UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] |
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2015.
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from __________ to __________.
Commission
File Number: 0-17204
INFINITY
ENERGY RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
20-3126427 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
11900
College Blvd, Suite 310, Overland Park, KS 66210
(Address
of principal executive offices) (Zip Code)
(913)
948-9512
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of Exchange Act.
Large accelerated
filer [ ] |
|
Accelerated filer
[ ] |
Non-accelerated
filer [ ] (Do not check if a smaller reporting company) |
|
Smaller reporting
company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of capital, as of the latest practicable date:
Class |
|
Outstanding
at May 13, 2015 |
Common
Stock, $0.0001 par value |
|
26,866,938 |
TABLE
OF CONTENTS
PART I - FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFINITY
ENERGY RESOURCES, INC.
Balance
Sheets
March
31, 2015 and December 31, 2014
(Unaudited)
| |
March 31, 2015 | | |
December 31, 2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 3,087 | | |
$ | 13,664 | |
Prepaid expenses | |
| 76,461 | | |
| 23,046 | |
Total current assets | |
| 79,548 | | |
| 36,710 | |
| |
| | | |
| | |
Oil and gas properties, using full cost accounting, net of accumulated depreciation, depletion and amortization: | |
| | | |
| | |
Unproved | |
| 9,641,991 | | |
| 9,628,098 | |
| |
| | | |
| | |
Total assets | |
$ | 9,721,539 | | |
$ | 9,664,808 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 5,861,093 | | |
$ | 5,960,225 | |
Accrued liabilities (including $793,112 due to related party at March 31, 2015 and $788,520 at December 31, 2014) | |
| 2,489,119 | | |
| 2,484,238 | |
Income tax liability | |
| 150,000 | | |
| 150,000 | |
Accrued interest and fees – bank and other | |
| 362,417 | | |
| 341,748 | |
Asset retirement obligations | |
| 1,716,003 | | |
| 1,716,003 | |
Derivative liabilities | |
| 164,060 | | |
| 701,214 | |
Line-of-credit with related party | |
| 46,225 | | |
| 33,807 | |
Notes payable-short term, net of discounts of $2,959 and $284,245 at March 31, 2015 and December 31, 2014, respectively | |
| 1,147,041 | | |
| 1,340,755 | |
Total current liabilities | |
| 11,935,958 | | |
| 12,727,990 | |
| |
| | | |
| | |
Redeemable, convertible preferred stock, par value $.0001, 6% cumulative dividend, authorized 10,000,000 shares: | |
| | | |
| | |
Series A, -0- shares issued and outstanding at March 31, 2015 and December 31, 2014 | |
| - | | |
| - | |
Series B, -0- shares issued and outstanding at March 31, 2015 and December 31, 2014 | |
| - | | |
| - | |
Total redeemable, convertible preferred stock | |
| - | | |
| - | |
Commitments and contingencies (Note 8) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ deficit: | |
| | | |
| | |
Common stock, par value $.0001, authorized 75,000,000 shares, issued and outstanding 26,666,938 and 25,559,678 shares at March 31, 2015 and December 31, 2014, respectively | |
| 2,667 | | |
| 2,556 | |
Additional paid-in capital | |
| 108,389,665 | | |
| 107,239,985 | |
Accumulated deficit | |
| (110,606,751 | ) | |
| (110,305,723 | ) |
Total stockholders’ deficit | |
| (2,214,419 | ) | |
| (3,063,182 | ) |
Total liabilities and stockholders’ deficit | |
$ | 9,721,539 | | |
$ | 9,664,808 | |
See notes
to unaudited financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statement
of Operations
For
the Three Months Ended March 31, 2015 and 2014
(Unaudited)
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
Operating expenses: | |
| | | |
| | |
Stock-based compensation | |
$ | 58,360 | | |
$ | 559,962 | |
General and administrative expenses | |
| 105,869 | | |
| 141,375 | |
Total operating expenses | |
| 164,229 | | |
| 701,337 | |
| |
| | | |
| | |
Operating loss | |
| (164,229 | ) | |
| (701,337 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Interest expense | |
| (573,083 | ) | |
| (1,246,134 | ) |
Change in derivative fair value | |
| 265,267 | | |
| (15,126 | ) |
Other income | |
| 171,017 | | |
| 72,835 | |
Total other income (expense) | |
| (136,799 | ) | |
| (1,188,425 | ) |
| |
| | | |
| | |
Loss before income taxes | |
| (301,028 | ) | |
| (1,889,762 | ) |
Income tax expense (benefit) | |
| - | | |
| - | |
| |
| | | |
| | |
Net loss | |
| (301,028 | ) | |
| (1,889,762 | ) |
| |
| | | |
| | |
Accrual of 6% dividend payable on Series A and B
redeemable, convertible preferred stock | |
| - | | |
| (25,527 | ) |
| |
| | | |
| | |
Loss applicable to common shareholders | |
$ | (301,028 | ) | |
$ | (1,915,289 | ) |
| |
| | | |
| | |
Basic and diluted net loss per share: | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | (0.08 | ) |
Diluted | |
$ | (0.01 | ) | |
$ | (0.08 | ) |
| |
| | | |
| | |
Weighted average shares outstanding – basic and diluted | |
| 25,910,521 | | |
| 25,185,678 | |
See notes
to unaudited financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statement
of Changes in Stockholders’ Equity
For
the Three Months Ended March 31, 2015
(Unaudited)
| |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
Stockholders’ | |
| |
| Shares | | |
| Amount | | |
| Capital | | |
| Deficit | | |
| Deficit | |
Balance, December 31, 2014 | |
| 25,559,678 | | |
$ | 2,556 | | |
$ | 107,239,985 | | |
$ | (110,305,723 | ) | |
$ | (3,063,182 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation | |
| - | | |
| - | | |
| 58,360 | | |
| - | | |
| 58,360 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock purchase warrants issued for debt issuance costs | |
| - | | |
| - | | |
| 207,952 | | |
| - | | |
| 207,952 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Transition of derivative warrant liability to equity | |
| | | |
| | | |
| 329,849 | | |
| | | |
| 329,849 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of line-of-credit to common stock | |
| 100,000 | | |
| 10 | | |
| 49,990 | | |
| - | | |
| 50,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of note payables and accrued interest to common stock | |
| 1,007,260 | | |
| 101 | | |
| 503,529 | | |
| - | | |
| 503,630 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| | | |
| | | |
| - | | |
| (301,028 | ) | |
| (301,028 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2015 | |
| 26,666,938 | | |
$ | 2,667 | | |
$ | 108,389,665 | | |
$ | (110,606,751 | ) | |
$ | (2,214,419 | ) |
See notes
to unaudited financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statement
of Cash Flows
For
the Three Months Ended March 31, 2015 and 2014
(Unaudited)
| |
For the Three Months Ended | |
| |
March 31, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (301,028 | ) | |
$ | (1,889,762 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Stock-based compensation | |
| 58,360 | | |
| 559,962 | |
Change in fair value of derivative liability | |
| (265,267 | ) | |
| 15,126 | |
Amortization of debt discount | |
| 523,784 | | |
| 1,202,516 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Increase in prepaid expenses | |
| (30,000 | ) | |
| - | |
Increase (decrease) in accounts payable and accrued liabilities | |
| (44,952 | ) | |
| 73,311 | |
Net cash used in operating activities | |
| (59,103 | ) | |
| (38,847 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Investment in oil and gas properties | |
| (13,893 | ) | |
| (14,999 | ) |
Net cash used in investing activities | |
| (13,893 | ) | |
| (14,999 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from debt and subordinated note payable | |
| - | | |
| 135,000 | |
Net borrowings (repayments) on line-of-credit | |
| 62,418 | | |
| (76,172 | ) |
Net cash provided by financing activities | |
| 62,418 | | |
| 58,828 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (10,578 | ) | |
| 4,982 | |
| |
| | | |
| | |
Cash and cash equivalents: | |
| | | |
| | |
Beginning | |
| 13,664 | | |
| 74 | |
End | |
$ | 3,086 | | |
$ | 5,056 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | - | |
Cash paid for taxes | |
| - | | |
| - | |
| |
| | | |
| | |
Supplemental noncash disclosures: | |
| | | |
| | |
Conversion of note payables and accrued interest to common stock | |
$ | 503,630 | | |
$ | - | |
Conversion of line-of-credit to common stock | |
| 50,000 | | |
| - | |
Discount from warrant derivative issued in connection with notes payable | |
| 57,961 | | |
| 180,825 | |
Issuance of common stock purchase warrants for debt issuance costs | |
| 207,952 | | |
| 365,507 | |
Series B Preferred shares and related accrued dividends satisfied by issuance of common shares | |
| - | | |
| 1,681,749 | |
Transition of derivative liability to equity | |
| 329,849 | | |
| - | |
Preferred dividends accrued | |
| - | | |
| 25,527 | |
See
notes to unaudited financial statements.
