Note
3 – Debt
Debt
consists of the following at September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Line-of-credit with related
party, net of unamortized discount of $198 and $420, of September 30, 2016 and December 31, 2015, respectively
|
|
$
|
68,105
|
|
|
$
|
67,883
|
|
Notes payable, short term:
|
|
|
|
|
|
|
|
|
Note payable, net
of unamortized discount of $-0- and $50,527, of September 30, 2016 and December 31, 2015, respectively
|
|
$
|
1,000,000
|
|
|
$
|
949,473
|
|
Note payable, net
of unamortized discount of $7 and $262, as of September 30, 2016 and December 31, 2015, respectively
|
|
|
49,993
|
|
|
|
49,738
|
|
Note payable, net
of unamortized discount of $8 and $238, as of September 30, 2016 and December 31, 2015, respectively
|
|
|
34,992
|
|
|
|
34,762
|
|
Total notes payable, short-term
|
|
$
|
1,084,985
|
|
|
$
|
1,033,973
|
|
Line-of-Credit
with Related Party
The
Company entered into a line-of-credit facility on September 23, 2013 that provides it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit is convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility is unsecured, bears interest at 8% per annum, and was renewed at its maturity several times with its
current maturity date as November 28, 2016. In consideration for the origination of the line of credit facility and the various
renewals, the Company granted the lender common stock purchase warrants. The most recent renewal was on August 28, 2016 whereby
the Company extended the line-of-credit expiration date to November 28, 2016 and issued a warrant to purchase 10,000 common shares
at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire on August 28, 2021. The Company
estimated the fair value of the warrants at $308 as of the August 28, 2016 grant date, which amount was recorded as debt issuance
costs and will be amortized to interest expense over the extended term of the line-of-credit.
During
the nine months ended September 30, 2016 and 2015, $1,434 and $269,683, respectively, of debt issuance costs amortized (including
amounts immediately expensed) to interest expense and the remaining unamortized balance was $198 as of September 30, 2016, which
is reflected as a discount on the outstanding loan balance.
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company fails to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remain the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company fails to pay the December 2013 Note on or before
its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to
$0.75 per share. All other terms of the warrant remain the same. The December 2013 Note may be prepaid without penalty at any
time. The Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note. The December
2013 Note is in technical default and the Company is seeking an extension of the maturity date of this Note (See Note 11) from
the holder; however, there can be no assurances such efforts will be successful.
The
Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates. The Company recognized the value
of the 20,000 shares of common stock issued ($104,000) and the increased value of the outstanding warrants due to the decrease
in their exercise price ($68,716) as an additional discount on the note payable to be amortized ratably over the extended term
of the underlying note.
The
discount recorded as of the December 27, 2013 origination date of the note and as a result of the amendments to the Note terms
and extensions of the maturity date has been amortized ratably over the term and extended terms of the note. Discount amortization
expense aggregated $50,526 and $68,336 for the nine months ended September 30, 2016 and 2015, respectively, and the remaining
unamortized discount was $-0- as of September 30, 2016. The related warrant derivative liability balance was $745 at fair value
as of September 30, 2016. See Note 6.
Other
than the Note described above, during the nine months ended September 30, 2016 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 is currently pursuing an additional extension from the Holder. In consideration, the Company granted the lender common
stock purchase warrants exercisable to purchase 5,000 shares of common stock on each extension date at an exercise price of
$5.60 per share, which warrants were immediately exercisable and expire in five years. The value of the 5,000 newly issued
warrants issued on January 7, 2016 totaled $379, and $131 on May 7, 2016 both of which are being amortized over the extension
period (through October 7, 2016). Discount amortization totaled $765 for the nine months ended September 30, 2016 and the
remaining unamortized discount was $7 as of September 30, 2016. The related warrant derivative liability balance was $359
at fair value as of September 30, 2016. See Note 6.
|
|
|
|
|
●
|
On
July 15, 2015 the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is currently pursuing
an additional extension from the Holder. In consideration, the Company granted the lender common stock purchase warrants exercisable
to purchase an aggregate of 3,500 shares of common stock on each extension date at an exercise price of $5.60 per share, which
warrants were immediately exercisable and expire in five years. The value of the 3,500 newly issued warrants on January 15,
2016 totaled $267 and $74 on May 15, 2016, both of which are being amortized over the extension period (through October 15,
2016). Discount amortization totaled $571 for the nine months ended September 30, 2016 and the remaining unamortized discount
was $8 as of September 30, 2016. The related warrant derivative liability balance was $251 at fair value as of September 30,
2016. See Note 6.
|
Note
4 – Common Stock
The
Company has delivered a total of 4,281,477 shares of common stock representing required principal repayments ($220,040 principal
balances) and 305,522 representing interest payments ($11,780 interest payments) during the nine months ended September 30, 2016.
See Note 2
– Secured Convertible Note Payable
.
Note
5 – Stock Options
The
Company applies ASC 718,
Stock Compensation
, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted, and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans however such Plans
have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase
of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately
or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also
has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The
Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of September 30, 2016, 500,000 shares were available for future grants under the 2015 Plan as all other Plans have now expired.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the nine months ended September 30, 2016.
The
following table summarizes stock option activity for the nine months ended September 30, 2016:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2015
|
|
|
411,450
|
|
|
$
|
38.04
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(8,000
|
)
|
|
|
(64.80
|
)
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
403,450
|
|
|
$
|
37.51
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
Outstanding and exercisable at September
30, 2016
|
|
|
403,450
|
|
|
$
|
37.51
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $7,598 and $100,972
during the nine months ended September 30, 2016 and 2015, respectively.
The
unrecognized compensation cost as of September 30, 2016 related to the unvested stock options as of that date was $-0-.
Note
6 – 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 effect until such time as the underlying warrant is exercised or terminated and the resulting derivative liability
will be transitioned from a liability to equity as of such date.
