Notes
to Condensed Financial Statements
March
31, 2020
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”)
has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion,
include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed
balance sheets, statements of operations, statements of stockholders’ deficit and cash flows for the periods presented.
Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2020 due to
various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the
rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the audited financial
statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on
Form 10-K, filed with the SEC.
Nature
of Operations
Since
2009 we had planned to pursue the exploration of potential oil and gas resources in the United States and in the Perlas and Tyra
concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”),
which contain a total of approximately 1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc.
in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We
also began assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of
natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide
support services for the production of oil and gas in the United States. As a result, on July 31, 2019 we acquired an option (the
“Option”) from Core Energy, LLC, a closely held company (“Core”), to purchase the production and mineral
rights/leasehold for oil & gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift
geological formation covering over 11,000 contiguous acres (the “Properties”). We paid a nonrefundable deposit of
$50,000 to bind the purchase option, which provided us the right to acquire the Properties for $2.5 million prior to December
31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are negotiating for
an extension of such Option and lowering of the purchase price of the Properties. There can be no assurance that the parties
will negotiate an extension and acceptable reduced price, particularly in light of recent events including the coronavirus
pandemic and its impact on the oil and gas industry.
If
the parties agree to extend, reprice or otherwise complete the acquisition, the purchase will include the existing production
equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include
a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical
producing wells, which currently produce from the Reagan Sand zone with an approximate depth of 3,600 feet.
We
intend to complete the acquisition of the Properties prior to the end of 2020, subject to successful renegotiations and obtaining
adequate financing. The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a
third-party purchaser prior to our exercise of the Option. If such a sale occurs, we would be entitled to 10% of the proceeds
of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of
like kind and provide us a first right of refusal to acquire such asset.
We
must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying our
existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there
can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further,
we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to exercise the Option.
Nicaragua
We
began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built
relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research
that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round
held by INE in January 2003.
On
March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan
Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental
study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired
over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact
Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic
data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D
and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
We
relied on raising debt and equity capital to fund our ongoing maintenance/expenditure obligations under the Nicaraguan Concession,
our day-to-day operations and corporate overhead because we have generated no operating revenues or cash flows in recent years.
The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and three other notes payable
with principal balances of $104,125 as of March 31, 2020 are now either due on demand or currently in default. In 2020 we abandoned
the Concessions.
Going
Concern
The
Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund
the (i) acquisition of the Properties under the Option; (ii) normal day-to-day operations and corporate overhead; and (iii) outstanding
debt and other financial obligations as they become due, as described below. These are substantial operational and financial issues
that must be successfully addressed during 2020.
The
Company is seeking new sources of debt and equity capital to fund the needs enumerated above. The Company is attempting to obtain
extensions of the maturity dates for its debt or compromises of the debt. In addition, the Company will seek offers from industry
operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and
development operations or other joint venture arrangement. The Company has restructured certain obligations that were in default
during 2019; however, there can be no assurance that it will be able to obtain such funding, extensions or additional restructurings
or on what terms.
Due
to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue
as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include
the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, stock-based awards
and overriding royalty interests, and the realization of deferred tax assets.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging.
ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the condensed statement of operations when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings.
Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The
purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and
gas prices and to manage the exposure to commodity price risk. As of March 31, 2020 and December 31, 2019 and during the periods
then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes
2, 3, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value
recognized in operations.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts payable, accrued liabilities and short-term notes represent the estimated fair
value due to the short-term nature of the accounts.
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
●
|
Level
1 —
|
Quoted
prices in active markets for identical assets and liabilities.
|
|
|
|
|
|
●
|
Level
2 —
|
Other
significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
|
|
|
|
|
|
●
|
Level
3 —
|
Significant
unobservable inputs (including the Company’s own assumptions in determining the fair value.
