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.
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 but not limited to, our December 2013 promissory note in the original principal
amount of $1,050,000 due in April 2016, which is in default, 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 purchase the Properties,
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)
the purchase and development of the Properties will require large amounts of capital or a commercial relationship with
an industry operator that we may not be able to obtain; (vi) the oil and gas market has been severely impacted by the negative
effects of the coronavirus because of the substantial and abrupt decrease in the demand for oil and gas globally; (vii) the
oil and gas exploration business involves a high degree of business and financial risk; (viii) we are continuing to negotiate
with our creditors and may face additional claims in the future; (viii)) any future production will be contingent on successful
exploration, development and acquisitions to establish reserves and revenue in the future; (ix) the oil and gas industry
is highly competitive; (x) drilling is an uncertain process with many risks; (xi) oil and gas prices are volatile, and
declines in prices would hurt our revenues and ability to achieve profitable operations; (xii) our common stock is traded
on the OTCQB, which may not have the visibility or liquidity that we seek for our common stock; (xiii) we depend on key
personnel; (xiv) sufficient voting power by coalitions of a few of our larger stockholders to make corporate governance
decisions that could have a significant effect on us and the other stockholders, including Hudson Bay Master Fund LP and Amegy
Bank, NA; (xv) 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; (xvi) possible issuance of common stock subject to options and warrants may
dilute the interest of stockholders; (xvii) our nonpayment of dividends and lack of plans to pay dividends in the future;
(xviii) 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; (xix) our additional securities
available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xx) our stock
price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (xxi) indemnification
of our officers and directors; (xxii) whether we will be able to renegotiate or extend the terms of the Option,
and on terms favorable to us, or otherwise maintain our interest in the Option; (xxiii) whether we will obtain an industry
or other financial partner to enable us to explore and develop our the Properties if we do obtain extensions or renegotiation
of the terms of the Concessions and (xxiv) the ultimate impact of the coronavirus to our business and our ability to raise
necessary capital to fund operations and our business plan.
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, 2019 and 2018.
2020
Operational and Financial Objectives
Corporate
Activities
During
the year ended December 31, 2019, the Company raised $142,500 in cash through a private placement of 1,425,000 shares of common
stock. It used the proceeds to pay the $50,000 nonrefundable deposit Option to acquire the Properties and for general working
capital purposes. The Company plans to continue to raise debt and equity capital in order to meet its contractual obligations,
in particular to acquire the Properties and to resolve the December 2013 Note.
The
Company has focused on resolving its outstanding obligations that are in default in 2019 and in that regard has entered into exchange
agreements with several holders of such obligations. The Company completed exchange agreements with the holders of the: (i) Senior
Secured Convertible Note with a principal balance of $2,197,231 and related warrant to purchase 1,800,000 shares of common stock;
(ii) notes payable with a principal balance of $240,000; and (iii) the warrants to purchase 240,000 shares of common stock issued
to the placement agent of the Senior Secured Convertible Note. These obligations were extinguished and exchanged for the issuance
of common stock and new warrants to purchase common stock. These were important developments which resolved obligations that were
in default without involving the payment of cash. In addition, the Company recorded a gain of $2,445,700 during the year ended
December 31, 2019 as a result of the exchange transactions.
In
addition, the Company entered into term sheets with two entities that further the Company’s 2019 objectives to resolve obligations
in default and to acquire the Properties.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid
principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies
regarding the December 2013 Note through an exchange agreement.
On July 31, 2019 the Company acquired the
Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a nonrefundable
deposit of $50,000 to bind the purchase option which gives it the right to acquire the Properties for $2.5 million prior to December
31, 2019. The Company was not able to exercise the Option prior to December 31, 2019 and the parties are negotiating an extension
and repricing of the purchase price under such Option. There can be no assurance that the parties will negotiate an extension
particularly in light of recent events including the coronavirus pandemic and its impact on the oil and gas industry.
The Option includes a provision permitting
Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to its exercise of the Option. If such
a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will
for a period of nine months following the buy-out find a project of like kind and provide the Company a first right of refusal
to acquire such asset.