The
Company has issued warrants to purchase an aggregate of 2,174,000 common shares in connection with various outstanding debt instruments
which require derivative accounting treatment as of September 30, 2016. A comparison of the assumptions used in calculating estimated
fair value of such derivative liabilities as of September 30, 2016 is as follows:
|
|
As
of
September 30, 2016
|
|
|
|
|
|
Volatility – range
|
|
|
169.6%
- 226.1 %
|
|
Risk-free rate
|
|
|
0.88%
- 1.42 %
|
|
Contractual term
|
|
|
1.58
- 5.58 years
|
|
Exercise price
|
|
|
$5.00
- $5.60
|
|
Number of warrants in aggregate
|
|
|
2,174,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance at December 31, 2015
|
|
$
|
210,383
|
|
Warrants issued
to originate or extend notes payable (recorded as discount on note payable) -Note 3
|
|
|
851
|
|
Unrealized derivative
gains included in other expense for the period
|
|
|
(167,830
|
)
|
Transition of derivative
liability to equity
|
|
|
—
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
43,404
|
|
The
warrant derivative liability consists of the following at September 30, 2016 and December 31, 2015:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Warrant issued to holder
of Secured convertible note
|
|
$
|
37,102
|
|
|
$
|
182,517
|
|
Warrant issued to placement agent
|
|
|
4,947
|
|
|
|
24,336
|
|
Warrant issued to holder of December
2013 Note
|
|
|
745
|
|
|
|
2,540
|
|
Warrants issued to holders of notes
payable - short term
|
|
|
610
|
|
|
|
990
|
|
Total warrant derivative liability
|
|
$
|
43,404
|
|
|
$
|
210,383
|
|
Note
7 – Warrants
The
following table summarizes warrant activity for the nine months ended September 30, 2016:
|
|
Number
of
Warrants
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
Outstanding and exercisable
at December 31, 2015
|
|
|
2,475,771
|
|
|
$
|
5.34
|
|
Issued for origination
or extension of notes payable (Note 3)
|
|
|
17,000
|
|
|
|
5.60
|
|
Issued for extension
of line-of-credit (Note 3)
|
|
|
30,000
|
|
|
|
5.00
|
|
Exercised/forfeited
|
|
|
(5,000
|
)
|
|
|
(15.00
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at September
30, 2016
|
|
|
2,517,771
|
|
|
$
|
5.34
|
|
The
weighted average term of all outstanding common stock purchase warrants was 5.1 years as of September 30, 2016. 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 September 30, 2016.
Note
8 – Income Taxes
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,185,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the tax
benefits from its net deferred tax asset.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2015. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates
prepared by the Company on a preliminary basis indicate that no ownership changes have occurred, and are currently not subject
to an annual limitation, but may be further limited by additional ownership changes which may occur in the future.
Note
9 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
In
April 2011, we filed with the Nicaraguan government an Environmental Impact Assessment (“EIA”) covering proposed seismic
activities on our Nicaraguan Concessions. The filing of the EIA was followed by a comment period during which there was interaction
between us the Ministerio del Ambiente y los Recursos Naturales de Nicaragua, an agency of the Nicaraguan government; and the
autonomous regions of Nicaragua that are nearest to the Nicaraguan Concessions. In April 2013 the EIA was formally approved by
the Nicaraguan government and we were cleared to commence 2-D and 3-D seismic mapping activities in the area. In late 2013 and
early 2014, we contracted with a fully integrated Geoscience company that provides geological, geophysical and reservoir services
to the global oil and gas industry, to conduct 2-D and 3-D seismic data covering selected areas within the boundaries of the Nicaraguan
Concessions.
The
final approval of the EIA by the Nicaraguan government of our environment impact study on April 13, 2013, began Sub-Period 2 for
both the Tyra and Perlas Blocks as defined in the Nicaraguan Concessions. The Company believes it has satisfied the acquisition,
processing and interpretation of Seismic data required in Sub-Period 2 for both the Perlas and Tyra Blocks. Therefore, it is now
in Sub-Period 3 of the exploration phase of the 30-year Concession for both Perlas and Tyra as of September 30, 2015. Sub-Period
3 of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016 and the
shooting of additional seismic on the Tyra Block. The Company plans to identify at least one potential drilling site on the Perlas
block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving the permit
to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot additional
seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The Company is
seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to complete its initial well from the
Nicaraguan government. There can be no assurance that it will be able to obtain such waiver of the requirements.
During
late December 2013, the Company completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan
Concessions at that point. It believes that the newly acquired 2-D seismic data, together with the previously acquired reprocessed
2-D seismic, has helped it further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone.
The Company’s geological consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally
oil) in place. In addition, the new 2-D seismic acquired in 2013 provided the first geological information regarding the potential
for oil resources in the Cretaceous Zone, which the Company could not evaluate using less precise older 2-D seismic mapping. It
has identified multiple promising sites on the Perlas Block for exploratory drilling and will plan the drilling of initial exploratory
wells in order to determine the existence of commercial hydrocarbon reserves, given sufficient financing. The Company believes
that it has performed all work necessary as of September 30, 2015 to proceed to Sub-Period 3 for the Perlas Block as defined in
the Nicaraguan Concessions, which requires the drilling of at least one exploratory well on the Perlas Block within the following
one-year period. The Company must first prepare and submit a supplemental EIA to the Nicaraguan government before the drilling
permit can be issued on the Perlas Block, which had not been completed as of September 30, 2016.
The
Company has not yet submitted the EIA supplement to the Nicaraguan Government and therefore has not received a drilling permit;
however, assuming that Government does accept the supplemental EIA and grant the drilling permit, the Company will be required
to drill at least one exploratory well on the Perlas Block during 2016 or risk being in default and losing its rights under the
Nicaraguan Concessions.
The
Company is in technical default of the Nicaraguan Concession because it has not provided the required letters of credit to the
Nicaraguan Government and is delinquent on the payment of approximately $155,567 for the annual training program and area fees
for 2016 that remains unpaid and outstanding as of September 30, 2016. In accordance with the Nicaraguan Concession agreements,
the Company had previously provided the Ministry of Energy with the required letters of credit in the amounts of $443,100 for
Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The Company had also made all required expenditures
related to the Nicaraguan Concessions for training programs and as “area fees,” for each respective year for 2010
through 2015. However, approximately $155,567 was due and payable in March 2016 for 2016 training program and area fees that remains
unpaid and outstanding as of September 30, 2016. The Company is attempting to negotiate the renewal and increase of the required
letters of credit, which total $1,356,227 for the Perlas block and $278,450 for the Tyra block with the Nicaraguan Government
and its lenders; however, there can be no assurance that the Company will be successful in the regard. The Nicaraguan Government
is in an election year in 2016, therefore such efforts have been delayed until the election is over. The Company considers it
is fully in compliance with the terms of the Nicaraguan Concessions agreements, except for the renewal of the expired letters
of credit and the delinquent payment for the 2016 training program and area fees.
The
Company must raise substantial amounts of debt and equity capital in the immediate future in order to fund: (1) the annual training
program and area fees for 2016: (2) the required letters of credit to the Nicaraguan Government; (3) the drilling of at least
one exploratory well on the Perlas Block of the Nicaraguan Concessions during 2016; (4) the shooting of additional seismic on
the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement from the Nicaraguan government;
(5) normal day-to-day operations and corporate overhead; and (6) outstanding debt and financial obligations as they become due.
These are substantial operational and financial issues that must be successfully mitigated during 2016 or the Company’s
ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt. The Company completed
the May 2015 Private Placement in May 2015 in an effort to obtain its required capital. See Note 2 to the Financial Statements.