|
The
estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants
issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest
rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants
as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant
derivatives as of March 31, 2020 and December 31, 2019 were classified under the fair value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of March 31, 2020 and December 31, 2019:
March
31, 2020
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
406
|
|
|
$
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
406
|
|
|
$
|
406
|
|
December
31, 2019
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,116
|
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,116
|
|
|
$
|
1,116
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods
ended March 31, 2020 and December 31, 2019.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at March 31, 2020 and December 31, 2019:
|
|
|
March
31, 2020
|
|
|
|
December
31, 2019
|
|
Secured convertible note
payable, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
Less:
Current maturities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Secured convertible
note payable, long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Following
is an analysis of the activity in the Note during the three months ended March 31, 2019:
|
|
Amount
|
|
Balance at December 31, 2018
|
|
$
|
2,197,231
|
|
Funding under the
Investor Note during the period
|
|
|
—
|
|
Principal repaid
during the period by issuance of common stock
|
|
|
—
|
|
Change in fair value
of secured convertible note during the period
|
|
|
—
|
|
Exchange
of secured convertible note payable for common stock
|
|
|
—
|
|
|
|
|
|
|
Balance at March 31, 2019
|
|
$
|
2,197,231
|
|
Following
is an analysis of the activity in the Note during the three months ended March 31, 2020:
|
|
|
Amount
|
|
Balance at December 31, 2019
|
|
$
|
—
|
|
Funding under the
Investor Note during the period
|
|
|
—
|
|
Principal repaid
during the period by issuance of common stock
|
|
|
—
|
|
Change in fair value
of secured convertible note during the period
|
|
|
—
|
|
Exchange
of secured convertible note payable for common stock
|
|
|
—
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
—
|
|
On
May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note
(the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The
placement agent for the Company in the transaction received a fee of 6% of cash proceeds, or $600,000, if and when the Company
receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted
a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and an
institutional investor (the “Investor”). The May 2015 Private Placement was made pursuant to an exemption from registration
under the Securities Act of 1933, as amended (the “33 Act”). At the closing, the Investor acquired the secured
convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash, with an aggregate initial
principal amount of $9,550,000 (the “Investor Note”).
On
May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a)
of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate
principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate
principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible
Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the
Company to deliver a new convertible note (the “Replacement Note”) with respect to the remaining principal balance
of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note
included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note.
The Company had recorded the fair value of the Replacement Note assuming that the remaining par value was $2,197,231 as asserted
by the Investor. The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and was
due in monthly installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the
Replacement Note at its maturity and it was therefore in technical default. The Replacement Note was to be secured to the same
extent as the Convertible Note. The Company and the Investor have negotiated a resolution of these outstanding matters regarding
the default status and the issuance of the Replacement Note under the terms of the financing.
On
May 23, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange
Agreement and Side-Letter Agreement as described below:
Exchange
Agreement: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued
in the May 2015 Private Placement (the “Original Securities”), including: (i) the Convertible Note, subject to the
Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231; (ii) the related accrued interest under
the Convertible Note, with a balance of $28,643; (iii) the Warrant; (iv) the Security and Pledge Agreement entered into by the
Company and the Investor in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in
connection with the May 2015 Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and the
Investor in connection with the May 2015 Private Placement, for 770,485 fully paid and nonassessable shares of Common Stock and
certain rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional
shares of Common Stock.
As
a result of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including any
rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s
ownership of the Original Securities.