The
Company has not resolved the contingencies regarding its various notes payable with an outstanding principal balance of $1,104,125
as of December 31, 2019 related to their default status. The Company continues to pursue resolutions of these defaults including
to negotiate extensions, waivers or new note agreements; however, there can be no assurance that the Company will be successful
in that regard.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going concern.
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, 2019 and 2018
Results
of Operations
Revenue
The
Company had no revenues in either 2019 or 2018 because it focused on the acquisition of domestic oil and gas properties, resulting
in its Option for the Properties on July 31, 2019.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2019 or 2018. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2019 and 2018.
The
Company has no current domestic exploration and development activities.
General
and Administrative Expenses
General and administrative expenses of $418,759
for the year ended December 31, 2019 increased $209,818, or 100%, from $208,941 in the same period in 2018. The increase in general
and administrative expenses is primarily attributable to stock based compensation expense totaling $186,274 related to the restricted
stock granted to our newly appointed COO in 2019, $76,415 in expenses associated with the December 31, 2019 expiration of the
Option to acquire the Properties and an increase in audit and legal fees associated with the Company’s regulatory
filings with the Securities and Exchange Commission and the exchange agreements finalized in 2019 offset by a $77,798 decrease
in Nicaragua Concession related expenses. The restricted stock granted to our new COO will continue be amortized through October
2020.
Interest
expense
Interest
expense decreased $24,292, or 20.8%, from $116,744 for the year ended December 31, 2018 to $92,452 for the year ended December
31, 2019. The decrease is attributable to the exchange transactions which extinguished the Senior Secured Convertible Note with
an approximate principal balance of $2.2 million and short-term notes payable with a principal balance totaling $240,000 during
the year ended December 31, 2019. Remaining interest expense is related to various short-term notes outstanding in both periods
which have matured and for which the Company was seeking extensions as of December 31, 2019.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company will need to continue with these types of short-term borrowings with high effective interest rates.
Gain
on exchange and extinguishment of debt and warrant obligations
The
gain on exchange and extinguishment of debt and warrant obligations is attributable to exchange transactions which extinguished
the Senior Secured Convertible Note with an approximate principal balance of $2.2 million, short term notes payable with a principal
balance totaling $240,000 and the warrant to purchase 240,000 shares of common stock issued to a placement agent during the year
ended December 31, 2019.
The
Company and the holders of these obligations agreed to extinguish the existing obligations (which were in default) in exchange
for the issuance of shares of common stock or new warrants to purchase common stock with no price or dilution protection. Upon
exchange of the securities the existing obligations were cancelled and both holders signed agreements which released the Company
of all obligations related to the old securities. As a result, the Company extinguished such original securities/obligations and
recorded the issuance of the new obligations at their fair value on the date of exchange resulting in a total gain of $2,445,700
during the year ended December 31, 2019.
In
addition, on July 25, 2019 the Company entered into a non-binding term sheet to enter into an exchange agreement with respect
to a note payable with a principal balance of $1.0 million, accrued interest approximating $481,000, a warrant to purchase 100,000
shares of common stock and a revenue sharing agreement for 1% of hydrocarbons produced on the Nicaraguan Concession. If the parties
agree to the term sheet, these obligations will be exchanged for the issuance of 740,500 shares of common stock and a cash payment
of $100,000. See Note 3, “Debt.”
Change
in Fair Value of Secured Convertible Note
The
Company issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note
on a fair value basis. On May 4, 2017, the Investor notified the Company that it elected to affect an Investor Optional Offset
under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000
in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000
in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note.
The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor
requested the Company to deliver the Replacement Note representing the remaining principal balance of $2,197,231 to replace the
Convertible Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231
as asserted by the Investor at its maturity date in May 2018. The resulting change in the estimated fair value was $150,794 during
the year ended December 31, 2018. There was no change in fair value during the year ended December 31, 2019 as the Convertible
Note matured in May 2018.
