Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This
annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity
problems; (ii) we have substantial obligations to a number of third parties, including but not limited to, our December 2013 promissory
note in the original principal amount of $1,050,000 due in April 2016, which is in default, and the Replacement Note, which we
are contesting, and there can be no assurance that we will be able to meet them; (iii) we require working capital for our operations
and obligations for the next 12 months and capital to meet our obligations under the Nicaraguan Concessions, and there can be
no assurances we will be able to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting
firm have concluded that there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions
and planned future exploration activities are in a country with a developing economy and are subject to the risks of political
and economic instability associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require
large amounts of capital or a commercial relationship with an industry operator that we may not be able to obtain; (vii) we do
not have sufficient resources to conduct required seismic mapping and drilling on our Nicaraguan Concessions, are in default on
various requirements of the Concessions and may forfeit our rights to the Concessions unless we can renegotiate their requirements
and terms; (viii) the oil and gas exploration business involves a high degree of business and financial risk; (ix) we will be
subject to regulations affecting our activities with the Nicaraguan Concessions if we ultimately develop them; (x) our operations
may be adversely affected by changes in the fiscal regime of Nicaragua; (xi) we are continuing to negotiate with our creditors
and may face additional claims in the future; (xii) oil prices may be affected by regional factors; (xiii) any future production
will be contingent on successful exploration, development and acquisitions to establish reserves and revenue in the future; (xv)
the oil and gas industry is highly competitive; (xvi) exploratory drilling is an uncertain process with many risks; (xvii) oil
and gas prices are volatile, and declines in prices would hurt our revenues and ability to achieve profitable operations; (xviii)
our common stock is traded on the OTCQB, which may not have the visibility or liquidity that we seek for our common stock; (xix)
we depend on key personnel; (xx) sufficient voting power by coalitions of a few of our larger stockholders to make corporate governance
decisions that could have a significant effect on us and the other stockholders, including Amegy Bank, NA; (xxi) sale of substantial
amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock,
including sales of shares of common stock that may be issued to the holder of the Replacement Note upon its conversion; (xxii)
possible issuance of common stock subject to options and warrants may dilute the interest of stockholders; (xxiii) whether the
Strategic Alternatives will result in an opportunity or transaction; (xxiv) our nonpayment of dividends and lack of plans to pay
dividends in the future; (xxv) future sale or issuance of a substantial number of shares of our common stock that could depress
the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxvi) our additional
securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvii)
our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (xxviii)
indemnification of our officers and directors; (xxix) whether we will be able to renegotiate or extend the terms of the Nicaraguan
Concessions, and on terms favorable to us, or otherwise maintain our interest in the Concessions; and (xxx) whether we will obtain
an industry or other financial partner to enable us to explore and develop our Nicaraguan Concessions if we do obtain extensions
or renegotiation of the terms of the Concessions.
The
following information should be read in conjunction with the Financial Statements and Notes presented elsewhere in this annual
report on Form 10-K. See Note 1 –
“Summary of Significant Accounting Policies,”
to the Financial Statements
for the Years Ended December 31, 2018 and 2017.
2018
Operational and Financial Objectives
Corporate
Activities
The
Nicaraguan Concessions represent our most substantial asset and are the focal point of our business plan. The Company is in default
of various provisions of the 30-year Concession for both the Perlas and Tyra blocks as of December 31, 2018, as noted above.
The
Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018,
including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the
Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $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, 2017
and 2018 area fees required for both the Perlas and Tyra which total approximately $167,000; and (5) payment of the 2016, 2017
and 2018 training fees required for both the Perlas and Tyra totaling approximately $300,000. The Company is seeking to extend,
renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. The Company
has encountered challenges in this regard because of the political situation in Nicaragua. 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 must raise substantial amounts of debt and equity capital from other sources in the immediate future in order
to fund the foregoing requirements plus normal day-to-day operations and corporate overhead and outstanding debt and other financial
obligations as they become due, including the $1.0 million December 2013 Note, and the five notes payable totaling $338,125, which
are either due on demand or currently in default and the Replacement Note, if issued. In light of the foregoing, the Company is
considering Strategic Alternatives.
These
are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability
to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
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 is seeking new outside sources of debt and equity capital to fund the substantial needs enumerated above, as well as satisfying
its existing debt obligations. The Company is attempting to obtain extensions of the maturity date for its debt; however, there
can be no assurance that it will be able to do so or what the final terms will be if the lenders agree to such extensions.
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.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
For
the Years Ended December 31, 2018 and 2017
Results
of Operations
Revenue
The
Company had no revenues in either 2018 or 2017 because it focused on the pursuit of the exploration, development, financing and
maintenance of the Nicaraguan Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2018 or 2017. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2018 and 2017.
The
Company has no current or planned domestic exploration and development activities. It is not actively working on any domestic
property, focusing instead on the exploration, development and financing of the Nicaraguan Concessions.
General
and Administrative Expenses
General
and administrative expenses of $208,941 for the year ended December 31, 2018 decreased $260,290, or 55.5%, from $469,231 in the
same period in 2017. The decrease in general and administrative expenses is primarily attributable to the Board of Directors discontinuing
compensation for the Company’s officers and directors effective January 1, 2018.
Interest
expense
Interest
expense increased slightly from $115,782 for the year ended December 31, 2017 to $116,744 for the year ended December 31, 2018.
