Notes
to Condensed Financial Statements
June
30, 2019
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”)
has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion,
include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed
balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for 2019 due to various factors. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed
financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial
Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature
of Operations
Since
2009 we had planned to pursue the exploration of potential oil and gas resources in the United States and 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. We sold our 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.
We
also began 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. As a result, on July 31, 2019 we acquired an option (the
“Option”) from Core Energy, LLC, a closely held company (“Core”), to purchase the production and mineral
rights/leasehold for oil & gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift
geological formation covering over 11,000 contiguous acres (the “Properties”). The purchase option gives us the right
to acquire the Properties for $2.5 million prior to December 31, 2019, provided we pay a non-refundable deposit by August 31,
2019.
The
purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic
data on the acreage. The Properties include a h
orizontal producing well, horizontal saltwater injection
well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan
Sand zone with an approximate depth of 3,600 feet.
We
intend to complete the acquisition of the Properties
prior to the end of this year, subject to obtaining adequate financing. The Option includes a provision permitting Core to exercise
a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such a sale occurs,
we would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will
for
a period of six months following the buy-out find a project of like kind and provide us a first right of refusal to acquire such
asset.
We
must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying our
existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there
can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further,
we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to exercise the Option.
Nicaragua
We
began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built
relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research
that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round
held by INE in January 2003.
On
March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan
Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental
study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired
over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact
Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic
data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D
and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
We
relied on raising debt and equity capital to fund our ongoing maintenance/expenditure obligations under the Nicaraguan Concession,
our day-to-day operations and corporate overhead because we have 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 three other notes payable
with principal balances of $148,625 as of June 30, 2019 are now either due on demand or currently in default. We had been seeking
resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can be no assurance
that we will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The
Company is in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of June 30, 2019, 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, 2018 and 2019
area fees required for both the Perlas and Tyra which total approximately $194,485; and (5) payment of the 2016, 2017, 2018 and
2019 training fees required for both the Perlas and Tyra totaling approximately $350,000. The Company had been 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; however, the political climate and domestic issues have caused the Company to halt such efforts
at this point pending additional information and evaluation of the situation. If the Company decides to continue its efforts regarding
the Concessions, 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 must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund
the requirements noted above for the Concessions plus finance (i) the acquisition of the Properties under the Option; (ii) normal
day-to-day operations and corporate overhead; and (iii) outstanding debt and other financial obligations as they become due, as
described below. These are substantial operational and financial issues that must be successfully addressed during 2019.
The
Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting
to obtain extensions of the maturity dates for its debt or compromises of the debt. In addition, the Company will seek offers
from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in
exploration and development operations or other joint venture arrangement. The Company has restructured certain obligations
that were in default during 2019; however, there can be no assurance that it will be able to obtain such funding, extensions or
additional restructurings or on what terms.
Going
Concern
Due
to the uncertainties related to the foregoing 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.
Recently
issued accounting pronouncements
In June 2018, the FASB issued ASU 2018-07,
"Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which modifies
the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment
awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning January 1, 2019. The adoption of the
standard had no impact on our financial position or results of operations for the three and six months ending June 30, 2019 and
2018.
In February 2016, the FASB issued ASU 2016-02,
“Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance sheet
as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases
to be classified as either operating or finance. Lessor accounting is similar to the current model, but updated to align with
certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance
for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning
after December 15, 2018. The adoption of the standard had no impact on our financial position or results of operations for the
three and six months ending June 30, 2019 and 2018.
The Company has evaluated all other recent
accounting pronouncements, and believes that none of them will have a material effect on the Company's financial position, results
of operations or cash flows.
Concentrations
The
Company’s business plan had consisted of developing the Nicaraguan Concessions in addition to potential domestic oil and
gas projects and it may become active in Nicaragua in the future, given sufficient capital and curing the defaults under the Nicaraguan
Concessions and its other financial obligations. The political climate in Nicaragua is unstable and is subject to radical change
over a short period of time. Unless there is a significant positive change in political and economic stability in Nicaragua, the
Company may not pursue development of the Concessions. In the alternative it had acquired the Option to purchase the Properties.
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 June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 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 condensed 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 June
30, 2019 and December 31, 2018, 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 condensed 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 June 30, 2019 and December 31, 2018 and during the periods
then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes
2, 3, 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 June 30, 2019 and December 31, 2018 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 June 30, 2019 and December 31, 2018:
June 30, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
82,071
|
|
|
|
82,071
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82,071
|
|
|
$
|
82,071
|
|
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
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods
ended June 30, 2019 and December 31, 2018.