On
May 23, 2019 and as amended on May 30, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding
matters and entered into the Exchange Agreement and Side-Letter Agreement as described below:
Exchange
Agreement: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued
in the May 2015 Private Placement, including: (i) the Convertible Note, subject to the Optional Offset (as defined in the Investor
Note), with a current balance of $2,197,231; (ii) the related accrued interest under the Convertible Note, with a balance of $28,643;
(iii) the Warrant; (iv) the Security and Pledge Agreement entered into by the Company and the Investor in connection with
the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in connection with the May 2015 Private Placement;
and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with the May 2015 Private
Placement, for 605,816 fully paid and nonassessable shares of Common Stock and certain rights (the “Rights”) to acquire
additional securities in the future, which may be exercised for additional shares of Common Stock.
Upon
consummation of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including
any rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s
ownership of the Original Securities.
Side-letter
Agreement: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement,
dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the
Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an
increase in the Number of Fully-Diluted Shares Outstanding of the Company from the execution date of the Exchange Agreement to
the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up Shares, if
any, shall provide the Investor with Rights to acquire additional Right Shares to adjust their ownership to 9.99% of the common
shares and common share equivalents then outstanding. Any common share equivalents then outstanding and to be issued in conjunction
with the Side-Letter Agreement will be issued in like tenor.
Consistent
with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter
Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement
the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant
to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
Change
in Derivative Fair Value
The
conversion feature in certain outstanding promissory notes and common stock purchase warrants issued in connection with short-term
notes and the Secured Convertible Note outstanding during 2019 and 2018 are treated as derivative instruments because the promissory
notes and warrants contain ratchet and anti-dilution provisions. In addition, the Side-Letter Agreement with Hudson Bay as a result
of the Exchange Agreement was considered a derivative and accordingly was marked-to-market until its finalization on November
23, 2019. The mark-to-market process resulted in a loss of $89,714 during the year ended December 31, 2019 and a gain of $38,681
during the year ended December 31, 2018. The loss recognized in the 2019 period is primarily the result of the Side-Letter Agreement
derivative issued pursuant to the Hudson Bay exchange agreement. Such side-letter provides anti-dilution protection to Hudson
Bay which will likely require the Company to issue common stock and warrants to purchase common stock on its expiration date of
November 23, 2019.
Income
Tax
The
Company recorded no income tax benefit (expense) in the year ended December 31, 2019. The Company has been in a cumulative tax
loss position and has substantial net operating loss carryforwards available to it at December 31, 2019. The Company has continued
to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense on its income before income
taxes during the year ended December 31, 2019.
The
Company recorded a tax benefit of $150,000 during the year ended December 31, 2018. The income tax benefit recorded in 2018 is
primarily due to the Tax Cuts and Jobs Act (the “Act”) that became law on December 22, 2017. The Act significantly
changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in
January 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000, which previously was reported as income taxes payable on the Company’s balance
sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, because the Company considered
it more likely than not that all the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act,
the Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the
Company has recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income
taxes payable to zero as of December 31, 2018.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,950,000 as of December 31, 2019, which
expire from 2025 through 2038. 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.
Net
income (loss)
As
a result of the above, the Company reported net income of $1,844,775 for the year ended December 31, 2019 compared to a net loss
of $287,798 for the same period in 2018. This represents an improvement of $2,132,573.
Basic
and Diluted Net Income (Loss) per Share
Basic
net income (loss) per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of
common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation
represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted”
method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss
per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect. In addition, in periods
in which there is net income and the effect of including common share equivalents in the diluted per share calculations would
be anti-dilutive (such as when the conversion or exercise price of the common share equivalents are higher than the average closing
market price per share) such anti-dilutive common share equivalents would also be excluded from the calculation of basic and diluted
weighted average shares outstanding.
During
the year ended December 31, 2019 all of the common stock equivalents outstanding were anti-dilutive as their respective conversion
or exercise prices were higher than the average closing market price per share during the period. Therefore, all of the common
stock equivalents outstanding during the year ended December 31, 2019 were excluded from the diluted weighted average shares outstanding
and diluted income per share calculations. The basic and diluted net income per share was $0.20 for the year ended December
31, 2019 the basic and diluted loss per share was $0.04 for the year ended December 31, 2018 for the reasons previously noted.