The
Company is also seeking offers from industry operators and other third parties for interests in the acreage in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement.
Accordingly, it intends to finance its business strategy through external financing, which may include debt and equity capital
raised in public and private offerings, joint ventures, sale of working or other interests, employment of working capital and
cash flow from operations, if any, and net proceeds from the sales of assets.
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.
Minimum
Work Program – Perlas
Block
Perlas – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
2
|
|
-
Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation
of 667km of new 2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
443,100
|
|
Sub-Period 2 Optional
|
|
1
|
|
- Acquisition, processing & interpretation
of 200km
2
of 3D seismic
|
|
53km2
|
|
$
|
1,356,227
|
|
Sub-Period 3 Optional
|
|
1
|
|
- Drilling of one exploration well to the Cretaceous
or 3,500m, whichever is Shallower
|
|
80km2
|
|
$
|
10,220,168
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one exploration well to the Cretaceous
or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except areas with discoveries
|
|
$
|
10,397,335
|
|
Minimum
Work Program – Tyra
Block
Tyra – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
1.5
|
|
-
Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new
2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
408,450
|
|
Sub-Period 2 Optional
|
|
0.5
|
|
- Processing &
interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period
|
|
40km2
|
|
$
|
278,450
|
|
Sub-Period 3 Optional
|
|
2
|
|
- Acquisition,
processing & interpretation of 250km
2
of new 3D seismic
|
|
160km2
|
|
$
|
1,818,667
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one
exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except areas with discoveries
|
|
$
|
10,418,667
|
|
Contractual
and Fiscal Terms
Training Program
|
|
US $50,000 per year, per block
|
|
|
|
|
Area
Fee
|
|
Years 1-3
|
|
$
|
0.05/hectare
|
|
|
|
Years 4-7
|
|
$
|
0.10/hectare
|
|
|
|
Years 8 & forward
|
|
$
|
0.15/hectare
|
|
Royalties
|
|
Recovery
Factor 0 – 1.5
|
|
|
Percentage
5%
|
|
|
|
1.5 – 3.0
|
|
|
10%
|
|
|
|
>3.0
|
|
|
15%
|
|
|
|
|
|
|
|
|
Natural Gas Royalties
|
|
Market value at production
|
|
|
5%
|
|
Corporate Tax
|
|
Rate no higher than 30%
|
|
|
|
|
Social Contribution
|
|
3% of the net profit (1.5% for each
autonomous region)
|
|
|
|
|
Investment
Protection
|
|
ICSID
arbitration OPIC insurance
|
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore
Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000
and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently
converted the subordinated promissory note to common stock.
Under
the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from
the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the
point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional
costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser
of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation
for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for
Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs.
The
RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production
during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to
maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and
directors.
The
Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any
exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing
Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing
and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned
domestic oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital
expenditures, earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity –
Wyoming and Infinity-Texas were disposed of prior to September 30, 2016; 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 September 30, 2016 and December 31, 2015 are sufficient to cover any potential
noncompliance liabilities relative to the plugging of abandoned wells, the removal of facilities and equipment, and site
restoration on oil and gas properties for its former oil and gas properties. The Company has not maintained insurance on the
domestic properties for a number of years nor has it owned/produced any oil & gas properties for a number of
years.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial
statements.
The
Company is currently involved in litigation as follows:
●
|
In
October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties.
The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
|
|
|
|
Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates
that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas
operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included
in the asset retirement obligation on the accompanying balance sheets.
|
|
|
●
|
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
|
|
|
●
|
Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement, dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued amounts in accounts payable as of September 30, 2016 and December
31, 2015, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
10 – Related Party Transactions
The
Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting firm for such support services and was not billed for any such services during the three and nine months ended September
30, 2016 and 2015. The amount due to the CFO’s firm for services previously provided was $762,407 at September 30, 2016
and December 31, 2015, 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 September 30, 2016 and December 31, 2015, the Company had accrued compensation to its officers and directors of $1,600,208
and $1,423,208, respectively.
The
Company entered into a line-of-credit facility on September 23, 2013 that provides it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit is convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility is unsecured, bears interest at 8% per annum, and was renewed at its maturity several times with its
current maturity date as November 28, 2016. In consideration for the origination of the line of credit facility and the various
renewals, the Company granted the lender common stock purchase warrants. On February 28, 2016 the Company extended the line-of-credit
expiration date to May 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share,
which warrants were immediately exercisable and expire on February 28, 2021. On May 28, 2016 the Company extended the line-of-credit
expiration date to August 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share,
which warrants were immediately exercisable and expire on May 28, 2021. On August 28, 2016 the Company extended the line-of-credit
expiration date to November 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share,
which warrants were immediately exercisable and expire on August 28, 2021.
Note
11
–
Subsequent Events
The
Company has not resolved the contingency related to the expired letters of credit and the delinquent payment of annual training
program and area fees for 2016 as required by its Nicaraguan Concessions (See Note 9). The Company continues to attempt to negotiate
the renewal of the letters of credit and payment of the annual training program and area fees with the Nicaraguan Government and
its lenders; however, there can be no assurance that the Company will be successful in that regard.
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender which
facility has an outstanding principal balance of $1,000,000. The facility is represented by a promissory note (the “Note”)
that matured in April 2016, and is currently in technical default. The Company is seeking an extension of the maturity date; however,
there can be no assurance that it will be able to obtain an extension or what the final terms will be if the lender agrees to
such extension.
On
November 7, 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 term of the note was for a period of 365 days and bears interest at 8% per annum.
Proceeds of the note were used for working capital purposes.
Note 12
–
Restatement to
previously issued interim financial statements
Subsequent to the issuance of the September
30, 2016 interim financial statements, management determined that the Company should obtain court approval before derecognizing
liabilities due to the expiration of their respective statute of limitations. The Company had previously derecognized liabilities
during the nine months ended September 30, 2016 which resulted in other income totaling $1,134,082. This amount was reversed in
the fourth quarter of 2016 which only affected the interim financial statements previously issued during 2016. As a result, the
interim financial statements previously issued for the nine months ended September 30, 2016, were restated.
