Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This
annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
FORWARD-LOOKING
STATEMENTS
This
annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity
problems; (ii) we have substantial obligations to a number of third parties, including our December 2013 in the original principal
amount of $1,050,000 due in April 2016 and the $12.0 million Convertible Note due May 2018, which began amortizing in October
2015, and there can be no assurance that we will be able to 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 and other requirements 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 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 Bank, NA; (xxi) sale of substantial amounts of our common stock that may have a depressive effect
on the market price of the outstanding shares of our common stock, including sales of shares of common stock issued to the holder
of the Convertible Note upon its conversion of portions of the outstanding principal amount of the Convertible Note; (xxii) possible
issuance of common stock subject to options and warrants may dilute the interest of stockholders; (xxiii) our ability to comply
with Sarbanes-Oxley Act of 2002 Section 404 as it may be required; (xxiv) our nonpayment of dividends and lack of plans to pay
dividends in the future; (xxv) future sale or issuance of a substantial number of shares of our common stock that could depress
the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxvi) our additional
securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvii)
our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (xxviii)
indemnification of our officers and directors; and (xxix) whether we will be able to find an industry or other financial partner
to enable us to explore and develop our Nicaraguan Concessions.
The
following information should be read in conjunction with the Financial Statements and Notes presented elsewhere in this annual
report on Form 10-K. See Note 1 –
“Summary of Significant Accounting Policies,”
to the Financial Statements
for the Years Ended December 31, 2015 and 2014.
2016
Operational and Financial Objectives
Corporate
Activities
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 December 31, 2014. In accordance
with the Nicaraguan Concession agreements, the Company has 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. The Company is currently negotiating the renewal of the required 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. 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, we completed the 2-D and 3-D seismic survey activities in the area as required under both of the
Nicaraguan Concessions at this 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 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 we could not evaluate using less precise 2-D seismic mapping. The evaluation of the newly acquired seismic
data is ongoing in order to determine the scope our exploration program.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
For
the Years Ended December 31, 2015 and 2014
Results
of Operations
2016
Operational and Financial Objectives
Corporate
Activities
We
hold a 100% working interest in any hydrocarbon deposits found under the Perlas Block (560,000 acres/2,268 km) and Tyra Block
(826,000 acres/3,342 km) located in shallow waters offshore Nicaragua. The final approval of the EIA by the Nicaraguan government
of our environment impact study on April 13, 2013, began Sub-Period 2 for both the Tyra and Perlas Blocks as defined in the Nicaraguan
Concessions. We believe we have satisfied the acquisition, processing and interpretation of Seismic data required in Sub-Period
2 for both the Perlas and Tyra Blocks. Therefore, we are now in Sub-Period 3 of the exploration phase of the 30-year Concession
for both Perlas and Tyra as of December 31, 2015. Sub-Period 3 of the Nicaraguan Concessions requires the drilling of at least
one exploratory well on the Perlas Block during 2016 and the shooting of additional seismic on the Tyra Block. We are in process
of identifying at least one potential drilling site on the Perlas block as required in Sub-Period 3 and will have to perform supplemental
EIA work prior to requesting and receiving the permit to drill from the Nicaraguan government. The work plan on the Tyra block
for Sub-Period 3 requires us to shoot additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement
of exploratory drilling. We are negotiating with the Nicaraguan government to seek a waiver of such additional seismic mapping
on the Tyra Block so that we can proceed with exploratory drilling. There can be no assurance whether we will be able to obtain
such waiver of the requirement.
During
late December 2013, we completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan Concessions
at that point. We believe that the newly acquired 2-D seismic data, together with the previously acquired reprocessed 2-D seismic,
helped us to further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological
consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally oil) in place. In addition,
the new 2-D seismic acquired in 2013 provided our first geological information regarding the potential for oil resources in the
Cretaceous Zone, which we could not evaluate using less precise older 2-D seismic mapping. We have identified multiple promising
sites on the Perlas Block for exploratory drilling and is planning the drilling of initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves. We believe that we have performed all work necessary as of December 31, 2015
to proceed to Sub-Period 3 for the Perlas Block as defined in the Nicaraguan Concessions, which requires the drilling of at least
one exploratory well on the Perlas concession within the following one-year period. We must first prepare and submit a supplemental
EIA to the Nicaraguan government before the drilling permit can be issued on the Perlas Block.
We
must prepare and submit the EIA supplement to the Nicaraguan Government, assuming that it does accept the supplemental EIA and
grant the drilling permit, we will be required to drill at least one exploratory well on the Perlas Block within one-year (estimated
to be prior to May 2016) or risk being in default and losing its rights under the Nicaraguan Concessions. We do not believe that
we will proceed to drilling the Nicaraguan Concessions during 2016 given the current state of the oil and gas commodity markets,
financing the drilling, and the challenging economics for any new exploration and development project, especially a project in
an area of the world without historical proven reserves of commercial hydrocarbons. We believe that we can negotiate extensions
with the Nicaraguan government of the required date by which an exploratory well must be drilled; however, there can be no assurance
in this regard.
The
Company is in technical default of the Nicaraguan Concession because it has not provided the required letters of credit to the
Nicaraguan Government. In accordance with the Nicaraguan Concession agreements, the Company had previously provided the Ministry
of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra
(expired September 2014). The Company had also made all required expenditures related to the Nicaraguan Concessions for training
programs and as “area fees,” for each respective year for 2010 through 2015. 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
the 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.
We
are also seeking offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions
in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. Accordingly,
we intend to finance our business strategy through external financing, which may include debt and equity capital raised in public
and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations,
if any, and net proceeds from the sales of assets.
Our
ability to complete these activities is dependent on a number of factors, including, but not limited to:
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The
availability of the capital resources required to fund the activities;
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The
availability of third party contractors for completion services; and
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The
approval by regulatory agencies of applications for permits to conduct exploration activities in a timely manner.
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We
do not expect that we will be able to meet the Nicaraguan Concession requirements and proceed to drilling the required exploration
wells during 2016 given the current state of the oil and gas commodity markets, the availability of financing and the challenging
economics for any new exploration and development project, especially a project in an area of the world without historical proven
reserves of commercial hydrocarbons. We believe that we will be able to negotiate extensions with the Nicaraguan government of
the required date by which an exploratory well must be drilled; however, there can be no assurance in this regard. These remain
as substantial operational and legal issues that we must resolve in order to maintain our rights under the Nicaraguan Concessions
during 2016.
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.
Results
of Operations
Reverse
Stock Split
In
November 2015, we filed an amendment to our Certificate of Incorporation to effect a one-for-ten reverse stock split of our issued
and outstanding shares of common stock. Our authorized shares and par value per share remain unchanged. All common stock share
and per share information in the following “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the accompanying financial statements and notes thereto have been adjusted to reflect retrospective application
of the reverse split, unless otherwise indicated. See Note 5
—“Common Stock”
to the Financial Statements
for the Years Ended December 31, 2015 and 2014 for additional information about the Reverse Split.
Results
of Operations
Overview
The
Company incurred a net loss applicable to common shareholders of $10,996,243, or $4.07 per share, for the year ended December
31, 2015 compared to a net loss applicable to common shareholders of $3,707,052, or $1.46 per share, for the year ended December
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) affected the Company’s net income
(loss) by $-0- and $(25,527) to arrive at net loss applicable to common shareholders for the years ended December 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 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 $192,148 for the year ended December 31, 2015 decreased 82.3% from those in 2014, which were $1,087,103.
The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued stock
options to compensate and motivate its officers, directors and other service providers in previous years that vest generally over
a two year time period. The Company has not granted any stock options during 2015. 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 year ended December 31, 2015 and the lower market price of the Company’s
common stock compared to the $30.00 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 of the common stock compared to the $30.00
per share exercise price resulted in substantially less grant date fair value of the January 2014 option grant that decreased
the overall amount amortized in the year ended December 31, 2015 compared to 2014.
General
and Administrative Expenses
General
and administrative expenses of $478,726 for the year ended December 31, 2015 decreased $255,976, or 34.8%, from those in 2014,
which were $734,702. The decrease in general and administrative expenses is attributable to an overall decrease in professional
fees of $138,122 as the Company engaged in less legal activities during the year ended December 31, 2015 compared to 2014 primarily
due to the settlement of the Berge litigation in 2014 and the change in our stock transfer agent in early 2015 for cost containment
purposes. We reduced our Nicaragua Concession expenses by $76,845 in 2015 compared to 2014 as we reduced our activities due to
the overall difficult environment for all oil and gas development projects. Reductions in general and administrative expenses
were also attributable to us attending fewer investor conferences or similar forums during the year ended December 31, 2015 compared
to 2014, which decreased such expenses by $41,009. The closing of the May 2015 Private Placement reduced the need to incur additional
costs related to capital raising and investor relations activities during the first half of 2015 coupled with the poor investment
climate for oil and gas companies during 2015.
Impairment
charge on oil and gas properties
The
Company determined to fully reserve the previously capitalized oil and gas expenditures as of December 31, 2015 and record an
impairment charge of $9,720,666 during the year ended December 31, 2015. The Company believes this is a reasonable and necessary
position based on the challenges it and the entire oil and gas industry currently faces.
The
current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world,
is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in
capital expenditure budgets for exploration and development projects. This may provide substantial impediments for the Company
and its ability to obtain adequate financing to fund the exploration and development of its Nicaraguan projects. If the Company
does not receive the funding anticipated under its May 2015 Private Placement, it must raise substantial amounts of debt and equity
capital from other sources 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 during 2016; (3) the shooting
of additional seismic on the Tyra Block of the Nicaraguan Concessions should it be unable to negotiate a waiver of such requirement
from the Nicaraguan government (4) the payment of normal day-to-day operations and corporate overhead and (5) the payment of outstanding
debt and other financial obligations as they become due. These are substantial operational and financial issues that must be successfully
addressed during 2016 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions
will be in significant doubt. Accordingly, the Company has determined that it would recognize a full impairment charge against
its previously capitalized oil and gas properties.
Gain
on sale of undeveloped leases
The
Company sold its interests in certain undeveloped leases located in Colorado during the year ended December 31, 2014 for a net
gain of $10,000. The Company has no remaining developed or undeveloped leases subsequent to such sale.
Gain
on settlement of litigation
Timothy
Berge, who filed an action in the District Court, City and County of Denver Colorado number 09CV9566, was granted a default judgment
on November 8, 2010 against the Company in the amount of $304,921 plus costs. Mr. Berge provided certain geological services to
Infinity Oil and Gas of Texas, Inc. and claimed breach of contract for failure to pay amounts he alleged were due. The Company
was unable to defend itself in this matter due to limited financial resources even though it believed that it had meritorious
defenses. On May 27, 2014 the Company settled this litigation by the issuance of 10,000 shares of common stock and the payment
of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation as an accrued liability
in the accompanying balance sheet. The value of the 10,000 shares of common stock and $10,000 cash paid in settlement of this
litigation totaled $125,000 resulting in a gain of $179,877, which was recorded in the statement of operations during the year
ended December 31, 2014. No similar transactions occurred during 2015.
Interest
expense
Interest
expense decreased from $3,498,808 for the year ended December 31, 2014 to $933,456 for the 2015. This significant decrease is
attributable to the Company converting approximately $555,000 of its interest bearing debt to common stock during early 2015.
The Company received loan proceeds of $450,000 from the senior convertible note issued in May 2015 and $85,000 from two other
convertible notes issued in July 2015 all of which bear interest at 8% and remained outstanding at December 31, 2015. In previous
years the Company issued short-term notes payable at various dates and extended them at their maturities by paying additional
compensation to the lenders chiefly in the form of warrants. The fair value of the warrants issued to the note holders at the
origination and extension dates of the short-term promissory notes was recorded as a discount on the related debt. Amortization
of the value of the warrants and revenue sharing interests granted to the holders resulted in a substantial increase in the overall
effective borrowing costs during the year ended December 31, 2014 compared to the same period in 2015. Discount amortization represents
a non-cash expense and totaled $778,279 and $3,317,672 of total interest expense recognized in the years ended December 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.
Senior
Convertible Note Issuance Costs
On
May 7, 2015, we completed the May 2015 Private Placement of a $12.0 million principal amount Convertible Note and a Warrant exercisable
to purchase 1,800,000 shares of our common stock, $0.0001 par value. We elected to account for and record such note on a fair
value basis. Accordingly, all related debt issuance expenses, which totaled $1,302,629 (including $1,071,201 representing the
value of the warrant to purchase 240,000 shares of common stock issued to placement agent and $231,428 of other fees and expenses),
was charged to non-operating expenses in May 2015. No similar transactions occurred during 2014.
Issuance
of Warrant Derivative in Connection with Senior Convertible Note
The
Warrant issued in the May 2015 Private Placement contains various provisions that grant the holder ratchet and anti-dilution rights.
Consequently, such Warrant is required to be treated on a liability basis at its estimated fair value and classified as a derivative
liability in the accompanying financial statements. We recorded its origination date estimated fair value at $8,034,007 as a non-operating
expense in the year ended December 31, 2015. The value of the Warrant to purchase 240,000 shares granted to the placement agent
in the May 2015 Private Placement was included in senior convertible note issuance costs in the statement of operations as previously
described.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the senior convertible note outstanding 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 their estimated fair value as of December 31, 2015 and 2014. The mark-to-market process resulted in a gain of $9,431,914 during
the year ended December 31, 2015 and a gain of $1,376,311 during the year ended December 31, 2014. The increase in the gain is
primarily the result of the derivative warrant liabilities issued in connection with the senior convertible note on May 7, 2015
and the reduction in the closing market price of our common stock between the May 7, 2015 ($5.00 per share) issuance date and
December 31, 2015 ($0.16 per share). Generally, the fair value of the derivative liability declines when the market value of the
underlying common stock decreases when compared to the derivatives exercise price.
Change
in Fair Value of Convertible Note
We
issued the Convertible Note in the May 2015 Private Placement and elected to account for and record the Convertible Note on a
fair value basis. We received $450,000 of proceeds at the date of issuance and the fair market value of the Convertible Note was
estimated to be $682,400 ($232,400 over the proceeds of the note) as of the issuance date and $265,929 ($49,071 less than the
carrying amount of the note) at December 31, 2015. The net $49,071 change in fair market value of the Convertible Note is included
in change in fair value of senior notes payable in the accompanying statement of operations for the year ended December 31, 2015.