Potential shares of common stock as of December 31, 2019 that have been excluded from the computation of diluted net income (loss)
per share amounted to 1,278,943 shares, which included 946,943 outstanding warrants and 332,000 outstanding stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development
of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the
world. Historically, we financed our operations through the issuance of equity and various short and long-term debt financing
that contained some level of detachable warrants to provide the holders with a level of equity participation.
Private
Placement of Common Stock
During
the year December 31, 2019, the Company has raised $142,500 in cash through a private placement of 1,425,000 shares of common
stock. It used the proceeds to pay the $50,000 nonrefundable deposit for the Option relating to the Properties and for general
working capital purposes.
Senior
Secured Convertible Note
On
May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal
amount Secured 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”).
On
May 23, 2019 and as amended on May 30, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding
matters and entered into the Exchange Agreement and Side-Letter Agreement as described in Note 3, “Debt.”
Short-Term
Notes Extinguished
In
November 2016, the Company issued a $200,000 convertible promissory note which requires no principal or interest payments until
its November 2017 maturity date and bears 8% interest. The proceeds of this note were used to retire the Company’s line-of-credit
upon its maturity in November 2016 and for general working capital purposes. This note was not retired at its maturity and was
therefore in default.
In
April 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible
at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April 19, 2018 and
bears interest at 8% per annum. This note was not retired at its maturity and therefore was in default.
On
June 19, 2019, the Company and the holders of these two convertible notes entered into an exchange agreement whereby the two convertible
notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. The exchange
agreement required the Company to issue the individual a new warrant to purchase up to 570,000 shares of common stock with a termination
date of June 19, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions in exchange
for the extinguishment of the two convertible notes and related accrued interest.
Short-Term
Notes Outstanding
On
July 7, 2015 and July 15, 2015, the Company borrowed a total of $85,000 from two individuals under convertible notes payable with
the conversion rate of $5.60 per share. The original terms of the notes were for a period of 90 days and the notes bore interest
at 8% per annum. In connection with the notes, the Company issued warrants for the purchase of a total of 34,000 shares of common
stock at $5.60 per share for a period of five years from the date of their issuance. The notes were not paid at maturity and now
are in default. The Company is attempting to negotiate a resolution to the default, but there can be no assurance that it will
be successful in that regard.
On
May 21, 2018 the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible
at a rate of $0.50 per share. During 2019 the Company borrowed an additional $56,000 from this same third-party lender under the
same terms. In addition, during October 2019 we repaid $50,000 of principal on this note. The note is due on demand and bears
interest at 8% per annum.
In
summary, as of December 31, 2019, the following debt was outstanding: (i) the two promissory notes in the total principal amount
of $85,000, which matured in October 2016 and are in default; (ii) the December 2013 Note in the principal amount of $1,000,000,
which was due in April 2016 and is in default for which the Company has entered into a term sheet to resolve the default and extinguish
the obligation; and (iii) $19,125 convertible promissory note, which is due on demand.
Capital
Expenditures
On July 31, 2019 the Company acquired the
Option to purchase the Properties. The Company paid the required nonrefundable $50,000 deposit which was required to bind the
Option to acquire the Properties for $2.5 million by December 31, 2019 to complete the transaction. In addition, the Company funded
lease extensions underlying the Option which totaled $26,415. We were unable to close on the Option prior to December 31, 2019
and the parties are negotiating an extension and repricing. There can be no assurance that it will be able to do so
or obtain the required financing or obtain it on terms favorable to the Company or its shareholders to acquire the Properties.
Accordingly, all costs associated with the option to acquire the Properties was expensed upon expiration of the option on
December 31, 2019.
The
Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting
to obtain extensions of the maturity dates for its debt or compromises of the debt. The Company has been successful in restructuring
certain obligations that were in default during 2019. However, there can be no assurance that it will be able to obtain additional
funding, extensions or restructurings or on what terms.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
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, 2019 and 2018
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors ad Stockholders of
Infinity Energy Resources, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Infinity Energy Resources, Inc. (the “Company”) as of December 31,
2019 and 2018, and the related statements of operations, stockholders’ deficit, and cash flows for each of the two years
in the period ended December 31, 2019, and the related notes and schedules (collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Substantial
doubt about the Company’s Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 1 to the accompanying 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. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation
of the events and conditions and management’s plans regarding 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.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2014.