INFINITY
ENERGY RESOURCES, INC.
Notes
to Unaudited Financial Statements
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 financial statements pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include
all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets,
statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for 2015 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 financial statements should be read in conjunction
with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,”
of our Annual Report on Form 10-K, filed with the SEC.
Nature
of Operations
The
Company is engaged in the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua
in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”) which contains a total of approximately
1.4 million acres. The Company sold its wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned
subsidiary, Infinity Oil and Gas of Wyoming, Inc., was dissolved in 2009.
The
Company has been actively pursuing exploration and development of the Nicaraguan Concessions, which represents its principal asset
and only exploration and development project. On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions.
Infinity has been conducting activities to develop geological information from the processing and evaluation of newly acquired
and existing 2-D and 3-D seismic data that was acquired for the Nicaraguan Concessions. The Company has progressed to a stage
on the Nicaraguan Concessions that it has identified multiple sites for exploratory drilling and is planning 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 has until May 2016 to drill its initial exploratory well or risk being in default and potentially losing
its rights under the Nicaraguan Concessions. In that regard, Infinity is seeking capital from various sources to continue the
geological and exploration activities of the Nicaraguan Concessions. It is 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.
Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States.
Going
Concern
As
reflected in the accompanying statements of operations, the Company has had a history of losses. In addition, the Company has
a significant working capital deficit and is currently experiencing substantial liquidity issues.
The
Company has relied on raising outside debt and equity capital in recent years in order to fund its ongoing maintenance/expenditure
obligations under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead since it has generated no
operating revenues in recent history.
Currently,
the Company is in technical default of the Nicaraguan Concession as it has not provided the required letters of credit to the
Nicaraguan Government, which total $1,356,227 for the Perlas block and $278,450 for the Tyra block. In addition, the Company was
delinquent in the payment of approximately $155,500 in annual maintenance payments required by the Nicaraguan Concession, but
it made such payments in early May 2015. The Company is in negotiations with the Nicaraguan Government and its lenders to renew
the letters of credit, although there is no assurance that it will be successful in that regard. The Company must raise substantial
amounts of debt and equity capital in the immediate future in order to fund: (1) the required letters of credit to the Nicaraguan
Government; (2) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan Concessions prior to May 2016;
(3) the payment of normal day-to-day operations and corporate overhead and (4) the payment of outstanding debt and other financial
obligations as they become due. These are substantial operational and financial issues that must be successfully mitigated during
2015 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 we will be able to obtain such capital or obtain it on favorable terms or within
the timeframe necessary to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements
relative to drilling the exploratory wells. Refer to Note 10 - “Subsequent Events” for recent developments regarding
these matters.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue
as a going concern.
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.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities and short term notes represent
the estimated fair value due to the short-term nature of the accounts.
The
carrying value of the Company’s debt under its line-of-credit with related party represents its estimated fair value due
to its short-term nature, its rate of interest, associated fees and expenses and initially recorded discount.
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
● |
Level
1 — Quoted prices in active markets for identical assets and liabilities. |
|
|
|
|
● |
Level
2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). |
|
|
|
|
● |
Level
3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value. |
The
estimated fair value of the Company’s derivative liabilities, all of which are related to detachable warrants issued and
the conversion feature granted in connection with 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 and non-performance risk factors, among other items . The fair values
for the warrant derivatives as of March 31, 2015 and December 31, 2014 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, 2015 and December 31, 2014:
March
31, 2015 | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | - | | |
$ | - | | |
$ | 164,060 | | |
$ | 164,060 | |
| |
| | | |
| | | |
| | | |
| | |
December
31, 2014 | |
| Level
1 | | |
| Level
2 | | |
| Level
3 | | |
| Total | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | - | | |
$ | - | | |
$ | 701,214 | | |
$ | 701,214 | |
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the three
months ended March 31, 2015 and 2014.
Reclassifications
Certain
amounts in the prior period were reclassified to conform with the current period’s financial statement presentation. These
reclassifications had no effect on previously reported net loss or accumulated deficit.
Note
2 – Debt
Debt
consists of the following at March 31, 2015 and December 31, 2014:
| |
March
31, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Line-of-credit with related party | |
$ | 46,225 | | |
$ | 33,807 | |
Notes payable, short term: | |
| | | |
| | |
Note payable, net of unamortized discount of $2,959 and $41,011, of March 31, 2015 and December 31, 2014 | |
$ | 1,047,041 | | |
$ | 1,008,989 | |
Note payable, net of unamortized discount of $-0- and $822, as of March 31, 2015 and December 31, 2014, respectively | |
| - | | |
| 24,178 | |
Note payable, net of unamortized discount of $-0- and $27,712, as of March, 2015 and December 31, 2014, respectively | |
| - | | |
| 72,288 | |
Notes payable, net of unamortized discount of $-0- and $175,248, as of March, 2015 and December 31, 2014, respectively | |
| 100,000 | | |
| 124,752 | |
Notes payable, net of unamortized discount of $-0- and $39,452, as of March, 2015 and December 31, 2014, respectively | |
| - | | |
| 110,548 | |
Total notes payable, short-term | |
$ | 1,147,041 | | |
$ | 1,340,755 | |
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 $100,000 at March 31, 2015 with an initial maturity of November 23, 2013. 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 in January 2014, April 2014 and February 2015. Its current maturity date is May 28, 2015. In consideration
for the origination of the line of credit facility and the various renewals, the Company granted the lender common stock purchase
warrants exercisable to purchase an aggregate of 450,000 shares of common stock at an exercise price of $1.50 per share (as amended
on January 23, 2014), which warrants were immediately exercisable and expired on various dates from September 23, 2018 to October
23, 2019 (as amended). The parties agreed as a condition to the renewal of the facility in January 2014 that all warrants would
be extended to a five-year term and the exercise price reduced to $1.50 per share. The Company estimated the fair value of the
warrants at $60,290 as of the original grant date in 2013, which amount was recorded as debt issuance costs and classified in
prepaid expenses in the accompanying balance sheets. The Company estimated the fair value of the new warrants exercisable to purchase
400,000 shares issued to extend the facility during 2014 and the increased value of the amended warrants to be $603,966, which
has been recorded as additional debt issuance costs and classified in prepaid expenses in the accompanying balance sheets.
Such
debt issuance costs are amortized ratably over the term of the credit facility and each respective extension. During the year
ended December 31, 2014, a total of $641,210 of debt issuance costs were amortized to interest expense and the remaining unamortized
balance was $23,046 as of December 31, 2014.
On
February 28, 2015, the line-of-credit facility matured and the Company was unable to repay the principal and interest. The Company
negotiated an extension to May 28, 2015 and granted the lender common stock purchase warrants exercisable to purchase an aggregate
of 100,000 shares of common stock at an exercise price of $0.50 per share, which warrants were immediately exercisable and expire
on February 28, 2020. The parties agreed as a condition to the renewal of the facility in February 2015 that all previously issued
warrants to the lender totaling 890,625 shares would be extended to a five-year term and the exercise price reduced to $0.50 per
share. The total value of the 100,000 newly issued warrants totaled $28,507 which is being amortized over the extension period.
The increased value of the amended warrants totaled $149,517 which was immediately expensed.
On
March 26, 2015, the Company negotiated an additional amendment to the line-of-credit facility, which increased the maximum amount
from $50,000 to $100,000. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase
an aggregate of 100,000 shares of common stock at an exercise price of $0.50 per share, which warrants were immediately exercisable
and expire on March 26, 2020. The parties agreed as a condition to the amendment of the facility on March 26, 2015 that the line-of-credit
will become convertible to common stock at an exchange rate of $0.50 per share. The total value of the 100,000 newly issued warrants
totaled $30,288 which is being amortized over the extension period.
Such
debt issuance costs are amortized ratably over the extended term of the credit facility. During the three months ended March 31,
2015 and 2014, a total of $182,133 and $365,452 of debt issuance costs were amortized (including amounts immediately expensed)
to interest expense and the remaining unamortized balance was $48,865 as of March 31, 2015.