No similar notes were outstanding during 2014.
Other
income
Other
income increased from $72,900 in for the year ended December 31, 2014 to $184,404 in 2015. Other income in both 2015 and 2014
is primarily related to the derecognition of certain liabilities due to the expiration of the statute of limitations on collection
of such obligations of the Company.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $67,415,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
For
the year ended December 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 December 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 $10,996,243 and $3,681,525 for the years ended December 31, 2015 and 2014, respectively,
a deterioration of $7,314,718 (198.7%).
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) affected the Company’s net loss by $-0-
and $25,527 to arrive at net loss applicable to common shareholders for the nine months ended December 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.
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 income (loss) per share is computed by dividing the net loss attributable
to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common
share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants
using the treasury stock and “if converted” method. For periods in which net losses from continuing operations are
incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion
of common share equivalents would have an anti-dilutive effect.
The
basic and diluted loss per share was $4.07 and $1.46 for the years ended December 31, 2015 and 2014, respectively, for the reasons
previously noted. All outstanding stock options and warrants to purchase common stock were considered antidilutive and therefore
excluded from the calculation of diluted loss per share for the years ended December 31, 2015 and 2014 because of the net loss
reported for each period. Potential shares of common stock as of December 31, 2015 that have been excluded from the computation
of diluted net loss per share amounted to 2,868,721 shares, which included 2,457,271 outstanding warrants and 411,450 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 Finance 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 Finance debt, related accrued interest and other fees, and the
Amegy Warrant. Although the conversion of Amegy and Offshore Finance 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 Finance 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 we borrowed approximately $1,825,000 on a short-term basis
by issuing various subordinated promissory notes with detachable warrants to purchase common shares. The fair value of the warrants
resulted in a substantial increase in the overall effective borrowing costs. We used the proceeds of these notes to repay previously
issued notes, including the foregoing related party note, to meet obligations and conduct seismic mapping related to our Nicaraguan
Concessions and to provide working capital.
In
April 2013, we conducted a private placement of units composed of common stock and warrants under which we raised $890,000 in
proceeds and exchanged $125,000 principal amount of an outstanding note plus accrued interest for units. We used part of these
proceeds to retire notes issued earlier in 2013.
We
were unable to raise long-term capital in 2014 to pay the majority of the outstanding short-term promissory notes on their respective
maturity dates. We were able to negotiate extensions of the maturity dates on these short-term promissory notes by issuing additional
warrants exercisable to purchase shares of common stock and, in one case, granting a revenue sharing interest in our Nicaraguan
Concessions.
In
the first quarter 2015, we were able to increase our line-of-credit to a maximum of $100,000, which provided us some liquidity,
but were unable to obtain other sources of capital. On February 28, 2015, the short-term note holders of maturing debt exercised
their right to convert principal balances totaling $475,000 and accrued interest totaling $28,630 into 100,726 shares of common
stock at an exchange rate of $5.00 per share. In addition on March 31, 2015, the lender who provides the line-of-credit facility
converted a partial principal balance totaling $50,000 into 10,000 shares of common stock at a price of $5.00 per share. These
debt to equity conversions helped to reduce our near term cash needs.
In
July 2015, the Company issued two promissory notes for total cash proceeds of $85,000. The promissory notes have maturity dates
in October 2015. In connection with the notes, the Company issued warrants exercisable to purchase 8,500 shares of common stock
at an exercise price of $5.60 per share. The warrants are immediately exercisable and terminate five years from their dates of
issuance. In October 2015, we negotiated extensions of these two promissory notes to January 2016 and later to May 2016. In connection
with extension of the notes, the Company issued warrants exercisable to purchase 8,500 shares of common stock at an exercise price
of $5.60 per share. The warrants are immediately exercisable and terminate five years from their dates of issuance.
On
December 27, 2013 the Company borrowed $1,050,000 under the December 2013 Note, which is an unsecured credit facility with a private,
third-party lender. Effective April 7, 2015 the Company and the lender agreed to extend the maturity date of the December 2013
Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May
2015 Private Placement in the principal amount of $9,550,000 (the “New Maturity Date”). All other terms of the Note
remain the same and the remaining principal balance was reduced to $1,000,000 as of December 31, 2015 after the $50,000 principal
repayment required by the extension agreement.
The
December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future
senior indebtedness, as such terms are defined in the December 2013 Note. The parties are negotiating an extension of the December
2013 Note which, if completed, will extend the maturity to April 7, 2017.
On
May 7, 2015 the Company completed the May 2015 Private Placement of $12.0 million Convertible Note and a Warrant exercisable to
purchase 1,800,000 shares of the Company’s common stock with an institutional investor. At the closing of the May 2015 Private
Placement, the investor acquired the Convertible Note by paying $450,000 in cash and issuing the Investor Note, secured by cash,
with a principal amount of $9,550,000. Assuming all amounts payable to the Company under the Investor Note are paid, the May 2015
Private Placement will result in gross proceeds of $10.0 million before placement agent fees and other expenses associated with
the transaction, subject to the satisfaction of certain conditions. The Company used the initial proceeds from the closing to
retire certain outstanding obligations, including the 2015 area and training fees of approximately $155,000 owed to the Nicaraguan
government relating to its Nicaragua Concessions, and to provide additional working capital.
The
Company will receive the remaining cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. The investor
may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part.
The
Convertible Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at
any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion
Price”). As a part of the May 2015 Private Placement, the Company issued a Warrant to the investor giving it the right to
purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The
Warrant is exercisable commencing six months from the date of issuance for a period of seven years from the date of issuance.
The
investor has no right to convert the Convertible Note or exercise the Warrant to the extent that such conversion or exercise would
result in the investor being the beneficial owner of in excess of 9.99% of the Company’s common stock. The Convertible Note
ranks senior to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions.
WestPark
Capital acted as placement agent for the Company in the May 2015 Private Placement and received a fee of 6% of cash proceeds,
or $600,000, if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing plus the
reimbursement of legal fees totaling $7,500. The Company also issued WestPark a warrant exercisable to purchase 240,000 shares
of common stock at a price of $5.00 per share. The warrant was exercisable upon from the date of issuance for a period of seven
years.
In
summary, as of December 31, 2015, we owed $68,303 on our line-of-credit, which is due February 28, 2016, the two promissory notes
in the total principal amount of $85,000 which is due in January 2016 and the December 2013 Note in the principal amount of $1,000,000
that is due on the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May 2015 Private
Placement in the principal amount of $9,550,000. We intend to seek additional short-term debt financing to provide the funds necessary
to pay-off the line-of-credit when it comes due and to provide working capital to fund normal operations, although we can provide
no assurances that we will be successful in this regard. Our current financial condition has made traditional bank loans and normal
financing terms unattainable; therefore, we may find it necessary to continue with these types of short-term borrowings with high
effective interest rates.
The
Company is in Sub-Period 3 of the exploration phase of the 30-year Concession for both Perlas and Tyra as of June 30, 2015. Sub-Period
3 of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016 and the
shooting of additional seismic on the Tyra Block. The Company is in process of identifying at least one potential drilling site
on the Perlas Block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving
the permit to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot
additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The
Company is negotiating with the Nicaraguan government to seek a waiver of the additional seismic mapping on the Tyra Block so
that it can proceed with exploratory drilling. There can be no assurance whether it will be able to obtain a waiver of the requirement.
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. In accordance with the Nicaraguan Concession agreements, the Company
must provide the Ministry of Energy with the required letters of credit in the amounts which total $1,356,227 for the Perlas block
and $278,450 for the Tyra block for exploration requirements on the leases as required by the Nicaraguan Concessions, to replace
the expired letters of credit. The minimum cash requirements to maintain and comply with the minimum work program as defined in
the Nicaraguan Concessions for the next twelve month period will be approximately $5,500,000 for the Perlas Block which includes
all costs to prepare for and drill the initial exploratory well, and $280,000 for the Tyra Block, assuming the waiver is granted
regarding the seismic mapping. If such waiver is not granted, the Company estimates it will require approximately $2,500,000 for
the seismic mapping. Finally, the Company estimates it will need approximately $300,000 to prepare and submit an environmental
supplement to the Nicaraguan government to identify and receive authorization to drill up to five wells in the Concessions.
The
Company has identified multiple sites for exploratory drilling and 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 approximately May 2016 to drill its initial exploratory well or risk being in default and losing its rights under the
Nicaraguan Concessions.
We
are negotiating the renewal and/or adjustment of the required letters of credit with the Nicaraguan Government. Further, we intend
to seek a waiver of the 3-D seismic mapping requirement because we do not believe it will be effective in providing additional
information due the supplemental water depth and other factors. We plan to prepare the necessary information to submit to the
EIA in order to obtain the necessary authorizations to drill up to five locations in the Concessions. There can be no assurance
that we will be successful in any of the foregoing regards. Except for the foregoing items, we believe we are in full compliance
with the terms of the Nicaraguan Concessions agreements.
The
Company must successfully comply with the restrictions related to the senior convertible note in order to release the remaining
$9.45 million in funding under the Investor Note or it must raise substantial amounts of debt and equity capital in the immediate
future in order to fund: (1) the required letters of credit to the Nicaraguan Government; (2) fund approximately $300,000 to prepare
and submit an environmental supplement to the Nicaraguan government to identify and receive authorization to drill up to five
wells in the Concessions; (3) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan Concessions
during 2016; (4) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate
a waiver of such requirement form the Nicaraguan government; (5) the payment of normal day-to-day operations and corporate overhead;
and (6) the payment of outstanding debt and financial obligations as they become due. These are substantial operational and financial
issues that must be successfully addressed during 2016 or the Company’s ability to satisfy the conditions necessary to maintain
its Nicaragua Concessions will be in significant doubt. The Company is actively seeking new outside sources of debt and equity
capital in order fund the substantial needs enumerated above, however, there can be no assurance that it will be able to obtain
such capital or obtain it on favorable terms or within the timeframe necessary to cure the technical defaults existing on the
Nicaraguan Concessions or to meet its ongoing requirements to drill the exploratory wells.
In
addition to the minimum cash requirements related to the Nicaraguan Concessions, we estimate that we will require approximately
$330,000 of working capital to maintain corporate operations for the next 12 months, but not including approximately $1,000,000
principal amount of a short-term promissory note due in April 2016, plus accrued interest, the $85,000 principal due on the two
promissory notes due in January 2016 and the $68,303 currently outstanding under a revolving line of credit due February 2016.
We owe $4,945,000 in trade payables related to seismic activities already performed (in December 2013) but not yet paid; however,
we believe such party has agreed to extend the time for payment of this obligation to until such time as we begin drilling operations
on the Nicaraguan Concessions. We also owe other obligations to third parties as noted on our balance sheet, which intend to pay,
negotiate and settle when prior to beginning any drilling operations, although there is no assurance that will be able negotiate
settlements with venders or avoid collection activities.
We
plan to raise long-term capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through
a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture
or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to
us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we may lose our rights to them.
The
Company is doubtful that it be able to meet the Nicaraguan concession requirements and proceed to drilling the required exploration
wells during 2016 given the current state of the oil and gas commodity markets and the challenging economics for any new exploration
and development project especially a project in an area of the world without historical proven reserves of commercial hydrocarbons.
The Company believes that it will be able to negotiate extensions with the Nicaraguan government relative to the required date
by which an exploratory well must be drilled however there can be no assurance in this regard. These remain as substantial operational
and legal issues that the Company must resolve in order to maintain its rights under the Nicaraguan Concessions during 2016.
Due
to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should we be unable to continue as a going concern.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain
critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.
Our significant accounting policies are summarized in the notes to our financial statements included in Item 8, “Financial
Statements”, of this annual report.
The
application of our accounting policies regarding full cost accounting for oil and gas properties (Note 9), accounting for the
issuance and valuation of derivative liabilities (Note 2, 3 and 7), accounting for deferred tax assets (Note 10) and estimates
involving our stock-based compensation, are considered critical accounting estimates made in 2015 and 2014 (Note 6).
Oil
and Gas Properties -
The Company follows the full cost method of accounting for exploration and development activities and
capitalizes direct costs, overhead costs and interest related to such activities. All of the Company’s investment in such
costs at December 31, 2015 and 2014 relate to unproved properties that relate to the Nicaraguan Concessions. Management must assess
at least annually to ascertain whether impairment of the recorded values has occurred, which involves evaluation of estimates
of lease terms for the properties; geographic and geologic data obtained, and estimated future net revenues. For the Nicaraguan
Concessions this involves considering terms of the Concessions, status of ongoing environmental study, evaluation of seismic data,
and plans to seek industry participation in future exploration and development.
Management
is doubtful that it be able to meet the Nicaraguan concession requirements and proceed to drilling the required exploration wells
during 2016 given the current state of the oil and gas commodity markets and the challenging economics for any new exploration
and development project especially a project in an area of the world without historical proven reserves of commercial hydrocarbons.
Management believes that it will be able to negotiate extensions with the Nicaraguan government relative to the required date
by which an exploratory well must be drilled however there can be no assurance in this regard. These remain as substantial operational
and legal issues that the Company must mitigate and resolve in order to maintain its rights under the Nicaraguan concessions during
2016.
Management
determined to fully reserve the previously capitalized oil and gas expenditures as of December 31, 2015 and record an impairment
charge of $9,720,666 during the year ended December 31, 2015. Management believes this is a reasonable and necessary position
based on the challenges currently faced by the Company and generally by the entire oil and gas industry.
Derivative
liabilities -
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 and Senior convertible note 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 2,3
and 7) 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.
Other
notes payable with a total principal balance of $475,000 ($503,630 including accrued interest) were extinguished during the year
ended December 31, 2015 which caused the associated warrant derivative liability to be transitioned to equity at its fair value
on the date of extinguishment. The warrant derivative liabilities transitioned to equity aggregated $329,849 during the year ended
December 31, 2015 which represented their respective fair value as of the date of the extinguishment of their underlying note
payable. None of the notes payable was extinguished during the year ended December 31, 2014.
The
assumptions used for determining the fair value of derivative liabilities outstanding during the years ended December 31, 2015
and 2014 are reflected in Notes 2, 3 and 7 to the Financial Statements.
Deferred
income taxes –
Accounting for income taxes requires significant estimates and judgments on the part of management. Such
estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are
expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred
tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained
on audit.