The following tables reflect the
corrections to the affected line items in the previously issued financial statements for the nine months ended September 30,
2016:
Effect on Balance Sheet items:
|
|
As of
September 30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As restated
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,483,120
|
|
|
$
|
519,164
|
|
|
$
|
6,002,284
|
|
Accrued liabilities
|
|
$
|
2,506,346
|
|
|
$
|
614,918
|
|
|
$
|
3,121,264
|
|
Accumulated deficit
|
|
$
|
(120,549,414
|
)
|
|
$
|
(1,134,082
|
)
|
|
$
|
(121,683,452
|
)
|
Effect on Statement of Operations:
|
|
Nine months
ended September 30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derecognition of liabilities
|
|
$
|
1,134,082
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
—
|
|
Net income (loss)
|
|
$
|
752,552
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
(381,530
|
)
|
Net income (loss) per share
|
|
$
|
0.12
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.06
|
)
|
Effect on Statements of Cash Flows:
|
|
Nine months
ended September 30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
752,552
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
(381,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from derecognition of liabilities
|
|
$
|
(1,134,082
|
)
|
|
$
|
1,134,082
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**********************
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered
by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity
problems; (ii) we have substantial obligations to a number of third parties, including our December 2013 promissory note in the
original principal amount of $1,050,000 which matured in April 2016 and is currently in technical default and the $12.0 million
Convertible Note due May 2018, which began amortizing in October 2015, and there can be no assurance that we will be able to obtain
an extension of the maturity date of the December 2013 promissory note or otherwise meet our obligations under either note; (iii)
we require working capital for our operations and obligations for the next 12 months and capital to pursue our exploration and
development efforts on the Nicaraguan Concessions, including compliance with the letter of credit and other requirements of the
Nicaraguan Concessions to maintain our rights in the Concessions, and there can be no assurances we will be able to maintain such
rights or obtain the required capital or do so on terms favorable to us; (iv) we and our independent registered public accounting
firm have concluded that there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions
and planned future exploration activities are in a country with a developing economy and are subject to the risks of political
and economic instability associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require
large amounts of capital or a commercial relationship with an industry operator which we have not been able to obtain at this
point; (vii) we do not have sufficient resources to conduct required seismic mapping on our Nicaraguan Concessions; (viii) the
oil and gas exploration business involves a high degree of business and financial risk; (ix) we will be subject to regulations
affecting our activities with the Nicaraguan Concessions; (x) our operations may be adversely affected by changes in the fiscal
regime of Nicaragua; (xi) we are continuing to negotiate with our creditors and may face additional claims in the future; (xii)
oil prices may be affected by regional factors; (xiii) any future production will be contingent on successful exploration, development
and acquisitions to establish reserves and revenue in the future; (xv) the oil and gas industry is highly competitive; (xvi) exploratory
drilling is an uncertain process with many risks; (xvii) oil and gas prices are volatile, and declines in prices would hurt our
revenues and ability to achieve profitable operations; (xviii) our common stock is traded on the Pink Sheets, which may not have
the visibility or liquidity that we seek for our common stock; (xix) we depend on key personnel; (xx) sufficient voting power
by coalitions of a few of our larger stockholders to make corporate governance decisions that could have significant effect on
us and the other stockholders, including Amegy Bank, NA; (xxi) sale of substantial amounts of our common stock that may have a
depressive effect on the market price of the outstanding shares of our common stock, including sales of shares of common stock
issued to the holder of the Convertible Note upon its conversion of portions of the outstanding principal amount of the Convertible
Note; (xxii) possible issuance of common stock subject to options and warrants may dilute the interest of stockholders; (xxiii)
our ability to comply with Sarbanes-Oxley Act of 2002 Section 404 as it may be required; (xxiv) our nonpayment of dividends and
lack of plans to pay dividends in the future; (xxv) future sale or issuance of a substantial number of shares of our common stock
that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital;
(xxvi) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of
our common stock; (xxvii) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited
public float; (xxviii) indemnification of our officers and directors; (xxix) whether we will be able to find an industry or other
financial partner to enable us to explore and develop our Nicaraguan Concessions; and (xxx) whether we will be able to identify,
acquire and finance domestic oil and gas properties with both proven and unproven reserves or whether such properties would provide
positive cash flow.
The
following information should be read in conjunction with the Condensed Financial Statements and Notes presented elsewhere in this
quarterly report on Form 10-Q. See Note 1 –
“Nature of Operations, Basis of Presentation and Summary of Significant
Accounting Policies,”
to the Condensed Financial Statements for the Three and Nine months ended September 30, 2016 and
2015.
2016
Operational and Financial Objectives
Corporate
Activities
We
hold a 100% working interest in any hydrocarbon deposits found under the Perlas Block (560,000 acres/2,268 km) and Tyra Block
(826,000 acres/3,342 km) located in shallow waters offshore Nicaragua. The final approval of the EIA by the Nicaraguan government
of our environment impact study on April 13, 2013, began Sub-Period 2 for both the Tyra and Perlas Blocks as defined in the Nicaraguan
Concessions. We believe we have satisfied the acquisition, processing and interpretation of Seismic data required in Sub-Period
2 for both the Perlas and Tyra Blocks. Therefore, we are now in Sub-Period 3 of the exploration phase of the 30-year Concession
for both Perlas and Tyra as of December 31, 2015. Sub-Period 3 of the Nicaraguan Concessions requires the drilling of at least
one exploratory well on the Perlas Block during 2016 and the shooting of additional seismic on the Tyra Block. We plan to identify
at least one potential drilling site on the Perlas block as required in Sub-Period 3 and will have to perform supplemental EIA
work prior to requesting and receiving the permit to drill from the Nicaraguan government. The work plan on the Tyra block for
Sub-Period 3 requires us to shoot additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement
of exploratory drilling. We are seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to
complete our initial well from the Nicaraguan government. There can be no assurance whether we will be able to obtain such waiver
of the requirements. The Nicaraguan Government is in an election year in 2016, therefore such efforts have been delayed until
the election is over.
During
late December 2013, we completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan Concessions
at that point. We believe that the newly acquired 2-D seismic data, together with the previously acquired reprocessed 2-D seismic,
helped us to further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological
consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally oil) in place. In addition,
the new 2-D seismic acquired in 2013 provided our first geological information regarding the potential for oil resources in the
Cretaceous Zone, which we could not evaluate using less precise older 2-D seismic mapping. We have identified multiple promising
sites on the Perlas Block for exploratory drilling and will plan the drilling of initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves, given sufficient capital. We believe that we have performed all work necessary
as of December 31, 2015 to proceed to Sub-Period 3 for the Perlas Block as defined in the Nicaraguan Concessions, which requires
the drilling of at least one exploratory well on the Perlas concession within the following one-year period. We must first prepare
and submit a supplemental EIA to the Nicaraguan government before the drilling permit can be issued on the Perlas Block.
We
must prepare and submit the EIA supplement to the Nicaraguan Government, assuming that it accepts the supplemental EIA and grant
the drilling permit, we will be required to drill at least one exploratory well on the Perlas Block during 2016 or risk being
in default and losing our rights under the Nicaraguan Concessions. We will not drill a well on the Nicaraguan Concessions during
2016 given the current state of the oil and gas commodity markets, financing the drilling, and the challenging economics for any
new exploration and development project, especially a project in an area of the world without historical proven reserves of commercial
hydrocarbons. We are attempting to negotiate extensions with the Nicaraguan government of the required date by which an exploratory
well must be drilled; however, there can be no assurance that we will be successful in this regard.