On
March 31, 2015, the Lender exercised its right to convert a portion of the outstanding line-of-credit principal balances totaling
$50,000 into a total of 100,000 shares of common stock at an exchange rate of $0.50 per share.
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 “Note”) with an original maturity date of March 12, 2014. The Company and
the lender agreed to extend the maturity date of the Note to dates in May and December 2014 and finally to April 7, 2015 (the
“New Maturity Date”). All other terms of the Note remain the same.
In
connection with one of the extensions of the Note, 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 Note in full by August 7, 2014. Therefore, the revenue
sharing agreement is fixed at one percent (1%). The Company paid no other consideration in connection with the extensions of the
Note, but paid the legal expenses of the lender related to the extensions of $25,000. The 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
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 has been reflected as a reduction of oil and
gas properties and as a discount on the renewed note payable and will be amortized ratably over the extended term of the note.
In
connection with its loan, the Company granted the lender a Warrant exercisable to purchase 1,000,000 shares of its common stock
at an exercise price of $1.50 per share. In connection with the extension to the New Maturity Date, 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 and the
exercise price was reduced to $1.00 per share. 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 13,333,333 and the exercise price drops to $0.075 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.
The
total discount recorded as of the December 27, 2013 origination date of the note was $890,103. The total additional discount recorded
in 2014 as a result of the amendments to the Note terms and extensions of the maturity date totaled $1,048,507. Discount amortization
expense aggregated $38,052 and $800,554 for the three months ended March 31, 2015 and 2014, respectively and the remaining unamortized
discount was $2,959 and $41,011 as of March 31, 2015 and December 31, 2014, respectively.
Other
than the Note described above, during the three months ended March 31, 2015 the Company had short-term notes outstanding with
entities or individuals as follows:
|
● |
On
January 7, 2014 it borrowed a total of $25,000 from an individual under a convertible note with a conversion price of $1.50
per share. The term of the note was for one year and it bears interest at 8% per annum. In connection with the loan, the Company
issued the lender a warrant exercisable to purchase 25,000 shares of common stock at $1.50 per share for a term of five years
from the date of the note. The terms of the note and warrant provide that if the note and interest are not paid in full by
its maturity date, the conversion price of the note and exercise price of the warrant automatically reduce to $0.50 per share.
The ratchet provision in the note conversion and warrant exercise price require that these be accounted for as derivative
liabilities. The Company recorded the estimated fair value of the conversion feature and warrants totaling $37,323 as discounts
on note payable and as a derivative liability in the same amount, as of the date of the note. On January 7, 2015, the Company
and the holder agreed to extend the maturity date of the note to February 28, 2015 and in consideration the Company granted
it an additional 25,000 warrants with an exercise price of $0.50 per share with a January 7, 2020 expiration date. The parties
agreed as a condition to the renewal of the facility in January 2015 that all previously issued warrants to the lender totaling
150,000 shares would be extended to a five-year term and the exercise price reduced to $0.50 per share. The value of the newly
issued warrants and the increased value of the amended warrants totaled $57,961 which was amortized over the extension terms.
Interest expense for the three months ended March 31, 2015 and 2014 includes discount amortization in the amount of $58,783
and $18,008, respectively, and as of March 31, 2015 and December 31, 2014, the remaining unamortized discount was $-0- and
$822, respectively. |
|
|
|
|
|
On
February 28, 2015, the holder exercised its right to convert the full principal balance of $25,000 and accrued interest totaling
$2,285 into 54,570 shares of common stock at an exchange rate of $0.50 per share. The Company paid the holder a fee of $2,729
in connection with the conversion of the note into common stock. |
|
|
|
|
● |
On
March 31, 2014 it borrowed a total of $100,000 from an entity under a convertible note with a conversion price of $1.50 per
share. The term of the note was for a period of 180 days and it bears interest at 8% per annum. In connection with the loan,
the Company issued the lender a warrant exercisable to purchase of 100,000 shares of common stock at $1.50 per share for a
term of five years from the date of the note. On September 30, 2014, the parties agreed to extend the maturity date of the
note to February 28, 2015, for which the Company granted an additional warrant exercisable to purchase 100,000 shares of common
stock at an exercise price of $1.00 per share for a five-year term and reduced the exercise price of the previously issued
warrants to $1.00 per share. The terms of the note and warrant provide that if the note and interest are not be paid in full
by its maturity date, the conversion price of the note and the exercise price of the warrant automatically reduce to $0.50
per share. The ratchet provision in the note conversion and warrant exercise price required that the conversion feature and
warrants be accounted for as derivative liabilities. The Company recorded the estimated fair value of the conversion feature
and warrants totaling $143,502 as a discount on note payable and as a derivative liability in the same amount, on the origination
date of the note. In addition, the fair value of the new warrants issued and changes to previously issued warrants at the
date of the extension was estimated at $70,924, which was also recorded as a discount on the note and a derivative liability.
The Company amortizes the discount to interest ratably over the term of the note. Interest expense for the three months ended
March 31, 2015 and 2014, respectively, includes discount amortization in the amount of $27,712 and $43,502, respectively,
and as of March 31, 2015 and December 31, 2014, the remaining unamortized discount was $-0- and $27,712. |
|
|
On
February 28, 2015, the holder exercised its right to convert the full principal balance of $100,000 and accrued interest totaling
$9,260 into 218,520 shares of common stock at an exchange rate of $0.50 per share. The parties agreed as a condition to the
conversion in February 2015 that all previously issued warrants to the lender totaling 200,000 shares would be extended to
a five-year term and the exercise price reduced to $0.50 per share. The value of the warrant derivative was increased to the
estimated value of $55,942 representing the amended terms of the previously issued warrants. The Company paid the holder a
fee of $10,926 in connection with the conversion of the note into common stock. |
|
|
|
|
● |
On
April 4, 2014 and June 7, 2014 it borrowed a total of $250,000 from an entity under two convertible notes payable with a conversion
price of $1.50 per share. The original terms of the April 4, 2014 and June 7, 2014 notes were for a period of 180 days and
bore interest at 8% per annum. On November 19, 2014 it borrowed an additional $50,000 and renewed the previously notes to
mature on February 28, 2015 and bearing interest at 8% per annum. In connection with the loans the Company issued the entity
a warrant excisable to purchase 250,000 shares of common stock at $1.50 per share for a term of five years from the date of
the notes. On November 19, 2014, the Company granted an additional 350,000 warrants with an exercise price of $1.00 per share
and a five-year term and reduced the existing 250,000 warrants exercise price to $1.00 per share. The terms of the notes and
warrants provide that if the notes and interest are not be paid in full by their respective maturity dates, the conversion
price of the notes and the exercise price of the warrants automatically reduce to $0.50 per share. The ratchet provision contained
in the note conversion and warrant exercise price required that these be accounted for as derivative liabilities. The Company
recorded the estimated fair value of the conversion feature and warrants totaling $278,585 as a discount on note payable and
as a derivative liability in the same amount, as of the date of the respective notes. In addition, the fair value of the new
warrants issued and changes to previously issued warrants at the date of the extension was estimated at $436,366 which was
also recorded as a discount on the note and a derivative liability. The Company amortizes the discount to interest ratably
over the term of the note. Interest expense for the three months ended March 31, 2015 and 2014 includes discount amortization
in the amount of $175,248 and $--0- and as of March 31, 2015, and December 31, 2014, the remaining unamortized discount was
$-0- and $175,248, respectively. |
|
|
|
|
|
On
February 28, 2015, the holder exercised its right to convert the partial principal balance of $200,000 and accrued interest
totaling $17,085 into 317,490 shares of common stock at an exchange rate of $0.50 per share. The parties agreed that the remaining
$100,000 principal balance will be paid in cash upon the Company closing on a new outside financing transaction. The parties
agreed as a condition to the conversion and the repayment of the $100,000 remaining principal balance on the note in February
2015 that all previously issued warrants to the lender totaling 600,000 shares would be extended to a five-year term and the
exercise price reduced to $0.50 per share. The value of the warrant derivative was increased to the estimated value of $152,751
representing the amended terms of the previously issued warrants. The Company paid the holder a fee of $21,709 in connection
with the conversion of the note into common stock. |
|
|
|
|
● |
On
April 14, 2014 it borrowed a total of $100,000 from an entity under a convertible note payable with the conversion rate of
$1.50 per share. The term of the note was for a period of 180 days and bore interest at 8% per annum. In connection with the
loan, the Company issued the entity a warrant for the purchase of 100,000 shares of common stock at $1.50 per share for a
period of five years from the date of the note. On October 2, 2014 it borrowed an additional $50,000 from this entity under
a convertible notes payable with the conversion rate of $1.00 per share and extended the term of the original note payable
to a maturity date of February 28, 2015. In connection with the issuance of the $50,000 note and the extension of the $100,000
note the Company issued 150,000 new warrants to acquire common stock at $1.00 per share for a term of five years and the reduction
in exercise price of the original 100,000 warrants from $1.50 per share to $1.00 per share. The terms of the note and warrant
provide that should the note and interest not be paid in full by its maturity date, the conversion price of the note and exercise
price of the warrants automatically reduce to $0.50 per share. The ratchet provision in the note conversion and warrant exercise
price required that these be accounted for as derivative liabilities. The Company recorded the estimated fair value of the
conversion feature and warrants totaling $200,120 as a discount on note payable and as a derivative liability in the same
amount, as of the date of the respective notes and the subsequent extension. Interest expense for the three months ended March
31, 2015 and 2014 includes discount amortization in the amount of $39,452 and $-0- and as of March 31, 2015 and December 31,
2014, the remaining unamortized discount was $-0- and $39,452, respectively. |
|
|
|
|
|
On
February 28, 2015, the holder exercised its right to convert the full principal balance of $150,000 into 300,000 shares of
common stock at an exchange rate of $0.50 per share. The parties agreed as a condition to the conversion in February 2015
that all previously issued warrants to the lender totaling 350,000 shares would be extended to a five-year term and the exercise
price reduced to $0.50 per share. The value of the warrant derivative was increased to the estimated value of $71,268 representing
the amended terms of the previously issued warrants. The Company paid the holder a fee of $15,000 in connection with the conversion
of the note into common stock. |
Note
3 – Common Stock
On
February 28, 2015, the Company issued a total of 1,007,260 shares of common stock to holders in exchange for notes payable with
a principal balances aggregating $475,000 and accrued interest totaling $28,630. The note holders had exercised their conversion
rights at an exchange rate of $0.50 per share.