As
required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting
and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected
to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2014, cumulative valuation
allowances in the amount of $25,788,000 were recorded in connection with the net deferred income tax assets. Based on a review
of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased to
$29,972,000 to fully reserve our deferred tax assets as of December 31, 2015. We determined that it was appropriate to continue
to provide a full valuation reserve on our net deferred tax assets as of December 31, 2015 because of the overall net operating
loss carryforwards available and our history of operating and tax losses. We expect to continue to maintain a full valuation allowance
until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the
extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable
income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit
and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.
As
required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance
with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position
taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax
expense for financial reporting purposes. We have no recorded liability as of December 31, 2015 representing uncertain tax positions.
We
have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense
taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax
benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income
tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability
to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options
have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance
is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income
in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded
deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional
tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability
to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in
future periods should our assumptions regarding the generation of future taxable income not be realized.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $67,415,000, which expire from 2025 through
2030. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the tax benefits from its net deferred
tax asset.
Stock
options -
We grant stock options to our employees and directors and such benefits provided are share-based payment awards,
which require us to make significant estimates related to determining the value of our share-based compensation. Our expected
stock-price volatility assumption is based on historical volatilities of the underlying stock obtained from public data sources.
We granted options exercisable to purchase -0- and 90,000 shares during the years ended December 31, 2015 and 2014, respectively.
The assumptions used for determining the grant-date fair value of options granted during the year ended December 31, 2014 are
reflected in Note 6 to the Financial Statements.
If
factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may
differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using
option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect
our estimates of fair values of our share-based compensation. Certain share-based payment awards, such as employee stock options,
may expire worthless or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly
in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair
value of employee share-based awards is determined using an established option pricing model, that value may not be indicative
of the fair value observed in a willing buyer/willing seller market transaction.
As
of and for the year ended December 31, 2015, there have been no material changes or updates to our critical accounting policies.
Inflation
and Seasonality
Inflation
has not materially affected us during the past fiscal year. We do not believe that our business is seasonal in nature.
Item
8. Financial Statements and Supplementary Data.
Infinity
Energy Resources, Inc.
Financial
Statements and Accompanying Notes
December
31, 2015 and 2014
Table of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of
Infinity Energy Resources, Inc.
Overland Park, Kansas
We have audited the accompanying balance sheets
of Infinity Energy Resources, Inc. (the “Company”) as of December 31, 2015 and 2014, and the related statements of
operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of Infinity Energy Resources, Inc. as of December 31,
2015 and 2014 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses, has no on-going operations, is in default of its obligations under the Nicaraguan oil
and gas concessions and has a significant working capital deficit, which raises substantial doubt about its ability to continue
as a going concern. Management’s plans with regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Leawood,
Kansas
April 14, 2016
INFINITY
ENERGY RESOURCES, INC.
Balance Sheets
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,734
|
|
|
$
|
13,664
|
|
Prepaid expenses
|
|
|
420
|
|
|
|
23,046
|
|
Total current assets
|
|
|
4,154
|
|
|
|
36,710
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties, using full cost accounting, net of accumulated
depreciation, depletion, impairment and amortization - Unproved
|
|
|
—
|
|
|
|
9,628,098
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,154
|
|
|
$
|
9,664,808
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,975,682
|
|
|
$
|
5,960,225
|
|
Accrued liabilities (including $788,520 due to related party at December
31, 2015 and 2014)
|
|
|
2,642,227
|
|
|
|
2,484,238
|
|
Income tax liability
|
|
|
150,000
|
|
|
|
150,000
|
|
Accrued interest (including $8,446 and $3,438 due to related party at December
31, 2015 and 2014, respectively)
|
|
|
403,205
|
|
|
|
341,748
|
|
Asset retirement obligations
|
|
|
1,716,003
|
|
|
|
1,716,003
|
|
Senior convertible note payable-current
|
|
|
130,345
|
|
|
|
—
|
|
Line-of-credit with related party
|
|
|
68,303
|
|
|
|
33,807
|
|
Notes payable-short term, net of discounts of $51,027
and $284,245 at December 31, 2015 and 2014, respectively
|
|
|
1,033,973
|
|
|
|
1,340,755
|
|
Total current liabilities
|
|
|
12,119,738
|
|
|
|
12,026,776
|
|
|
|
|
|
|
|
|
|
|
Senior convertible note payable-long term
|
|
|
135,584
|
|
|
|
—
|
|
Derivative liabilities
|
|
|
210,383
|
|
|
|
701,214
|
|
Total long-term liabilities
|
|
|
345,967
|
|
|
|
701,214
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.0001 per share, 10,000,000 shares authorized;
No shares issued or outstanding as of December 31, 2015 and
2014
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $.0001 per share, authorized 75,000,000 shares,
issued and outstanding 3,125,570 and 2,556,054 shares at
December 31, 2015 and 2014, respectively
|
|
|
313
|
|
|
|
256
|
|
Additional paid-in capital
|
|
|
108,840,102
|
|
|
|
107,242,285
|
|
Accumulated deficit
|
|
|
(121,301,966
|
)
|
|
|
(110,305,723
|
)
|
Total stockholders’ deficit
|
|
|
(12,461,551
|
)
|
|
|
(3,063,182
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
4,154
|
|
|
$
|
9,664,808
|
|
The accompanying notes are an integral part
of these financial statements.
INFINITY ENERGY RESOURCES,
INC. AND SUBSIDIARY
Statements of Operations
|
|
For
the Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Operating expenses (income):
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
192,148
|
|
|
$
|
1,087,103
|
|
General and administrative expenses
|
|
|
478,726
|
|
|
|
734,702
|
|
Impairment charge on oil and gas properties
|
|
|
9,720,666
|
|
|
|
—
|
|
Gain on sale of undeveloped leases
|
|
|
—
|
|
|
|
(10,000
|
)
|
Gain on settlement of litigation
|
|
|
—
|
|
|
|
(179,877
|
)
|
Total operating expenses, net
|
|
|
10,391,540
|
|
|
|
1,631,928
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,391,540
|
)
|
|
|
(1,631,928
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(933,456
|
)
|
|
|
(3,498,808
|
)
|
Senior convertible note payable issuance costs
|
|
|
(1,302,629
|
)
|
|
|
—
|
|
Issuance of warrant derivative in connection with senior convertible note
|
|
|
(8,034,007
|
)
|
|
|
—
|
|
Change in derivative fair value
|
|
|
9,431,914
|
|
|
|
1,376,311
|
|
Change in fair value of Senior convertible note payable
|
|
|
49,071
|
|
|
|
—
|
|
Other income, net
|
|
|
184,404
|
|
|
|
72,900
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(604,703
|
)
|
|
|
(2,049,597
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(10,996,243
|
)
|
|
|
(3,681,525
|
)
|
Income tax benefit (expense)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(10,996,243
|
)
|
|
|
(3,681,525
|
)
|
|
|
|
|
|
|
|
|
|
Accrual of 6% dividend payable on Series A and B redeemable, convertible
preferred stock
|
|
|
—
|
|
|
|
(25,527
|
)
|
|
|
|
|
|
|
|
|
|
Loss applicable to common shareholders
|
|
$
|
(10,996,243
|
)
|
|
$
|
(3,707,052
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(4.07
|
)
|
|
$
|
(1.46
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
2,704,044
|
|
|
|
2,545,257
|
|
The accompanying notes are an integral part
of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements of Changes
in Stockholders’ Deficit
Years ended December
31, 2015 and 2014
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 31, 2013
|
|
|
2,504,009
|
|
|
$
|
251
|
|
|
$
|
103,744,676
|
|
|
$
|
(106,624,198
|
)
|
|
$
|
(2,879,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,087,103
|
|
|
|
—
|
|
|
|
1,087,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock purchase warrants issued for debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
603,966
|
|
|
|
—
|
|
|
|
603,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition of derivative warrant liability to equity
|
|
|
—
|
|
|
|
—
|
|
|
|
35,280
|
|
|
|
—
|
|
|
|
35,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in settlement of litigation
|
|
|
10,000
|
|
|
|
1
|
|
|
|
114,999
|
|
|
|
—
|
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of 6% dividend payable on Series B redeemable, convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
(25,527
|
)
|
|
|
—
|
|
|
|
(25,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B redeemable, convertible preferred stock to common
stock
|
|
|
42,045
|
|
|
|
4
|
|
|
|
1,681,788
|
|
|
|
—
|
|
|
|
1,681,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,681,525
|
)
|
|
|
(3,681,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
|
2,556,054
|
|
|
|
256
|
|
|
|
107,242,285
|
|
|
|
(110,305,723
|
)
|
|
|
(3,063,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
192,148
|
|
|
|
—
|
|
|
|
192,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock purchase warrants issued for debt issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
252,711
|
|
|
|
—
|
|
|
|
252,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition of derivative warrant liability to equity
|
|
|
—
|
|
|
|
—
|
|
|
|
329,849
|
|
|
|
—
|
|
|
|
329,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for extension of note payable
|
|
|
20,000
|
|
|
|
2
|
|
|
|
103,998
|
|
|
|
—
|
|
|
|
104,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of line-of-credit to common stock
|
|
|
10,000
|
|
|
|
1
|
|
|
|
49,999
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of note payables and accrued interest to common stock
|
|
|
100,726
|
|
|
|
10
|
|
|
|
503,620
|
|
|
|
—
|
|
|
|
503,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for principal payments on senior convertible note payable
|
|
|
424,530
|
|
|
|
43
|
|
|
|
159,957
|
|
|
|
—
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for interest payments on senior convertible note payable
|
|
|
14,260
|
|
|
|
1
|
|
|
|
5,535
|
|
|
|
—
|
|
|
|
5,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,996,243
|
)
|
|
|
(10,996,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
|
3,125,570
|
|
|
$
|
313
|
|
|
$
|
108,840,102
|
|
|
$
|
(121,301,966
|
)
|
|
$
|
(12,461,551
|
)
|
The accompanying notes are an integral part
of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements of Cash
Flows
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,996,243
|
)
|
|
$
|
(3,681,525
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
192,148
|
|
|
|
1,087,103
|
|
Change in fair value of derivative liability
|
|
|
(9,431,914
|
)
|
|
|
(1,376,311
|
)
|
Change in fair value of senior convertible note
|
|
|
(49,071
|
)
|
|
|
—
|
|
Amortization of debt discount
|
|
|
778,279
|
|
|
|
3,317,672
|
|
Impairment charge for oil and gas properties
|
|
|
9,720,666
|
|
|
|
—
|
|
Gain on sale of undeveloped leases
|
|
|
—
|
|
|
|
(10,000
|
)
|
Gain on settlement of litigation
|
|
|
—
|
|
|
|
(179,877
|
)
|
Issuance of warrant derivative in connection with senior convertible note
|
|
|
8,034,007
|
|
|
|
—
|
|
Warrant derivative issued for senior convertible note payable issuance costs
|
|
|
1,302,629
|
|
|
|
—
|
|
Change in operations assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in accounts payable and accrued liabilities
|
|
|
269,069
|
|
|
|
447,983
|
|
Net cash used in operating activities
|
|
|
(180,430
|
)
|
|
|
(394,955
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of undeveloped leases
|
|
|
—
|
|
|
|
10,000
|
|
Investment in oil and gas properties
|
|
|
(92,568
|
)
|
|
|
(115,622
|
)
|
Net cash used in investing activities
|
|
|
(92,568
|
)
|
|
|
(105,622
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from debt and subordinated note payable
|
|
|
85,000
|
|
|
|
635,000
|
|
Repayment of notes payable
|
|
|
(150,000
|
)
|
|
|
—
|
|
Repayment of note payable to related party
|
|
|
—
|
|
|
|
(60,000
|
)
|
Proceeds from issuance of senior convertible notes payable
|
|
|
475,000
|
|
|
|
—
|
|
Net borrowings (repayments) on line-of-credit
|
|
|
84,496
|
|
|
|
(60,833
|
)
|
Senior convertible note payable issuance costs
|
|
|
(231,428
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
263,068
|
|
|
|
514,167
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(9,930
|
)
|
|
|
13,590
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
13,664
|
|
|
|
74
|
|
Ending
|
|
$
|
3,734
|
|
|
$
|
13,664
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
36,709
|
|
|
$
|
33,626
|
|
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
|
|
|
$
|
—
|
|
Issuance of common stock for extension of note payable
|
|
$
|
104,000
|
|
|
$
|
—
|
|
Warrant derivatives issued in connection with notes payable and extensions
|
|
$
|
165,723
|
|
|
$
|
1,225,589
|
|
Issuance of common stock purchase warrants for debt issuance costs
|
|
$
|
252,711
|
|
|
$
|
603,966
|
|
Transition of derivative liability to equity
|
|
$
|
329,849
|
|
|
$
|
—
|
|
Issuance of common stock for principal and interest payments on senior convertible
note payable
|
|
$
|
165,536
|
|
|
$
|
—
|
|
Series B Preferred shares and related accrued dividends satisfied by issuance
of common shares
|
|
$
|
—
|
|
|
$
|
1,681,749
|
|
Issuance of revenue sharing interest in Nicaragua Concession to note holder
|
|
$
|
—
|
|
|
$
|
964,838
|
|
Issuance of common stock in settlement of litigation
|
|
$
|
—
|
|
|
$
|
115,000
|
|
Preferred dividends accrued
|
|
$
|
—
|
|
|
$
|
25,527
|
|
The accompanying notes are an integral part
of these financial statements.
INFINITY ENERGY RESOURCES,
INC.
Notes to Financial Statements
December 31, 2015
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Infinity Energy Resources (the “Company”
or “Infinity”) 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
contain a total of approximately 1.4 million acres. The Company sold its wholly-owned subsidiary Infinity Oil and Gas of Texas,
Inc. in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
The 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 seismic data that was
acquired for the Nicaraguan Concessions. Infinity has conducted activities to develop geological information from the processing
and evaluation of 2-D seismic data that was acquired for the Nicaraguan Concessions. The Company has identified multiple sites
for exploratory drilling and is planning the initial exploratory well on the Perlas Block in order to determine the existence
of commercial hydrocarbon reserves, subject to receipt from the Nicaraguan government of authorizations for the drilling of up
to five wells, financing and satisfaction of other conditions. In order to meet its obligations under the Perlas Block of the
Nicaraguan Concession, the Company has to drill its initial exploratory well during 2016 or risk being in default and losing its
rights under the Nicaraguan Concessions. The work plan on the Tyra block now requires the Company to shoot additional seismic
prior to the commencement of exploratory drilling. The Company is negotiating with the Nicaraguan government to seek the waiver
of the additional seismic mapping on the Tyra Block and extension of time to complete its initial well. There can be no assurance
whether it will be able to obtain such waiver of the requirement. The current environment for oil and gas development projects,
especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices
for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development
projects. There can be no assurance whether the Company will be able to obtain adequate financing to fund the exploration and
development of its Nicaraguan projects.
