs relate to the
its Nicaraguan Concessions.
Proceeds
from the sales of oil and gas properties are accounted for as adjustments to 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 would be recognized in the determination of the Company’s net earnings/loss.
Asset
Retirement Obligations
The
Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities
to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability
is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging
of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted
as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic
oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to
the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations
to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation
related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in
Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas
producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and
its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned
wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related
to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized
since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included
in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not
perform its obligations to reclaim abandoned wells in a timely manner.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815
Derivatives and Hedging
.
ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in
the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The
purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and
gas prices and to manage the exposure to commodity price risk. As of March 31, 2017 and December 31, 2016 and during the periods
then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes
2, 3 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value
recognized in operations.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities and short term notes represent
the estimated fair value due to the short-term nature of the accounts.
The
carrying value of the Company’s debt under its line-of-credit with related party represents its estimated fair value due
to its short-term nature, its rate of interest, associated fees and expenses and initially recorded discount.
In
accordance with ASC Topic 820 —
Fair Value Measurements and Disclosures
(“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
●
|
Level
1
|
—
|
Quoted
prices in active markets for identical assets and liabilities.
|
|
|
|
|
|
|
●
|
Level
2
|
—
|
Other
significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
|
|
|
|
|
|
|
●
|
Level
3
|
—
|
Significant
unobservable inputs (including the Company’s own assumptions in determining the fair value.
|
The
estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants
issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest
rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants
as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant
derivatives as of March 31, 2017 and December 31, 2016 were classified under the fair value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of March 31, 2017 and December 31, 2016:
March
31, 2017
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
143,984
|
|
|
$
|
143,984
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
184,073
|
|
|
|
184,073
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
328,057
|
|
|
$
|
328,057
|
|
December
31, 2016
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
141,328
|
|
|
$
|
141,328
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
183,430
|
|
|
|
183,430
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
324,758
|
|
|
$
|
324,758
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods
ended March 31, 2017 and December 31, 2016.
Net
Income (Loss) per Share
Pursuant
to FASB ASC Topic 260,
Earnings per Share,
basic net income (loss) per share is computed by dividing the net income (loss)
by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in
which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations,
as the inclusion of common share equivalents would have an anti-dilutive effect.
Reclassifications
Certain
amounts in the prior period were reclassified to conform to the current period’s financial statement presentation. These
reclassifications had no effect on previously reported net loss or accumulated deficit.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Secured
convertible note payable, at fair value
|
|
$
|
143,984
|
|
|
$
|
141,328
|
|
Less:
Current maturities
|
|
|
(111,394
|
)
|
|
|
(91,736
|
)
|
|
|
|
|
|
|
|
|
|
Secured
convertible note payable, long-term
|
|
$
|
32,590
|
|
|
$
|
49,592
|
|
Following
is an analysis of the activity in the secured convertible note during the three months ended March 31, 2017:
|
|
Amount
|
|
Balance
at December 31, 2016
|
|
$
|
141,328
|
|
Funding
under the Investor Note during the period
|
|
|
—
|
|
Principal
repaid during the period by issuance of common stock
|
|
|
—
|
|
Change
in fair value of secured convertible note during the period
|
|
|
2,656
|
|
|
|
|
|
|
Balance
at March 31, 2017
|
|
$
|
143,984
|
|
The
funded and unfunded portion of the Investor Note consists of the following at March 31, 2017:
|
|
March
31, 2017
|
|
Investor
notes - Available funding (subject to limitations)
|
|
$
|
10,000,000
|
|
Unfunded
amount of investor notes
|
|
|
(9,490,000
|
)
|
|
|
|
|
|
Investor
notes - funded (prior to any repayments)
|
|
$
|
510,000
|
|
On
May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note
(the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The
placement agent for the Company in the transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company
receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted
a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the
Investor. The May 2015 Private Placement was made pursuant to an exemption from registration under such Act. At the closing, the
Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash,
with an aggregate initial principal amount of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the
Company under the Investor Note are paid without any offset or default, the May 2015 Private Placement will result in gross proceeds
of $10.0 million before placement agent fees and other expenses associated with the transaction, subject to the satisfaction of
certain conditions. The Company used the proceeds from this offering to retire certain outstanding obligations, including the
2015 area and training fees relating to its Nicaraguan Concessions, and to provide working capital. As of March 31, 2017, an additional
$60,000 was funded under the Investor Note for a total of $510,000 advanced to the Company prior to any repayments.