On
March 31, 2015, the Company issued a total of 100,000 shares of common stock to the holder of the line-of-credit in exchange for
a partial principal balance of $50,000. The lender had exercised their conversion right at an exchange rate of $0.50 per share.
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 470,000 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
475,000 shares of the Company’s common stock are reserved for issuance under the 2005 Plan. 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 other equity incentive plans with terms similar to the 2005 and 2006 Plans. As of
December 31, 2014, 136,500 shares were available for future grants under all plans.
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, 2015.
The following
table summarizes stock option activity for the three months ended March 31, 2015:
| |
Number
of
Options | | |
Weighted
Average
Exercise
Price Per
Share | | |
Weighted
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
Outstanding at December 31, 2014 | |
| 4,204,500 | | |
$ | 3.89 | | |
| 6.3 years | | |
$ | 90,335 | |
Granted | |
| -- | | |
| -- | | |
| | | |
| | |
Exercised | |
| -- | | |
| -- | | |
| | | |
| | |
Forfeited | |
| (30,000 | ) | |
| 8.50 | | |
| | | |
| | |
Outstanding at March 31, 2015 | |
| 4,174,500 | | |
$ | 3.86 | | |
| 6.1 years | | |
$ | 34,265 | |
Outstanding and exercisable at March 31, 2015 | |
| 3,854,500 | | |
$ | 3.93 | | |
| 5.9 years | | |
$ | 34,265 | |
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $58,360 and $559,962
during the three months ended March 31, 2015 and 2014, respectively.
The
unrecognized compensation cost as of March 31, 2015 related to the unvested stock options as of that date was $141,385, which
will be amortized over the next ten months.
Note
5 – Derivative Instruments
Derivatives
– Warrants Issued Relative to Note Payables
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the conversion features and detachable
warrants issued in connection with 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 note payable and warrant agreement terms (Note 2) and non-performance risk factors, among other items (ASC
820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3). When the note payable 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. Notes payable with a total principal balance of $475,000 were extinguished during the three months
ended March 31, 2015. A comparison of the assumptions used in calculating estimated fair value of derivative liabilities at the
issue date and as of the date of the transition from liability to equity during the three months ended March 31, 2015 is as follows:
| |
Upon Issuance | | |
As of date of
transition to
equity | | |
As of March 31, 2015 | |
| |
| | |
| | |
| |
Volatility – range | |
| 104 | % | |
| 104 | % | |
| 102 | % |
Contractual term | |
| 5.0 years | | |
| 5.0 years | | |
| 3.1 years | |
Exercise price | |
$ | 0.50 | | |
$ | 0.50 | | |
$ | 1.00 | |
Number of warrants in aggregate | |
| 25,000 | | |
| 1,325,000 | | |
| 1,000,000 | |
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, 2014 | |
$ | 701,214 | |
Fair value of warrant derivative at issuance date | |
| 57,961 | |
Unrealized derivative gains included in other expense | |
| (265,267 | ) |
Transition of derivative liability to equity | |
| (329,849 | ) |
| |
| | |
Balance at March 31, 2015 | |
$ | 164,069 | |
Note
6 – Warrants
The following
table summarizes warrant activity for the three months ended March 31, 2015:
| |
Number
of
Warrants | | |
Weighted
Average
Exercise Price
Per Share | |
Outstanding and exercisable at December 31, 2014 | |
| 3,662,710 | | |
$ | 1.59 | |
Issued in conjunction with notes payable (Note 2) | |
| 25,000 | | |
| 0.50 | |
Issued in conjunction with line-of-credit (Note 2) | |
| 200,000 | | |
| 0.50 | |
Exercised | |
| - | | |
| - | |
| |
| | | |
| | |
Outstanding and exercisable at March 31, 2015 | |
| 3,887,710 | | |
$ | 0.86 | |
The
weighted average term of all outstanding common stock purchase warrants was 3.98 years as of March 31, 2015. 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, 2015.
Note
7 — Supplemental Oil and Gas Information
Estimated
Proved Oil and Gas Reserves (Unaudited)
As of March
31, 2015 and December 31, 2014, the Company had no proved reserves. As such, there are no estimates of proved reserves to disclose,
nor standardized measure of discounted future net cash flows relating to proved reserves.
Costs
Incurred in Oil and Gas Activities
Costs incurred
during the three months ended March 31, 2015 in connection with the Company’s oil and gas acquisition, exploration and development
activities are shown below.
| |
Three
months ended
March 31, 2015 | |
Property acquisition costs: | |
| | |
Proved | |
$ | - | |
Unproved | |
| | |
Total property acquisition costs | |
| - | |
Development costs | |
| - | |
Exploration costs | |
| 13,893 | |
Total costs | |
$ | 13,893 | |
Exploration
costs during the three months ended March 31, 2015 included $13,893 in area concession and training fees accrued to be paid to
the Nicaraguan Government for 2015.
Aggregate
capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion
and amortization are as follows:
| |
March
31, 2015 | | |
December
31, 2014 | |
| |
| |
Proved oil and gas properties | |
$ | - | | |
$ | - | |
Unproved oil and gas properties | |
| 10,606,729 | | |
| 10,592,836 | |
Total | |
| 10,606,729 | | |
| 10,592,836 | |
Less amounts allocated to revenue sharing interest
granted to Note holder for extension of maturity date (See Note 2) | |
| (964,738 | ) | |
| (964,738 | ) |
Less accumulated depreciation, depletion and amortization | |
| - | | |
| - | |
| |
| | | |
| | |
Net capitalized costs | |
$ | 9,641,991 | | |
$ | 9,628,098 | |
Costs
Not Being Amortized
Oil and
gas property costs not being amortized at March 31, 2015, by year that the costs were incurred, are as follows:
Year Ended December 31, | | |
| |
2015 (through March 31, 2015) | | |
$ | 13,893 | |
2014 | | |
| 115,622 | |
2013 | | |
| 6,051,411 | |
2012 | | |
| 581,723 | |
2011 | | |
| 731,347 | |
Prior | | |
| 3,112,733 | |
Total costs not being amortized | | |
$ | 10,606,729 | |
The above
unevaluated costs relate to the Company’s approximate 1,400,000 acre Nicaraguan Concessions.
The Company
anticipates that these unproved costs in the table above will be reclassified to proved costs within the next five years.