On May 7, 2015 the Company completed the private
placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Senior Convertible Note (the “Note”)
and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”)
with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000
in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
Assuming all amounts payable to the Company under the Investor Note are paid, the May 2015 Private Placement will result in gross
proceeds of $10.0 million before placement agent fees and other expenses associated with the transaction, subject to the satisfaction
of certain conditions. The Company 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. As
of December 31, 2015 an additional $25,000 was funded under the Investor Note for a total of $475,000 advanced to the Company.
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 Concessions and the receipt of forbearance or similar agreements relative to its general creditors,
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 $5.00 per share (the “Conversion Price”). As a part of the May 2015 Private Placement,
the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s
common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing six months from the date of issuance
for a period of seven years from the date of issuance. The Note ranks senior to the Company’s existing and future indebtedness
and is secured by all of the assets of the Company, excluding the Concessions.
In addition, the Company continues to seek
offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions in exchange
for cash and a carried interest in exploration and development operations or other joint venture arrangement.
Going Concern
As reflected in the accompanying statements
of operations, the Company has had a history of losses. In addition, the Company has a significant working capital deficit and
is currently experiencing substantial liquidity issues.
The Company has relied on raising 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 or cash flows in recent
history.
The Company is in Sub-Period 3 of the exploration
phase of the 30-year Concession for both Perlas and Tyra as of December 31, 2015. Sub-Period 3 of the Nicaraguan Concessions requires
the drilling of at least one exploratory well on the Perlas Block during 2016 and the shooting of additional seismic on the Tyra
Block. The Company is in process of identifying at least one potential drilling site on the Perlas Block as required in Sub-Period
3 and will have to perform supplemental EIA work prior to requesting and receiving the permit to drill from the Nicaraguan government.
The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot additional seismic, which is estimated to cost
approximately $2,500,000 prior to the commencement of exploratory drilling. The Company is negotiating with the Nicaraguan government
to seek a waiver of the additional seismic mapping on the Tyra Block so that it can proceed with exploratory drilling. There can
be no assurance whether it will be able to obtain a waiver of the requirement.
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. In accordance with the Nicaraguan Concession agreements, the Company must provide the Ministry of Energy with the
required letters of credit in the amounts which total $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration
requirements on the leases as required by the Nicaraguan Concessions, to replace the expired letters of credit. The minimum cash
requirements to maintain and comply with the minimum work program as defined in the Nicaraguan Concessions for the next twelve
month period will be approximately $5,500,000 for the Perlas Block, which includes all costs to prepare for and drill the initial
exploratory well, and $280,000 for the Tyra Block, assuming the waiver is granted regarding the seismic mapping. If such waiver
is not granted, the Company estimates it will require approximately $2,500,000 for the seismic mapping. Finally, the Company estimates
it will need approximately $300,000 to prepare and submit an environmental supplement to the Nicaraguan government to identify
and receive authorization to drill up to five wells in the Concessions.
If the Company does not receive the funding
anticipated under its May 2015 Private Placement, it must raise substantial amounts of debt and equity capital from other sources
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 during 2016; (3) the shooting of additional seismic
on the Tyra Block of the Nicaraguan Concessions should it be unable to negotiate a waiver of such requirement from the Nicaraguan
government (4) the payment of normal day-to-day operations and corporate overhead and (5) the payment of outstanding debt and
other financial obligations as they become due. These are substantial operational and financial issues that must be successfully
addressed during 2016 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions
will be in significant doubt. The Company is actively seeking new outside sources of debt and equity capital in addition to the
May 2015 Private Placement in order to 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. The current
environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very
challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital
expenditure budgets for exploration and development projects. These may provide substantial impediments for the Company and its
ability to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
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, senior convertible note payable, stock-based awards
and overriding royalty interests, and the realization of deferred tax assets.
Oil and Gas Properties
The Company follows the full cost method of
accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition, exploration, and development
of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and seismic costs) and
the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead
related to development activities is also capitalized during the acquisition phase. In the years ended December 31, 2015 and 2014,
the Company capitalized direct costs, overhead costs and interest (all subject to impairment) as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
$
|
92,568
|
|
|
$
|
115,622
|
|
In April 2013 the Environmental Impact Assessment
(“EIA”) was formally approved by the Nicaraguan government and the Company was cleared to commence 2-D and 3-D seismic
mapping activities in the area. In late 2013 and early 2014 the Company conducted 2-D and 3-D seismic mapping beneath the waters
of the Tyra and Perlas blocks constituting the Nicaraguan Concessions. Concurrent with the approval of the EIA, the Company concluded
that the acquisition phase of the Nicaraguan Concessions had been completed and the exploration phase had commenced with the start
2-D and 3-D seismic mapping activities. Accordingly, the Company ceased the capitalization of overhead, legal costs, certain consulting
and ancillary costs paid to the Nicaraguan government in accordance with the Concession agreement.
Depletion of proved oil and gas properties
is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on relative
energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset retirement costs,
are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including capitalized interest
and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved properties are assessed periodically
(at least annually) to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant
are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic
and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated
discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk
adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs
are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed
is deducted from the costs to be amortized, and reported as a period expense when the impairment is recognized. All unproved property
costs as of December 31, 2015 and December 31, 2014 relate to the Nicaraguan Concessions. In assessing the unproved property costs
for impairment, the Company takes into consideration various information including: i) the terms of the government concessions,
ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements, iii) the ongoing evaluation
of the seismic data, iv) the commodity prices for oil and gas products, v) the overall environment related to oil and gas exploration
and development projects for unproven targets in unproven regions of the world, vi) the availability of financing for financial
and strategic partners, and vii) other factors that would impact the viability of a significant long-term oil and gas exploration
and development project.
The current environment for oil and gas development
projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity
prices for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development
projects. These may provide substantial impediments for the Company and its ability to obtain adequate financing to fund the exploration
and development of its Nicaraguan projects. The Company has performed its impairment tests as of December 31, 2015 and has concluded
that a full impairment reserve should be provided on the costs capitalized for the Nicaraguan Concessions oil and gas properties.
Pursuant to full cost accounting rules, the
Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized costs less related
accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future
net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic mean of the previous
12 months’ first-of-month prices and current costs, including the effects of derivative instruments accounted for as cash
flow hedges, but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued
on the balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the
lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax
effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the
excess must be charged to expense and may not be reversed in future periods. As of December 31, 2015 and 2014, the Company did
not have any proved oil and gas properties, and all unproved property costs relate to the its Nicaraguan Concessions.
Proceeds from the sales of oil and gas properties
are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly
alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss would be recognized
in the determination of the Company’s net earnings/loss.
Concentrations
The Company’s only asset is the Nicaraguan
Concessions and it expects to be active in Nicaragua for the foreseeable future, given sufficient capital. The political climate
in Nicaragua could become unstable and subject to radical change over a short period of time. In the event of a significant negative
change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability of the Company to
obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under its Nicaraguan
Concessions.
Derivative Instruments
The Company accounts for derivative instruments
or hedging activities under the provisions of ASC 815
Derivatives and Hedging
. ASC 815 requires the Company to record derivative
instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative
and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss)
and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify
for hedge treatment are recognized in earnings.
The purpose of hedging is to provide a measure
of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to
commodity price risk. As of December 31, 2015 and 2014 and during the years then ended, the Company had no oil and natural gas
derivative arrangements outstanding.
As a result of certain terms, conditions and
features included in certain common stock purchase warrants issued by the Company (Notes 2, 3 and 7), those warrants are required
to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in operations.
Income Taxes
The Company uses the asset and liability method
of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax
benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the
utilization of such assets to be more likely than not. Management routinely assesses the realizability of the Company’s
deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not
be fully utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments
and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions.
When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation
allowance is provided to reduce the recorded deferred tax asset. When the Company can project that a portion of the deferred tax
asset can be realized through application of a portion of tax loss carryforward, the Company will record that utilization as a
deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances
will not materially change and require the Company to adjust its deferred income tax asset valuation allowance in a future period.
The Company recognized a deferred tax asset, net of valuation allowance, of $0 at December 31, 2015 and 2014.
The Company is potentially subject to taxation
in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application
of complex income tax laws and regulations in various taxing jurisdictions. It recognizes certain income tax positions that meet
a more-likely-than not recognition threshold. If the Company ultimately determines that the payment of these liabilities will
be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability for unrecognized tax benefit was
recorded as of December 31, 2015 and 2014.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash
consists of cash on hand and demand deposits with financial institutions. Although the Company had minimal cash as of December
31, 2015 and 2014, it is the Company’s policy that all highly liquid investments with a maturity of three months or less
when purchased would be cash equivalents and would be included along with cash as cash and equivalents.
Asset Retirement Obligations
The Company records estimated future asset
retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount
of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted
each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of
facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the
full cost pool using the units of production method. Although the Company had divested all of its domestic oil properties that
contain operating and abandoned wells as of December 31, 2014, the Company may have obligations related to the divestiture of
certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations to reclaim abandoned
wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation related to Infinity-Texas
because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012. The
Company has recognized an additional liability of $734,897 related to its former Texas oil and gas producing properties (included
in asset retirement obligations) to recognize the potential personal liability of the Company and its officers for the Infinity-Texas
oil and gas properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. In addition,
management believes the Company has been relieved from asset retirement obligations related to Infinity-Wyoming because of the
sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized an additional liability of
$981,106 related to its former Wyoming and Colorado oil and gas producing properties (included in asset retirement obligations)
to recognize the potential liability of the Company and its officers should the new owner not perform its obligations to reclaim
abandoned wells in a timely manner.
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
Note and various derivative liabilities, which are related to detachable warrants issued in connection with various notes payable,
were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments,
estimated volatility of the price of the Company’s common stock, interest rates, the probability of both 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 and December 31, 2015 and 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 December 31, 2015 and 2014:
December
31, 2015
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
265,929
|
|
|
$
|
265,929
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
210,383
|
|
|
|
210,383
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476,312
|
|
|
$
|
476,312
|
|
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 years ended December 31, 2015 and 2014.
Reverse Stock Split
In November 2015, the Company filed an amendment
to its Certificate of Incorporation to effect a one-for-ten reverse stock split of its issued and outstanding shares of common
stock. Its authorized shares and par value per share remain unchanged. All common stock share and per share information in the
accompanying financial statements and notes thereto have been adjusted to reflect retroactive application of the reverse split,
unless otherwise indicated. See
Note 5 – Common Stock
for additional information about the Reverse Split.
Net Loss per Share
Pursuant to FASB ASC Topic 260,
Earnings
per Share,
basic net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders
by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in
which net losses 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.
Foreign Currency
The United States dollar is the functional
currency for the Company’s operations. Although the Company’s acquisition and exploration activities have been conducted
in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated in United States dollars.
The Company expects that a significant portion of its required and discretionary expenditures in the foreseeable future will also
be denominated in United States dollars. Any foreign currency gains and losses are included in the results of operations in the
period in which they occur. The Company does not have any cash accounts denominated in foreign currencies.
Recent Accounting Pronouncements
Recently Adopted Accounting Guidance (generally
adopted by most clients)
During the fourth quarter of 2015, the Company
adopted ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying
value of the associated debt liability, and amortization of those costs should be reported as interest expense. This ASU is effective
for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that
have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the
balance sheet. This change did not have a material impact on the financial statements.
Recent Accounting Pronouncements Issued
But Not Adopted as of December 31, 2015
In January 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP
on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting
for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for
financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for
fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by
means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance
is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities
under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently
evaluating the impact of adopting this guidance.
In November 2015, the FASB issued (ASU) 2015-17,
Balance Sheet Classification of Deferred Taxes.
Currently deferred taxes for each tax jurisdiction are presented as a net
current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance
requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified
as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods
beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter
of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on
the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due
to the full valuation allowance against the Company’s net deferred tax assets.
In September 2015, the FASB issued ASU 2015-16,
Simplifying the Accounting for Measurement –Period Adjustments
. Changes to the accounting for measurement-period
adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance
sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes
made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which
the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date
of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring
entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public
and private companies for periods beginning after December 15, 2015. Adoption of this new standard is not expected to have a material
impact on the Company’s financial statements.
In May 2015, the FASB issued ASU 2015-07,
“Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent),” which removes the requirement to categorize within the fair value hierarchy all investments
for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement
to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share
practical expedient. This ASU is effective for annual periods, including interim periods within those annual periods, beginning
after December 15, 2015, and early adoption is permitted. The new guidance should be applied on a retrospective basis to all periods
presented. The Company is currently evaluating the impact of adopting this guidance.
In February 2015, the FASB issued ASU 2015-02,
“Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which makes changes to both the variable interest
model and voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for
certain investment funds. All reporting entities that hold a variable interest in other legal entities will need to re-evaluate
their consolidation conclusions as well as disclosure requirements. This ASU is effective for annual periods beginning after December
15, 2015, and early adoption is permitted, including any interim period. The Company does not expect the adoption of this guidance
to have an impact on the financial statements.
In January 2015, the FASB issued ASU 2015-01,
“Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),” effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. This update eliminates from GAAP the concept of extraordinary
items. The adoption of ASU 2014-16 will not have a significant impact on the Company’s financial position or results of
operations.
In November 2014, the FASB issued ASU 2014-16,
“Derivatives and Hedging (Topic 815).” Entities commonly raise capital by issuing different classes of shares, including
preferred stock, that entitle the holders to certain preferences and rights over the other shareholders. The specific terms of
those shares may include conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences,
among other features. One or more of those features may meet the definition of a derivative under GAAP. Shares that include such
embedded derivative features are referred to as hybrid financial instruments. The objective of this update is to eliminate the
use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments
issued in the form of a share. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. The adoption of ASU 2014-16 will not have a significant impact on the Company’s financial position
or results of operations.