The
Company is in technical default of the Nicaraguan Concession because it has not provided the required letters of credit to the
Nicaraguan Government and has not paid the annual training fees and area fees for 2016 which approximate $155,567. In accordance
with the Nicaraguan Concession agreements, the Company had previously provided the Ministry of Energy with the required letters
of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The Company
had also made all required expenditures related to the Nicaraguan Concessions for training programs and as “area fees,”
for each respective year for 2010 through 2015. However, approximately $155,567 was due and payable in March 2016 for 2016 training
program and area fees that remains unpaid and outstanding as of September 30, 2016. The Company is attempting to negotiate the
payment of the 2016 training program and area fees and renewal and increase of the required letters of credit which total $1,356,227
for the Perlas block and $278,450 for the Tyra block with the Nicaraguan Government and its lenders; however, there can be no
assurance that the Company will be successful in the regard. The Company considers it is in compliance with the terms of the Nicaraguan
Concessions agreements, except for the renewal of the expired letters of credit and payment of the 2016 training program and area
fees. The foregoing items remain as substantial operational and legal issues that we must resolve in order to maintain our rights
under the Nicaraguan Concessions during 2016.
We
are also seeking offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions
in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. Accordingly,
we intend to finance our business strategy through external financing, which may include debt and equity capital raised in public
and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations,
if any, and net proceeds from the sales of assets.
Our
ability to complete these activities is dependent on a number of factors, including, but not limited to:
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The
availability of the capital resources required to fund the activities;
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The
availability of third party contractors for completion services; and
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The
approval by regulatory agencies of applications for permits to conduct exploration activities in a timely manner.
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We
are considering the acquisition of domestic oil and gas properties with both proven and unproven reserves. We believe that the
current distressed state for oil and gas properties and the resulting decline in valuations may yield an opportunity for us to
accumulate undervalued domestic oil and gas assets at attractive prices and terms with the objective of achieving positive cash
flows despite the decline in natural gas and crude oil commodity prices. We are seeking financing for such cash generating oil
and gas properties at reasonable cost of capital. This initiative is intended to provide us with positive cash flows to address
immediate working capital needs until the environment improves for exploration projects such as the Nicaraguan Concessions. No
assurances can be given regarding our ability to identify, acquire and finance such domestic properties or whether such properties
would provide positive cash flow.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
For
the Three Months Ended September 30, 2016 and 2015
Results
of Operations
Revenue
The
Company had no revenues in either 2016 or 2015 as it focused solely on the exploration, development, financing and maintenance
of the Nicaraguan Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2016 or 2015. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2016 and 2015.
The
Company has no current domestic exploration and development activities; however, it is seeking to identify and acquire domestic
properties with both proven and unproven reserves, given sufficient financing. It is not actively working on any domestic property,
focusing instead on the pursuit of the exploration, development and financing of the Nicaraguan Concessions.
General
and Administrative Expenses
General
and administrative expenses of $107,703 for the three months ended September 30, 2016 decreased $19,618, or 15.1%, from $126,871
in the same period in 2015. The decrease in general and administrative expenses is primarily attributable to a decrease of $16,000
in shareholder/investor relations expenses as the Company has not incurred such expenses after the completion of the Secured Convertible
Note Payable financing in 2015. The decrease was also attributable to an overall decrease in Delaware franchise taxes in 2016
as compared to 2015.
Stock-based
compensation
Stock-based
compensation expenses of $-0- for the three months ended September 30, 2016 decreased $45,588, or 100% from the same period in
2015. The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued
stock options to compensate and motivate its officers, directors and other service providers in previous years that vest generally
over a two-year time period. The Company did not grant any stock options during 2016 and 2015. The significant decrease in stock-based
compensation expense during 2016 compared to 2015 is attributable to the full vesting of the January 2014 stock option grant in
January 2016, which reduced the related amortization during the three months ended September 30, 2016 compared to 2015. All outstanding
stock options are fully vested as of September 30, 2016.
Interest
expense
Interest
expense decreased from $144,090 for the three months ended September 30, 2015 to $27,455 for the 2016 period. This significant
decrease is attributable to the Company converting approximately $555,000 of its interest bearing debt to common stock during
early 2015. The Company received loan proceeds of $450,000 from the Secured Convertible Note issued in May 2015 and $85,000 from
two other convertible notes issued in July 2015, all of which bear interest at 8% per annum and remained outstanding at September
30, 2016. In previous years the Company issued short-term notes payable at various dates and extended their maturities by paying
additional compensation to the lenders chiefly in the form of warrants. The fair value of the warrants issued to the note holders
at the origination and extension dates of the short-term promissory notes was recorded as a discount on the related debt. Amortization
of the value of the warrants and revenue sharing interests granted to the holders resulted in a substantial increase in the overall
effective borrowing costs during the three months ended September 30, 2015 compared to the same period in 2016. Discount amortization
represents a non-cash expense and totaled $316 and $103,843 of total interest expense recognized in the three months ended September
30, 2016 and 2015, respectively.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company may find it necessary to continue with these types of short-term borrowings with high effective interest rates.
Change
in Fair Value of Secured Convertible Note
We
issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair
value basis. We received $450,000 of proceeds at the date of issuance and the fair market value of the Secured Convertible Note
was estimated to be $265,929 as of December 31, 2015 and $148,480 at September 30, 2016. After considering principal repayments
and additional funding received the net ($2,807) and $162,235 change in fair market value of such Note is included in the accompanying
statement of operations for the three months ended September 30, 2016 and 2015, respectively.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the secured convertible note outstanding during 2016 and 2015 are treated as derivative instruments because the promissory notes
and warrants contain ratchet and anti-dilution provisions. Accordingly, we adjusted the value of the outstanding derivative liabilities
to their estimated fair value as of September 30, 2016 and 2015. The mark-to-market process resulted in a gain of $50,062 during
the three months ended September 30, 2016 and a gain of $5,861,721 during the three months ended September 30, 2015. The decrease
in the gain recognized is primarily the result of the lesser reduction in the closing market price of our common stock between
the December 31, 2015 ($0.16 per share) and September 30, 2016 ($0.03 per share) compared to the corresponding period in 2015
($5.50 at December 31, 2014 versus $0.80 at September 30, 2015). Generally, the fair value of the derivative liability declines
when the market value of the underlying common stock decreases compared to the derivatives exercise price.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,185,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
For
the three months ended September 30, 2016, the Company realized net losses. The Company anticipates operating losses and additional
tax losses for the foreseeable future and does not believe that utilization of its tax loss carryforward is more likely than not.