Side-letter
Agreement: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement,
dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the
Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an
increase in the Number of Fully-Diluted Shares Outstanding (as defined below) of the Company from the execution date of the Exchange
Agreement to the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up
Shares, if any, shall provide the Investor with Rights to acquire additional Right Shares (as defined in the Exchange Agreement)
to be calculated according to the following formula:
|
●
|
A-B=
aggregate number of Right Shares
|
|
●
|
A
= 9.99% of shares of Common Stock outstanding on November 23, 2019 (calculated based on the Number of Fully-Diluted Shares
Outstanding (as defined below))
|
|
|
|
|
●
|
B
= The shares of Common Stock Issued to the Investor contemporaneously with the Exchange Agreement
|
For
the purposes of the Side-Letter Agreement, “Number of Fully-Diluted Shares Outstanding” means, as of any time of determination,
the sum of (i) the aggregate number of issued and outstanding shares of Common Stock as of such time of determination; (ii) the
aggregate maximum number of shares of Common Stock issuable on an as-converted and as-exchanged basis, as applicable (excluding
any exercise of warrants to purchase Common Stock), pursuant to all capital stock and all other securities of the Company or any
of its subsidiaries (excluding any warrants to purchase Common Stock and all Rights issued pursuant to the Exchange Agreement)
outstanding as of such time of determination (or issuable pursuant to agreements in effect as of such time) that are at any time
and under any circumstances (after issuance thereof, if applicable), directly or indirectly, convertible into or exchangeable
for, or which otherwise entitles the holder thereof to acquire, Common Stock (assuming, for such purpose, that each such security
is convertible or exchangeable, as applicable, at the lowest price per share for which one share of Common Stock is at any time,
directly or indirectly, issuable upon the conversion or exchange, as applicable, of any such security and without regards to any
limitations on conversion or exchange applicable thereto); and (iii) without duplication with clause (ii) above, the aggregate
maximum number of shares of Common Stock issuable pursuant to any agreement (excluding any warrants to purchase Common Stock and
all Rights issued pursuant to the Exchange Agreement) of any person with the Company or any of its subsidiaries in effect as of
such time of determination (assuming, for such purpose, that the shares of Common Stock, directly or indirectly, issued pursuant
to such agreement is issued at the lowest price per share for which one share of Common Stock is at any time, directly or indirectly,
issuable pursuant to such agreement).
Notwithstanding
the foregoing, if any warrants to purchase Common Stock are outstanding (or issuable upon conversion or exchange of securities
outstanding) as of such six-month anniversary (each, an “Outstanding Warrant”), on such six-month anniversary, the
Company shall issue the Investor an additional Right to acquire a warrant (the “New Warrant”) exercisable for up to
9.99% of the shares of Common Stock issuable upon exercise of all Outstanding Warrants as of such six-month anniversary (the “New
Warrant Shares”). The New Warrant Shares shall be of like tenor to the Outstanding Warrants.
Pursuant
to the Side-Letter Agreement, the Company also agreed that from the execution date of the Exchange Agreement until twelve (12)
months from such date, the Company will not raise capital at a price that is below $0.10 per share of Common Stock (as adjusted
for stock splits, stock dividends, stock combinations, recapitalizations and similar events) without the Investor’s consent.
On
May 30, 2019, the Company and the Investor entered into Amendment No. 1 to Exchange Agreement (the “Amendment”). Following
execution of the Exchange Agreement on May 23, 2019, the Company and the Investor became aware of an inadvertent error regarding
the number of shares of Common Stock to be issued to the Investor pursuant to the Exchange Agreement. The Company and the Investor
agreed to amend the Exchange Agreement so it reflects the correct number of shares of Common Stock to be issued and to ensure
that the Investor does not beneficially own in excess of 9.99% of the shares of Common Stock outstanding immediately following
the effective date of the Exchange Agreement. Pursuant to the Amendment, the Company and the Investor agreed that the number of
shares of Common Stock to be issued to the Investor would be an aggregate of 605,816 shares, instead of the 770,485 shares stated
in the Exchange Agreement.
Consistent
with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter
Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement
the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant
to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
Following
is an analysis of gain on exchange of the debt and warrant obligations pursuant to the Exchange Agreement which was finalized
on November 23, 2019:
|
|
Amount
|
|
Obligations extinguished on the date
of exchange, May 23, 2019:
|
|
|
|
|
Convertible
Note balance at the date of exchange, May 23, 2019
|
|
$
|
2,197,231
|
|
Accrued interest
on the Convertible Note at the date of exchange, May 23, 2019
|
|
|
28,643
|
|
Fair value of Warrant
Derivative at the date of exchange, May 23, 2019
|
|
|
116,731
|
|
Securities issued in exchange for the
obligations extinguished on the date of Exchange, May 23, 2019 and the finalization of the Side-Letter Agreement at November
23, 2019:
|
|
|
|
|
605,816 Common shares
issued on the date of exchange May 23, 2019 valued at $0.121 per share, the closing market price on May 23, 2019
|
|
|
(73,304
|
)
|
567,348 Common shares
issued pursuant to the finalization of the Side-Letter agreement on November 23, 2019
|
|
|
(68,082
|
)
|
|
|
|
|
|
Issuance
of warrants to purchase 61,380 common shares issued pursuant to the finalization
of the Side-Letter agreement on November
23, 2019
|
|
|
(7,358
|
)
|
|
|
|
|
|
Gain on exchange
of debt and warrant obligations
|
|
$
|
2,193,861
|
|
In
addition, the Company issued a warrant in May 2015 to purchase 240,000 shares issued as part of the placement fee in connection
with the Note. The warrant contained an expiration date of May 7, 2022 and an exercise price of $5.00 per share and is subject
to certain price protection and dilution provisions. Such warrant was treated as a derivative liability for accounting purposes
due to its ratchet and anti-dilution provisions.