In August 2014, the FASB issued ASU 2014-15,
“Presentation of Financial Statements – Going Concern (Subtopic 205-40), effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides
guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability
to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods
ending after December 15, 2016, and early adoption is permitted. The Company expects to adopt this guidance on January 1, 2017.
The Company is currently evaluating the potential impact, if any, the adoption of ASU 2014-15 will have on footnote disclosures,
however, the Company does not expect the adoption of this guidance to have any impact on its financial position, results of operations
or cash flows.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed
disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting
periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or
modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we
expect to adopt this guidance on January 1, 2018. The Company has not yet determined its approach to adoption or the impact the
adoption of this guidance will have on its financial position, results of operations or cash flows, if any.
Reclassifications
Certain amounts in the prior period were reclassified
to conform to the current period’s financial statement presentation. These reclassifications had no effect on previously
reported net loss or accumulated deficit.
Note 2 – Senior Convertible Note
Payable
Senior Convertible Note (the “Note)
payable consists of the following at December 31, 2015:
|
|
December 31, 2015
|
|
Senior convertible note payable, at fair value
|
|
$
|
265,929
|
|
Less: Current maturities
|
|
|
(130,345
|
)
|
|
|
|
|
|
Senior convertible note payable, long-term
|
|
$
|
135,584
|
|
The funded and unfunded portion of the Investor
Note consists of the following at December 31, 2015:
|
|
December
31, 2015
|
|
Investor
notes - Available funding (subject to limitations)
|
|
$
|
10,000,000
|
|
Unfunded
amount of investor notes
|
|
|
(9,525,000
|
)
|
|
|
|
|
|
Investor
notes - funded (prior to any repayments)
|
|
$
|
475,000
|
|
On May 7, 2015, the Company completed the
May 2015 Private Placement of a $12.0 million principal amount senior secured convertible note (the “Note”) and Warrant
to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The placement agent for the Company in the
transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company receives the full cash proceeds. It
received $27,000 of such amount at the closing. In addition, the placement agent was granted a warrant to purchase 240,000 shares
of common stock at $5.00 per share, which warrant is immediately exercisable.
The Note and Warrant were issued pursuant
to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the Investor. The May 2015 Private Placement
was made pursuant to an exemption from registration under such Act. At the closing, the Investor acquired the senior convertible
note by paying $450,000 in cash and issuing a senior promissory note, secured by cash, with an aggregate initial principal amount
of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the Company under the Investor Note are paid
without any offset or default, the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement
agent fees and other expenses associated with the transaction, subject to the satisfaction of certain conditions. The Company
used the proceeds from this offering to retire certain outstanding obligations, including the 2015 area and training fees relating
to its Nicaraguan Concessions, and to provide working capital. As of December 31, 2015, an additional $25,000 was funded under
the Investor Note for a total of $475,000 advanced to the Company.
The Company is to receive the remaining cash
proceeds upon each voluntary or mandatory prepayment of the Investor Note. An Investor may, at its option and at any time, voluntarily
prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part,
upon the occurrence of one or more of the following mandatory prepayment events:
(1)
Mandatory Prepayment
upon Conversion
– At any time the Investor has converted more than $2.0 million principal amount of the Note, representing
the original issue discount of the Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis,
for each subsequent conversion of the Note.
(2)
Mandatory Prepayment
upon Mandatory Prepayment Notices
– The Company may require the Investor to prepay the Investor Note by delivering a
mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, (ii) the Company’s
receipt of all Governmental Authorizations, as defined in the Purchase Agreement, necessary to commence drilling on at least five
Properties, also as defined in the Purchase Agreement, within the Nicaraguan Concessions, and (iii) the Company obtaining forbearance
agreements from certain third parties to whom the Company owes obligations. Notwithstanding the foregoing, the Company may not
request a mandatory prepayment if after giving effect to such proposed mandatory prepayment, the Company, would hold more than
$4.0 million in cash or if prepayment under the Investor Note for the preceding sixty calendar day period would exceed $2.0 million.
The Investor Note also
contains certain offset rights, which if executed, would reduce the amount outstanding under the Note and the Investor Note and
the cash proceeds received by the Company.
Description of the
Senior Convertible Note
The Note is senior to the Company’s
existing and future indebtedness and is secured by all of the assets of the Company, excluding the Nicaraguan Concessions, and
to the extent and as provided in the related security documents.
The Note is convertible at any time at the
option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”).
The Note matures on the three-year anniversary of the issuance date thereof. If the Company issues or sells shares of its common
stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per
share that is less than the Conversion Price then in effect, the then current Conversion Price will be decreased to equal such
lower price. The foregoing adjustments to the Conversion Price for future stock issues will not apply to certain exempt issuances,
including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon
stock splits, reverse stock splits, and similar capital changes.
On the first business day of each month beginning
on the earlier of the (i) effectiveness of a registration statement the Company files to register the shares of common stock issuable
upon conversion of the Note or exercise of the Warrant, as defined below, or (ii) sixth month following the date of the Note through
and including the maturity date (the “Installment Dates”), the Company will pay to the Note holder an amount equal
to (i) one-thirtieth (1/30th) of the original principal amount of the Note (or the principal outstanding on the Installment Date,
if less) plus (ii) the accrued and unpaid interest with respect to such principal plus (iii) the accrued and unpaid late charges
(if any) with respect to such principal and interest. The Investor has the ability to defer or accelerate such monthly payments
in its sole discretion.
Prior to the maturity date, the Note will
bear interest at 8% per annum (or 18% per annum during an event of default) with interest payable in cash or in shares of Common
Stock monthly in arrears on the first business day of each calendar month following the issuance date.
Each monthly payment may be made in cash,
in shares of the Company’s common stock, or in a combination of cash and shares of its common stock. The Company’s
ability to make such payments with shares of its common stock will be subject to various equity conditions, including the existence
of an effective registration statement covering the resale of the shares issued in payment (or, in the alternative, the eligibility
of the shares issuable pursuant to the Note and the Warrant, as defined below, for sale without restriction under Rule 144 and
without the need for the Company to remain current with its public filing obligations) and certain minimum trading price and trading
volume. Such shares will be valued, as of the date on which notice is given by the Company that payment will be made in shares,
at the lower of (1) the then applicable Conversion Price and (2) a price that is 80.0% of the arithmetic average of the three
lowest weighted average prices of the Company’s common stock during the twenty-trading day period ending two trading days
before the applicable determination date (the “Measurement Period”). If the Company elects to pay such monthly payment
in shares of the Company’s stock it is required to pre-deliver shares of the Company’s common stock and is required
to deliver additional shares, if any, to a true-up such number of shares to the number of shares required to be delivered on the
applicable Installment Date pursuant to the calculation above.
At any time after the issuance date, the Company
will have the right to redeem all or any portion of the outstanding principal balance of the Note plus all accrued but unpaid
interest and any other charges at a price equal to 125% of such amount provided that (i) the arithmetic average of the closing
sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds 200% of the Conversion Price and
(ii) among other conditions, there is an effective registration statement covering the resale of the shares issued in payment
or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant for sale without restriction
under Rule 144 and without the need for the Company to remain current with its public filing obligations. The Investor has the
right to convert any or all of the amount to be redeemed into common stock prior to redemption.
Upon the occurrence of an event of default
under the Note, the Investor may, so long as the event of default is continuing, require the Company to redeem all or a portion
of its Note. Each portion of the Note subject to such redemption must be redeemed by the Company, in cash, at a price equal to
the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid interest, and accrued and unpaid
late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest
closing sale price of the shares of common stock during the period beginning on the date immediately preceding the event of default
and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during
such period.
Subject to certain conditions, the Investor
may also require the Company to redeem all or a portion of its Note in connection with a transaction that results in a Change
of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such redemption in cash at a price
equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and unpaid interest, and accrued and
unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the
greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the earlier
to occur of (i) the consummation of the Change of Control and (ii) the public announcement of such Change of Control and ending
on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period.
Description of the
Warrant
.
As a part of the May 2015 Private Placement,
the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s
common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing six months from the date of issuance
and the exercise prices for the Warrant is subject to adjustment for certain events, such as stock splits and stock dividends.
If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible
into shares of its common stock for a price per share that is less than the exercise price then in effect, the exercise price
of the Warrant will be decreased to equal such lesser price. Upon each such adjustment, the number of the shares of the Company’s
common stock issuable upon exercise of the Warrant will increase proportionately. The foregoing adjustments to the exercise price
for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans.
In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99% Restriction on
Conversion of Note and Exercise of Warrant
The Investor has no right to convert the Note
or exercise the Warrant to the extent that such conversion or exercise would result in the Investor being the beneficial owner
in excess of 9.99% of the Company’s common stock. The Company was required to hold a meeting of its shareholders to approve
increase the number of its authorized shares to meet its obligations under the Purchase Agreement to have reserved 200% of the
shares issuable upon conversion of the Note and exercise of the Warrant. The Company held its Annual Meeting of Shareholders on
September 25, 2015 and the shareholders approved the reverse split of the Company’s common stock issued and outstanding
shares, which satisfied this requirement.
Registration Rights
Agreement
In connection with the May 2015 Private Placement,
the Company and the Investor entered into a Registration Rights Agreement under which the Company is required, on or before 45
days after the closing of the May 2015 Private Placement, to file a registration statement with the Securities and Exchange Commission
(the “SEC”) covering the resale of 130% of the shares of the Company’s common stock issuable pursuant to the
Note and Warrant and to use its best efforts to have the registration declared effective as soon as practicable. The Company will
be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is
not filed or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities,
as such term is defined in the Registration Rights Agreement. The Company filed the required registration statement on Form S-1
on June 19, 2015 and the Securities and Exchange Commission declared the Form S-1 effective on October 9, 2015 and has thereby
satisfied this requirement.
Participation Rights
If, during the period beginning on the closing
date and ending on the four (4) year anniversary of the closing date, the Company offers, sells, grants any option to purchase,
or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent securities (a “Subsequent Placement”),
the Investor will have the right to participate for 50% of any such future Subsequent Placement.
Description of the
Financial Accounting and Reporting
The Company elected to account for the Note
on its fair value basis, therefore, the fair value of the Note, including its embedded conversion feature, were estimated together
utilizing a binomial lattice model on its origination date and the Black-Sholes model at December 31, 2015. Such assumptions included
the following:
|
|
Upon
Issuance
|
|
|
As
of
December 31, 2015
|
|
|
|
|
|
|
|
|
Volatility
– range
|
|
|
102.6
|
%
|
|
|
135.3
|
%
|
Risk-free
rate
|
|
|
1.00
|
%
|
|
|
1.31
|
%
|
Contractual
term
|
|
|
3.0
years
|
|
|
|
2.33
years
|
|
Conversion
price
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Par
value of note
|
|
$
|
540,000
|
|
|
$
|
378,000
|
|
Based upon the Company’s election to
account for the Note at fair value all related debt issuance expenses which totaled $1,302,629 (including $1,071,201 representing
the value of the warrant issued to placement agent and $231,428 of other fees and expenses) was charged to non-operating expenses
in 2015. The Company received $450,000 of proceeds at the date of issuance and the Company liquidated principal balances of $135,000,
net during the year ended December 31, 2015. The fair market value of the Note was estimated to be $682,400 as of the issuance
date and $265,259 at December 31, 2015. The net $49,071 change in fair market value of the Note is included in change in fair
value of senior notes payable in the accompanying statement of operations for the year ended December 31, 2015.
The Warrant issued to purchase 1,800,000 common
shares in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution
provisions. Accordingly, the Company has estimated the fair value of the warrant derivative as of the issuance date of the Note
was issued at $8,034,007, which has been charged to non-operating expense for the year ended December 31, 2015. Changes in the
fair value of the warrant derivative liabilities totaled $7,851,490 (reduction in the derivative liability) through December 31,
2015, which is included in changes in derivative fair value in the accompanying statement of operations for the year ended December
31, 2015. The warrant derivative liability balance related to such warrants was $182,517 as of December 31, 2015.
The warrant issued to purchase 240,000 shares
issued as part of the placement fee in connection with the Note was treated as a derivative liability for accounting purposes
due to its ratchet and anti-dilution provisions. Accordingly, the Company has estimated the fair value of the warrant derivative
as of the issuance date at $1,071,201, which is included in senior convertible note issuance costs for the year ended December
31, 2015. Changes in the fair value of the warrant derivative liability totaled $1,046,865 (reduction in the derivative liability)
through December 31, 2015, which is included in changes in derivative fair value in the accompanying statement of operations for
the year ended December 31, 2015. The warrant derivative liability balance related to such warrants was $24,336 as of December
31, 2015.
Note 3 – Debt
Debt consists of the following at December
31, 2015 and 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Line-of-credit with related party
|
|
$
|
68,303
|
|
|
$
|
33,807
|
|
Notes payable, short term:
|
|
|
|
|
|
|
|
|
Note payable, net of unamortized discount of $50,527 and $41,011, of December
31, 2015 and 2014, respectively
|
|
$
|
949,473
|
|
|
$
|
1,008,989
|
|
Note payable, net of unamortized discount of $262 and $-0-, as of December
31, 2015 and 2014, respectively
|
|
|
49,738
|
|
|
|
—
|
|
Note payable, net of unamortized discount of $238 and $-0-, as of December
31, 2015 and 2014, respectively
|
|
|
34,762
|
|
|
|
—
|
|
Note payable, net of unamortized discount of $-0- and $822, as of December
31, 2015 and 2014, respectively
|
|
|
—
|
|
|
|
24,178
|
|
Note payable, net of unamortized discount of $-0- and $27,712, as of December
31, 2015 and 2014, respectively
|
|
|
—
|
|
|
|
72,288
|
|
Notes payable, net of unamortized discount of $-0- and $175,248, as of December
31, 2015 and 2014, respectively
|
|
|
—
|
|
|
|
124,752
|
|
Note payable, net of unamortized discount of $-0-
and $39,452, as of December 31, 2015 and 2014, respectively
|
|
|
—
|
|
|
|
110,548
|
|
Total notes payable, short-term
|
|
$
|
1,033,973
|
|
|
$
|
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 $75,000 at August 28, 2015 with an initial maturity of November 28, 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, February 2015, May 2015, August 2015 and November 2015. Its current maturity date is May 28, 2016. In consideration
for the origination of the line of credit facility and the various renewals, the Company granted the lender common stock purchase
warrants exercisable to purchase an aggregate of 45,000 shares of common stock at an exercise price of $15.00 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 $15.00 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 amortized to expense
over the term of the line-of-credit. The Company estimated the fair value of the new warrants exercisable to purchase 40,000 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 amortized to expense over the extended term of the facility.