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 June 30, 2019 and December 31, 2018.
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 June 30, 2019. During the six months ended June 30, 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 condensed 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 six months ended June 30, 2018 as it reduced the corresponding income
taxes payable to zero as of June 30, 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 condensed
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.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at June 30, 2019 and December 31, 2018:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Secured convertible note payable, at fair value
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
Less: Current maturities
|
|
|
|
|
|
|
(2,197,231
|
)
|
|
|
|
|
|
|
|
|
|
Secured convertible note payable, long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Following
is an analysis of the activity in the Note during the six months ended June 30, 2019:
|
|
Amount
|
|
Balance at December 31, 2018
|
|
$
|
2,197,231
|
|
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
|
|
|
—
|
|
Exchange of secured convertible note payable for common stock
|
|
|
(2,197,231
|
)
|
|
|
|
|
|
Balance at June 30, 2019
|
|
$
|
—
|
|
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 received 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 an
institutional investor (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
had recorded the fair value of the Replacement Note assuming that the remaining par value was $2,197,231 as asserted by the Investor.
The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and was due in monthly
installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the Replacement Note
at its maturity and it was therefore in technical default. The Replacement Note was to be secured to the same extent as the Convertible
Note. The Company and the Investor have negotiated a resolution of these outstanding matters regarding the default status and
the issuance of the Replacement Note under the terms of the financing.
On
May 23, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange
Agreement and Side-Letter Agreement as described below:
Exchange
Agreement
: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued
in the May 2015 Private Placement (the “Original Securities”), including: (i) the Convertible Note, subject to the
Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231.00, (ii) the related accrued interest
under the Convertible Note, with a balance of $26,107.52, (iii) the Warrant, (iv) the Security and Pledge Agreement entered into
by the Company and the Investor in connection with the May 2015 Private Placement, (v) the Guaranty made in favor of the Investor
in connection with the May 2015 Private Placement, and (vi) the Registration Rights Agreement entered into by the Company and
the Investor in connection with the May 2015 Private Placement, for 770,485 fully paid and nonassessable shares of Common Stock
and certain rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional
shares of Common Stock.
As
a result of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including any
rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s
ownership of the Original Securities.
Side-letter
Agreement
: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement,
dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the
Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an
increase in the Number of Fully-Diluted Shares Outstanding (as defined below) of the Company from the execution date of the Exchange
Agreement to the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up
Shares, if any, shall provide the Investor with Rights to acquire additional Right Shares (as defined in the Exchange Agreement)
to be calculated according to the following formula:
|
●
|
A-B=
aggregate number of Right Shares
|
|
●
|
A
= 9.99% of shares of Common Stock outstanding on such six-month anniversary (calculated based on the Number of Fully-Diluted
Shares Outstanding (as defined below))
|
|
●
|
B
= The shares of Common Stock Issued to the Investor contemporaneously with the Exchange Agreement
|
For
the purposes of the Side-Letter Agreement, “Number of Fully-Diluted Shares Outstanding” means, as of any time of determination,
the sum of (i) the aggregate number of issued and outstanding shares of Common Stock as of such time of determination, (ii) the
aggregate maximum number of shares of Common Stock issuable on an as-converted and as-exchanged basis, as applicable (excluding
any exercise of warrants to purchase Common Stock), pursuant to all capital stock and all other securities of the Company or any
of its subsidiaries (excluding any warrants to purchase Common Stock and all Rights issued pursuant to the Exchange Agreement)
outstanding as of such time of determination (or issuable pursuant to agreements in effect as of such time) that are at any time
and under any circumstances (after issuance thereof, if applicable), directly or indirectly, convertible into or exchangeable
for, or which otherwise entitles the holder thereof to acquire, Common Stock (assuming, for such purpose, that each such security
is convertible or exchangeable, as applicable, at the lowest price per share for which one share of Common Stock is at any time,
directly or indirectly, issuable upon the conversion or exchange, as applicable, of any such security and without regards to any
limitations on conversion or exchange applicable thereto), and (iii) without duplication with clause (ii) above, the aggregate
maximum number of shares of Common Stock issuable pursuant to any agreement (excluding any warrants to purchase Common Stock and
all Rights issued pursuant to the Exchange Agreement) of any person with the Company or any of its subsidiaries in effect as of
such time of determination (assuming, for such purpose, that the shares of Common Stock, directly or indirectly, issued pursuant
to such agreement is issued at the lowest price per share for which one share of Common Stock is at any time, directly or indirectly,
issuable pursuant to such agreement).