The interest expense is related to various short-term notes outstanding in both periods. These short-term notes have matured and
the Company was seeking extensions as of December 31, 2018.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company will need to continue with these types of short-term borrowings with high effective interest rates.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the Secured Convertible Note outstanding during 2018 and 2017 are treated as derivative instruments because the promissory notes
and warrants contain ratchet and anti-dilution provisions. Accordingly, the Company adjusted the value of the outstanding derivative
liabilities to their estimated fair value as of December 31, 2018 and 2017. The mark-to-market process resulted in a gain of $38,681
during the year ended December 31, 2018 and a gain of $79,247 during the year ended December 31, 2017. The decrease in the gain
recognized is primarily the result of the relatively stable closing market price of the common stock between the December 31,
2017 ($0.06 per share) and December 31, 2018 ($0.04 per share) and the value of the derivatives tend to decline as the period
of time until termination declines.
Change
in Fair Value of Secured Convertible Note
We
issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair
value basis. 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 the Replacement Note representing the remaining principal balance of $2,197,231 to replace the Convertible
Note. The Company has recorded the fair value of the Convertible Notes assuming that the remaining par value is $2,197,231 as
asserted by the Investor. The change in the estimated fair value of $150,794 during the year ended December 31, 2018 compared
to a change of $1,905,109 for 2017. The increased fair value at December 31, 2018 reflects the accretion of value to the Note
balance as it reached its maturity date in May 2018. The Company plans to continue to negotiate with the Investor regarding the
issuance of the Replacement Note under the terms of the financing and taking into consideration that the Investor only funded
$510,000 in the entire transaction, but there can be no assurance that it will be successful in this regard.
Income
Tax
The
Company recorded an income tax benefit of $150,000 in the year ended December 31, 2018 compared to $-0- for the year ended December
31, 2017 primarily due to the Tax Cuts and Jobs Act (the “Act”) that became law on December 22, 2017. The Act significantly
changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in
2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000, which previously was reported as income taxes payable on the Company’s balance sheet
and the corresponding deferred tax asset was fully reserved based on all available evidence, because the Company considered it
more likely than not that all the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the
Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company
has recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income taxes
payable to zero as of December 31, 2018.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000 as of December 31, 2018, which
expire from 2025 through 2038. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
Net
loss
As
a result of the above, we reported a net loss of $287,798 for the year ended December 31, 2018 compared to a net loss of $2,410,875
for the year ended December 31, 2017. This represents an improvement of $2,123,077.
Basic
and Diluted Loss per Share
Basic
net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net loss 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 from continuing operations 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.
The
basic and diluted loss per share was $0.04 for the year ended December 31, 2018, for the reasons previously noted. The basic and
diluted loss per share was $0.31 for the year ended December 31, 2017. All outstanding stock options and warrants to purchase
common stock were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the year ended
December 31, 2018 and 2017 because the exercise prices of the stock options and warrants were substantially higher than market
price in 2018 and 2017 and the net loss reported for both years. Potential shares of common stock as of December 31, 2018 that
have been excluded from the computation of diluted net loss per share amounted to 2,703,763 shares, which included 2,365,563 outstanding
warrants and 338,200 outstanding stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development
of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the
world. Historically, we financed our operations through the issuance of redeemable preferred stock and various short and long-term
debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation should
we be successful exploring our Nicaraguan Concessions.
On
December 27, 2013 the Company borrowed $1,050,000 under the December 2013 Note, which is an unsecured credit facility with a private,
third-party lender. Effective April 7, 2015 the Company and the lender agreed to extend the maturity date of the December 2013
Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May
2015 Private Placement in the principal amount of $9,550,000 (the “New Maturity Date”). All other terms of the Note
remained the same and the remaining principal balance was reduced to $1,000,000 as of September 30, 2016 after the $50,000 principal
repayment required by the extension agreement.
The
December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future
senior indebtedness, as such terms are defined in the December 2013 Note. The December 2013 Note matured in April 2016 and is
currently in default. The Company is seeking an extension of the maturity date; however, there can be no assurance that it will
be able to obtain such extension or what the final terms will be if the lender agrees to such an extension.
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”).
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 the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The
aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue
discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible
Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company plans to continue to negotiate
with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing
and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that
it will be successful in this regard.
In
July 2015, the Company issued two promissory notes for total cash proceeds of $85,000. The maturity dates of the promissory notes
have been extended several times, but they matured in October 2016 and are currently in default. In connection with the origination
and extension of the notes, the Company issued warrants exercisable to purchase shares of common stock at an exercise price of
$5.60 per share. The warrants are immediately exercisable and terminate five years from their dates of issuance. The Company is
seeking an extension of the maturity date of these notes; 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.
In
November 2016, the Company issued a $200,000 convertible promissory note which requires no principal or interest payments until
its November 2017 maturity date and bears 8% interest. The proceeds of this note were used to retire the Company’s line-of-credit
upon its maturity in November 2016 and for general working capital purposes. This note was not retired at its maturity and is
now in default. The Company is negotiating with the Holder to resolve this default.
In
April 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 note required no principal or interest payments until its maturity date of April 19, 2018 and
bears interest at 8% per annum. The note is in default and the Company is negotiating with the Holder to resolve this default.
On
May 21, 2018, the Company borrowed $13,125 under an unsecured promissory note with a private third party lender, which is convertible
at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum.