On
June 4, 2019, the Company entered into an exchange agreement with the warrant holder to extinguish the original warrant including
its certain price protection and dilution provisions, for a new warrant to purchase up to 50,000 common shares with a termination
date of June 4, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions.
The
estimated fair value of the original warrant derivative as of May 23, 2019, the date of the exchange agreement, was $37,368 representing
a change of $29,795 from January 1, 2019.
As
a result of the exchange agreement, the Company extinguished the derivative liability of $37,368 attributable to the original
warrant and recognized the estimated value of the new warrant of $7,985 as of June 4, 2019, the date of the exchange agreement.
The resulting $29,383 difference been the estimated fair value of the old warrant extinguished and the new warrant issued to the
holder was recorded as a gain on exchange of debt and warrant obligations effective June 4, 2019.
Note
3 – Debt
Debt
consists of the following at March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Convertible notes payable, short term:
|
|
|
|
|
|
|
|
|
Note
payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note payable, (in
default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note payable (in
default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Note
payable (due on demand)
|
|
|
19,125
|
|
|
|
19,125
|
|
Total notes payable,
short-term
|
|
$
|
1,104,125
|
|
|
$
|
1,104,125
|
|
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company failed to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remained the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired as of March
31, 2020 and is no longer exercisable.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the December 2013 Note on or
before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops
to $0.75 per share. All other terms of the warrant remained the same. The warrant expired as of March 31, 2020 and December 31,
2019. The December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing
and future senior indebtedness, as such terms are defined in the Note. The December 2013 Note is in default and the Company is
pursuing a resolution to this default, including completing the extinguishment of the note balance, accrued interest and revenue
sharing agreement through an exchange agreement which is further described below; however, there can be no assurances such efforts
will be successful.
The
Warrant was 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 was revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The Warrant
expired as of March 31, 2020 and December 31, 2019. The discount was 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.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid
principal balance of $1.0 million as of March 31, 2020 and December 31, 2019. The term sheet, if consummated, will resolve the
default contingencies regarding the December 2013 Note through an exchange agreement. Under the proposed terms the Company will
make a cash payment of $100,000 within 60 days of the execution of an Exchange Agreement and will issue 740,500 shares of common
stock to the holder in exchange for and cancellation of the following obligations:
|
●
|
December
2013 Note with an original principal balance of $1,050,000 and current principal balance of $1,000,000;
|
|
●
|
Accrued
and unpaid interest of approximately $505,000 as of March 31, 2020 related to the December 2013 Note;
|
|
●
|
Common
Stock Purchase Warrant issued December 27, 2013 to acquire 100,000 shares of common stock with an exercise price of $5.00
per share;
|
|
●
|
Preemptive
Rights Agreement dated December 27, 2013; and
|
|
●
|
Revenue
Sharing Agreement issued May 30, 2014 representing one half of one percent (1/2%) of the gross revenue derived from the share
of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions.
|
The
term sheet is non-binding until such time as the cash payment is made and the common stock are issued to the holder and there
can be no assurance that the Company will successfully complete the Exchange Agreement. The Company did not make the required
$100,000 cash payment within the contractual 60-day time period and therefore the term sheet is not binding on the parties. The
parties are attempting to resolve the payment default and otherwise complete the Exchange Agreement as described above.