Therefore, because of the uncertainty as to the ultimate utilization of the Company’s loss carryforwards, any deferred tax
asset at September 30, 2016 that resulted from anticipated benefit from future utilization of such carryforward has been fully
offset by a valuation allowance.
Net
income (loss)
As
a result of the above, we reported a net loss of $87,903 for the three months ended September 30, 2016 compared to net income
of $5,707,407 for the three months ended September 30, 2015. This represents a determination of $5,795,310.
Basic
and Diluted Income (Loss) per Share
Basic
net Income (Loss) 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 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 from continuing operations are
incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion
of common share equivalents would have an anti-dilutive effect.
The
basic and diluted income (loss) per share was ($0.01) for the three months ended September 30, 2016 for the reasons previously
noted. The basic and diluted income (loss) per share was $2.12 and $2.00 for the three months ended September 30, 2015, respectively,
for the reasons previously noted. All outstanding stock options and warrants to purchase common stock were considered antidilutive
and therefore excluded from the calculation of diluted income (loss) per share for the three months ended September 30, 2016 because
of the exercise price of the warrants being substantially higher than market price in 2016 and the net loss reported for 2016
period. Potential shares of common stock as of September 30, 2016 that have been excluded from the computation of diluted net
loss per share amounted to 2,911,221 shares, which included 2,507,771 outstanding warrants and 403,450 outstanding stock options.
For
the Nine months ended September 30, 2016 and 2015
Results
of Operations
Revenue
The
Company had no revenues in either 2016 or 2015 as it focused solely on the pursuit of the exploration, development, financing
and maintenance of the Nicaraguan Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2016 or 2015. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2016 and 2015.
The
Company has no current or planned domestic exploration and development activities at this time. It is not actively working on
any domestic property, focusing instead on the exploration, development and financing of the Nicaraguan Concessions.
General
and Administrative Expenses
General
and administrative expenses of $339,199 for the nine months ended September 30, 2016 decreased $15,856, or 4.5%, from $355,055
in the same period in 2015. The decrease in general and administrative expenses is primarily attributable to a reduction of $47,665
in Delaware franchise taxes offset by an increase of $31,552 in Nicaraguan Concession costs incurred. The Delaware franchise tax
is based on our total assets, which decreased substantially due to the impairment of our Nicaraguan oil and gas properties during
2015. The Company is no longer capitalizing Nicaraguan Concession expenditures due to the decision to fully impair the Nicaraguan
Project at December 31, 2015 as a result of the difficult oil and gas economy and noncompliance issues with the requirements of
the Concessions. The decrease in general and administrative costs was also attributable to a reduction in expenses relating to
the Company attending fewer investor conferences or similar forums during the three months ended September 30, 2016 compared to
2015. The closing of the May 2015 Private Placement reduced the need to incur additional costs related to capital raising and
investor relations activities during the 2016 period coupled with the poor investment climate for oil and gas companies during
2016 and 2015.
Stock-based
compensation
Stock-based
compensation expenses of $7,598 for the nine months ended September 30, 2016 decreased $138,962, or 94.8%, from the $146,560 of
expense incurred during the same period in 2015. The Company has had minimal resources to pay employees, consultants and other
service providers. Therefore, it has issued stock options to compensate and motivate its officers, directors and other service
providers in previous years that vest generally over a two-year time period. The Company did not grant any stock options during
2016 and 2015. The significant decrease in stock-based compensation expense during 2016 compared to 2015 is attributable to the
full vesting of the January 2014 stock option grant in January 2016, which reduced the related amortization during the nine months
ended September 30, 2016 compared to 2015. All outstanding stock options are fully vested as of September 30, 2016.
Interest
expense
Interest
expense decreased from $841,395 for the nine months ended September 30, 2015 to $134,972 for the 2016 period. This significant
decrease is attributable to the Company converting approximately $555,000 of its interest bearing debt to common stock during
early 2015. The Company received loan proceeds of $450,000 from the Secured Convertible Note issued in the May 2015 Private Placement
and $85,000 from two other convertible notes issued in July 2015, all of which bear interest at 8% per annum and remained outstanding
at September 30, 2016. In previous years the Company issued short-term notes payable at various dates and extended their maturities
by paying additional compensation to the lenders chiefly in the form of warrants. The fair value of the warrants issued to the
note holders at the origination and extension dates of the short-term promissory notes was recorded as a discount on the related
debt. Amortization of the value of the warrants and revenue sharing interests granted to the holders resulted in a substantial
increase in the overall effective borrowing costs during the nine months ended September 30, 2015 compared to the same period
in 2016. Discount amortization represents a non-cash expense and totaled $53,297 and $717,162 of total interest expense recognized
in the nine months ended September 30, 2016 and 2015, respectively.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company may find it necessary to continue with these types of short-term borrowings with high effective interest rates.
Secured
Convertible Note Payable Issuance Costs
On
May 7, 2015, we completed the May 2015 Private Placement of a $12.0 million principal amount Secured Convertible Note and a Warrant
exercisable to purchase 1,800,000 shares of our common stock, $0.0001 par value. We elected to account for and record such note
on a fair value basis. Accordingly, all related debt issuance expenses, which totaled $1,302,629 (including $1,071,201 representing
the value of the warrant to purchase 240,000 shares of common stock issued to placement agent and $231,428 of other fees and expenses),
was charged to non-operating expenses during the nine months ended September 30, 2015. No similar transaction occurred during
2016.
Change
in Fair Value of Secured Convertible Note
We
issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair
value basis. We received $450,000 of proceeds at the date of issuance and the fair market value of the Secured Convertible Note
was estimated to be $265,929 as of December 31, 2015 and $148,480 at September 30, 2016. After considering principal repayments
and additional funding received the net $67,591 and $5,865 change in fair market value of such Note is included in the accompanying
statement of operations for the nine months ended September 30, 2016 and 2015, respectively.
Issuance
of Warrant Derivative in Connection with Secured Convertible Note
The
Warrant issued in the May 2015 Private Placement contains various provisions that grant the holder ratchet and anti-dilution rights.
Consequently, such Warrant is required to be treated on a liability basis at its estimated fair value and classified as a derivative
liability in the accompanying financial statements. We recorded its origination date estimated fair value at $8,034,007 as a non-operating
expense in the nine months ended September 30, 2015. The value of the Warrant to purchase 240,000 shares granted to the placement
agent in the May 2015 Private Placement was included in Secured Convertible Note issuance costs in the statement of operations
as previously described.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the Secured Convertible Note outstanding during 2016 and 2015 are treated as derivative instruments because the promissory notes
and warrants contain ratchet and anti-dilution provisions. Accordingly, we adjusted the value of the outstanding derivative liabilities
to their estimated fair value as of September 30, 2016 and 2015. The mark-to-market process resulted in a gain of $167,830 during
the nine months ended September 30, 2016 and a gain of $8,329,827 during the nine months ended September 30, 2015. The decrease
in the gain recognized is primarily the result of the lesser reduction in the closing market price of our common stock between
the December 31, 2015 ($0.16 per share) and September 30, 2016 ($0.03 per share) compared to the corresponding period in 2015
($5.50 at December 31, 2014 versus $0.80 at September 30, 2015). Generally, the fair value of the derivative liability declines
when the market value of the underlying common stock decreases compared to the derivatives exercise price.