In
summary, as of December 31, 2018, the following debt was outstanding: (i) $40,000 on our convertible promissory note, which matured
on April 19, 2018 and is in default; (ii) $200,000 on our convertible promissory note, which matured on November 7, 2017 and is
currently in default; (iii) the two promissory notes in the total principal amount of $85,000, which matured in October 2016 and
are in default; (iv) the Replacement Note with a fair value of $2,197,231 which matured in May 2018 and is currently in technical
default; (v) the December 2013 Note in the principal amount of $1,000,000, which was due in April 2016 and is in default; and
(vi) $13,125 on our convertible promissory note, which is due on demand.
The
Company is in default of various provisions of the 30-year Concessions for both Perlas and Tyra blocks as of December 31, 2018,
as noted earlier. The Company is pursuing negotiations with Nicaraguan Government officials to address the pending defaults.
The
Company must raise substantial amounts of debt and equity capital from available sources in the immediate future in order to fund
the requirements related to the Nicaraguan Concessions and fund (i) its normal day-to-day operations and corporate overhead, (ii)
pay its outstanding debt and other financial obligations as they become due including the $1.0 million December 2013 Note, the
$2,197,231 due in 2018 representing the May 2015 Private Placement and the various short-term notes payable totaling $338,125,
which are either due on demand or are currently in default. These are substantial operational and financial issues that must be
successfully addressed during 2019 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 will need to obtain funding in 2018 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 foregoing
defaults. 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 Concessions and meet its other financial
requirements.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern. 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.
Inflation
and Seasonality
Inflation
has not materially affected us during the past fiscal year. We do not believe that our business is seasonal in nature.
Item
8. Financial Statements and Supplementary Data.
Infinity
Energy Resources, Inc.
Financial
Statements and Accompanying Notes
December
31, 2018 and 2017
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors ad Stockholders of
Infinity
Energy Resources, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Infinity Energy Resources, Inc. (the “Company”) as of December 31,
2018 and 2017, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in
the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In
our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December
31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Substantial
doubt about the Company’s Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 1 to the accompanying financial statements,
the
Company has suffered recurring losses, has no on-going operations, is in default of its obligations under the Nicaraguan oil and
gas concessions and has a significant working capital deficit.
These conditions raise substantial
doubt about the Company’s ability to continue as a going concern.
Management’s evaluation of the events and
conditions and management’s plans regarding these matters are also described in Note 1.
The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2014.
New
York, New York
April
15, 2019
INFINITY
ENERGY RESOURCES, INC.
Balance
Sheets
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,367
|
|
|
$
|
6,255
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,367
|
|
|
|
6,255
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,367
|
|
|
$
|
6,255
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,040,948
|
|
|
$
|
6,005,405
|
|
Accrued liabilities (including $788,520 due to related party at December 31, 2018 and 2017)
|
|
|
3,699,747
|
|
|
|
3,544,361
|
|
Income tax liability
|
|
|
—
|
|
|
|
150,000
|
|
Accrued interest
|
|
|
509,894
|
|
|
|
393,151
|
|
Asset retirement obligations
|
|
|
1,716,003
|
|
|
|
1,716,003
|
|
Secured convertible note payable-current
|
|
|
2,197,231
|
|
|
|
2,046,437
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable-short term
|
|
|
1,338,125
|
|
|
|
1,325,000
|
|
Total current liabilities
|
|
|
15,501,948
|
|
|
|
15,180,357
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
65,502
|
|
|
|
104,183
|
|
Total liabilities
|
|
|
15,567,450
|
|
|
|
15,284,540
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.0001 per share, 10,000,000 shares authorized; no shares issued or outstanding as of December 31, 2018 and 2017
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $.0001 per share, authorized 75,000,000 shares, issued and outstanding 7,712,569 shares at December 31, 2018 and 2017
|
|
|
771
|
|
|
|
771
|
|
Additional paid-in capital
|
|
|
109,080,273
|
|
|
|
109,080,273
|
|
Accumulated deficit
|
|
|
(124,647,127
|
)
|
|
|
(124,359,329
|
)
|
Total stockholders’ deficit
|
|
|
(15,566,083
|
)
|
|
|
(15,278,285
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,367
|
|
|
$
|
6,255
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Operations
|
|
For the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
208,941
|
|
|
$
|
469,231
|
|
Total operating expenses
|
|
|
208,941
|
|
|
|
469,231
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(208,941
|
)
|
|
|
(469,231
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(116,744
|
)
|
|
|
(115,782
|
)
|
Change in derivative fair value
|
|
|
38,681
|
|
|
|
79,247
|
|
Change in fair value of senior convertible note payable
|
|
|
(150,794
|
)
|
|
|
(1,905,109
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(228,857
|
)
|
|
|
(1,941,644
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(437,798
|
)
|
|
|
(2,410,875
|
)
|
Income tax benefit (expense)
|
|
|
150,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(287,798
|
)
|
|
$
|
(2,410,875
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
7,712,569
|
|
|
|
7,712,569
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Stockholders’ Deficit
Years
ended December 31, 2018 and 2017
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance,
December 31, 2016
|
|
|
7,712,569
|
|
|
$
|
771
|
|
|
$
|
109,080,273
|
|
|
$
|
(121,948,454
|
)
|
|
$
|
(12,867,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,410,875
|
)
|
|
|
(2,410,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
7,712,569
|
|
|
|
771
|
|
|
|
109,080,273
|
|
|
|
(124,359,329
|
)
|
|
|
(15,278,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(287,798
|
)
|
|
|
(287,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
|
|
7,712,569
|
|
|
$
|
771
|
|
|
$
|
109,080,273
|
|
|
$
|
(124,647,127
|
)
|
|
$
|
(15,566,083
|
)
|
See
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(287,798
|
)
|
|
$
|
(2,410,875
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
|
(38,681
|
)
|
|
|
(79,247
|
)
|
Change in fair value of senior convertible note
|
|
|
150,794
|
|
|
|
1,905,109
|
|
|
|
|
|
|
|
|
|
|
Change in operations assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in income taxes payable
|
|
|
(150,000
|
)
|
|
|
—
|
|
Increase in accounts payable
|
|
|
35,543
|
|
|
|
40,076
|
|
Increase in accrued liabilities
|
|
|
155,386
|
|
|
|
383,071
|
|
Increase in accrued interest
|
|
|
116,743
|
|
|
|
115,782
|
|
Net cash used in operating activities
|
|
|
(18,013
|
)
|
|
|
(46,084
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible note payable
|
|
|
13,125
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
13,125
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(4,888