Note
8 — Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
The
Company received notification of final approval of the environmental impact assessment (“EIA”) by the Nicaraguan government
on April 13, 2013, which began Sub-Period 2 as defined in the Nicaraguan concessions.
Therefore, the Company has progressed to Sub-Period 2 of the exploration phase of the 30-year Concession for both Perlas and Tyra
as of March 31, 2015. 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.
The
Company is currently negotiating 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 that regard. The Company considers it is fully in compliance with the terms of the Nicaraguan
Concessions agreements, except for the renewal and increase of the expired letters of credit. Refer to Note 10 - “Subsequent
Events” for recent developments regarding these matters.
Minimum
Work Program – Perlas
Block Perlas – Exploration Minimum Work Commitment and Relinquishments | |
Exploration Period (6 Years) | | |
Duration (Years) | | |
Work Commitment | |
Relinquishment | | |
Irrevocable Guarantee | |
Sub-Period1 | | |
| 2 | | |
- Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D) | |
| 26km2 | | |
$ | 443,100 | |
Sub-Period
2 Optional | | |
| 1 | | |
-
Acquisition, processing & interpretation of 200km2 of 3D seismic | |
| 53km2 | | |
$ | 1,356,227 | |
Sub-Period
3 Optional | | |
| 1 | | |
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower | |
| 80km2 | | |
$ | 10,220,168 | |
Sub-Period
4 Optional | | |
| 2 | | |
- Drilling of one exploration well to the
Cretaceous or 3,500m, whichever is
shallower - Geochemical analysis | |
| All
acreage
except
areas with
discoveries | | |
$ | 10,397,335 | |
Minimum
Work Program - Tyra
Block Tyra – Exploration Minimum Work Commitment and Relinquishments | |
Exploration Period (6 Years) | | |
Duration (Years) | | |
Work Commitment | |
Relinquishment | | |
Irrevocable Guarantee | |
Sub-Period1 | | |
| 1.5 | | |
- Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new 2D seismic (or equivalent in 3D) | |
| 26km2 | | |
$ | 408,450 | |
Sub-Period
2 Optional | | |
| 0.5 | | |
- Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period | |
| 40km2 | | |
$ | 278,450 | |
Sub-Period
3 Optional | | |
| 2 | | |
-
Acquisition, processing & interpretation of 250km2 of new 3D seismic | |
| 160km2 | | |
$ | 1,818,667 | |
Sub-Period
4 Optional | | |
| 2 | | |
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis | |
| All acreage
except areas with discoveries | | |
$ | 10,418,667 | |
Contractual
and Fiscal Terms
Training Program | |
US $50,000 per year, per block |
Area Fee | |
Years 1-3 | |
$ | 0.05/hectare | |
| |
Years 4-7 | |
$ | 0.10/hectare | |
| |
Years 8 & forward | |
$ | 0.15/hectare | |
Royalties | |
Recovery Factor | |
| Percentage | |
| |
0 – 1.5 | |
| 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 | |
Sub-Period
2 of the exploration phase began April 13, 2013, when the Nicaraguan Government approved the environmental impact study. The Company
believes that it has performed all work necessary as of March 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. The Nicaraguan
Government has yet to accept the progression to Sub-Period 3 of the Perlas Block, however assuming that it does accept the progression,
Infinity will be required to drill at least one exploratory well on the Perlas Block within one-year (estimated to be prior to
May 2016). 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. In addition to the minimum
cash requirements related to the Nicaraguan Concessions, the Company estimates that it will require approximately $330,000 of
working capital to maintain corporate operations for the next 12 months, but not including approximately $1,150,000 principal
amount of short-term promissory notes due in April 2015, plus accrued interest, and other obligations owed to third parties. Refer
to Note 10 - “Subsequent Events” for recent developments regarding these matters.
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Off-Shore,
an accredited investor, to issue a subordinated secured 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 secured 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 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 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.
Letter
of Intent to enter Exploration Services Agreement
On
October 13, 2014 the Company announced that it had entered into a Letter of Intent (“LOI”) with Granada Exploration,
LLC, which has agreed to join with the Company to explore for potential hydrocarbons beneath Infinity’s 1.4 million-acre
oil and gas concessions in the Caribbean Sea offshore Nicaragua. Under the terms of the LOI, Granada Exploration will provide
its services in exchange for a working interest in the Nicaraguan Concessions. The scope of such services will be more specifically
described in a mutually acceptable Exploration Services Agreement (“ESA”), which is currently being negotiated. The
ESA is anticipated to provide that Granada will earn an assignment from Infinity of an undivided 30% working interest in the Concessions,
based on an 80% net revenue interest. Granada and Infinity are also anticipated to enter into a Joint Operating Agreement. Granada
may, at its discretion, participate in an initial exploratory well for up to an additional undivided 20% working interest, on
a prospect-by-prospect basis, with such additional interest to be based on an 80% net revenue interest.
The
LOI is subject to Granada’s normal and customary due diligence, including the evaluation of the Company’s Form 10-K
and 10-Q filings, documents showing that the Company is in good standing regarding the Nicaraguan Concessions and with the Nicaraguan
government; negotiation and approval of mutually acceptable formal agreements; and final approval by a majority of the partners
that comprise Granada Exploration, LLC. The parties continue to negotiate the terms of the ESA, but have not entered into definitive
agreements and Granada has not completed its normal and customary due diligence.
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
have been disposed of as of March 31, 2015; 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, 2015 and December 31, 2014 is sufficient to cover any potential noncompliance liabilities relative to the 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.
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:
|
● |
Exterran
Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, who filed an action in the District Court of Erath
County, Texas, number CV30512, on March 31, 2010 against Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc.,
Longhorn Properties, LLC, and Forest Oil Corporation. Exterran Energy Solutions, L.P. provided certain gas compressor and
related equipment pursuant to a Gas Compressor/Production Equipment Master Rental & Servicing Agreement with Infinity
dated January 3, 2005 in Erath County, Texas and has claiming breach of contract for failure to pay amounts due. On October
13, 2011, a default judgment was entered against the Company in the amount of $445,521 plus interest and attorney fees. The
Company has included the impacts of this litigation as liabilities 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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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 has engaged in negotiations with the State of Texas in late 2012 and early 2013 and has 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 retain potential
liability on the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore these liabilities, to the extent they might become actual, 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 classified
as an asset retirement obligation on the 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 Company’s offshore
Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity dated November
20, 2013 and is claiming 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 around June 19, 2014 under which it would issue 28,000 shares of common stock in full settlement
of any balance then owed and final termination of the agreement. Torrey disputes the Company’s contentions and has submitted
the dispute to binding arbitration. The Company has accrued $49,000 in accounts payable as of March 31, 2015 and December
31, 2014, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
Note
9 – Related Party Transactions
The
Company currently 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 and consist primarily of accounting, tax and other administrative fees. For the years ended December 31,
2014 and 2013, the Company was billed $0 for such services. The amount due to the CFO’s firm for services provided was $767,407
at March 31, 2015 and December 31, 2014, 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.
The
Company entered into a subordinated loan with Off-Shore in the aggregate amount of $1,275,000 for funds used to maintain the Nicaraguan
Concessions. This note was satisfied by the Company’s issuance of shares of Series B redeemable convertible preferred stock
effective April 13, 2012 to Off-Shore and the conversion of the Series B redeemable convertible preferred stock to common stock
effective February 28, 2014. The managing partner of Off-Shore and the CFO are partners in the accounting firm which the Company
uses for general corporate purposes. In the February 2014 transaction, Offshore exchanged all of its 15,016 shares of Series B
preferred stock for 375,400 shares of common stock. Each share of Series B preferred had a liquidation and par value of $100.
The Company also issued Offshore an additional 45,048 shares of common stock for $180,192, the amount of the accrued and unpaid
dividends on the Series B preferred stock as of the effective date of the transaction. As a result, the Company issued a total
of 420,448 shares of common stock valued at $4.00 per share for a total of $1,681,792, which has been reflected as common stock
and additional paid in capital.
In
connection with its subordinated loan, Off-Shore was granted a one percent (1%) revenue sharing interest in the Nicaraguan Concessions.
The managing partner of Off-Shore and the CFO are partners in the accounting firm which the Company uses for general corporate
purposes. The revenue sharing interest remains in effect after the conversion of the subordinated promissory note to Series A
preferred stock and subsequently to common stock. In connection with its dissolution Off-Shore assigned its RSP to its individual
members, which includes the former managing partner of Offshore.