Other income (expense)
Other income (expense) decreased
from $174,457 for the nine months ended September 30, 2015 to $-0- in 2016. The Company derecognized certain
previously recorded liabilities in 2015 due to the expiration of the statute of limitations on collection of such
obligations for the Company.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,185,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
For
the nine months ended September 30, 2016, the Company realized net income. However, the Company anticipates operating losses and
additional tax losses for the foreseeable future and does not believe that utilization of its tax loss carryforward is more likely
than not. Therefore, because of the uncertainty as to the ultimate utilization of the Company’s loss carryforwards, any
deferred tax asset at September 30, 2016 that resulted from anticipated benefit from future utilization of such carryforward has
been fully offset by a valuation allowance.
Net
income (loss)
As
a result of the above, we reported a net loss of $381,530 for the nine months ended September 30, 2016 compared
to a net loss of $2,181,227 for the nine months ended September 30, 2015. This represents an improvement of $1,799,697.
Basic
and Diluted Income (Loss) 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 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 from continuing operations are incurred, weighted
average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents
would have an anti-dilutive effect.
The
basic and diluted loss per share was $0.06 for the nine months ended September 30, 2016, for the reasons previously
noted. The basic and diluted loss per share was $0.82 for the nine months ended September 30, 2015. All outstanding stock options
and warrants to purchase common stock were considered antidilutive and therefore excluded from the calculation of diluted income
(loss) per share for the nine months ended September 30, 2016 and 2015 because of the exercise price of the warrants was substantially
higher than market price in 2016 and the net loss reported for both periods. Potential shares of common stock as of September
30, 2016 that have been excluded from the computation of diluted net loss per share amounted to 2,911,221 shares, which included
2,507,771 outstanding warrants and 403,450 outstanding stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development
of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the
world. Historically, we financed our operations through the issuance of redeemable preferred stock and various short and long-term
debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation should
we be successful exploring our Nicaraguan Concessions.
During
2013 we borrowed approximately $1,825,000 on a short-term basis by issuing various subordinated promissory notes with detachable
warrants to purchase common shares. The fair value of the warrants resulted in a substantial increase in the overall effective
borrowing costs. We used the proceeds of these notes to repay previously issued notes, including the foregoing related party note,
to meet obligations and conduct seismic mapping related to our Nicaraguan Concessions and to provide working capital. In addition,
we entered into an unsecured line-of-credit with a related party that supplemented its working capital needs and also provided
detachable warrants to purchase common stock that increased the overall cost of the borrowing.
In
April 2013, we conducted a private placement of units composed of common stock and warrants under which we raised $890,000 in
proceeds and exchanged $125,000 principal amount of an outstanding note plus accrued interest for units. We used part of these
proceeds to retire notes issued earlier in 2013.
We
were unable to raise long-term capital in 2014 to pay the majority of the outstanding short-term promissory notes on their respective
maturity dates. We were able to negotiate extensions of the maturity dates on these short-term promissory notes by issuing additional
warrants exercisable to purchase shares of common stock and, in one case, granting a revenue sharing interest in our Nicaraguan
Concessions.
In
the first quarter 2015, we were able to increase our line-of-credit to a maximum of $100,000, which provided us some liquidity,
but were unable to obtain other sources of capital. On February 28, 2015, the short-term note holders of maturing debt exercised
their right to convert principal balances totaling $475,000 and accrued interest totaling $28,630 into 100,726 shares of common
stock at an exchange rate of $5.00 per share. In addition, on September 30, 2015, the lender who provides the line-of-credit facility
converted a partial principal balance totaling $50,000 into 10,000 shares of common stock at a price of $5.00 per share. Such
debt to equity conversions helped to reduce our near term cash needs.
In
July 2015, the Company issued two promissory notes for total cash proceeds of $85,000. The promissory notes have maturity dates
that have been extended several times and currently mature in October 2016. In connection with the origination and extension
of the notes, the Company issued warrants exercisable to purchase shares of common stock at an exercise price of $5.60 per share.
The warrants are immediately exercisable and terminate five years from their dates of issuance.
On
December 27, 2013 the Company borrowed $1,050,000 under the December 2013 Note, which is an unsecured credit facility with a private,
third-party lender. Effective April 7, 2015 the Company and the lender agreed to extend the maturity date of the December 2013
Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May
2015 Private Placement in the principal amount of $9,550,000 (the “New Maturity Date”). All other terms of the Note
remained the same and the remaining principal balance was reduced to $1,000,000 as of September 30, 2016 after the $50,000 principal
repayment required by the extension agreement.
The
December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future
senior indebtedness, as such terms are defined in the December 2013 Note. The December 2013 Note matured in April 2016 and is
currently in technical default. The Company is seeking an extension of the maturity date; however, there can be no assurance that
it will be able to obtain such extension or what the final terms will be if the lender agrees to such an extension.
On
May 7, 2015 the Company completed the May 2015 Private Placement of $12.0 million Secured Convertible Note and a Warrant exercisable
to purchase 1,800,000 shares of the Company’s common stock with an institutional investor. At the closing of the May 2015
Private Placement, the investor acquired the Convertible Note by paying $450,000 in cash and issuing the Investor Note, secured
by cash, with a principal amount of $9,550,000. Assuming all amounts payable to the Company under the Investor Note are paid,
the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement agent fees and other expenses associated
with the transaction, subject to the satisfaction of certain conditions. The Company used the initial proceeds from the closing
to retire certain outstanding obligations, including the 2015 area and training fees of approximately $155,000 owed to the Nicaraguan
government relating to its Nicaragua Concessions, and to provide additional working capital.
The
Company will receive the remaining cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. The investor
may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part.
The
Convertible Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at
any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion
Price”). As a part of the May 2015 Private Placement, the Company issued a Warrant to the investor giving it the right to
purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The
Warrant is exercisable commencing six months from the date of issuance for a period of seven years from the date of issuance.
The
investor has no right to convert the Convertible Note or exercise the Warrant to the extent that such conversion or exercise would
result in the investor being the beneficial owner of in excess of 9.99% of the Company’s common stock. The Convertible Note
ranks senior to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions.