|
)
|
|
|
(6,084
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
6,255
|
|
|
|
12,339
|
|
Ending
|
|
$
|
1,367
|
|
|
$
|
6,255
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Notes
to Financial Statements
December
31, 2018
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature
of Operations
The
Company plans to pursue 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
Nicaraguan Concessions represent its principal asset and only exploration and development project. On March 5, 2009 Infinity signed
the contracts relating to its Nicaraguan Concessions. Infinity 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 identified multiple
sites for exploratory drilling and intends to 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 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. It has not been able to pay the 2016, 2017 and 2018 area fees and training fees
for both the Perlas and Tyra blocks as required under the Nicaraguan Concessions and is in default. The Company is seeking to
negotiate extensions, waivers and/or new Perlas and Tyra Concession agreements with the Nicaraguan government to cure such defaults.
It has encountered challenges in this regard because of the political situation in Nicaragua. 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.
The
Company is assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of
natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide
support services for the production of oil and gas in the United States.
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”).
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 (the “Replacement Note”) representing the remaining principal balance of $2,197,231
to replace the Convertible Note. The Replacement Note provides for a one-year maturity from May 7, 2017, a conversion price of
$0.50 per share and is currently in technical default. The Company is continuing to negotiate with the Investor a resolution of
this matter regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that
the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this
regard.
The
Note was to mature on the three-year anniversary of its issuance, bore interest at 8% per annum, and was 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 is now in default and the Company has had discussions with the Holder regarding a resolution to the default, but there
has been no progress at present. 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 nine months from the date of issuance for a period of seven years from the date
of issuance. The Note ranked senior to the Company’s existing and future indebtedness and is secured by all the assets of
the Company, excluding the Concessions. The proposed Replacement Note would have the same security interest as the Convertible
Note.
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. The Company has a significant
working capital deficit, has notes payable that are in default and is 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 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 years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other
notes payable with principal balances of $338,125 as of December 31, 2018 are now either due on demand or currently in default.
The Company is seeking resolutions to these defaults including 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 was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018,
including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the
Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $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, 2017
and 2018 area fees required for both the Perlas and Tyra which total approximately $167,000; and (5) payment of the 2016, 2017
and 2018 training fees required for both the Perlas and Tyra totaling approximately $300,000. The Company is seeking to extend,
renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. The Company
has encountered challenges in this regard because of the political situation in Nicaragua. 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 must raise substantial amounts of debt and equity capital from other sources in the immediate future in order
to fund the foregoing and (i) normal day-to-day operations and corporate overhead, (ii) outstanding debt and other financial obligations
as they become due, including the $1.0 million December 2013 Note, and the five notes payable totaling $338,125, which are either
due on demand or currently in default and the Replacement Note, if issued. These are substantial operational and financial issues
that must be successfully addressed during 2019 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 sources of debt and equity capital to fund the substantial needs enumerated above. The Company is also attempting
to obtain extensions of the maturity date for its debt. There can be no assurance that it will be successful in these regards.
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 and it other financial obligations.
The political climate in Nicaragua is unstable and is 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 December 31, 2018 and 2017, 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 December 31, 2018 and 2017 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 December 31, 2018 and 2017 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
December 31, 2018 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 December 31,
2018 and 2017, the Company did not have any proved oil and gas properties, and all unproved property costs relate to 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 December 31, 2018 and 2017 and during the years 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, 5 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 payable, accrued liabilities and short term notes represent the estimated fair
value due to the short-term nature of the accounts.
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 December 31, 2018 and 2017 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 December 31, 2018 and 2017:
December
31, 2018
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
|
$
|
2,197,231
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
65,502
|
|
|
|
65,502
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,262,733
|
|
|
$
|
2,262,733
|
|
December
31, 2017
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,046,437
|
|
|
$
|
2,046,437
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
104,183
|
|
|
|
104,183
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,150,620
|
|
|
$
|
2,150,620
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the years
ended December 31, 2018 and 2017.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and
tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset
to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses
the realizability of the Company’s deferred income tax assets, and a valuation allowance is recognized if it is determined
that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making
such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such
factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not
to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can
project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the
Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can
be no assurance that facts and circumstances will not materially change and require the Company to adjust its deferred income
tax asset valuation allowance in a future period. The Company recognized a deferred tax asset, net of valuation allowance, of
$0 at December 31, 2018 and 2017.