The
Company is to receive the remaining cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. An Investor
may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject
to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1)
Mandatory Prepayment upon Conversion
– At any time the Investor has converted more than $2.0 million principal amount
of the Note, representing the original issue discount of the Note, the Investor will be required to prepay the Investor Note,
on a dollar-for-dollar basis, for each subsequent conversion of the Note.
(2)
Mandatory Prepayment upon Mandatory Prepayment Notices
– The Company may require the Investor to prepay the Investor
Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions,
(ii) the Company’s receipt of all Governmental Authorizations, as defined in the Purchase Agreement, necessary to commence
drilling on at least five Properties, also as defined in the Purchase Agreement, within the Nicaraguan Concessions, and (iii)
the Company obtaining forbearance agreements from certain third parties to whom the Company owes obligations. Notwithstanding
the foregoing, the Company may not request a mandatory prepayment if after giving effect to such proposed mandatory prepayment,
the Company would hold more than $4.0 million in cash or if prepayment under the Investor Note for the preceding sixty calendar
day period would exceed $2.0 million.
The
Investor Note also contains certain offset rights, which if executed, would reduce the amount outstanding under the Note and the
Investor Note and the cash proceeds received by the Company.
Description
of the Secured Convertible Note
The
Note is secured to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The
Note is convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share
(the “Conversion Price”). The Note matures on the three-year anniversary of the issuance date thereof. If the Company
issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares
of its common stock for a price per share that is less than the Conversion Price then in effect, the then current Conversion Price
will be decreased to equal such lower price. The foregoing adjustments to the Conversion Price for future stock issues will not
apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion
Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
On
the first business day of each month beginning on the earlier of the (i) effectiveness of a registration statement the Company
files to register the shares of common stock issuable upon conversion of the Note or exercise of the Warrant, as defined below,
or (ii) sixth month following the date of the Note through and including the maturity date (the “Installment Dates”),
the Company will pay to the Note holder an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the
Note (or the principal outstanding on the Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to
such principal plus (iii) the accrued and unpaid late charges (if any) with respect to such principal and interest. The Investor
has the ability to defer or accelerate such monthly payments in its sole discretion.
Prior
to the maturity date, the Note will bear interest at 8% per annum (or 18% per annum during an event of default) with interest
payable in cash or in shares of Common Stock monthly in arrears on the first business day of each calendar month following the
issuance date.
Each
monthly payment may be made in cash, in shares of the Company’s common stock, or in a combination of cash and shares of
its common stock. The Company’s ability to make such payments with shares of its common stock will be subject to various
equity conditions, including the existence of an effective registration statement covering the resale of the shares issued in
payment (or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant, as defined below,
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations)
and certain minimum trading price and trading volume. Such shares will be valued, as of the date on which notice is given by the
Company that payment will be made in shares, at the lower of (1) the then applicable Conversion Price and (2) a price that is
80.0% of the arithmetic average of the three lowest weighted average prices of the Company’s common stock during the twenty-trading
day period ending two trading days before the applicable determination date (the “Measurement Period”). If the Company
elects to pay such monthly payment in shares of the Company’s stock it is required to pre-deliver shares of the Company’s
common stock and is required to deliver additional shares, if any, to a true-up such number of shares to the number of shares
required to be delivered on the applicable Installment Date pursuant to the calculation above.
At
any time after the issuance date, the Company will have the right to redeem all or any portion of the outstanding principal balance
of the Note plus all accrued but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i)
the arithmetic average of the closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds
200% of the Conversion Price and (ii) among other conditions, there is an effective registration statement covering the resale
of the shares issued in payment or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations.