New
York, New York
May
14, 2020
INFINITY
ENERGY RESOURCES, INC.
Balance
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ASSETS
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Current assets:
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|
|
Cash and cash equivalents
|
|
$
|
1,785
|
|
|
$
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,785
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,785
|
|
|
$
|
1,367
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,091,453
|
|
|
$
|
6,040,948
|
|
Accrued liabilities (including $788,520 due to related party at December 31, 2019 and 2018)
|
|
|
3,777,580
|
|
|
|
3,699,747
|
|
Accrued interest
|
|
|
528,684
|
|
|
|
509,894
|
|
Asset retirement obligations
|
|
|
1,716,003
|
|
|
|
1,716,003
|
|
Secured convertible note payable-current
|
|
|
—
|
|
|
|
2,197,231
|
|
Convertible notes payable-short term
|
|
|
1,104,125
|
|
|
|
1,338,125
|
|
Total current liabilities
|
|
|
13,217,845
|
|
|
|
15,501,948
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
1,116
|
|
|
|
65,502
|
|
Total liabilities
|
|
|
13,218,961
|
|
|
|
15,567,450
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.0001 per share, 10,000,000 shares authorized; no shares issued or outstanding as of December 31, 2019 and 2018
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $.0001 per share, 75,000,000 shares authorized, 12,310,733 and 7,712,569 shares issued and outstanding at December 31, 2019 and 2018, respectively
|
|
|
1,231
|
|
|
|
771
|
|
Additional paid-in capital
|
|
|
109,583,945
|
|
|
|
109,080,273
|
|
Accumulated deficit
|
|
|
(122,802,352
|
)
|
|
|
(124,647,127
|
)
|
Total stockholders’ deficit
|
|
|
(13,217,176
|
)
|
|
|
(15,566,083
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
1,785
|
|
|
$
|
1,367
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Operations
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
418,759
|
|
|
$
|
208,941
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
418,759
|
|
|
|
208,941
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(418,759
|
)
|
|
|
(208,941
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(92,452
|
)
|
|
|
(116,744
|
)
|
Gain on exchange and extinguishment of debt and warrant obligations
|
|
|
2,445,700
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of secured convertible note payable
|
|
|
—
|
|
|
|
(150,794
|
)
|
Change in derivative fair value
|
|
|
(89,714
|
)
|
|
|
38,681
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,263,534
|
|
|
|
(228,857
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,844,775
|
|
|
|
(437,798
|
)
|
Income tax (expense) benefit
|
|
|
—
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,844,775
|
|
|
$
|
(287,798
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
(0.04
|
)
|
Weighted average shares outstanding – basic and diluted
|
|
|
9,086,265
|
|
|
|
7,712,569
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Stockholders’ Deficit
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, December 31, 2017
|
|
|
7,712,569
|
|
|
$
|
771
|
|
|
$
|
109,080,273
|
|
|
$
|
(124,359,329
|
)
|
|
$
|
(15,278,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(287,798
|
)
|
|
|
(287,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
7,712,569
|
|
|
|
771
|
|
|
|
109,080,273
|
|
|
|
(124,647,127
|
)
|
|
|
(15,566,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
186,274
|
|
|
|
—
|
|
|
|
186,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
(200
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares pursuant to exchange agreements
|
|
|
605,816
|
|
|
|
61
|
|
|
|
29,308
|
|
|
|
—
|
|
|
|
29,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock purchase warrants pursuant to exchange agreements
|
|
|
—
|
|
|
|
—
|
|
|
|
70,549
|
|
|
|
—
|
|
|
|
70,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares pursuant to side-letter agreement
|
|
|
567,348
|
|
|
|
57
|
|
|
|
68,025
|
|
|
|
—
|
|
|
|
68,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants pursuant to side-letter agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
7,358
|
|
|
|
—
|
|
|
|
7,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant Private Placement
|
|
|
1,425,000
|
|
|
|
142
|
|
|
|
142,358
|
|
|
|
—
|
|
|
|
142,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,844,775
|
|
|
|
1,844,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
|
12,310,733
|
|
|
$
|
1,231
|
|
|
$
|
109,583,945
|
|
|
$
|