The
following notes were extinguished on June 19, 2019:
|
●
|
On
November 8, 2016 the Company borrowed a total of $200,000 from an individual under a convertible note payable with the conversion
rate of $5.00 per share. The note required no principal or interest payments until its maturity date of November 7, 2017 and
bore interest at 8% per annum. The note was not paid on its original maturity date.
|
|
|
|
|
●
|
On
April 20, 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is
convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April
19, 2018 and bore interest at 8% per annum. The note was not paid on its maturity date.
|
On
June 19, 2019, the Company and the holder of these two convertible notes entered into an exchange agreement whereby the two convertible
notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. Under the
exchange agreement the Company issued the individual a new warrant exercisable to purchase up to 570,000 shares of common stock
at an exercise price of $0.50 per share with a termination date of June 19, 2026 without any price protection or dilution provisions
in exchange for the extinguishment of the two convertible notes and related accrued interest. The Black-Scholes valuation of the
warrant issued to the holder on June 19, 2019 totaled $62,564.
Following
is an analysis of gain on extinguishment of the obligations pursuant to the Exchange Agreement on June 19, 2019:
|
|
Amount
|
|
Obligations extinguished on the date
of exchange, June 19, 2019:
|
|
|
|
|
Convertible
Notes balance at the date of exchange, June 19, 2019
|
|
$
|
240,000
|
|
Accrued interest
on the Convertible Notes at the date of exchange, June 19, 2019
|
|
|
45,020
|
|
|
|
|
|
|
Securities issued in exchange for the
obligations extinguished on the date of the exchange, June 19, 2019:
|
|
|
|
|
Value
of the stock purchase warrant issued on the date of exchange, June 19, 2019
|
|
|
(62,564
|
)
|
|
|
|
|
|
Gain on exchange
of debt and warrant obligations
|
|
$
|
222,456
|
|
Other
than the December 2013 Note, at March 31, 2020 the Company had short-term notes outstanding with entities or individuals as follows:
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. The
Company and its lender are pursuing a resolution of this default. There can be no assurance that the Company will be successful
in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase 5,000
shares of common stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable
and expire in five years. The value of the 5,000 warrants issued on January 7, 2016 totaled $379 and $131 on
May 7, 2016, both of which were amortized over the extension period (through October 7, 2016). The related warrant derivative
liability balance was $239 and $662 as of March 31, 2020 and December 31, 2019, respectively. See Note 5.
|
|
●
|
On
July 15, 2015, the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is pursuing a
resolution of this default including an additional extension from the holder. There can be no assurance that the Company will
be successful in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable
to purchase an aggregate of 3,500 shares of common stock on each extension date at an exercise price of $5.60 per share, which
warrants were immediately exercisable and expire in five years. The value of the 3,500 warrants on January 15,
2016 totaled $267 and $74 on May 15, 2016, both of which were amortized over the extension period (through October 15, 2016).
The related warrant derivative liability balance was $167 and $454 as of March 31, 2020 and December 31, 2019, respectively.
See Note 5.
|
|
●
|
On
May 21, 2018 the Company borrowed $13,125 under an unsecured promissory note with a private third-party lender which is convertible
into common stock at a rate of $0.50 per share. During June 2019 and August 2019 the Company borrowed an additional $50,500
and $5,500, respectively, from this same third-party lender under the same terms. The note is due on demand and bears
interest at 8% per annum. In October 2019 the Company repaid $50,000 in principal on this demand note. The outstanding principal
on the notes totaled $19,125 as of March 31, 2020 and December 31, 2019.
|
Note
4 – Stock Options
The
Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 Plan and 2006 Plan; however, the 2005
Plan and the 2006 Plan 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 Plan and
2006 Plan.
At
the Annual Meeting of Stockholders held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of March 31, 2020, 500,000 shares were available for future grants under the 2015 Plan. All other plans have now expired.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the three months ended March 31, 2020 and 2019.
The
following table summarizes stock option activity for the three months ended March 31, 2020:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
2.29 years
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
2.04
years
|
|
$
|
—
|
|
Outstanding and
exercisable at March 31, 2020
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
2.04
years
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0-
during the three months ended March 31, 2020 and 2019, respectively.