The Investor has the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
Upon
the occurrence of an event of default under the Note, the Investor may, so long as the event of default is continuing, require
the Company to redeem all or a portion of its Note. Each portion of the Note subject to such redemption must be redeemed by the
Company, in cash, at a price equal to the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid
interest, and accrued and unpaid late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined
by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately
preceding the event of default and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest
Conversion Price in effect during such period.
Subject
to certain conditions, the Investor may also require the Company to redeem all or a portion of its Note in connection with a transaction
that results in a Change of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such
redemption in cash at a price equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and
unpaid interest, and accrued and unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient
determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date
immediately preceding the earlier to occur of (i) the consummation of the Change of Control and (ii) the public announcement of
such Change of Control and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion
Price in effect during such period.
Description
of the Warrant
.
As
a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an
aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable
commencing six months from the date of issuance and the exercise prices for the Warrant is subject to adjustment for certain events,
such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase shares
of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the exercise
price then in effect, the exercise price of the Warrant will be decreased to equal such lesser price. Upon each such adjustment,
the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately.
The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including
issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits,
reverse stock splits, and similar capital changes. The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99%
Restriction on Conversion of Note and Exercise of Warrant
The
Investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result
in the Investor being the beneficial owner in excess of 9.99% of the Company’s common stock. The Company was required to
hold a meeting of its shareholders to approve increase the number of its authorized shares to meet its obligations under the Purchase
Agreement to have reserved 200% of the shares issuable upon conversion of the Note and exercise of the Warrant. The Company held
its Annual Meeting of Shareholders on September 25, 2015 and the shareholders approved the reverse split of the Company’s
common stock issued and outstanding shares, which satisfied this requirement.
Registration
Rights Agreement
In
connection with the May 2015 Private Placement, the Company and the Investor entered into a Registration Rights Agreement under
which the Company is required, on or before 45 days after the closing of the May 2015 Private Placement, to file a registration
statement with the Securities and Exchange Commission (the “SEC”) covering the resale of 130% of the shares of the
Company’s common stock issuable pursuant to the Note and Warrant and to use its best efforts to have the registration declared
effective as soon as practicable. The Company will be subject to certain monetary penalties, as set forth in the Registration
Rights Agreement, if the registration statement is not filed or does not remain available for the resale (subject to certain allowable
grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement. The Company filed
the required registration statement on Form S-1 on June 19, 2015 and the Securities and Exchange Commission declared the Form
S-1 effective on October 9, 2015 and has thereby satisfied this requirement.
Participation
Rights
If,
during the period beginning on the closing date and ending on the four (4) year anniversary of the closing date, the Company offers,
sells, grants any option to purchase, or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent
securities (a “Subsequent Placement”), the Investor will have the right to participate for 50% of any such future
Subsequent Placement.
Description
of the Financial Accounting and Reporting
The
Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including its embedded
conversion feature, were estimated together utilizing a binomial lattice model on its origination date and the Black-Sholes model
at March 31, 2017. Such assumptions included the following:
|
|
Upon
Issuance
|
|
|
As
of
March
31, 2017
|
|
|
|
|
|
|
|
|
Volatility
– range
|
|
|
102.6
|
%
|
|
|
276.4
|
%
|
Risk-free
rate
|
|
|
1.00
|
%
|
|
|
1.5
|
%
|
Contractual
term
|
|
|
3.0
years
|
|
|
|
1.1
years
|
|
Conversion
price
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Par
value of note
|
|
$
|
540,000
|
|
|
$
|
155,952
|
|
The
Company received $450,000 of proceeds at the date of issuance and after repayments and additional funding the net principal balance
was $129,960 as of March 31, 2017. The fair market value of the Note was estimated to be $682,400 as of the issuance date, $141,328
at December 31, 2016 and $143,984 as of March 31, 2017. The net change in fair market value of the Note of $2,656 and $53,206
is included in change in fair value of senior secured convertible note payable in the accompanying statement of operations for
the three months ended March 31, 2017 and 2016, respectively.