Notwithstanding
the foregoing, if any warrants to purchase Common Stock are outstanding (or issuable upon conversion or exchange of securities
outstanding) as of such six-month anniversary (each, an “Outstanding Warrant”), on such six-month anniversary, the
Company shall issue the Investor an additional Right to acquire a warrant (the “New Warrant”) exercisable for up to
9.99% of the shares of Common Stock issuable upon exercise of all Outstanding Warrants as of such six-month anniversary (the “New
Warrant Shares”). The New Warrant Shares shall be of like tenor to the Outstanding Warrants.
Pursuant
to the Side-Letter Agreement, the Company also agreed that from the execution date of the Exchange Agreement until twelve (12)
months from such date, the Company will not raise capital at a price that is below $0.10 per share of Common Stock (as adjusted
for stock splits, stock dividends, stock combinations, recapitalizations and similar events) without the Investor’s consent.
On
May 30, 2019, the Company and the Investor entered into Amendment No. 1 to Exchange Agreement (the “Amendment”). Following
execution of the Exchange Agreement on May 23, 2019, the Company and the Investor became aware of an inadvertent error regarding
the number of shares of Common Stock to be issued to the Investor pursuant to the Exchange Agreement. The Company and the Investor
agreed to amend the Exchange Agreement so it reflects the correct number of shares of Common Stock to be issued and to ensure
that the Investor does not beneficially own in excess of 9.99% of the shares of Common Stock outstanding immediately following
the effective date of the Exchange Agreement. Pursuant to the Amendment, the Company and the Investor agreed that the number of
shares of Common Stock to be issued to the Investor would be an aggregate of 605,816 shares, instead of the 770,485 shares stated
in the Exchange Agreement.
Description
of the Financial Accounting and Reporting
At
inception, 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 at each periodic reporting date through May 23, 2019 which was the date
the parties entered into the exchange agreement which extinguished the Note and related warrants as previously described.
The Note was revalued to its estimated fair value at each periodic reporting date with any changes in the Note’s fair value
being charged/credited to the statement of operations.
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 May 23, 2019,
the date of the exchange agreement was $116,731 representing a change of $59,639 from December 31, 2018, which is included in
changes in derivative fair value in the accompanying condensed statement of operations for the six months ended June 30, 2019.
See Note 5.
The
Exchange Agreement was treated an extinguishment of debt on the date it was entered May 23, 2019. Under the Exchange Agreement,
the Investor exchanged all of its rights under the original securities issued in the May 2015 Private Placement, including: (i)
the Convertible Note, subject to the Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231.00,
(ii) the related accrued interest under the Convertible Note, with an unpaid and accrued balance of $26,107.52, (iii) the Warrant
with an estimated fair value of $116,731, (iv) the Security and Pledge Agreement entered into by the Company and the Investor
in connection with the May 2015 Private Placement, (v) the Guaranty made in favor of the Investor in connection with the May 2015
Private Placement, and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with
the May 2015 Private Placement, for 605,816 fully paid and nonassessable shares of Common Stock and certain rights granted in
the Side-Letter to acquire additional securities in the future, which may be exercised for additional shares of Common Stock.
The Side-Letter rights/obligations represent a derivative and accordingly, its fair value was estimated and recorded at the date
of Exchange Agreement and will continue to be revalued and adjusted to its estimated fair value at each periodic reporting date
until it expires and/or the underlying securities are issued to the Holder.
Following
is an analysis of gain on exchange of the debt and warrant obligations pursuant to the Exchange Agreement during
the six months ended June 30, 2019:
|
|
Amount
|
|
Obligations extinguished on the date of exchange, May 23, 2019:
|
|
|
|
|
Convertible Note balance at the date of exchange, May 23, 2019
|
|
$
|
2,197,231
|
|
Accrued interest on the Convertible Note at the date of exchange, May 23, 2019
|
|
|
28,643
|
|
Fair value of Warrant Derivative at the date of exchange, May 23, 2019
|
|
|
116,731
|
|
Securities issued in exchange for the obligations extinguished the date of Exchange, May 23, 2019:
|
|
|
|
|
605,816 Common shares issued on the date of exchange, May 23, 2019 valued at $0.121 per share, the closing market price on May 23, 2019
|
|
|
(73,304
|
)
|
Side-Letter derivative value estimated on the date of exchange, May 23, 2019
|
|
|
(107,860
|
)
|
|
|
|
|
|
Gain on exchange of debt and warrant obligations
|
|
$
|
2,161,441
|
|
In
addition, the Company issued a warrant in May 2015 to purchase 240,000 shares issued as part of the placement fee in connection
with the Note. The warrant contained an expiration date of May 7, 2022 and an exercise price of $5.00 per share and is subject
to certain price protection and dilution provisions. Such warrant was treated as a derivative liability for accounting purposes
due to its ratchet and anti-dilution provisions.