The
intrinsic value as of March 31, 2020 related to the vested and unvested stock options as of that date was $-0-. The unrecognized
compensation cost as of March 31, 2020 related to the unvested stock options as of that date was $-0-
Restricted
stock grants. During 2019 the Board of Directors granted restricted stock awards to our new Chief Operating Officer. Restricted
stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest
over a period of time generally corresponding to yearly anniversaries of the grant date. Unvested shares of restricted stock awards
may be forfeited upon the termination of service of employment with the Company, depending upon the circumstances of termination.
Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s
rights, including voting rights and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the three months ended March 31, 2020 is as follows:
|
|
Number
of
Restricted
shares
|
|
|
Weighted
average
grant date
fair value
|
|
Nonvested balance, December 31, 2019
|
|
|
750,000
|
|
|
$
|
0.13
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Nonvested balance, March 31, 2020
|
|
|
750,000
|
|
|
$
|
0.13
|
|
The
Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted granted aggregating $24,308
and $-0- during the three months ended March 31, 2020 and 2019, respectively.
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant.
As of March 31, 2020, there were $49,418 of total unrecognized compensation costs related to all remaining non-vested restricted
stock grants, which will be amortized over the next seven months in accordance with the respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Years
ended
|
|
Number
of
shares
|
|
|
|
|
|
|
2020
|
|
|
750,000
|
|
Note
5 – Derivative Instruments
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, 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 warrant agreement terms (Note 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 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
Company issued warrants to purchase an aggregate of 34,000 shares of common stock, in connection with various outstanding debt
instruments which require derivative accounting treatment as of March 31, 2020 and December 31, 2019. A comparison of the assumptions
used in calculating estimated fair value of such derivative liabilities as of March 31, 2020 and December 31, 2019 is as follows:
|
|
As
of
March
31, 2020
|
|
|
As
of
December
31, 2019
|
|
|
|
|
|
|
|
|
Volatility – range
|
|
|
344.8
|
%
|
|
|
316.2
|
%
|
Risk-free rate
|
|
|
0.37
|
%
|
|
|
1.69
|
%
|
Contractual term
|
|
|
0.25
– 1.08
|
years
|
|
|
0.5
– 1.3
|
years
|
Exercise price
|
|
$
|
5.60
|
|
|
$
|
5.60
|
|
Number of warrants in aggregate
|
|
|
34,000
|
|
|
|
34,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance at December 31, 2019
|
|
$
|
1,116
|
|
Unrealized
derivative gains included in other income/expense for the period
|
|
|
(710
|
)
|
|
|
|
|
|
Balance at March 31, 2020
|
|
$
|
406
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the three months March 31, 2020:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding and exercisable
at December 31, 2019
|
|
|
946,943
|
|
|
$
|
1.78
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised/forfeited
|
|
|
(171,563
|
)
|
|
|
(5.00
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at March 31, 2020
|
|
|
775,380
|
|
|
$
|
1.07
|
|
The
weighted average term of all outstanding common stock purchase warrants was 5.5 years as of March 31, 2020. The intrinsic value
of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero
as of March 31, 2020.
Note
7 – Income Taxes
The
effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily
due to the net operating loss history of the Company maintaining a full reserve on all net deferred tax assets during the three
months ended March 31, 2020 and 2019. In addition, the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017
which significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate
to 21% starting in 2018. Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after
December 31, 2017.
The
Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March
31, 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore,
it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue
to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its
ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is
more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,950,000 in accordance with its 2019
Federal Income tax return as filed, which expire from 2025 through 2038.
The
Company has recently completed the filing of its tax returns for the tax years 2012 through 2019. Therefore, all such tax returns
are open to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Management has
not completed its review of whether such ownership changes have occurred, and whether the Company currently is subject to an annual
limitation or the possibility of the complete elimination of the net operating loss carry- forwards might have occurred. In addition,
the Company may be further limited by additional ownership changes which may occur in the future.
Note
8 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for a number of years. The Company is
not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
The
Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2019,
including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the
Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227
for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017,
2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $194,485; and (5) payment of the 2016,
2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $350,000. The Company had been
seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions
with the Nicaraguan government to cure the defaults; however, the political climate, domestic issues and other factors
caused the Company to halt such efforts and to abandon the Concessions in 2020.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic
oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures,
earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of well prior to December 31, 2019; however, the Company may remain liable for certain asset retirement costs should
the new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003
as of March 31, 2020 and December 31, 2019 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.