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 10,000 shares of common stock at an
exercise price of $5.00 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 $5.00 per share. The total value of the 10,000
newly issued warrants totaled $28,507, which was amortized over the extension period.
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 10,000 shares of common
stock at an exercise price of $5.00 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 $5.00 per share. The total value of the 10,000 newly issued warrants totaled $30,288, which was amortized
over the extension period.
On May 28, 2015, the Company negotiated an
additional amendment to the line-of-credit facility, which decreased the maximum amount from $100,000 to $75,000 and extended
its maturity date to August 28, 2015. In consideration, the Company granted the lender common stock purchase warrants exercisable
to purchase an aggregate of 10,000 shares of common stock at an exercise price of $5.00 per share, which warrants were immediately
exercisable and expire on May 26, 2020. The parties agreed as a condition to the amendment of the facility on May 26, 2015 that
the line-of-credit will be convertible to common stock at an exercise price of $5.00 per share. The total value of the 10,000
newly issued warrants totaled $35,652, which was amortized over the extension period.
On August 26, 2015, the Company negotiated
an additional amendment to the line-of-credit facility, which extended its maturity date to November 28, 2015. In consideration,
the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate of 10,000 shares of common
stock at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire on August 26, 2020. The
total value of the 10,000 newly issued warrants totaled $8,452, which was amortized over the extension period.
On November 26, 2015, the Company negotiated
an additional amendment to the line-of-credit facility, which extended its maturity date to February 28, 2016. In consideration,
the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate of 10,000 shares of common
stock at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire on November 26, 2020. The
total value of the 10,000 newly issued warrants totaled $655, which is being amortized over the extension period.
During the years ended December 31, 2015 and
2014, respectively, $275,337 and $593,643 of debt issuance costs were amortized (including amounts immediately expensed) to interest
expense, respectively and the remaining unamortized balance was $420 as of December 31, 2015, which is included in prepaid expenses.
Effective March 31, 2015, the lender exercised
its right to convert a portion of the outstanding line-of-credit principal balances totaling $50,000 into 10,000 shares of common
stock at a price of $5.00 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 “December 2013 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, to April 7, 2015. Effective April 7, 2015 the Company
and the lender agreed to further 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 (the “New Maturity Date”).
In connection with the December 2013 Note,
the Company granted the lender a warrant (the “Warrant”) exercisable to purchase 100,000 shares of its common stock
at an exercise price of $15.00 per share. In connection with an extension to April 2015, the parties amended the date for exercise
of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary of such date. The Company issued
no additional warrants to the lender in connection with the extension of the Note to the New Maturity Date. If the Company fails
to pay the Note on or before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and
the exercise price drops to $0.75 per share. All other terms of the Warrant remain the same. The Warrant has been treated as a
derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and
as a discount on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding
income (loss) reflected in the statement of operations as change in derivative liability. The discount is amortized ratably through
the original maturity date and each of the extended maturity dates.
In connection with an extensions of the December
2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue sharing agreement with the lender to grant the
lender under the revenue sharing agreement an irrevocable right to receive a monthly payment equal to one half of one percent
(1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions
and any other oil and gas concessions that the Company and its affiliates may acquire in the future. This percent increased to
one percent (1%) when the Company did not pay the December 2013 Note in full by August 7, 2014. Therefore, the revenue sharing
agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive revenue sharing agreement granted to the
lender as consideration for the extension of the maturity date to December 7, 2014 was estimated to be $964,738. Such amount has
been reflected as a reduction of oil and gas properties and as a discount on the renewed note payable and amortized ratably over
the extended term of the note.
In connection with the extension of the maturity
date of the December 2013 Note to April 7, 2016, the Company also (i) issued the lender 20,000 shares of restricted common stock;
(ii) decreased the exercise price of the warrant to $5.00 per share and extended the term of the warrant to a period commencing
on the New Maturity Date and expiring on the third anniversary of such date; and (iii) paid $50,000 toward amounts due under the
December 2013 Note. The Company issued no additional warrants to the lender in connection with the extension of the Note to the
New Maturity Date. If the Company fails to pay the December 2013 Note on or before its New Maturity Date, the number of shares
issuable under the Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the warrant
remain the same. The December 2013 Note may be prepaid without penalty at any time. The Note is subordinated to all existing and
future senior indebtedness, as such terms are defined in the Note.
The Warrant has been treated as a derivative
liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and as a discount
on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding income (loss)
reflected in the statement of operations as change in derivative liability. The discount is amortized ratably through the original
maturity date and each of the extended maturity dates. The Company recognized the value of the 20,000 shares of common stock issued
($104,000) and the increased value of the outstanding warrants due to the decrease in their exercise price ($68,716) as an additional
discount on the note payable to be amortized ratably over the extended term of the underlying note.
The discount recorded as of the December 27,
2013 origination date of the note and as a result of the amendments to the Note terms and extensions of the maturity date has
been amortized ratably over the term and extended terms of the note. Discount amortization expense aggregated $163,201 and $1,804,092
for the years ended December 31, 2015 and 2014, respectively, and the remaining unamortized discount was $50,527 and $41,011 as
of December 31, 2015 and 2014, respectively. The related warrant derivative liability balance was $2,540 at fair value as of December
31, 2015.
Other than the Note described above, during
the years ended December 31, 2015 and 2014 the Company had short-term notes outstanding with entities or individuals as follows:
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016. In consideration, the Company granted
the lender common stock purchase warrants exercisable to purchase an aggregate of 5,000 shares of common stock at an exercise
price of $5.60 per share, which warrants were immediately exercisable and expire on October 7, 2020. The total value of the
5,000 newly issued warrants totaled $3,447, and is being amortized over the extension period. Discount amortization totaled
$25,499 for the year ended December 31, 2015. The remaining unamortized discount was $262 as of December 31, 2015. The related
warrant derivative liability balance was $581 at fair value as of December 31, 2015.
|
|
|
|
|
●
|
On
July 15, 2015 the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 15, 2016. In consideration, the Company granted
the lender common stock purchase warrants exercisable to purchase an aggregate of 3,500 shares of common stock at an exercise
price of $5.60 per share, which warrants were immediately exercisable and expire on October 15, 2020. The total value of the
3,500 newly issued warrants totaled $1,458, and is being amortized over the extension period. Discount amortization totaled
$13,047 for the year ended December 31, 2015. The remaining unamortized discount was $238 as of December 31, 2015. The related
warrant derivative liability balance was $409 at fair value as of December 31, 2015.
|
|
|
|
|
●
|
On
January 7, 2014 the Company borrowed a total of $25,000 from an individual under a convertible note with a conversion price
of $15.00 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 2,500 shares of common stock at $15.00 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 $5.00
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 2,500 warrants with an exercise price of $5.00 per share with a January 7, 2020 expiration date.
The parties agreed as a condition of the renewal of the facility in January 2015 that all previously issued warrants to the
lender totaling 15,000 shares would be extended to a five-year term and the exercise price reduced to $5.00 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 years ended December 31, 2015 and 2014 includes discount amortization in the
amount of $58,783 and $36,501, respectively and as of December 31, 2015 and 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
5,457 shares of common stock at a price of $5.00 per share. The value of the warrant derivative was increased to the estimated
value of $49,887 representing the amended terms of the previously issued warrants as of the date of conversion and transition
to equity. 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 the Company borrowed a total of $100,000 from an entity under a convertible note with a conversion price of
$15.00 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 10,000 shares of common stock at $15.00 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 10,000 shares
of common stock at an exercise price of $10.00 per share for a five-year term and reduced the exercise price of the previously
issued warrants to $10.00 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 $5.00 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 amortized the discount to interest ratably over the term of the note. Interest expense for the years ended December
31, 2015 and 2014, respectively, includes discount amortization in the amount of $27,712 and $186,714, respectively and as
of December 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
21,852 shares of common stock at a price of $5.00 per share. The parties agreed as a condition to the conversion in February 2015
that all previously issued warrants to the lender totaling 20,000 shares would be extended to a five-year term and the exercise
price be reduced to $5.00 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 as of the date of conversion and transition to equity. 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 $15.00 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 25,000 shares of common stock at $15.00 per share for a term of five years from the date of
the notes. On November 19, 2014, the Company granted an additional 35,000 warrants with an exercise price of $10.00 per share
and a five-year term and reduced the existing 25,000 warrants exercise price to $10.00 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 $5.00 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 amortized the discount to interest ratably
over the term of the note. Interest expense for the years ended December 31, 2015 and 2014 includes discount amortization
in the amount of $175,248 and $539,703, respectively and as of December 31, 2015, and 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 43,417 shares of common stock at an exchange rate of $5.00 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 which occurred in May 2015. 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 60,000 shares would be extended to a five-year term and the exercise
price be reduced to $5.00 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 as of the date of conversion and transition to equity. 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 the Company borrowed a total of $100,000 from an entity under a convertible note payable with the conversion
rate of $15.00 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 10,000 shares of common stock at $15.00 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 $10.00 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 15,000 new warrants to acquire common stock at $10.00 per share for a term of five years
and the reduction in exercise price of the original 10,000 warrants from $15.00 per share to $10.00 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 $5.00 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
years ended December 31, 2015 and 2014 includes discount amortization in the amount of $39,452 and $103,111, respectively
and as of December 31, 2015 and 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 30,000 shares of common stock at a
price of $5.00 per share. The parties agreed as a condition to the conversion in February 2015 that all previously issued warrants
to the lender totaling 35,000 shares would be extended to a five-year term and the exercise price be reduced to $5.00 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.
As described above, other notes payable with
a total principal balance of $475,000 ($503,630 including accrued interest) were extinguished during the year ended December 31,
2015, which caused the associated warrant derivative liability to be transitioned to equity at its fair value on the date of extinguishment.
The warrant derivative liabilities transitioned to equity aggregated $329,849 during the year ended December 31, 2015 which represented
their respective fair value as of the date of the extinguishment of their underlying note payable.
Note 4 – Preferred Stock
On February 28, 2012, the Company signed a
definitive agreement Off-Shore Finance (“Offshore”) relating to outstanding debt and other obligations owed them.
In accordance with the agreement, on April 13, 2012, the Company issued Offshore 1,502 shares of Series B redeemable convertible
preferred stock. The Series B redeemable convertible preferred stock had a 6% annual dividend and were convertible into common
stock at a price of $65.00 per share. The preferred stock would automatically convert into common stock if the average of the
closing prices of the common stock for 30 consecutive trading days equaled at least $75.00 per share. The Company had the right
to redeem the preferred stock at any point for an amount equal to their issue price of $1,000 per share plus all accrued and unpaid
dividends. The Series B preferred stock had no voting privileges and was non-transferrable for 180 days after issuance.
Effective February 28, 2014, the Company received
Conversion Notices from Offshore that effected the conversion of all Series B preferred stock outstanding including accrued and
unpaid dividends thereon into shares of common stock. In the transaction, Offshore exchanged all of its 1,502 shares of Series
B preferred stock for 37,540 shares of common stock. Each share of Series B preferred had a liquidation and par value of $1,000.
The Company also issued Offshore an additional 4,505 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 42,045 shares of common stock valued at $40.00 per share, for a total of $1,681,792, which has been reflected as common stock
and additional paid in capital in the accompanying balance sheets.
Note 5 – Common Stock
During 2015, the Company issued a total of
424,530 shares of common stock to the holder of the senior convertible note payable in the form of principal payments aggregating
$160,000 and 14,260 shares of common stock for accrued interest totaling $5,536. See
Note 2
– Senior Convertible Note
Payable
.
On February 28, 2015, the Company issued a
total of 100,726 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 $5.00 per
share.
On March 31, 2015, the Company issued a total
of 10,000 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 its conversion right at an exchange rate of $5.00 per share.
On May 8, 2015, the Company issued a lender
20,000 shares of restricted common stock valued at $104,000 (based on closing market price on the date of issuance) in connection
with the extension of the maturity date of a note payable (See Note 3). The Company recorded the issuance of the common stock
at its fair value with a corresponding increase in discount on the note to be amortized over the extended terms of the note.
The Annual Meeting of Stockholders was held
on September 25, 2015 at which the stockholders approved an amendment to the Company’s Certificate of Incorporation to effect
a reverse split of its outstanding shares of common stock, par value $0.0001 per share, by a ratio in the range of one-for-eight
and one-for-11, as determined in the sole discretion of the Board of Directors. On October 19, 2015 the Board of Directors approved
a reverse split of its common shares in the ratio of 1-for-10 which became effective on November 17, 2015.
This reverse stock split decreased the issued
and outstanding shares by approximately 24,180,244 shares, the number of shares of common stock underlying outstanding warrants
by approximately 22,115,439 shares, outstanding stock options by approximately 3,703,050 shares and the number of shares underlying
the convertible notes by 2,400,000 shares. Furthermore, the authorized shares of common stock remained at 75,000,000 shares and
the par value remained at $0.0001 per common share. The authorized shares of preferred stock remained at 10,000,000 shares. GAAP
requires that the reverse stock split be applied retrospectively to all periods presented. As a result, all stock, warrant and
option transactions described herein have been adjusted to reflect the one-for-ten reverse stock split.
During 2014, the Company issued a total of
10,000 shares of common stock to an individual to settle outstanding litigation (See Note 11). The Company recorded the issuance
of the 10,000 shares based upon the closing market price on the date of issuance and a corresponding credit to common stock and
additional paid-in capital of $115,000.
Note 6 – Stock Options
The Company applies ASC 718,
Stock Compensation
,
which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards.
ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under
share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost
is recognized based on the grant-date fair value for all share-based payments granted, and is estimated in accordance with the
provisions of ASC 718.