As
of March 31, 2015 and December 31, 2014, the Company had accrued compensation to its officers and directors of $1,246,208 and
$1,187,208, 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 $100,000 at March 31, 2015 with an initial maturity of November 23, 2013. 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 in January 2014, April 2014 and February 2015. Its current maturity date is May 28, 2015. In consideration
for the origination of the line of credit facility and the various renewals, the Company granted the lender common stock purchase
warrants exercisable to purchase an aggregate of 450,000 shares of common stock at an exercise price of $1.50 per share (as amended
on January 23, 2014), which warrants were immediately exercisable and expired on various dates from September 23, 2018 to October
23, 2019 (as amended). The parties agreed as a condition to the renewal of the facility in January 2014 that all warrants would
be extended to a five-year term and the exercise price reduced to $1.50 per share. The Company estimated the fair value of the
warrants at $60,290 as of the original grant date in 2013, which amount was recorded as debt issuance costs and classified in
prepaid expenses in the accompanying balance sheets. The Company estimated the fair value of the new warrants exercisable to purchase
400,000 shares issued to extend the facility during 2014 and the increased value of the amended warrants to be $603,966, which
has been recorded as additional debt issuance costs and classified in prepaid expenses in the accompanying balance sheets.
On
February 28, 2015, the line-of-credit facility matured and the Company was unable to repay the principal and interest. The Company
negotiated an extension to May 28, 2015 and granted the lender common stock purchase warrants exercisable to purchase an aggregate
of 100,000 shares of common stock at an exercise price of $0.50 per share, which warrants were immediately exercisable and expire
on February 28, 2020. The parties agreed as a condition to the renewal of the facility in February 2015 that all previously issued
warrants to the lender totaling 890,625 shares would be extended to a five-year term and the exercise price reduced to $0.50 per
share. The total value of the 100,000 newly issued warrants totaled $28,507 which is being amortized over the extension period.
The increased value of the amended warrants totaled $149,517 which was immediately expensed.
On
March 26, 2015, the Company negotiated an additional amendment to the line-of-credit facility, which increased the maximum amount
from $50,000 to $100,000. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase
an aggregate of 100,000 shares of common stock at an exercise price of $0.50 per share, which warrants were immediately exercisable
and expire on March 26, 2020. The parties agreed as a condition to the amendment of the facility on March 26, 2015 that the line-of-credit
will become convertible to common stock at an exchange rate of $0.50 per share. The total value of the 100,000 newly issued warrants
totaled $30,288 which is being amortized over the extension period.
On
March 7, 2014 the Company borrowed $10,000 from an individual who is related to Infinity’s Chairman and President. The note
was due on demand and bore interest at 8% per annum. This demand note was repaid in full during April 2014.
Note
10 — Subsequent Events
On
May 7, 2015 the Company completed the private placement of $12.0 million principal amount Senior Secured Convertible Note (the
“Note”) and a Warrant to purchase 18,000,000 shares of the Company’s common stock (the “Warrant”) with an
institutional investor.
At
the closing on May 7, 2015, the investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by
cash, with a principal amount of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the Company under
the Investor Note are paid, the 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
investor must prepay the Investor Note, in whole or in part, upon the occurrence of one or more mandatory prepayment events. These
include (i) the investor’s conversion of the Note into shares of common stock upon which the investor will be required to prepay
the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Note and (ii) the Company’s delivering
a mandatory prepayment notice to the investor after it has received governmental authorizations from the Nicaraguan authorities
necessary to commence drilling on at least five sites within the Nicaraguan Concessions, among other conditions.
The
Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at any time at
the option of the holder into shares of the Company’s common stock at $0.50 per share (the “Conversion Price”). As a
part of the private placement, the Company issued a Warrant to the investor giving it the right to purchase up to an aggregate
of 18,000,000 shares of the Company’s common stock at an exercise price of $0.50 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.
If
the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible
into shares of its common stock for a price per share that is less than the Conversion Price or Warrant exercise price then in
effect, the then current Conversion Price and Warrant exercise prices will be decreased to equal such lower price.
The
investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result
in the investor being the beneficial owner of in excess of 9.99% of the Company’s common stock.
The
Note ranks senior to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions.
The
Company used a portion of the funds from this credit facility to resolve the contingency related to the delinquent payment of
2015 training and area fees and the expired letters of credit for its Nicaraguan concessions (See Note 8). The Company continues
to negotiate the renewal of the letters of credit with the Nicaraguan Government and its lenders; however, there can be no assurance
that the Company will be successful in that regard.
WestPark
Capital acted as placement agent for the Company in the transaction and will receive a fee of 6% of cash proceeds, or $600,000,
if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing. The Company also issued
WestPark a warrant exercisable to purchase 1,800,000 shares of common stock at a price of $0.50 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.
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 “Note”). Effective April 7, 2015 the Company and the lender agreed to extend
the maturity date of the Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor
Note issued to the Company by Hudson Bay Master Fund, Ltd. in the principal amount of $9,550,000 (the “New Maturity Date”).
All other terms of the Note remain the same. The extension to the New Maturity Date closed on May 8, 2015.
The 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.
In
connection with the loan, the Company granted the lender a warrant exercisable to purchase 1,000,000 shares of its common stock
at an exercise price of $1.00 per share. In connection with the extension of the maturity date of the Note to the New Maturity
Date, the Company (i) issued the lender 200,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant
to $0.50 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 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 Note on or
before its New Maturity Date, the number of shares issuable under the Warrant increases to 13,333,333 and the exercise price drops
to $0.075 per share. All other terms of the warrant remain the same.
**********************
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) while we have retired our debt obligations to Amegy and Off-Shore, we still have substantial obligations to a number
of third parties, including the Senior Secured Convertible Note described in Note 10-“Subsequent Events” and there
can be no assurance that we will be able to meet them; (iii) we require working capital for our operations and obligations for
the next 12 months and capital to continue our exploration and development efforts on the Nicaraguan Concessions, including compliance
with the letter of credit requirement of the Nicaraguan Concessions, and there can be no assurances we will be able to obtain
it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have concluded that there
exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions and planned future exploration
activities are in a country with a developing economy and are subject to the risks of political and economic instability associated
with such economies; (vi) exploration and development of our Nicaraguan Concessions will require large amounts of capital or a
commercial relationship with an industry operator which we may not be able to obtain; (vii) we may not have sufficient resources
to conduct required future 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 OTCQB, which may not have the visibility or liquidity that we
seek for our common stock; (xix) we depend on key personnel; (xx) sufficient voting power by coalitions of a few of our larger
stockholders to make corporate governance decisions that could have significant effect on us and the other stockholders, including
Amegy; (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; (xxii) possible issuance of common stock subject to the Series B Preferred, 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 satisfy the conditions of our May 2015 financing and receive payments under the Investor
Note, as described in Note 10 - “Subsequent Events.”
The
following information should be read in conjunction with the Unaudited Financial Statements and Notes presented elsewhere in this
quarterly report on Form 10-Q.
2015
Operational and Financial Objectives
Corporate
Activities
The
Company holds a 100% 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 Company received notification of final approval of
the EIA by the Nicaraguan government on April 13, 2013, which began Sub-Period 2
as defined in the Nicaraguan concessions. Therefore, the Company has progressed to Sub-Period 2 of the exploration phase of the
30-year Concession for both Perlas and Tyra as of March 31, 2015. 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
2014 but it is currently delinquent on its training and area fee obligations for 2015 which total $155,507. The Company is currently
negotiating 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 that regard. 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.
During
late December 2013, we completed the 2-D and 3-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 and 3-D seismic data, together with the previously acquired
reprocessed 2-D seismic, will help 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 3-D seismic provided our first geological information regarding the potential for oil resources
in the Cretaceous Zone, which we could not evaluate using less precise 2-D seismic mapping. At
the current time, the Company believes it has progressed to a stage on the Perlas Block of the Nicaraguan Concession that it has
identified multiple promising sites for exploratory drilling and is planning the drilling of initial exploratory wells in order
to determine the existence of commercial hydrocarbon reserves. In order to meet its obligations under the Nicaraguan Concession,
the Company has until April 2016 to drill its initial exploratory well or risk being in default and potentially losing its rights
under the Nicaraguan Concessions. Currently, the Company is technical default of the Nicaraguan Concession as it has not provided
the required letters of credit to the Nicaraguan Government. 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 Company is in negotiations with the Nicaraguan Government and its lenders to renew the letters
of credit, although there is no assurance that it will be successful in that regard. The Company must raise substantial amounts
of debt and equity capital in the immediate future in order to fund: (1) the required letters of credit to the Nicaraguan Government;
(2) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan Concessions prior to April 2016; (3) the
payment of normal day-to-day operations and corporate overhead and (4) payment of outstanding debt and financial obligations as
they become due. These are substantial operational and financial issues that must be successfully mitigated during 2015 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 we will be able to obtain such capital or obtain it on favorable terms or within
the timeframe necessary to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements
relative to drilling the exploratory wells. 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:
|
● |
The
availability of the capital resources required to fund the activities; |
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|
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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. |
Refer to
Note 10 - “Subsequent Events” for recent developments regarding these matters.