The
Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves
dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes
certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that
the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability
for unrecognized tax benefit was recorded as of December 31, 2017. During the year ended December 31, 2018 the Company determined
that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore
it reversed the liability and recognized an income tax benefit as described in the following section.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s balance sheet
and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely
than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company
now considers it more likely than not that all the AMT tax credit carryforward will be realized. Accordingly, the Company has
recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income taxes
payable to zero as of December 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward
because the Company had not previously paid the AMT tax but rather it recorded the income tax liability on the accompanying balance
sheet.
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.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which provides guidance on a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers. The effective date for this ASU, which
was deferred by ASU 2015-14 issued in August 2015, is for fiscal years beginning after December 15, 2017. In March 2016, the FASB
also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09 which revises the structure of the indicators to provide
indicators of when the entity is the principal or agent in a revenue transaction, and eliminated two of the indicators (“the
entity’s consideration is in the form of a commission” and “the entity is not exposed to credit risk”)
in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment
depending on the terms and conditions of the contract. In April 2016, the FASB also issued ASU 2016-10, which clarifies the implementation
guidance on identifying promised goods or services and on determining whether an entity’s promise to grant a license with
either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the
entity’s intellectual property (which is satisfied over time). The amendments, collectively, should be applied retrospectively
to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company adopted
this ASU on January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company
would recognize the cumulative effect of initially applying the ASU as an adjustment to opening retained earnings at the date
of initial application. The Company did not have any material adjustments at the date of adoption. The comparative periods have
not been restated.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU
2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements
were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts
with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and
lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The
modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative
period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing
the impact that ASU 2016-02 will have on its financial statements.
In
July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842):
Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified
retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the
earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method
to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods
prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from
the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will,
in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the
lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating
leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed
under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s fiscal year beginning
January 1, 2019 and subsequent interim periods. The Company is currently evaluating the impact the adoption of these ASUs will
have on the Company’s financial statements.
In
January 2017, the FASB issued ASU 2017-01 (“ASU 2017-01”), Business Combinations, which clarifies the definition of
a business, particularly when evaluating whether transactions should be accounted for as acquisitions or dispositions of assets
or businesses. The first part of the guidance provides a screen to determine when a set is not a business; the second part of
the guidance provides a framework to evaluate whether both an input and a substantive process are present. The guidance will be
effective after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption
is permitted for transactions that have not been reported in issued financial statements. The Company does not believe that the
adoption of this pronouncement will have an impact on the presentation of its financial statements.
In
January 2017, FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill
Impairment, Step 2 of the goodwill impairment test, which requires determining the implied fair value of goodwill and comparing
it with its carrying amount has been eliminated. Thus, the goodwill impairment test is performed by comparing the fair value of
a reporting unit with its carrying amount (i.e., what was previously referred to as Step 1). In addition, ASU No. 2017-04 requires
entities having one or more reporting units with zero or negative carrying amounts to disclose (1) the identity of such reporting
units, (2) the amount of goodwill allocated to each, and (3) in which reportable segment the reporting unit is included. ASU No.
2017-04 is effective as follows: (1) for a public business entity that is an SEC filer for annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the
adoption of this standard on our financial statements.
In
February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update will be effective
for all interim and annual reporting periods beginning after December 15, 2018. The Company does not believe that the adoption
of these amendments have an impact on its financial statements.
In
March 2018, the FASB issued Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”). ASU 2018-05 adds various SEC paragraphs pursuant to the
issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs
Act (“SAB No. 118”), which was effective immediately. SAB No.118 provides for a provisional one year measurement period
for entities to finalize their accounting for certain income tax effects related to the Tax Cuts and Jobs Act. The adoption of
ASU 2018-05 had no material impact on the Company’s financial statements as of and for the year ending December 31, 2018.
See Note 8, Income Taxes, for disclosures related to this amended guidance.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share based compensation. The guidance is effective for the Company for the
fiscal year beginning January 1, 2020. While the exact impact of this standard is not known, the guidance is not expected to have
a material impact on the Company’s financial statements, as non-employee stock compensation is nominal relative to the Company’s
total expenses as of December 31, 2018.
In
October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance
for Variable Interest Entities” (“ASU 2018-17”). This ASU reduces the cost and complexity of financial reporting
associated with consolidation of variable interest entities (VIEs). A VIE is an organization in which consolidation is not based
on a majority of voting rights. The new guidance supersedes the private company alternative for common control leasing arrangements
issued in 2014 and expands it to all qualifying common control arrangements. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently assessing the
impact the adoption of ASU 2018- 17 will have on the Company’s financial statements.
In
July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842):
Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified
retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the
earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method
to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods
prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from
the associated lease component if certain conditions are present. An entity that elects to use the practical expedients will,
in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the
lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating
leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed
under previous GAAP. ASU 2016-02, ASU 2018-10 and ASU 2018-11 will be effective for the Company’s fiscal year beginning
January 1, 2019 and subsequent interim periods. The Company is currently evaluating the impact the adoption of these ASUs will
have on the Company’s financial statements.