On
June 4, 2019, the Company entered into an exchange agreement with the warrant holder to extinguish the original warrant including
its certain price protection and dilution provisions, for a new warrant to purchase up to 50,000 common shares with a termination
date of June 4, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions.
The
estimated fair value of the original warrant derivative as of May 23, 2019, the date of the exchange agreement, was $37,368 representing
a change of $29,795 from December 31, 2018, which is included in changes in derivative fair value in the accompanying condensed
statement of operations for the six months ended June 30, 2019. See Note 5.
As
a result of the exchange agreement, the Company extinguished the derivative liability of $37,368 attributable to the original
warrant and recognized the estimated value of the new warrant of $7,985 as of June 4, 2019, the date of the exchange agreement.
The resulting $29,383 difference been the estimated fair value of the old warrant extinguished and the new warrant issued to the
holder has been recorded as a gain on exchange of debt and warrant obligations in the accompanying condensed statement of operations
for the six months ended June 30, 2019.
Note
3 – Debt
Debt
consists of the following at June 30, 2019 and December 31, 2018:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Convertible notes payable, short term:
|
|
|
|
|
|
|
|
|
Note payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note payable (extinguished through exchange agreement)
|
|
|
—
|
|
|
|
200,000
|
|
Note payable (extinguished through exchange agreement)
|
|
|
—
|
|
|
|
40,000
|
|
Note payable, (in default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note payable (in default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Note payable (due on demand)
|
|
|
63,625
|
|
|
|
13,125
|
|
Total notes payable, short-term
|
|
$
|
1,148,625
|
|
|
$
|
1,338,125
|
|
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 condensed statement of operations as change in derivative liability.
The discount is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired
as of June 30, 2019 and is no longer exercisable.
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 remained the same. The warrant has expired as of June 30, 2019 and is no longer
exercisable. 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 completing the extinguishment of the note balance, accrued interest and revenue
sharing agreement through an exchange agreement which is further described in Note 10; 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 condensed statement of operations as change in derivative liability.
The Warrant expired as of June 30, 2019 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
following notes have been extinguished on June 19, 2019:
|
●
|
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 required no principal or interest payments until its maturity date of November 7, 2017 and
bore interest at 8% per annum. The note was not paid on its original maturity date.
|
|
|
|
|
●
|
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 bore interest at 8% per annum. The note was not paid on its maturity date.
|
On
June 19, 2019, the Company and the holder of these two convertible notes entered into an exchange agreement whereby the two convertible
notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. The exchange
agreement required the Company to issue the individual a new warrant to purchase up to 570,000 common shares with a termination
date of June 19, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions in exchange
for the extinguishment of the two convertible notes and related accrued interest. The Black-Scholes valuation of the warrant issued
to the holder on June 19, 2019 totaled $62,564.
Following
is an analysis of gain on extinguishment of the obligations pursuant to the Exchange Agreement during the six months ended June
30, 2019:
|
|
Amount
|
|
Obligations extinguished on the date of exchange, June 19, 2019:
|
|
|
|
|
Convertible Notes balance at the date of exchange, June 19, 2019
|
|
$
|
240,000
|
|
Accrued interest on the Convertible Notes at the date of exchange, June 19, 2019
|
|
|
45,020
|
|
|
|
|
|
|
Securities issued in exchange for the obligations extinguished on the date of the exchange, June 19, 2019:
|
|
|
|
|
Value of the stock purchase warrant issued on the date of exchange, June 19, 2019
|
|
|
(62,564
|
)
|
|
|
|
|
|
Gain on exchange of debt and warrant obligations
|
|
$
|
222,456
|
|
Other
than the December 2013 Note and the two convertible notes which have been extinguished as described above, during the six months
ended June 30, 2019 the Company had short-term notes outstanding with entities or individuals as follows:
|
●
|
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 $868 and $492 as of June 30, 2019 and December 31, 2018, 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 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 $608 and $345 as of June 30, 2019 and December 31, 2018, 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. During June 2019 the Company borrowed an additional $50,500 from this same third-party lender
under the same terms. 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.