WestPark
Capital acted as placement agent for the Company in the May 2015 Private Placement and 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 plus the
reimbursement of legal fees totaling $7,500. The Company also issued WestPark a warrant exercisable to purchase 240,000 shares
of common stock at a price of $5.00 per share. The warrant was exercisable upon from the date of issuance for a period of seven
years.
In
summary, as of September 30, 2016, we owed: (i) $68,105 on our line-of-credit, which is due November 28, 2016; (ii) the two promissory
notes in the total principal amount of $85,000, which are due in October 2016; (iii) the Secured Convertible note with a fair
value of $148,450, which is due in 23 monthly installment payments either in cash or stock; and (iv) and the December 2013 Note
in the principal amount of $1,000,000, which was due in April 2016 and is currently in technical default. We are seeking to extend
the maturity date in order to cure the technical default; however, there can be no assurance that it will be able to obtain such
extension or what the final terms will be if the lender agrees to such extension. We intend to seek additional funding under the
Investor Note or other short-term debt financing to provide the funds necessary to pay-off the line-of-credit when it comes due
and to provide working capital to fund normal operations, although we can provide no assurances that we will be successful in
this regard. Our current financial condition has made traditional bank loans and normal financing terms unattainable; therefore,
we may find it necessary to continue with the type of short-term borrowings with high effective interest rates that we have used
in the past.
The
Company is in Sub-Period 3 of the exploration phase of the 30-year Concessions for both Perlas and Tyra as of September 30, 2015.
Sub-Period 3 of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016
and the shooting of additional seismic on the Tyra Block. The Company plans to identify at least one potential drilling site on
the Perlas Block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving
the permit to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot
additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The
Company is seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to complete its initial
well from the Nicaraguan government. There can be no assurance whether it will be able to obtain a waiver of the requirements.
The Nicaraguan Government is in an election year in 2016, therefore such efforts have been delayed until the election is over.
In
accordance with the Nicaraguan Concession agreements, the Company has previously provided the Ministry of Energy with the required
letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The
Company has also made all required expenditures related to the Nicaraguan Concessions for training programs and as “area
fees,” for each respective year for 2010 through 2015. However, the Company is delinquent with respect to the payment of
the 2016 training program and area fees which approximate $155,000 as of September 30, 2016. In accordance with the Nicaraguan
Concession agreements, the Company must provide the Ministry of Energy with the required letters of credit in the amounts which
total $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases as required by
the Nicaraguan Concessions, to replace the expired letters of credit. The minimum cash requirements to maintain and comply with
the minimum work program as defined in the Nicaraguan Concessions for the next twelve-month period will be approximately $5,500,000
for the Perlas Block which includes all costs to prepare for and drill the initial exploratory well, and $280,000 for the Tyra
Block, assuming the waiver is granted regarding the seismic mapping. If such waiver is not granted, the Company estimates it will
require approximately $2,500,000 for the seismic mapping. Finally, the Company estimates it will need approximately $300,000 to
prepare and submit an environmental supplement to the Nicaraguan government to identify and receive authorization to drill up
to five wells in the Concessions.
The
Company has identified multiple sites for exploratory drilling and will plan the initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves, subject to receipt from the Nicaraguan government of authorizations for the
drilling of up to five wells. In order to meet its obligations under the Perlas Block of the Nicaraguan Concession, the Company
must drill its initial exploratory well during 2016 or risk being in default and losing its rights under the Nicaraguan Concessions.
We
are negotiating the renewal and/or adjustment of the required letters of credit with the Nicaraguan Government. Further, we are
seeking a waiver of the 3-D seismic mapping requirement because we do not believe it will be effective in providing additional
information due the supplemental water depth and other factors. The Nicaraguan Government is in an election year in 2016, therefore
such efforts have been delayed until the election is over. We plan to prepare the necessary information to submit to the EIA in
order to obtain the necessary authorizations to drill up to five locations in the Concessions. There can be no assurance that
we will be successful in any of the foregoing regards. Except for the foregoing items, we believe we are in full compliance with
the terms of the Nicaraguan Concessions agreements.
The
Company must successfully comply with the restrictions related to the secured convertible note in order to release the remaining
$9.49 million in funding under the Investor Note or it must raise substantial amounts of debt and equity capital in the immediate
future in order to fund: (1) the 2016 training program and area fees which are delinquent; (2) the required letters of credit
to the Nicaraguan Government; (3) fund approximately $300,000 to prepare and submit an environmental supplement to the Nicaraguan
government to identify and receive authorization to drill up to five wells in the Concessions; (4) the drilling of at least one
exploratory well on the Perlas Block of the Nicaraguan Concessions during 2016; (5) the shooting of additional seismic on the
Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement form the Nicaraguan government;
(6) the payment of normal day-to-day operations and corporate overhead; and (7) the payment of outstanding debt and financial
obligations as they become due including the $1.0 million December 2013 Note which currently is in technical default. These
are substantial operational and financial issues that must be successfully addressed during 2016 or the Company’s ability
to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt. The Company is actively
seeking new outside sources of debt and equity capital in order fund the substantial needs enumerated above; however, there can
be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary
to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements to drill the exploratory
wells.
In
addition to the minimum cash requirements related to the Nicaraguan Concessions, we estimate that we will require approximately
$330,000 of working capital to maintain corporate operations for the next 12 months, but not including (i) approximately $1,000,000
principal amount of a short-term promissory note which matured in April 2016 and is in technical default, plus accrued interest;
(ii) the $85,000 principal due on the two promissory notes due in October 2016 and (iii) the $68,105 currently outstanding under
a revolving line of credit due August 2016. We owe $4,945,000 in trade payables related to seismic activities already performed
(in December 2013) but not yet paid; however, we believe such party has agreed to extend the time for payment of this obligation
to until such time as we begin drilling operations on the Nicaraguan Concessions. We also owe other obligations to third parties
as noted on our balance sheet, which we intend to pay, to negotiate and/or settle prior to the beginning of any drilling
operations, although there is no assurance that will be able negotiate settlements with venders or avoid collection activities.
We
plan to raise long-term capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through
a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture
or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to
us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we may lose our rights to them.
The
Company will not be able to meet all of the Nicaraguan Concession requirements in 2016, including proceeding to drill the required
exploration well during 2016, given the current state of the oil and gas commodity markets and the challenging economics for any
new exploration and development project especially a project in an area of the world without historical proven reserves of commercial
hydrocarbons. The Company is attempting to negotiate extensions with the Nicaraguan government relative to the required date by
which any exploratory wells must be drilled as well as the other requirements for maintaining the Concessions; however, there
can be no assurance that it will be successful in this regard. These are substantial operational and legal issues that the Company
must resolve in order to maintain its rights under the Nicaraguan Concessions during 2016.
Due
to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should we be unable to continue as a going concern.