The
Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would
have a material effect on the accompanying financial statements.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Secured convertible note
payable, at fair value
|
|
$
|
2,197,231
|
|
|
$
|
2,046,437
|
|
Less:
Current maturities
|
|
|
(2,197,231
|
)
|
|
|
(2,046,437
|
)
|
|
|
|
|
|
|
|
|
|
Secured convertible
note payable, long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Following
is an analysis of the activity in the Note during the year ended December 31, 2018:
|
|
Amount
|
|
Balance at December 31, 2017
|
|
$
|
2,046,437
|
|
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
|
|
|
150,794
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
2,197,231
|
|
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”).
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 (the “Replacement Note”) with respect to the remaining principal balance of $2,197,231
to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an
approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company
has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor,
resulting in a change in the estimated fair value of $1,905,109 during the year ended December 31, 2017. The Replacement Note
provides for a maturity date of May 7, 2018, a conversion price of $0.50 per share and is due in monthly installment payments
through May 2018 either in cash or stock, among other terms. The Company did not repay the note at its maturity date and the note
is now in technical default. It is to be secured to the same extent as the Convertible Note. The Company is continuing to negotiate
a resolution of this matter with the Investor regarding the current default status, the issuance of the Replacement Note under
the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there
can be no assurance that it will be successful in this regard.
Description
of the Secured Convertible Note
The
Note is senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding
the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The
Note was 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 was to mature 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 bore 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 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 had 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 nine 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 an increase to 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.
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 the Black-Scholes model at December 31, 2018 and 2017.
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 December 31, 2018 and 2017. The fair market value of the Note was estimated to be $682,400 as of the issuance
date, $2,046,437 at December 31, 2017 and $2,197,231 as of December 31, 2018. The net change in fair market value of the Note
of $150,794 is included in change in fair value of senior secured convertible note payable in the accompanying statement of operations
for the year ended December 31, 2018.
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 the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The
aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue
discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible
Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company is negotiating with the Investor
regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration
the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this
regard.
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. The estimated fair value of the warrant derivative as of December 31,
2018 was $57,092, representing a change of $33,427 from December 31, 2017, which is included in changes in derivative fair value
in the accompanying statement of operations for the year ended December 31, 2018. See Note 5.
The
warrant 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 $2,096 (decrease in the derivative liability) through December 31, 2018, which is included in changes in derivative
fair value in the accompanying statement of operations for the year ended December 31, 2018. The warrant derivative liability
balance related to such warrants was $7,573 and $12,069 as of December 31, 2018 and 2017, 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
suspended such installments during the third and fourth quarters of 2016 and the suspension continued through December 31, 2018.
Note
3 – Debt
Debt
consists of the following at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Convertible notes payable, short term:
|
|
|
|
|
|
|
|
|
Note
payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note payable (in
default)
|
|
|
200,000
|
|
|
|
200,000
|
|
Note payable (in
default)
|
|
|
40,000
|
|
|
|
40,000
|
|
Note payable, (in
default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note payable (in
default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Note
payable (due on demand)
|
|
|
13,125
|
|
|
|
—
|
|
Total notes payable,
short-term
|
|
$
|
1,338,125
|
|
|
$
|
1,325,000
|
|
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 failed 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 remained 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 failed 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 December 2013 Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the
Note. The December 2013 Note is in default and the Company is pursuing a resolution to this default including seeking an extension
of the maturity date of this Note (See Note 11) from the holder; however, there can be no assurances such efforts will be successful.
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 Warrant
expired as of December 31, 2018 and can no longer be exercised. The discount has been 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 December 31, 2018 and 2017. The related warrant derivative liability balance was $-0- and
$31 as of December 31, 2018 and 2017, respectively. See Note 5. The Warrant term has expired as of December 31, 2018 and can no
longer be exercised.
Other
than the December 2013 Note described above, during the year ended December 31, 2018 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. The note was not paid on its original maturity date. The Company is pursuing a resolution
of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will
be successful in this regard.
|
|
|
|
|
●
|
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 note required no principal or interest payments until its maturity date of April
19, 2018 and bears interest at 8% per annum. The note was not paid on its maturity date. The Company is pursuing a resolution
of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will
be successful in this regard.
|
|
|
|
|
●
|
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 and its lender are pursuing a resolution of this default. There can be no assurance that the Company will be successful
in this regard. 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 were amortized over the extension period (through October 7, 2016). The related warrant derivative
liability balance was $492 and $920 as of December 31, 2018 and 2017, 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
a resolution of this default including an additional extension from the Holder. There can be no assurance that the Company
will be successful in this regard. 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 were amortized over the extension period (through October 15, 2016).
The related warrant derivative liability balance was $345 and $644 as of December 31, 2018 and 2017, respectively. See Note
5.
|
|
|
|
|
●
|
On
May 21, 2018, the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible
at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum.
|
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 December 31, 2018, 500,000 shares were available for future grants under the 2015 Plan. 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 years ended December 31, 2018 and 2017.
The
following table summarizes stock option activity for the year ended December 31, 2018:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2017
|
|
|
376,950
|
|
|
$
|
37.82
|
|
|
3.5 years
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(38,750
|
)
|
|
|
(7.97
|
)
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
3.1 years
|
|
$
|
—
|
|
Outstanding and
exercisable at December 31, 2018
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
3.1 years
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0-
during the years ended December 31, 2018 and 2017, respectively.