In May 2006, the Company’s stockholders
approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which both incentive and non-statutory stock options
may be granted to employees, officers, non-employee directors and consultants. An aggregate of 47,000 shares of the Company’s
common stock are reserved for issuance under the 2006 Plan. In June 2005, the Company’s stockholders approved the 2005 Equity
Incentive Plan (the “2005 Plan”), under which both incentive and non-statutory stock options may be granted to employees,
officers, non-employee directors and consultants. An aggregate of 47,500 shares of the Company’s common stock were reserved
for issuance under the 2005 Plan however such 2005 Plan has now expired and no further issuances can be made. Options granted
under the 2005 Plan and 2006 Plan allow for the purchase of common stock at prices not less than the fair market value of such
stock at the date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally
expire ten years after the date of grant. The Company also has issued other stock options not pursuant to a formal plan with terms
similar to the 2005 and 2006 Plans.
The Annual Meeting of Stockholders was held
on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc. 2015 Stock Option and Restricted Stock
Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As of December 31, 2015, 515,650 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 year ended December 31, 2015.
The following table summarizes stock option
activity for the nine months ended December 31, 2015:
|
|
Number of Options
|
|
|
Weighted Average Exercise
Price Per Share
|
|
|
Weighted Average Remaining
Contractual Term
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding at December 31, 2014
|
|
|
420,450
|
|
|
$
|
38.91
|
|
|
|
6.3 years
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
78.40
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
411,450
|
|
|
$
|
38.04
|
|
|
|
5.4
years
|
|
|
$
|
—
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
381,450
|
|
|
$
|
38.67
|
|
|
|
5.2
years
|
|
|
$
|
—
|
|
The Company recorded stock-based compensation
expense in connection with the vesting of options granted aggregating $192,148 and $1,087,103 during the years ended December
31, 2015 and 2014, respectively.
The unrecognized compensation cost as of December
31, 2015 related to the unvested stock options as of that date was $7,598, which will be amortized during the first quarter 2016.
Note 7 – 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 detachable warrants issued in connection with various notes payable and
the senior convertible note, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual
term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability
of both the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the note
payable and warrant agreement terms (Note 2 and 3) and non-performance risk factors, among other items (ASC 820,
Fair Value
Measurements
(“ASC 820”) fair value hierarchy Level 3). The detachable warrants issued in connection with the
senior convertible note contains ratchet and anti-dilution provisions that remain in effect during the term of the warrant while
the ratchet and anti-dilution provisions of the other notes payable cease when the related note payable is extinguished. When
the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative liability will be adjusted
to fair value and the resulting derivative liability will be transitioned from a liability to equity as of such date. The derivative
liability associated with the warrants issued in connection with the senior convertible note payable will remain effect until
such time as the underlying warrant is exercised or terminated and the resulting derivative liability will be transitioned from
a liability to equity as of such date.
On May 7, 2015, the Company completed the
May 2015 Private Placement of a $12.0 million principal amount senior convertible note and a Warrant to purchase 1,800,000 shares
of the Company’s common stock, $0.0001 par value. The detachable Warrant to purchase 1,800,000 shares of common stock is
treated as a derivative liability in the accompanying financial statements at its estimated fair value. In addition, the placement
agent for the May 2015 Private Placement was granted a warrant to purchase 240,000 shares of common stock which is also treated
as a derivative liability. Further, the Company issued warrants to purchase 8,500 shares of common stock in relation to two promissory
notes in July 2015 which required derivative accounting treatment. A comparison of the assumptions used in calculating estimated
fair value of such derivative liabilities at the issue date and as of December 31, 2015 is as follows:
|
|
Upon
Issuance
|
|
|
As
of
December 31, 2015
|
|
|
|
|
|
|
|
|
Volatility – range
|
|
|
119.2
|
%
|
|
|
131.4
|
%
|
Risk-free rate
|
|
|
1.92
|
%
|
|
|
2.09
|
%
|
Contractual term
|
|
|
7.00 years
|
|
|
|
6.33 years
|
|
Exercise price
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Number of warrants in aggregate
|
|
|
2,040,000
|
|
|
|
2,040,000
|
|
Based on such assumptions the estimated fair
value of the Warrant issued in connection with the May 2015 Private Placement aggregated $8,034,007 as of the date of issuance,
which has been recorded as a non-operating expense in the year ended December 31, 2015. The estimated fair value of the warrant
to purchase 240,000 common shares issued to the placement agent warrant in connection with the senior convertible note totaled
$1,071,201, which was expensed as a senior convertible note issuance cost in the year ended December 31, 2015. In addition, the
change in the estimated value of both warrants from their origination to December 31, 2015 represented a decrease of $8,898,355,
which has been included in non-operating expenses together with other changes in derivative fair value of the other warrants described
below which aggregated $533,559.
Other notes payable with a total principal
balance of $475,000 were extinguished during the year ended December 31, 2015 which caused the associated warrant derivative liability
to be transitioned to equity at its fair value on the date of extinguishment. The Company issued warrants to purchase 19,500 shares
of common stock in 2015 related to the origination and extension of a notes payable and warrants to purchase 100,000 shares of
common stock are outstanding in relation to the $1.000,000 promissory notes issued in December 2013 and its extension all of which
required derivative accounting treatment. 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 year ended December 31,
2015 is as follows:
|
|
Upon
Issuance
|
|
|
As of date of
transition to equity
|
|
|
As
of
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Volatility – range
|
|
|
103.3%
- 109.1%
|
|
|
|
104
|
%
|
|
|
107.7%
- 135.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free rate
|
|
|
1.34% - 1.63%
|
|
|
|
1.0
|
%
|
|
|
0.92% - 1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual term
|
|
|
5.0 years
|
|
|
|
5.0 years
|
|
|
|
2.33 – 4.83
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price
|
|
|
$5.00 - $5.60
|
|
|
$
|
5.00
|
|
|
|
$5.00 - $5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of warrants in the aggregate
|
|
|
19,500
|
|
|
|
132,500
|
|
|
|
117,000
|
|
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
|
|
Warrants
issued in connection with the Senior convertible note (expensed at issuance date)-Note 2
|
|
|
8,034,007
|
|
Warrants
issued for the Senior convertible note placement fee (expensed at issuance date)-Note 2
|
|
|
1,071,201
|
|
Warrants
issued to originate or extend notes payable (recorded as discount on note payable) -Note 3
|
|
|
165,724
|
|
Unrealized
derivative gains included in other expense for the period
|
|
|
(9,431,914
|
)
|
Transition
of derivative liability to equity-Note 3
|
|
|
(329,849
|
)
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
$
|
210,383
|
|
The warrant derivative liability consists
of the following at December 31, 2015 and 2014:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Warrant issued to holder of Senior convertible note
|
|
$
|
182,517
|
|
|
$
|
—
|
|
Warrant issued to placement agent
|
|
|
24,336
|
|
|
|
—
|
|
Warrants issued to holders of notes payable - short term
|
|
|
3,530
|
|
|
|
701,214
|
|
Total warrant derivative liability
|
|
$
|
210,383
|
|
|
$
|
701,214
|
|
Note 8 – Warrants
The following table summarizes warrant activity
for the year ended December 31, 2015:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
Outstanding
and exercisable at December 31, 2014
|
|
|
366,271
|
|
|
$
|
13.94
|
|
Issued
in conjunction with senior convertible note payable (Note 2)
|
|
|
1,800,000
|
|
|
|
5.00
|
|
Issued
for senior convertible note payable placement fee (Note 2)
|
|
|
240,000
|
|
|
|
5.00
|
|
Issued
for origination or extension of notes payable (Note 3)
|
|
|
19,500
|
|
|
|
5.60
|
|
Issued
for extension of line-of-credit (Note 3)
|
|
|
50,000
|
|
|
|
5.00
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at December 31, 2015
|
|
|
2,475,771
|
|
|
$
|
5.34
|
|
The weighted average term of all outstanding
common stock purchase warrants was 5.8 years as of December 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 December 31, 2015.
Note 9 – Supplemental Oil and Gas
Information
Estimated Proved Oil and Gas Reserves
(Unaudited)
As of December 31, 2015 and 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 year ended December
31, 2015 in connection with the Company’s oil and gas acquisition, exploration and development activities are shown below.
|
|
Year
ended
December 31, 2015
|
|
Property
acquisition costs:
|
|
|
|
Proved
|
|
$
|
-
|
|
Unproved
|
|
|
|
|
Total
property acquisition costs
|
|
|
-
|
|
Development
costs
|
|
|
-
|
|
Exploration
costs
|
|
|
92,568
|
|
Total
costs
|
|
$
|
92,568
|
|
Exploration costs during the year ended December
31, 2015 primarily related to area concession fees to be paid to the Nicaraguan Government for 2015 and the supplement to the
environmental impact study in preparation for the drilling of exploratory wells.
Aggregate capitalized costs relating to the
Company’s oil and gas producing activities, and related accumulated depreciation, depletion, impairment and amortization
are as follows:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
Proved
oil and gas properties
|
|
$
|
-
|
|
|
$
|
-
|
|
Unproved
oil and gas properties
|
|
|
10,685,404
|
|
|
|
10,592,836
|
|
Total
|
|
|
10,685,404
|
|
|
|
10,592,836
|
|
Less
amounts allocated to revenue sharing interest granted to Note holder for extension of maturity date (See Note 3)
|
|
|
(964,738
|
)
|
|
|
(964,738
|
)
|
Less
accumulated impairment charge on oil and gas properties
|
|
|
(9,720,666
|
)
|
|
|
—
|
|
Less
accumulated depreciation, depletion and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net
capitalized costs
|
|
$
|
—
|
|
|
$
|
9,628,098
|
|
Management has performed its impairment tests
on its oil and gas properties as of December 31, 2015 and has concluded that a full impairment reserve should be provided on the
costs capitalized for its unproved oil and gas properties consisting solely of the Nicaraguan Concessions. Therefore, an impairment
charge of $9,720,666 has been including in operating expenses for the year ended December 31, 2015 which reduces the carrying
amount of oil and gas properties to zero as of December 31, 2015. The current environment for oil and gas development projects,
especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices
for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development
projects. This may provide substantial impediments for the Company and its ability to obtain adequate financing to fund the exploration
and development of its Nicaraguan projects and the overall economic viability of the Concessions should hydrocarbons be discovered
in commercial quantities.
Costs Not Being Amortized
Oil and gas property costs not being amortized
at December 31, 2015, (all accumulated costs have been reserved through an impairment charge as of December 31, 2015) costs by
year that the costs were incurred, are as follows:
Year
Ended December 31,
|
|
|
|
2015
|
|
$
|
92,568
|
|
2014
|
|
|
115,622
|
|
2013
|
|
|
6,051,411
|
|
2012
|
|
|
581,723
|
|
2011
|
|
|
731,347
|
|
Prior
|
|
|
3,112,733
|
|
Total
costs not being amortized
|
|
$
|
10,685,404
|
|
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 10 – Income Taxes
The provision for income taxes consists of
the following:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Current income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Total income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The effective income tax rate on continuing
operations varies from the statutory federal income tax rate as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Federal income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income tax rate
|
|
|
(4.4
|
)
|
|
|
(4.4
|
)
|
State tax assessment reversed
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
38.0
|
|
|
|
38.4
|
|
Other, net
|
|
|
0.4
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The significant temporary differences and
carry-forwards and their related deferred tax asset (liability) and deferred tax asset valuation allowance balances are as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals and other
|
|
$
|
1,015
|
|
|
$
|
954
|
|
Asset retirement obligations
|
|
|
659
|
|
|
|
659
|
|
Note payable discounts and derivatives
|
|
|
399
|
|
|
|
752
|
|
Stock-based compensation
|
|
|
1,870
|
|
|
|
1,120
|
|
Alternative minimum tax credit carry-forward
|
|
|
143
|
|
|
|
143
|
|
Net operating loss carry-forward
|
|
|
25,886
|
|
|
|
22,160
|
|
Gross deferred tax assets
|
|
|
29,972
|
|
|
|
25,788
|
|
Less valuation allowance
|
|
|
(29,972
|
)
|
|
|
(25,788
|
)
|
Deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
For income tax purposes, the Company has net
operating loss carry-forwards of approximately $67,415,000, which expire from 2025 through 2030. The Company has provided a 100%
valuation allowance due to the uncertainty of realizing the tax benefits from its net deferred tax asset.
The Company has not completed the filing of
tax returns for the tax years 2012 through 2015. Therefore, all such tax returns are open to examination by the Internal Revenue
Service.
The Internal Revenue Code contains provisions
under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has
experienced a more than 50% change in ownership over a three-year period. Current estimates prepared by the Company indicate that
no ownership changes have occurred, and are currently not subject to an annual limitation, but may be further limited by additional
ownership changes which may occur in the future.
As discussed in Note 1, “Summary of
Significant Accounting Policies,” tax positions are evaluated in a two-step process. Management first determines whether
it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not
recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax
position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest,
penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the
financial statements.
Note 11 – Commitments and Contingencies
The Company has not maintained insurance coverage
on its U.S domestic oil and gas properties for several years. The Company is not in compliance with Federal and State laws regarding
the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission
regarding administrative filings and renewal permits relative to its Texas oil and gas properties that were sold in 2012. The
ultimate resolution of these compliance issues could have a material adverse impact on the Company’s financial statements.
Nicaraguan Concessions
In April 2011, we filed with the Nicaraguan
government an Environmental Impact Assessment (“EIA”) covering proposed seismic activities on our Nicaraguan Concessions.
The filing of the EIA was followed by a comment period during which there was interaction between us the Ministerio del Ambiente
y los Recursos Naturales de Nicaragua, an agency of the Nicaraguan government; and the autonomous regions of Nicaragua that are
nearest to the Nicaraguan Concessions. In April 2013 the EIA was formally approved by the Nicaraguan government and we were cleared
to commence 2-D and 3-D seismic mapping activities in the area. In late 2013 and early 2014, we contracted with a fully integrated
Geoscience company that provides geological, geophysical and reservoir services to the global oil and gas industry, to conduct
2-D and 3-D seismic data covering selected areas within the boundaries of the Nicaraguan Concessions. In March 2014 we opened
a seismic data room in order for potential strategic and/or financial partners to view the fully processed results of the seismic
survey activities which continues to be available.