The
Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting
purposes due to its ratchet and anti-dilution provisions. Accordingly, the Company has estimated the fair value of the warrant
derivative as of the issuance date of the Note was issued at $8,034,007, which has been charged to non-operating expense during
the 2015. The estimated fair value of the warrant derivative as of March 31, 2017 was $156,748, representing a change of $1,287
from December 31, 2016, which is included in changes in derivative fair value in the accompanying statement of operations for
the three months ended March 31, 2017. See Note 5.
The
warrant issued to purchase 240,000 shares issued as part of the placement fee in connection with the Note was treated as a derivative
liability for accounting purposes due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative
liability totaled $172 (increase in the derivative liability) through March 31, 2017, which is included in changes in derivative
fair value in the accompanying statement of operations for the three months ended March 31, 2017. The warrant derivative liability
balance related to such warrants was $20,900 and $20,728 as of March 31, 2017 and December 31, 2016, respectively. See Note 5.
The
Company is required to make monthly installment payments in the form of cash, common stock or a combination of both. The Holder
has suspended such installments during the third and fourth quarters of 2016 and the first quarter of 2017.
Note
3 – Debt
Debt
consists of the following at March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Convertible
notes payable, short term:
|
|
|
|
|
|
|
|
|
Note
payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note
payable
|
|
|
200,000
|
|
|
|
200,000
|
|
Note
payable, (in default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note
payable (in default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Total
notes payable, short-term
|
|
$
|
1,285,000
|
|
|
$
|
1,285,000
|
|
|
Line-of-Credit
with Related Party
The
Company entered into a line-of-credit facility on September 23, 2013 that provided it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit was convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility was unsecured, bore interest at 8% per annum, and was paid off at its maturity in November 2016.
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company fails to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remain the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company fails to pay the December 2013 Note on or before
its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to
$0.75 per share. All other terms of the warrant remain the same. The December 2013 Note may be prepaid without penalty at any
time. The Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note. The December
2013 Note is in technical default and the Company is seeking an extension of the maturity date of this Note (See Note 10) from
the holder; however, there can be no assurances such efforts will be successful. The Company and its lender are assessing the
status of the Nicaraguan Concessions and what effect that may have on the extension or renewal of these notes.
The
Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates. The Company recognized the value
of the 20,000 shares of common stock issued ($104,000) and the increased value of the outstanding warrants due to the decrease
in their exercise price ($68,716) as an additional discount on the note payable to be amortized ratably over the extended term
of the underlying note.
The
discount recorded as of the December 27, 2013 origination date of the note and as a result of the amendments to the Note terms
and extensions of the maturity date has been amortized ratably over the term and extended terms of the note and the remaining
unamortized discount was $-0- as of March 31, 2017 and December 31, 2016. The related warrant derivative liability balance was
$3,597 and $4,429 as of March 31, 2017 and December 31, 2016, respectively. See Note 5.
Other
than the Note described above, during the three months ended March 31, 2017 the Company had short-term notes outstanding with
entities or individuals as follows:
|
●
|
On
November 8, 2016 the Company borrowed a total of $200,000 from an individual under a convertible note payable with the conversion
rate of $5.00 per share. The note requires no principal or interest payments until its maturity date of November 7, 2017 and
bears interest at 8% per annum.
|
|
|
|
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. The
Company is currently pursuing an additional extension from the Holder. The Company and its lender are assessing the status
of the Nicaraguan Concessions and what effect that may have on the extension or renewal of these notes. In consideration,
the Company granted the lender common stock purchase warrants exercisable to purchase 5,000 shares of common stock on each
extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire in five years.