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 March 31, 2015 and 2014
Results
of Operations
Overview
Infinity
incurred a net loss applicable to common shareholders of $301,028, or $0.01 per share, for the three months ended March 31, 2015
compared to a net loss applicable to common shareholders of $1,915,289, or $0.08 per share, for the three months ended March 31,
2014. The Company issued Series A Preferred and Series B Preferred effective April 13, 2012. The 6% cumulative dividend accrued
as well as the accretion in the value ascribed to the Series A Preferred and Series B Preferred (which represents value attributable
to holders of the Series A Preferred and Series B Preferred rather than common stock) affects the Company’s net income (loss)
by $-0- and $(25,527) to arrive at net loss applicable to common shareholders for the three months ended March 31, 2015 and 2014,
respectively. The Series A Preferred was converted to common stock on December 30, 2013 and the Series B Preferred was converted
to common stock on February 28, 2014, which eliminated the 6% cumulative dividend accrued in 2015 compared to 2014.
Revenue
The
Company had no revenues in either 2015 or 2014. It focused solely on the exploration, development and financing of the Nicaraguan
Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2015 or 2014. The Company sold its investment in Infinity-Texas
in July 2012, and had no developed oil and gas properties in the United States in 2015 and 2014.
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.
.
Stock-based
compensation
Stock-based
compensation expenses of $58,360 for the three months ended March 31, 2015 decreased 90% from those in 2014, which were $559,962.
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. The significant decrease in stock-based
compensation expense during 2015 compared to 2014 is attributable to the full vesting of the November 2012 stock option grant
in November 2014, which eliminated the related amortization during the three months ended March 31, 2015 and lower market price
of the Company’s common stock compared to the $3.00 per share exercise price on the date of the most recent stock option
grant in January 2014, which is being amortized over two years. The significant decrease in the market price the common stock
compared to the $3.00 per share exercise price resulted in substantially less grant date fair value of the January 2014 option
grant that deceased the overall amount amortized in the three months ended March 31, 2015.
General
and Administrative Expenses
General
and administrative expenses of $105,869 for the three months ended March 31, 2015 decreased $35,506, or 25% from those in 2014,
which were $141,375. The decrease in general and administrative expenses is attributable to an overall decrease in professional
fees of $16,400 as the Company engaged in less legal activities during the three months ended March 31, 2015 compared to 2014
and changed its auditors and stock transfer agent for cost containment purposes. Reductions in general and administrative expenses
was also attributable to us attending less investor conferences or similar forums during the three months ended March 31, 2015
as compared to 2014.
Interest
expense
Interest
expense decreased from $1,246,134 for the three months ended March 31, 2014 to $573,083 in 2015. This significant decrease is
attributable to the Company converting approximately $575,000 of its interest bearing debt to common stock during the three months
ended March 31, 2015. The Company issued short-term notes payable at the issuance dates and extension dates as additional compensation
to the lender. The fair value of the warrants issued to the note holders at the origination date and extension date of the short-term
promissory notes was recorded as a discount on the related debt. Amortization 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 March
31, 2014 compared to 2015. Discount amortization represents a non-cash expense and totaled $523,784 and $1,202,516 of total interest
expense recognized in the three months ended March 31, 2015 and 2014, 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 Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with such short-term notes
during 2015 and 2014 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 fair value as of March 31, 2015 and
2014. The mark-to-market process resulted in a gain of $265,267 during the three months ended December 31, 2015 and a loss of
$15,126 during the three months ended March 31, 2014. The gain recognized in 2015 is attributable to the significant reduction
in the market value of our common stock experienced during 2015 as compared to 2014. The closing market price of our common stock
was $0.37 per share at March 31, 2015 compared to $1.41 per share as of March 31, 2014 which resulted in lower estimates of the
warrant’s derivative liabilities.
Other
income
Other
income increased from $72,835 in for the three months ended March 31, 2014 to $171,017 in 2015. Other income in both 2015 and
2014 is primarily related to derecognition of certain liabilities due to the expiration of the statute of limitations on collection
of obligations of the Company.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $57,675,000, which expire from 2025 through
2029. 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 March 31, 2015, 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 carryforward, any deferred tax
asset at March 31, 2015 that resulted from anticipated benefit from future utilization of such carryforward has been fully offset
by a valuation allowance.
Net
loss
As a result
of the above, we reported a net loss of $301,028 and $1,889,762 for the three months years ended March 31, 2015 and 2014, respectively,
an improvement of $1,588,734 (84%).
Loss
applicable to common shareholders
The
Company issued Series A Preferred and Series B Preferred effective April 13, 2012. The 6% cumulative dividend accrued as well
as the accretion in the value ascribed to the Series A Preferred and Series B Preferred (which represents value attributable to
holders of the Series A Preferred and Series B Preferred rather than common stock) affects the Company’s net loss by $-0-
and $25,527 to arrive at net loss applicable to common shareholders for the three months ended March 31, 2015 and 2014, respectively.
The Series A Preferred was converted to common stock on December 30, 2013 and the Series B Preferred was converted to common stock
on February 28, 2014, which reduced the amount of the 6% cumulative dividend accrued in 2015 compared to 2014.
The
Series A Preferred and Series B Preferred had a preference over common shareholders and therefore such amounts have been deducted
from net loss to report loss applicable to common shareholders of $301,028 and $1,915,289 for the three months ended March 31,
2015 and 2014, respectively.
Basic
and Diluted Loss per Share
Basic
net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net 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 $0.01 and $0.08 for the three months ended March 31, 2015 and 2014, respectively, for the
reasons previously noted. All outstanding stock options were considered antidilutive and therefore excluded from the calculation
of diluted loss per share for the three months ended March 31, 2015 and 2014 because of the net loss reported for each period.
Potential common shares as of March 31, 2015 that have been excluded from the computation of diluted net loss per share amounted
to 8,062,210 shares, which included 3,887,710 outstanding warrants and 4,174,500 outstanding stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses. We financed our operations primarily through a line of credit with Amegy and Offshore through February
28, 2012, when we entered into definitive agreements with Amegy and Off-Shore relating to outstanding debt and other obligations
we owed to them. Effective April 13, 2012, we issued shares of common stock and Series A Preferred and Series B Preferred stock
in satisfaction of all the outstanding Amegy and Off-Shore debt, related accrued interest and other fees, and the Amegy Warrant.
Although the conversion of Amegy and Offshore debt to equity in 2012 relieved us of a considerable portion of our current liabilities,
we continue to have a significant working capital deficit and to experience substantial liquidity issues. Amegy exchanged all
of its shares of Series A Preferred, including accrued and unpaid dividends, for shares of common stock as of December 30, 2013
and Offshore converted all of its shares of Series B Preferred, including accrued and unpaid dividends, into shares of common
stock on February 28, 2014.
During
2012 we borrowed $250,000 under a short-term credit facility with a related party. We issued an interest-bearing note and common
stock purchase warrants in connection with the facility. During 2013 the Company 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
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 off 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 exercised their right to
convert principal balances totaling $475,000 and accrued interest totaling $28,630 into 1,007,260 shares of common stock at an
exchange rate of $0.50 per share. In addition on March 31, 2015, the lender who provides the line-of-credit facility exercised
its right to convert a partial principal balance totaling $50,000 into 100,000 shares of common stock at an exchange rate of $0.50
per share. These debt to equity conversions helped to reduce our near term cash needs.
As
of March 31, 2015, we owed $46,225 on our line-of-credit, which is due in May 2015 and a total of $1,150,000 short term promissory
notes that are due: (i) $100,000 on demand and (ii) $1,050,000 in April 2015. We intend to negotiate extensions of the $1,050,000
note or raise long-term debt or equity capital to retire these notes as they become due, 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 these types of short-term borrowings with high effective
interest rates. See Note 10 - “Subsequent Events” for current information on these matters.