The
intrinsic value as of December 31, 2018 related to the vested and unvested stock options as of that date was $-0. The unrecognized
compensation cost as of December 31, 2018 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 2,074,000 shares of common stock in connection with various outstanding
debt instruments which require derivative accounting treatment as of December 31, 2018. A comparison of the assumptions used in
calculating estimated fair value of such derivative liabilities as of December 31, 2018 is as follows:
|
|
As
of
December
31, 2018
|
|
|
|
|
|
Volatility – range
|
|
|
237.3%
- 272.8
|
%
|
Risk-free rate
|
|
|
2.51%
- 2.59
|
%
|
Contractual term
|
|
|
1.5
- 3.3 years
|
|
Exercise price
|
|
|
$
5.00
- $5.60
|
|
Number of warrants in aggregate
|
|
|
2,074,000
|
|
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, 2017
|
|
$
|
104,183
|
|
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
|
|
|
(38,681
|
)
|
Transition
of derivative liability to equity
|
|
|
—
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
65,502
|
|
The
warrant derivative liability consists of the following at December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Warrant issued to holder
of Secured convertible note (Note 2)
|
|
$
|
57,092
|
|
|
$
|
90,519
|
|
Warrant issued to placement agent (Note
2)
|
|
|
7,573
|
|
|
|
12,069
|
|
Warrant issued to holder of December
2013 Note (Note 3)
|
|
|
—
|
|
|
|
31
|
|
Warrants issued
to holders of notes payable - short term (Note 3)
|
|
|
837
|
|
|
|
1,564
|
|
Total warrant
derivative liability
|
|
$
|
65,502
|
|
|
$
|
104,183
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the year ended December 31, 2018:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding and exercisable
at December 31, 2017
|
|
|
2,505,771
|
|
|
$
|
5.25
|
|
Issued for extension
of notes payable (Note 3)
|
|
|
—
|
|
|
|
—
|
|
Issued for extension
of line-of-credit (Note 3)
|
|
|
—
|
|
|
|
—
|
|
Exercised/forfeited
|
|
|
(140,208
|
)
|
|
|
(5.74
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at December 31, 2018
|
|
|
2,365,563
|
|
|
$
|
5.01
|
|
The
weighted average term of all outstanding common stock purchase warrants was 3.1 years as of December 31, 2018. 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 December 31, 2018.
Note
7 – Supplemental Oil and Gas Information
Estimated
Proved Oil and Gas Reserves (Unaudited)
As
of December 31, 2018 and 2017, the Company had no proved reserves. As such, there are no estimates of proved reserves to disclose,
nor standardized measure of discounted future net cash flows relating to proved reserves.
Costs
Incurred in Oil and Gas Activities
Costs
incurred during the year ended December 31, 2018 in connection with the Company’s oil and gas acquisition, exploration and
development activities are shown below.
|
|
Year
ended
December
31, 2018
|
|
Property acquisition costs:
|
|
|
|
|
Proved
|
|
$
|
—
|
|
Unproved
|
|
|
|
|
Total property acquisition
costs
|
|
|
—
|
|
Development costs
|
|
|
—
|
|
Exploration
costs
|
|
|
155,584
|
|
Total costs
|
|
$
|
155,584
|
|
Exploration
costs during the year ended December 31, 2018 primarily related to area concession and training fees to be paid to the Nicaraguan
Government for 2018. All costs related to the Nicaraguan Concessions have been expensed as incurred during the year ended December
31, 2018 as the Concessions are in default status and the Nicaraguan Concession assets are considered to be impaired and fully
reserved as of December 31, 2018 and 2017.
Aggregate
capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion,
impairment and amortization are as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Proved oil and gas properties
|
|
$
|
—
|
|
|
$
|
—
|
|
Unproved
oil and gas properties
|
|
|
11,176,773
|
|
|
|
11,021,189
|
|
Total
|
|
|
11,176,773
|
|
|
|
11,021,189
|
|
Less amounts allocated to revenue sharing
interest granted to Note holder for extension of maturity date (See Note 3)
|
|
|
(964,738
|
)
|
|
|
(964,738
|
)
|
Less accumulated impairment charge on
oil and gas properties as of December 31, 2015
|
|
|
(9,720,666
|
)
|
|
|
(9,720,666
|
)
|
Less amounts charged directly to operations
since January 1, 2016
|
|
|
(491,369
|
)
|
|
|
(335,785
|
)
|
Less accumulated
depreciation, depletion and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net capitalized
costs
|
|
$
|
—
|
|
|
$
|
—
|
|
Management
has performed its impairment tests on its oil and gas properties as of December 31, 2018 and 2017, has concluded that a full impairment
reserve should be provided on the costs capitalized for its unproved oil and gas properties consisting solely of the Nicaraguan
Concessions. Therefore, an impairment charge of $9,720,666 was charged to operations during the year ended December 31, 2015 which
reduced the carrying amount of oil and gas properties to zero. The Nicaraguan Concessions remained fully impaired as of December
31, 2018 and 2017. 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. This may provide substantial impediments for
the Company and its ability to obtain adequate financing to fund the exploration and development of its Nicaraguan projects and
the overall economic viability of the Concessions should hydrocarbons be discovered in commercial quantities.