The value of the 5,000 newly issued warrants issued on January 7, 2016 totaled $379, and $131 on May 7, 2016 both of which
are being amortized over the extension period (through October 7, 2016). The related warrant derivative liability balance
was $1,664 and $1,654 as of March 31, 2017 and December 31, 2016, respectively. See Note 5.
|
|
●
|
On
July 15, 2015 the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is currently pursuing
an additional extension from the Holder. The Company and its lenders are assessing the status of the Nicaraguan Concessions
and what effect that may have on the extension or renewal of these notes. In consideration, the Company granted the lender
common stock purchase warrants exercisable to purchase an aggregate of 3,500 shares of common stock on each extension date
at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire in five years. The value of
the 3,500 newly issued warrants on January 15, 2016 totaled $267 and $74 on May 15, 2016, both of which are being amortized
over the extension period (through October 15, 2016). The related warrant derivative liability balance was $1,164 and $1,158
as of March 31, 2017 and December 31, 2016, respectively. See Note 5.
|
Note
4 – Stock Options
The
Company applies ASC 718,
Stock Compensation
, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted, and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans however such Plans
have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase
of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately
or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also
has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The
Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of March 31, 2017, 500,000 shares were available for future grants under the 2015 Plan as all other Plans have now expired.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the three months ended March 31, 2017.
The
following table summarizes stock option activity for the three months ended March 31, 2017:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31,
2016
|
|
|
393,450
|
|
|
$
|
37.46
|
|
|
4.6 years
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2017
|
|
|
393,450
|
|
|
$
|
37.46
|
|
|
4.4 years
|
|
$
|
—
|
|
Outstanding
and exercisable at March 31, 2017
|
|
|
393,450
|
|
|
$
|
37.46
|
|
|
4.4 years
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $7,598
during the three months ended March 31, 2017 and 2016, respectively.
The
intrinsic value as of March 31, 2017 related to the vested and unvested stock options as of that date was $-0-. The unrecognized
compensation cost as of March 31, 2017 related to the unvested stock options as of that date was $-0-.
Note
5 – Derivative Instruments
Derivatives
– Warrants Issued Relative to Notes Payable
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued
in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing
model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s
common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment
to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk
factors, among other items (ASC 820,
Fair Value Measurements
(“ASC 820”) fair value hierarchy Level 3). The
detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and
the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during
the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note
payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative
liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity
as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note
payable will remain in effect until such time as the underlying warrant is exercised or terminated and the resulting derivative
liability will be transitioned from a liability to equity as of such date.
The
Company has issued warrants to purchase an aggregate of 2,174,000 common shares in connection with various outstanding debt instruments
which require derivative accounting treatment as of March 31, 2017. A comparison of the assumptions used in calculating estimated
fair value of such derivative liabilities as of March 31, 2017 is as follows:
|
|
As
of
March 31, 2017
|
|
|
|
|
|
Volatility
– range
|
|
|
198.1%
- 276.4%
|
|
Risk-free rate
|
|
|
1.5%
- 2.22 %
|
|
Contractual term
|
|
|
1.00
- 5.0 years
|
|
Exercise price
|
|
|
$5.00
- $5.60
|
|
Number of warrants
in aggregate
|
|
|
2,174,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance at December 31, 2016
|
|
$
|
183,430
|
|
Warrants
issued to originate or extend notes payable (recorded as discount on note payable) -Note 3
|
|
|
—
|
|
Unrealized
derivative gains included in other expense for the period
|
|
|
643
|
|
Transition
of derivative liability to equity
|
|
|
—
|
|
|
|
|
|
|
Balance at March
31, 2017
|
|
$
|
184,073
|
|
The
warrant derivative liability consists of the following at March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Warrant
issued to holder of Secured convertible note (Note 2)
|
|
$
|
156,748
|
|
|
$
|
155,461
|
|
Warrant issued to placement
agent (Note 2)
|
|
|
20,900
|
|
|
|
20,728
|
|
Warrant issued to holder
of December 2013 Note (Note 3)
|
|
|
3,597
|
|
|
|
4,429
|
|
Warrants
issued to holders of notes payable - short term (Note 3)
|
|
|
2,828
|
|
|
|
2,812
|
|
Total
warrant derivative liability
|
|
$
|
184,073
|
|
|
$
|
183,430
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the three months ended March 31, 2017:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price Per Share
|
|
Outstanding
and exercisable at December 31, 2016
|
|
|
2,517,771
|
|
|
$
|
5.34
|
|
Issued
for extension of notes payable (Note 3)
|
|
|
—
|
|
|
|
—
|
|
Issued
for extension of line-of-credit (Note 3)
|
|
|
—
|
|
|
|
—
|
|
Exercised/forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at March 31, 2017
|
|
|
2,517,771
|
|
|
$
|
5.34
|
|
The
weighted average term of all outstanding common stock purchase warrants was 4.6 years as of March 31, 2017. The intrinsic value
of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero
as of March 31, 2017.