At
the Annual Meeting of Stockholders 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 June 30, 2019, 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 periods ended June 30, 2019 and December 31, 2018.
The
following table summarizes stock option activity for the six months June 30, 2019:
|
|
Number of Options
|
|
|
Weighted Average Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
|
3.1 years
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,200
|
)
|
|
|
(7.80
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
|
2.80 years
|
|
|
$
|
—
|
|
Outstanding and exercisable at June 30, 2019
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
|
2.80 years
|
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0-
during the six months ended June 30, 2019 and 2018, respectively.
The
intrinsic value as of June 30, 2019 related to the vested and unvested stock options as of that date was $-0. The unrecognized
compensation cost as of June 30, 2019 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 34,000 and 2,074,000 shares of common stock, respectively in connection
with various outstanding debt instruments which require derivative accounting treatment as of June 30, 2019 and December 31, 2018.
A comparison of the assumptions used in calculating estimated fair value of such derivative liabilities as of June 30, 2019 is
as follows:
|
|
As of
June 30, 2019
|
|
|
|
|
|
Volatility – range
|
|
|
284.1
|
%
|
Risk-free rate
|
|
|
1.76
|
%
|
Contractual term
|
|
|
1.00 – 1.8 years
|
|
Exercise price
|
|
$
|
5.60
|
|
Number of warrants in aggregate
|
|
|
34,000
|
|
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, 2018
|
|
$
|
65,502
|
|
Side-letter derivative issued in exchange transactions -Note 2
|
|
|
107,860
|
|
Unrealized derivative losses included in other expense for the period
|
|
|
62,808
|
|
Extinguishment of derivative liability in exchange transactions
|
|
|
(154,099
|
)
|
|
|
|
|
|
Balance at June 30, 2019
|
|
$
|
82,071
|
|
The
warrant derivative liability consists of the following at June 30, 2019 and December 31, 2018:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Warrant issued to holder of Secured convertible note (Note 2)
|
|
$
|
—
|
|
|
$
|
57,092
|
|
Warrant issued to placement agent (Note 2)
|
|
|
—
|
|
|
|
7,573
|
|
Side-letter derivative issued to holder of Secured convertible note pursuant to exchange transaction (Note 2)
|
|
|
80,594
|
|
|
|
—
|
|
Warrants issued to holders of notes payable - short term (Note 3)
|
|
|
1,477
|
|
|
|
837
|
|
Total warrant derivative liability
|
|
$
|
82,071
|
|
|
$
|
65,502
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the six months June 30, 2019:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
2,365,563
|
|
|
$
|
5.01
|
|
Issued
|
|
|
620,000
|
|
|
|
0.50
|
|
Exercised/forfeited
|
|
|
(2,040,000
|
)
|
|
|
(5.00
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2019
|
|
|
945,563
|
|
|
$
|
4.85
|
|
The
weighted average term of all outstanding common stock purchase warrants was 5.0 years as of June 30, 2019. 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 June 30, 2019.
Note
7 – Income Taxes
The
provision for income taxes consists of the following:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Current income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
Deferred income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Total income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
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 condensed 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 six months ended June 30, 2018 as it reduced the corresponding income
taxes payable to zero as of June 30, 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 condensed balance
sheet.
The
Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at June
30, 2019. 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 at December 31, 2018, which
expires from 2025 through 2038.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2018. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
Note
8 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s condensed 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,
2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016,
2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company had been
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; however, the political climate and domestic issues have caused the Company
to halt such efforts at this point pending additional information and evaluation of the situation. If the Company decides to continue
its efforts respecting the Concessions, there can be no assurance whether it will be able to extend, renew and/or renegotiate
the 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 200km2 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 250km2 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 June 30, 2019; 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 June 30, 2019 and December 31, 2018 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.
Non-binding
Term Sheet to Extinguish Note Payable in Default
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid
principal balance of $1 million as of June 30, 2019. The term sheet, if consummated, will resolve the default contingencies regarding
the December 2013 Note through an exchange agreement. Under the proposed terms the holder will exchange the following existing
obligations:
|
●
|
8%
Promissory Note issued December 27, 2013 with an original principal balance of $1,050,000 and current principal balance of
$1,000,000;
|
|
●
|
Accrued
and unpaid interest of approximately $481,000 as of June 30, 2019 related to the 8% Promissory Note;
|
|
●
|
Common
Stock Purchase Warrant issued December 27, 2013 to acquire 100,000 shares of common stock with an exercise price of $5 per
share;
|
|
●
|
Preemptive
Rights Agreement dated December 27, 2013; and
|
|
●
|
Revenue
Sharing Agreement issued May 30, 2014 representing 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.
|
The
holder will receive the following consideration in exchange for the extinguishment of the existing obligations:
the
Company will make a cash payment of $100,000 to the holder within 120 days of the execution of an Exchange Agreement and will
issue common shares totaling 740,500 shares to the holder.