The final approval of the EIA by the Nicaraguan
government of our environment impact study on April 13, 2013, began Sub-Period 2 for both the Tyra and Perlas Blocks as defined
in the Nicaraguan Concessions. The Company believes it has satisfied the acquisition, processing and interpretation of Seismic
data required in Sub-Period 2 for both the Perlas and Tyra Blocks. Therefore, it is now in Sub-Period 3 of the exploration phase
of the 30-year Concession for both Perlas and Tyra as of June 30, 2015. Sub-Period 3 of the Nicaraguan Concessions requires the
drilling of at least one exploratory well on the Perlas Block during 2016 and the shooting of additional seismic on the Tyra Block.
The Company is in process of identifying at least one potential drilling site on the Perlas block as required in Sub-Period 3
and will have to perform supplemental EIA work prior to requesting and receiving the permit to drill from the Nicaraguan government.
The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot additional seismic, which is estimated to cost
approximately $2,500,000 prior to the commencement of exploratory drilling. The Company is negotiating with the Nicaraguan government
to seek a waiver of the additional seismic mapping on the Tyra Block so that it can proceed with exploratory drilling. There can
be no assurance that it will be able to obtain such waiver of the requirement.
During late December
2013, we completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan Concessions at that
point. We believe that the newly acquired 2-D seismic data, together with the previously acquired reprocessed 2-D seismic, has
helped us further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological
consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally oil) in place. In addition,
the new 2-D seismic acquired in 2013 provided our first geological information regarding the potential for oil resources in the
Cretaceous Zone, which we could not evaluate using less precise older 2-D seismic mapping. We have
identified multiple
promising sites on the Perlas Block for exploratory drilling and are planning the drilling of initial exploratory wells in order
to determine the existence of commercial hydrocarbon reserves, given sufficient financing. We believe that we have performed all
work necessary as of June 30, 2015 to proceed to Sub-Period 3 for the Perlas Block as defined in the Nicaraguan Concessions, which
requires the drilling of at least one exploratory well on the Perlas Block within the following one-year period. We must first
prepare and submit a supplemental EIA to the Nicaraguan government before the drilling permit can be issued on the Perlas Block,
which had not been completed as of December 31, 2015.
The Company has not yet submitted the EIA
supplement to the Nicaraguan Government and therefore has not received a drilling permit; however, assuming that Government does
accept the supplemental EIA and grant the drilling permit, the Company will be required to drill at least one exploratory well
on the Perlas Block within one year (estimated to be prior to May 2016) or risk being in default and losing our rights under the
Nicaraguan Concessions.
The Company is in technical default of the
Nicaraguan Concession because it has not provided the required letters of credit to the Nicaraguan Government. In accordance with
the Nicaraguan Concession agreements, the Company had previously provided the Ministry of Energy with the required letters of
credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The Company
had also made all required expenditures related to the Nicaraguan Concessions for training programs and as “area fees,”
for each respective year for 2010 through 2015. 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 the 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.
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 during 2016; (3) the shooting
of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement
from the Nicaraguan government; (4) the payment of normal day-to-day operations and corporate overhead; and (5) the payment of
outstanding debt and financial obligations as they become due. These are substantial operational and financial issues that must
be successfully mitigated during 2016 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua
Concessions will be in significant doubt. The Company completed the May 2015 Private Placement in May 2015 in an effort to obtain
its required capital. See Note 2 to the Financial Statements.
The Company is also seeking offers from industry
operators and other third parties for interests in the acreage in the Nicaraguan Concessions in exchange for cash and a carried
interest in exploration and development operations or other joint venture arrangement. Accordingly, it intends to finance 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.
The following charts set
forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions in order for the Company
to retain them.
Minimum Work Program – Perlas
Block
Perlas – Exploration Minimum Work Commitment and Relinquishments
|
|
Exploration
Period
(6 Years)
|
|
|
Duration
(Years)
|
|
|
Work
Commitment
|
|
|
Relinquishment
|
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
|
|
2
|
|
|
-
Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation
of 667km of new 2D seismic (or equivalent in 3D)
|
|
|
26km2
|
|
|
$
|
443,100
|
|
Sub-Period
2 Optional
|
|
|
|
1
|
|
|
-
Acquisition, processing & interpretation of 200km
2
of 3D seismic
|
|
|
53km2
|
|
|
$
|
1,356,227
|
|
Sub-Period
3 Optional
|
|
|
|
1
|
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower
|
|
|
80km2
|
|
|
$
|
10,220,168
|
|
Sub-Period
4 Optional
|
|
|
|
2
|
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
|
All
acreage except areas with discoveries
|
|
|
$
|
10,397,335
|
|
Minimum Work Program – Tyra
Block
Tyra – Exploration Minimum Work Commitment and Relinquishments
|
|
Exploration
Period
(6 Years)
|
|
|
Duration
(Years)
|
|
|
Work
Commitment
|
|
Relinquishment
|
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
|
|
1.5
|
|
|
-
Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new
2D seismic (or equivalent in 3D)
|
|
|
26km2
|
|
|
$
|
408,450
|
|
Sub-Period
2 Optional
|
|
|
|
0.5
|
|
|
-
Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period
|
|
|
40km2
|
|
|
$
|
278,450
|
|
Sub-Period
3 Optional
|
|
|
|
2
|
|
|
-
Acquisition, processing & interpretation of 250km
2
of new 3D seismic
|
|
|
160km2
|
|
|
$
|
1,818,667
|
|
Sub-Period
4 Optional
|
|
|
|
2
|
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
|
All
acreage except areas with discoveries
|
|
|
$
|
10,418,667
|
|
Contractual and Fiscal Terms
Training
Program
|
|
US
$50,000 per year, per block
|
Area
Fee
|
|
Years
1-3
|
|
$0.05/hectare
|
|
|
Years
4-7
|
|
$0.10/hectare
|
|
|
Years
8 & forward
|
|
$0.15/hectare
|
Royalties
|
|
Recovery
Factor 0 – 1.5
|
|
Percentage
5%
|
|
|
1.5
– 3.0
|
|
10%
|
|
|
>3.0
|
|
15%
|
|
|
|
|
|
Natural
Gas Royalties
|
|
Market
value at production
|
|
5%
|
Corporate
Tax
|
|
Rate
no higher than 30%
|
Social
Contribution
|
|
3%
of the net profit (1.5% for each autonomous region)
|
Investment
Protection
|
|
ICSID
arbitration OPIC insurance
|
Revenue Sharing
Commitments
On March 23, 2009, the Company entered into
a Securities Purchase Agreement, dated effective as of March 23, 2009, with Off-Shore, an accredited investor, to issue a subordinated
promissory note in the aggregate principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan
Concessions. Off-Shore funded a total of $1,275,000 and subsequently converted the subordinated promissory note to common stock.
Under the Revenue Sharing Agreement (the “Revenue
Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal to the revenue derived from
one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP
will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP will be paid to Off-Shore
by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous
month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop
the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore. In connection with its
dissolution Off-Shore assigned its RSP to its individual members.
On June 6, 2009 the Company entered into a
Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a
monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the
wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons
to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain
additional costs.
The RSP shall be paid by the last day of each
month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan
Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions,
and does not create any rights in the Nicaraguan Concessions for officers and directors.
The Company intends to seek joint venture
or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling operations on the
Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff Roberts to assist
the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity
assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the
hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs
incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance
and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the last day of each month based on
the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions.
The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does
not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In connection with the extension of the December
2013 Note with a $1,050,000 principal balance issued in December 2013, the Company entered into a Revenue Sharing Agreement in
May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue derived from one percent (1%) of 8/8ths
of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas
concessions that the Company and its affiliates may acquire in the future. The RSP will bear its proportionate share of all costs
incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance
and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received
by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Sharing
Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions.
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 with progress being delayed due to the current environment affecting oil and
gas exploration projects and uncertainties involving the status of the Nicaraguan concessions.
Lack of Compliance
with Law Regarding Domestic Properties
Infinity has not been in compliance with existing
federal, state and local laws, rules and regulations for its previously owned domestic oil and gas properties and this could have
a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity.
All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas have been disposed of as of December 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 December 31, 2015 and 2014 are 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:
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Exterran
Energy Solutions, L.P., f/k/a Hanover Compression Limited Partnership, which 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 claimed 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 engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
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Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore 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 Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
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Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement, dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days written notice by either party. The Company made payments totaling $14,000 and issued
15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing the required
services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that the parties
agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock in full settlement
of any balance then owed and final termination of the agreement. Torrey disputes the Company’s contentions and has submitted
the dispute to binding arbitration. The Company has accrued $49,000 in accounts payable as of December 31, 2015 and 2014,
which management believes is sufficient to provide for the ultimate resolution of this dispute.
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Timothy
Berge, who filed an action in the District Court, City and County of Denver Colorado number 09CV9566, was granted a default
judgment on November 8, 2010 against the Company in the amount of $304,921 plus costs. Mr. Berge provided certain geological
services to Infinity Oil and Gas of Texas, Inc. and claimed breach of contract for failure to pay amounts he alleged were
due. The Company was unable to defend itself in this matter due to limited financial resources even though it believes that
it had meritorious defenses. On May 27, 2014 the Company settled this litigation by the issuance of 10,000 shares of common
stock and the payment of $10,000 cash. The Company had previously established a provision of $304,878 related to this litigation
as an accrued liability in the accompanying balance sheet. The value of the 10,000 shares of common stock and $10,000 cash
paid in settlement of this litigation totaled $125,000, resulting in a gain of $179,878, which was recorded in the statement
of operations for the year ended December 30, 2014.
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Note 12 – Related Party Transactions
The Company does not have any employees other
than the CEO and CFO. In previous years, certain general and administrative services (for which payment is deferred) had been
provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket expenses and consist primarily of
accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s accounting for such support services.
For the years ended December 31, 2015 and 2014, the Company was billed $0 for such services. The amount due to the CFO’s
firm for services provided was $767,407 at December 31, 2015 and 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 Offshore 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 Offshore
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 37,540 shares of common
stock. Each share of Series B preferred had a liquidation and par value of $1,000. The Company also issued Offshore an additional
4,505 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 42,045 shares of common stock valued at $40.00
per share for a total of $1,681,792, which has been reflected as common stock and additional paid in capital during the year ended
December 31, 2014.
In connection with its subordinated loan,
Offshore was granted a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. The managing partner of Offshore
and the CFO are partners in the accounting firm which the Company has used 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, Offshore assigned its RSP to its individual members, which includes the former
managing partner of Offshore.
As of December 31, 2015 and 2014, the Company
had accrued compensation to its officers and directors of $1,423,208 and $1,187,208, respectively.
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 10,000 shares of common stock at an
exercise price of $5.00 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 89,063
shares would be extended to a five-year term and the exercise price reduced to $5.00 per share. The total value of the 10,000
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 10,000 shares of common
stock at an exercise price of $5.00 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 exercise price of $5.00 per share. The total value of the 10,000 newly issued warrants totaled $30,288, which is being
amortized over the extension period.
On May 26, 2015, the Company negotiated an
additional amendment to the line-of-credit facility, which decreased the maximum amount from $100,000 to $75,000. In consideration,
the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate of 10,000 shares of common
stock at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire on May 26, 2020. The parties
agreed as a condition to the amendment of the facility on May 26, 2015 that the line-of-credit will be convertible to common stock
at an exercise price of $5.00 per share. The total value of the 10,000 newly issued warrants totaled $35,652, which is being amortized
over the extension period.
On August 28, 2015, the Company negotiated
an additional amendment to the line-of-credit facility, which extended its maturity date to November 28, 2015. In consideration,
the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate of 10,000 shares of common
stock at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire on August 28, 2020. The
total value of the 10,000 newly issued warrants totaled $8,452, which is being amortized over the extension period.
On November 26, 2015, the Company negotiated
an additional amendment to the line-of-credit facility, which extended its maturity date to February 28, 2016 and later to May
28, 2016. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate
of 10,000 shares of common stock at an exercise price of $5.00 per share, which warrants were immediately exercisable and expire
on November 26, 2020. The total value of the 10,000 newly issued warrants totaled $655, 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 13
–
Subsequent Events
From January 1, 2016 through the report issuance
date of this Annual Report (April 14, 2016), the Company issued a total of 2,266,446 shares of common stock to the holder of the
senior convertible note payable in the form of principal payments aggregating $137,000 and related accrued interest. On March
30, 2016, the senior convertible note holder released a total of $35,000 of funding to the Company under the investor note. See
Note 2
– Senior Convertible Note Payable.
The Company has not resolved the contingency
related to the expired letters of credit for its Nicaraguan concessions (See Note 11). 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.
During January 2016, the Company extended
the maturity date of two promissory notes with principal balances totaling $85,000. The new maturity dates are May 7, 2016 and
May 15, 2016. In connection with the extension of the maturity date of these notes Company issued the lenders warrants to purchase
a total of 8,500 shares of common stock at an exercise price of $5.60 per share which are immediately exercisable and expire in
5 years.
On February 28, 2016, the Company extended
the maturity date of the line-of-credit which provides for borrowings on a revolving basis up to $75,000. The new maturity date
is May 28, 2016. In connection with the extension of the maturity date of the line-of-credit, the Company issued the lender a
warrant to purchase 10,000 shares of common stock at an exercise price of $5.00 per share which are immediately exercisable and
expire in 5 years.
On December 27, 2013 the Company borrowed
$1,050,000 under an unsecured credit facility with a private, third-party lender which has an outstanding principal balance of
$1,000,000. The facility is represented by a promissory note (the “Note”). Effective April 7, 2016 the Company and
the lender have agreed in principal to extend the maturity date of the Note from April 7, 2016 to the earlier of (i) April 7,
2017 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 are expected to remain the same.
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 proposed extension
of the maturity date of the Note to the New Maturity Date, the Company (i) will issue to the lender 20,000 shares of restricted
common stock; and (ii) agreed to pay $50,000 toward amounts due under the Note as soon as sufficient funds are available to do
so. The Company will issue no additional warrants to the lender in connection with the proposed extension of the Note to the New
Maturity Date. If the Company fails to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the warrant are expected to
remain the same.
The
parties are negotiating and finalizing the documents relative to this proposed extension, therefore the terms may change as and
when such documents are finalized and executed. However, there can be no assurance that such extension will be completed or that
the current agreed terms will be the finalized terms of such extension.
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