Note
7 – Income Taxes
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,270,000, which expire from 2025 through
2030. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the tax benefits from its net deferred
tax asset.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2016. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates
prepared by the Company on a preliminary basis indicate that no ownership changes have occurred, and are currently not subject
to an annual limitation, but may be further limited by additional ownership changes which may occur in the future.
Note
8 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
The
Company is in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2017. Specifically,
the Company is in default of the following requirements: 1) the drilling of at least one exploratory well on the Perlas Block
during 2016, 2) the shooting of additional seismic on the Tyra Block during 2016, 3) the Company has not provided the Ministry
of Energy with the required letters of credit in the amounts, which total $1,356,227 for the Perlas block and $278,450 for the
Tyra block for exploration requirements on the leases, 3) payment of the 2016 area fees required for both the Perlas and Tyra
which total $55,566 and 4) payment of the 2016 training fees required for both the Perlas and Tyra which total $100,000. The Company
is seeking to extend, renew and/or renegotiate the Nicaraguan Concessions with the Nicaraguan government at March 31, 2017 in
order to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan
Concessions and the ultimate terms of if the Company is successful. The Company is currently pursuing meetings with Nicaraguan
Government officials in order to address the pending defaults.
The
Company
must raise substantial
amounts of debt and equity capital from other sources in the immediate future in order to fund: (1) the annual training program
and area fees for 2016 and 2017; (2) required letters of credit to the Nicaraguan Government; (3) the drilling of at least one
exploratory well on the Perlas Block of the Nicaraguan Concessions during 2017; (4) the shooting of additional seismic on the
Tyra Block of the Nicaraguan Concessions should it be unable to negotiate a waiver of such requirement from the Nicaraguan government;
(5) normal day-to-day operations and corporate overhead; and (6) outstanding debt and other financial obligations as they become
due including the $1.0 million December 2013 Note, and the two notes payable totaling $85,000, which currently are in technical
default. These are substantial operational and financial issues that must be successfully addressed during 2017 or the Company’s
ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking new outside sources of debt and equity capital in order to fund the substantial needs enumerated above;
however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe
necessary to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to
drilling the exploratory wells. The current environment for oil and gas development projects, especially discoveries in otherwise
undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting
industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments
for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
The
following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions
in order for the Company to retain them unless it is successful in obtaining extensions, renewals or the renegotiation of the
entire Concessions Agreements for the Perlas and Tyra blocks.
Minimum
Work Program – Perlas
Block
Perlas – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
2
|
|
- Environmental
Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation
of 667km of new 2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
443,100
|
|
Sub-Period 2 Optional
|
|
1
|
|
- Acquisition, processing
& interpretation of 200km
2
of 3D seismic
|
|
53km2
|
|
$
|
1,356,227
|
|
Sub-Period 3 Optional
|
|
1
|
|
- Drilling of one exploration
well to the Cretaceous or 3,500m, whichever is Shallower
|
|
80km2
|
|
$
|
10,220,168
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one exploration
well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except
areas with discoveries
|
|
$
|
10,397,335
|
|
Minimum
Work Program – Tyra
Block
Tyra – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
1.5
|
|
- Environmental
Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new 2D seismic (or
equivalent in 3D)
|
|
26km2
|
|
$
|
408,450
|
|
Sub-Period 2 Optional
|
|
0.5
|
|
- Processing &
interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period
|
|
40km2
|
|
$
|
278,450
|
|
Sub-Period 3 Optional
|
|
2
|
|
- Acquisition, processing
& interpretation of 250km
2
of new 3D seismic
|
|
160km2
|
|
$
|
1,818,667
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one exploration
well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except
areas with discoveries
|
|
$
|
10,418,667
|
|
Contractual
and Fiscal Terms
Training Program
|
|
US $50,000 per year, per block
|
|
|
|
Area
Fee
|
|
Years 1-3
|
|
$
|
0.05
|
/hectare
|
|
|
Years 4-7
|
|
$
|
0.10
|
/hectare
|
|
|
Years 8 & forward
|
|
$
|
0.15
|
/hectare
|
Royalties
|
|
Recovery
Factor 0 – 1.5
|
|
|
Percentage
5
|
%
|
|
|
1.5 – 3.0
|
|
|
10
|
%
|
|
|
>3.0
|
|
|
15
|
%
|
|
|
|
|
|
|
|
Natural
Gas Royalties
|
|
Market value at production
|
|
|
5
|
%
|
Corporate
Tax
|
|
Rate no higher than
30%
|
|
|
|
|
Social
Contribution
|
|
3% of the net profit
(1.5% for each autonomous region)
|
|
|
|
|
Investment
Protection
|
ICSID
arbitration OPIC insurance
|
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore
Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000
and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently
converted the subordinated promissory note to common stock.