Binding
Term Sheet to Acquire Domestic Oil and Gas Properties
On
July 31, 2019 the Company acquired the Option from Core to purchase the production and mineral rights/leasehold for the Properties.
The Company paid a nonrefundable deposit of $50,000 to bind the Option, which gave it the right to acquire the Properties
for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the
parties are negotiating for an extension of such option and a reduction of the purchase price, although there can be no
assurance that the parties will reach an agreement to do so. The Company has expensed all costs related to the Option to acquire
the Properties as of March 31, 2020 and December 31, 2019 as the Option expired on December 31, 2019.
The
purchase was to include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic
data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater
disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand zone with an approximate
depth of 3,600 feet.
The
Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior
to our exercise of the Option. If such a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the
closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide
the Company a first right of refusal to acquire such asset.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial
statements.
The
Company is currently involved in litigation as follows:
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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.
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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.
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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.
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Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of March 31 2020 and December
31, 2019, which management believes is sufficient to provide for the ultimate resolution of this dispute.
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Note
9 – Related Party Transactions
The
Company does not have any employees other than the CEO, COO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the three months ended March 31, 2020 and
2019. The amount due to the CFO’s firm for services previously provided was $762,407 at March 31, 2020 and December 31,
2019 and is included in accrued liabilities at both dates.
On
July 31, 2019 the Company acquired an Option from Core to purchase the production and mineral rights/leasehold for the Properties.
The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties
for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the
parties are negotiating an extension of such Option and a reduction of the purchase price, although there can be no assurance
that the parties will reach an agreement to do so.
As
of March 31, 2020 and December 31, 2019, the Company had accrued compensation to its officers and directors of $1,829,208. The
Board of Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Note
10 – Subsequent Events
COVID
– 19 PANDEMIC
The
condensed financial statements contained in this Report as well as the description of our business contained herein, unless otherwise
indicated, principally reflect the status of our business and the results of our operations as of March 31, 2020. Continuing after
such date, economies throughout the world continue to be severely disrupted by the effects of the quarantines, business closures
and the reluctance of individuals to leave their homes as a result of the outbreak of the coronavirus (Covid-19). In particular,
the oil and gas market has been severely impacted by the negative effects of the coronavirus because of the substantial and abrupt
decrease in the demand for oil and gas globally. In addition, the capital markets have been disrupted and our efforts to raise
necessary capital will likely be adversely impacted by the outbreak of the virus and we cannot forecast with any certainty when
the disruptions caused by it will cease to impact our business and the results of our operations. In reading this report on Form
10-Q, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional
uncertainties caused by the outbreak of Covid-19.
NICARAGUA
CONCESSIONS
The
Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The
Company had been seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of
the Nicaraguan Concessions with the Nicaraguan government to cure the defaults; however, the political climate, domestic
issues and other factors caused the Company to halt such efforts in 2020 and abandon the project relating to the Concessions.
DEBT
OBLIGATIONS
The
Company has not resolved the contingencies regarding its various notes payable related to their default status as described in
Notes 3 other than the December 2013 Note described above. The Company continues to pursue resolutions of these defaults including
to negotiate extensions, waivers or new note agreements; however, there can be no assurance that the Company will be successful
in that regard.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which had an unpaid
principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies
regarding the December 2013 Note through an exchange agreement. See Note 3, “Debt.”
OIL
AND GAS PROPERTY ACQUISITION
On
July 31, 2019 the Company acquired an Option from Core to purchase the production and mineral rights/leasehold for the Properties.
The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties
for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the
parties are negotiating for an extension of such Option and a reduction of the purchase price, although there can be no
assurance that the parties will reach an agreement to do so.
RELATED
PARTY DEBT OBLIGATION
On
May 13, 2020, the Company borrowed $41,000 from its Chairman, CEO & President in the form of an unsecured promissory note
bearing 6% interest and due on demand. The proceeds were used for general working capital purposes.
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