The
Company holds a 100% interest in 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 Company received notification of final approval of the EIA by the Nicaraguan government
on April 13, 2013, which began Sub-Period 2 as defined in the Nicaraguan concessions.
Therefore, the Company has progressed to Sub-Period 2 of the exploration phase of the 30-year Concession for both Perlas and Tyra
as of March 31, 2015. 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. The Company is currently negotiating
the renewal 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 that regard.
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 is in year three of the exploration phase of the 30-year Nicaraguan Concessions.
During
December 2013 and January 2014, the Company completed the 2-D and 3-D seismic survey activities in the area as required under
both of the Nicaraguan Concessions at this point. The Company believes that the newly acquired 2-D and 3-D seismic data, together
with the previously acquired reprocessed 2-D seismic, will help us to further evaluate the structures that were previously identified
with 2-D seismic in the Eocene Zone. Its geological consultants have estimated that these Eocene structures may contain recoverable
oil in place. In addition, the 3-D seismic should provide our first geological information regarding the potential for oil resources
in the Cretaceous Zone, which it could not evaluate using less precise 2-D seismic mapping. At
the current time, the Company believes it has progressed to a stage on the Perlas Block of the Nicaraguan Concession that it has
identified multiple promising sites for exploratory drilling and is planning the drilling of initial exploratory wells in order
to determine the existence of commercial hydrocarbon reserves. In order to meet its obligations under the Nicaraguan Concession,
the Company has until April 2016 to drill its initial exploratory well or risk being in default and potentially losing its rights
under the Nicaraguan Concessions. Currently, the Company is technical default of the Nicaraguan Concession as it has not provided
the required letters of credit to the Nicaraguan Government. 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 Company is in negotiations with the Nicaraguan Government and its lenders to renew the letters
of credit, although there is no assurance that it will be successful in that regard.
The
Company must raise substantial amounts of debt and equity capital in the immediate future in order to fund: (1) the required letters
of credit to the Nicaraguan Government; (2) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan
Concessions prior to April 2016; (3) the payment of normal day-to-day operations and corporate overhead; and (4) payment of outstanding
debt and financial obligations as they become due. These are substantial operational and financial issues that must be successfully
mitigated during 2015 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 we will be able to obtain such capital or obtain it
on favorable terms or within the timeframe necessary to cure the technical defaults existing on the Nicaraguan Concessions or
to meet its ongoing requirements relative to drilling the exploratory wells.
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. Refer to
Note 10 - “Subsequent Events” for recent developments regarding these matters.
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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Not Applicable)
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. Based on their evaluation as of March 31, 2015, the end of the period covered by this quarterly report on
Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures
are effective but not timely in assuring that financial statement presentation and disclosure are in conformity with those which
are required to be included in our periodic SEC filings. The lack of timeliness is a material weakness which management believes
could be relieved with sufficient working capital to allow full-time accounting staff or the equivalent.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Internal
control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined
to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal
controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.
PART
II
ITEM
1. LEGAL PROCEEDINGS
The
Company is currently involved in litigation as follows:
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Exterran
Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, who filed an action in the District Court of Erath
County, Texas, number CV30512, on March 31, 2010 against Infinity Oil and Gas of Texas, Inc., Infinity Energy Resources, Inc.,
Longhorn Properties, LLC, and Forest Oil Corporation. Exterran Energy Solutions, L.P. provided certain gas compressor and
related equipment pursuant to a Gas Compressor/Production Equipment Master Rental & Servicing Agreement with Infinity
dated January 3, 2005 in Erath County, Texas and has claiming breach of contract for failure to pay amounts due. On October
13, 2011, a default judgment was entered against the Company in the amount of $445,521 plus interest and attorney fees. The
Company has included the impacts of this litigation as liabilities 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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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 has engaged in negotiations with the State of Texas in late 2012 and early 2013 and has 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 retain potential
liability on the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore these liabilities, to the extent they might become actual, 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 classified
as an asset retirement obligation on the 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 Company’s offshore
Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity dated November
20, 2013 and is claiming 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 around June 19, 2014 under which it would issue 28,000 shares of common stock in full settlement
of any balance then owed and final termination of the agreement. Torrey disputes the Company’s contentions and has submitted
the dispute to binding arbitration. The Company has accrued $49,000 in accounts payable as of March 31, 2015 and December
31, 2014, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following sets forth information regarding the issuance of unregistered securities by the Company during the three months ended
March 31, 2015.
On
February 28, 2015, the short-term notes payable holders exercised its right to convert principal balances totaling $475,000 and
accrued interest totaling $28,630 into 1,007,260 shares of common stock at an exchange rate of $0.50 per share. In addition on
March 31, 2015, the lender who provides the line-of-credit facility exercised its right to convert a partial principal balance
totaling $50,000 into 100,000 shares of common stock at an exchange rate of $0.50 per share.
The
Company relied on the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the
“Securities Act”) for conversion the forgoing notes into shares of common stock. The Company did not pay any compensation
or fees to any party in connection with the issuance of the shares of Common Stock, but paid such noteholders fees totaling $55,363
in connection with the conversion of their loans.
The
Company entered into a line-of-credit facility on September 23, 2013, which after amendments, provides for borrowings on a revolving
basis up to a maximum of $100,000 at March 31, 2015. The parties agreed to extend the maturity date of this facility November
23, 2013 to January 23, 2014 and subsequently to March 31, 2015. The entity providing the credit facility is owned by an officer
of another corporation for which the Company’s president and chairman of the board serves as president and chairman of the
board. The facility is convertible at and exchange rate of $0.50 per share, is unsecured and bears interest at 8% per annum. The
Company granted the lender common stock purchase warrants to acquire a total of 200,000 shares of common stock at an exercise
price of $0.50 per share (as amended on March 26, 2015), which warrants are immediately exercisable and expire from February 28,
2020 to March 26, 2020. The parties agreed as a condition to the renewal of the line-of-credit in February 2015 that all previously
existing warrants would be extended to a five-year term and the exercise price reduced to $0.50 per share. On February 28, 2015,
the line-of-credit facility matured and the Company was unable to repay the principal and interest.
On
March 31, 2015 the Company negotiated an extension of the facility to May 28, 2015 and granted the lender common stock purchase
warrants exercisable to purchase an aggregate of 100,000 shares of common stock at an exercise price of $0.50 per share, which
warrants were immediately exercisable and expire on February 28, 2020. The parties agreed as a condition to the renewal of the
facility in February 2015 that all previously issued warrants to the lender totaling 890,625 shares would be extended to a five-year
term and the exercise price reduced to $0.50 per share.
The
Company used the loan proceeds for working capital and paid no compensation to any party in connection with the establishment
credit facility and warrants. It relied on the exemption from registration set forth in Section 4(a)(2) of the Securities Act
for issuance of the credit facility and warrants.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
(c) Exhibits.
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31.1 |
Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 |
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act) |
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Signature |
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Date |
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|
/s/
Stanton E. Ross |
|
Chief
Executive Officer |
|
May
15, 2015 |
Stanton
E. Ross |
|
(Principal
Executive Officer) |
|
|
|
|
|
|
|
/s/
Daniel F. Hutchins |
|
Chief
Financial Officer |
|
May
15, 2015 |
Daniel
F. Hutchins |
|
(Principal
Financial and Accounting Officer) |
|
|
Index
of Exhibits
|
31.1 |
Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
31.2 |
Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
32 |
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley
Act) |
EXHIBIT
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT
TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Stanton
E. Ross, certify that:
1. I
have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within
those entities, particularly during the period(s) in which this quarterly report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent function):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting
/s/
Stanton E. Ross |
|
Stanton E. Ross |
|
Chief Executive
Officer |
|
May 15, 2015 |
|
EXHIBIT
31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Daniel
F. Hutchins, certify that:
1. I
have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within
those entities, particularly during the period(s) in which this quarterly report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent function):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting
/s/
Daniel F. Hutchins |
|
Daniel F. Hutchins |
|
Chief Financial
Officer |
|
May 15, 2015 |
|
EXHIBIT
32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Infinity Energy Resources, Inc. (the “Company”) on Form 10-Q for the period
ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each
of the undersigned hereby certifies to the best of his knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
/s/
Stanton E. Ross |
|
Stanton E. Ross |
|
Chief Executive
Officer |
|
May 15, 2015 |
|
|
|
/s/ Daniel
F. Hutchins |
|
Daniel F. Hutchins |
|
Chief Financial
Officer |
|
May 15, 2015 |
|
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