Costs
Not Being Amortized
Oil
and gas property costs not being amortized at December 31, 2018, (all accumulated costs have been reserved through an impairment
charge as of December 31, 2015 and through direct expense for January 1, 2016 and after) costs by year that the costs were incurred,
are as follows:
Year Ended December 31,
|
|
|
|
2018 (expensed directly)
|
|
$
|
155,584
|
|
2017 (expensed directly)
|
|
|
170,274
|
|
2016 (expensed directly)
|
|
|
165,511
|
|
2015
|
|
|
92,568
|
|
2014
|
|
|
115,622
|
|
2013
|
|
|
6,051,411
|
|
2012
|
|
|
581,723
|
|
2011
|
|
|
731,347
|
|
Prior
|
|
|
3,112,733
|
|
Total costs not
being amortized
|
|
$
|
11,176,773
|
|
The
above unevaluated costs relate to the Company’s approximate 1,400,000 acre Nicaraguan Concessions.
The
Company anticipates that these unproved costs in the table above will be reclassified to proved costs within the next five years.
Note
8 – Income Taxes
The
provision for income taxes consists of the following:
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Current income tax expense
(benefit)
|
|
$
|
(150,000
|
)
|
|
$
|
—
|
|
Deferred income
tax benefit
|
|
|
—
|
|
|
|
—
|
|
Total income
tax expense (benefit)
|
|
$
|
(150,000
|
)
|
|
$
|
—
|
|
The
effective income tax rate on continuing operations varies from the statutory federal income tax rate as follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal income tax rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State income tax rate
|
|
|
(4.4
|
)
|
|
|
(4.4
|
)
|
Revaluation of deferred tax assets based
on changes in enacted tax laws
|
|
|
—
|
|
|
|
386.2
|
|
Change in valuation allowance
|
|
|
26.4
|
|
|
|
(347.8
|
)
|
AMT Credit carryforward
|
|
|
(34.3
|
)
|
|
|
—
|
|
Other, net
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Effective tax
rate
|
|
|
(34.3
|
)%
|
|
|
—
|
%
|
The
significant temporary differences and carry-forwards and their related deferred tax asset (liability) and deferred tax asset valuation
allowance balances are as follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and other
|
|
$
|
940
|
|
|
$
|
900
|
|
Asset retirement obligations
|
|
|
435
|
|
|
|
435
|
|
Note payable discounts and derivatives
|
|
|
(510
|
)
|
|
|
(460
|
)
|
Stock-based compensation
|
|
|
1,190
|
|
|
|
1,190
|
|
Alternative minimum tax credit carry-forward
|
|
|
—
|
|
|
|
150
|
|
Net operating
loss carry-forward
|
|
|
16,930
|
|
|
|
16,885
|
|
Gross deferred tax assets
|
|
|
18,985
|
|
|
|
19,100
|
|
Less valuation
allowance
|
|
|
(18,985
|
)
|
|
|
(19,100
|
)
|
Deferred tax
asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily
due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Act significantly changed U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s balance sheet
and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely
than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company
now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has
recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income taxes
payable to zero as of December 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward
as the Company had not previously paid the AMT tax rather it recorded the income tax liability on the accompanying balance sheet.
The
Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at December
31, 2018. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore,
it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue
to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its
ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is
more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000, which expire from 2025 through
2038.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2017. 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. Management has
not completed its review of whether such ownership changes have occurred, and whether the Company currently is subject to an annual
limitation or the possibility of the complete elimination of the net operating loss carry- forwards might have occurred.
In addition, the Company may be further limited by additional ownership changes which may occur in the future.
As
discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process.
Management first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax
position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize
in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds
and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately
result in payment or receipt of cash in the financial statements.
Note
9 – 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 was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018,
including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the
Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $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, 2017
and 2018 area fees required for both the Perlas and Tyra which total approximately $167,000; and (5) payment of the 2016, 2017
and 2018 training fees required for both the Perlas and Tyra totaling approximately $300,000. The Company is seeking a resolution
of these defaults including the ability 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. It must raise substantial amounts of debt and equity capital
from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial
issues that must be successfully addressed during 2019 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 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 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 well prior to December 31, 2018; 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 December 31, 2018 and 2017 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 December 31, 2018 and
2017, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
10 – 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 year ended December 31, 2018 and 2017.
The amount due to the CFO’s firm for services previously provided was $762,407 at December 31, 2018 and 2017, 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 December 31, 2018 and 2017, the Company had accrued compensation to its officers and directors of $1,829,208 and $1,829,208,
respectively. The Board of Directors has authorized the Company to cease compensation for its officers and directors effective
January 1, 2018.
Note
11
–
Subsequent Events
The
Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 9). The
Company continues to attempt to negotiate extensions, waivers or a new Concession agreement with the Nicaraguan Government; however,
there can be no assurance that the Company will be successful in that regard. The Company is pursuing meetings with Nicaraguan
Government officials to address the pending defaults; however, the political situation in Nicaragua has complicated this task.
The
Company has not resolved the contingencies regarding its various notes payable related to their default status as described in
Notes 2 and 3. The Company continues to pursue resolutions of these defaults including to negotiate extensions, waivers or new
note agreements; however, there can be no assurance that the Company will be successful in that regard.
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