Under
the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from
the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the
point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional
costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser
of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation
for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for
Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs.
The
RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production
during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to
maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and
directors.
The
Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any
exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing
Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing
and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic
oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures,
earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of prior to March 31, 2017; however, the Company may remain liable for certain asset retirement costs should the
new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003 as
of March 31, 2017 and December 31, 2016 are sufficient to cover any potential noncompliance liabilities relative to the plugging
of abandoned wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former oil
and gas properties. The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced
any oil & gas properties for a number of years.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial
statements.
The
Company is currently involved in litigation as follows:
●
|
In
October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties.
The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
|
|
|
|
Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates
that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas
operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included
in the asset retirement obligation on the accompanying balance sheets.
|
|
|
●
|
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
|
|
|
●
|
Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement, dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of March 31, 2017 and December
31, 2016, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
9 – Related Party Transactions
The
Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the three months ended March 31, 2017 and
2016. The amount due to the CFO’s firm for services previously provided was $762,407 at March 31, 2017 and December 31,
2016, and is included in accrued liabilities at both dates.
On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue
received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue
Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any
rights in the Nicaraguan Concessions for officers and directors.
In
connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan
Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing
partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate
purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes
the former managing partner of Offshore.
As
of March 31, 2017 and December 31, 2016, the Company had accrued compensation to its officers and directors of $1,652,208 and
$1,601,208, respectively.
The
Company entered into a line-of-credit facility on September 23, 2013 that provided it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit was convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility was unsecured, bore interest at 8% per annum, and was renewed at its maturity several times until it
was paid in full on its extended maturity date on November 28, 2016. In consideration for the origination of the line of credit
facility and the various renewals, the Company granted the lender common stock purchase warrants. On February 28, 2016 the Company
extended the line-of-credit expiration date to May 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise
price of $5.00 per share, which warrants were immediately exercisable and expire on February 28, 2021. On May 28, 2016 the Company
extended the line-of-credit expiration date to August 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise
price of $5.00 per share, which warrants were immediately exercisable and expire on May 28, 2021. On August 28, 2016 the Company
extended the line-of-credit expiration date to November 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise
price of $5.00 per share, which warrants were immediately exercisable and expire on August 28, 2021.
Note
10
–
Subsequent Events
On
April 20, 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible
at a rate of $5.00 per share. The facility is represented by promissory notes that matures on April 19, 2018.
On
May 7, 2015, the Company completed a private placement of a $12.0 million principal amount Senior Secured Convertible Note and
warrant to purchase 18,000,000 shares of the Company’s common stock, $0.0001 par value.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 3, 2015, by and between the Company and an
institutional investor. The Investor acquired the Note by paying $450,000 in cash and issuing a secured promissory note, secured
by cash, with an aggregate initial principal amount of $9,550,000 (the “Investor Note”).
On
May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the
Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal
outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal
of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible
Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested
the Company to deliver a new convertible note with respect to the remaining principal balance of $2,197,231 to replace the original
Convertible Note.
**********************