Upon
completion of the $100,000 cash payment and issuance of 740,500 common shares contemplated by the proposed exchange agreement,
the holder and the Company will proceed to cancel the certificate(s) and other physical documents evidencing the ownership of
the existing obligations. The term sheet is non-binding until such time as the cash payment is made and the common shares are
issued to the holder and there can be no assurance that the Company will successfully complete the exchange agreement.
Non-binding
Term Sheet to Acquire Domestic Oil and Gas Properties
On
July 31, 2019 the Company acquired an option (the “Option”) from Core Energy, LLC, a closely held company (“Core”),
to purchase the production and mineral rights/leasehold for oil & gas properties, subject to overriding royalties to third
parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”).
The purchase option gives the Company the right to acquire the Properties for $2.5 million prior to December 31, 2019, provided
it pays a non-refundable deposit by August 31, 2019.
The
purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic
data on the acreage. The Properties include a h
orizontal producing well, horizontal saltwater injection
well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan
Sand zone with an approximate depth of 3,600 feet.
The
Company
intends to complete the acquisition of
the Properties prior to the end of this year, subject to obtaining adequate financing. The Option includes a provision permitting
Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such
a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will
for a period of six months following the buy-out find a project of like kind and provide the Company
a first right of refusal to acquire such asset.
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 condensed
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 condensed 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 June 30, 2019 and December
31, 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
9 – Related Party Transactions
The
Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the six months ended June 30, 2019 and 2018.
The amount due to the CFO’s firm for services previously provided was $762,407 at June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, the Company had accrued compensation to its officers and directors of $1,829,208. The
Board of Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Note
10
–
Subsequent Events
The
Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The
Company had been 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; however, the political climate and domestic issues
have caused the Company to halt such efforts at this point pending additional information and evaluation of the situation.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid
principal balance of $1 million as of June 30, 2019. The term sheet, if consummated, will resolve the default contingencies regarding
the December 2013 Note through an exchange agreement. Under the proposed terms the holder will exchange the following existing
obligations:
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8%
Promissory Note issued December 27, 2013 with an original principal balance of $1,050,000 and current principal balance of
$1,000,000;
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Accrued
and unpaid interest of approximately $481,000 as of June 30, 2019 related to the 8% Promissory Note;
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Common
Stock Purchase Warrant issued December 27, 2013 to acquire 100,000 shares of common stock with an exercise price of $5 per
share;
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Preemptive
Rights Agreement dated December 27, 2013; and
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Revenue
Sharing Agreement issued May 30, 2014 representing 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.
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The
holder will receive the following consideration in exchange for the extinguishment of the existing obligations:
the
Company will make a cash payment of $100,000 to the holder within 120 days of the execution of an Exchange Agreement and will
issue common shares totaling 740,500 shares to the holder.
Upon
completion of the $100,000 cash payment and issuance of 740,500 common shares contemplated by the proposed exchange agreement,
the holder and the Company will proceed to cancel the certificate(s) and other physical documents evidencing the ownership of
the existing obligations. The term sheet is non-binding until such time as the cash payment is made and the common shares are
issued to the holder and there can be no assurance that the Company will successfully complete the exchange agreement.
On
July 31, 2019 the Company acquired an option (the “Option”) from Core Energy, LLC, a closely held company (“Core”),
to purchase the production and mineral rights/leasehold for oil & gas properties, subject to overriding royalties to third
parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”).
The purchase option gives the Company the right to acquire the Properties for $2.5 million prior to December 31, 2019, provided
it pays a non-refundable deposit by August 31, 2019.
The
purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic
data on the acreage. The Properties include a h
orizontal producing well, horizontal saltwater injection
well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan
Sand zone with an approximate depth of 3,600 feet.
The
Company
intends to complete the acquisition of
the Properties prior to the end of this year, subject to obtaining adequate financing. The Option includes a provision permitting
Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such
a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will
for a period of six months following the buy-out find a project of like kind and provide the Company
a first right of refusal to acquire such asset.
The
Company has not resolved the contingencies regarding its various notes payable related to their default status as described in
Notes 3 other than the December 2013 Note described above. 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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