(122,802,352
|
)
|
|
$
|
(13,217,176
|
)
|
See
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Statements
of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,844,775
|
|
|
$
|
(287,798
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
|
89,714
|
|
|
|
(38,681
|
)
|
Change in fair value of senior convertible note
|
|
|
—
|
|
|
|
150,794
|
|
Gain on exchange of debt and warrant obligations
|
|
|
(2,445,700
|
)
|
|
|
—
|
|
Stock based compensation
|
|
|
186,274
|
|
|
|
—
|
|
Write-off of oil and gas property purchase option costs
|
|
|
76,415
|
|
|
|
—
|
|
Change in operations assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in income taxes payable
|
|
|
—
|
|
|
|
(150,000
|
)
|
Increase in accounts payable
|
|
|
6,569
|
|
|
|
35,543
|
|
Increase in accrued liabilities
|
|
|
77,833
|
|
|
|
155,386
|
|
Increase in accrued interest
|
|
|
92,453
|
|
|
|
116,743
|
|
Net cash used in operating activities
|
|
|
(71,667
|
)
|
|
|
(18,013
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Deposit on purchase of oil and gas properties
|
|
|
(76,415
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(76,415
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from private placement of common stock
|
|
|
142,500
|
|
|
|
—
|
|
Proceeds from issuance of convertible note payable
|
|
|
56,000
|
|
|
|
13,125
|
|
Repayment of convertible note payable
|
|
|
(50,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
148,500
|
|
|
|
13,125
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
418
|
|
|
|
(4,888
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,367
|
|
|
|
6,255
|
|
Ending
|
|
$
|
1,785
|
|
|
$
|
1,367
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of secured convertible note payable
|
|
$
|
2,197,231
|
|
|
$
|
—
|
|
Exchange of convertible notes payable - short term
|
|
$
|
240,000
|
|
|
$
|
—
|
|
Issuance of common shares pursuant to exchange agreements
|
|
$
|
97,451
|
|
|
$
|
—
|
|
Issuance of common stock purchase warrants pursuant to exchange agreements
|
|
$
|
77,907
|
|
|
$
|
—
|
|
Issuance of shares of restricted common stock
|
|
$
|
200
|
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these financial statements.
INFINITY
ENERGY RESOURCES, INC.
Notes
to Financial Statements
December
31, 2019
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature
of Operations
Since
2009 we had planned to pursue the exploration of potential oil and gas resources in the United States and in the Perlas and Tyra
concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”),
which contain a total of approximately 1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc.
in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We also began assessing various opportunities
and strategic alternatives involving the acquisition, exploration and development of natural gas and oil properties in the United
States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and
gas in the United States. As a result, on July 31, 2019 we acquired an option (the “Option”) from Core Energy, LLC,
a closely held company (“Core”), to purchase the production and mineral rights/leasehold for oil & gas properties,
subject to overriding royalties to third parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous
acres (the “Properties”). We paid a nonrefundable deposit of $50,000 to bind the purchase option, which provided us
the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the
option prior to December 31, 2019 and the parties are currently negotiating an extension of such Option and lowering the purchase
price of the Properties. There can be no assurance that the parties will negotiate an extension particularly in light of recent
events including the coronavirus pandemic and its impact on the oil and gas industry.
If
the parties agree to extend, reprice or otherwise complete the acquisition, the purchase will include the existing production
equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include
a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical
producing wells, which currently produce from the Reagan Sand zone with an approximate depth of 3,600 feet.
We intend to complete the acquisition of the
Properties prior to the end of 2020, subject to successful renegotiations and obtaining adequate financing. The Option
includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to
our exercise of the Option. If such a sale occurs, we would be entitled to 10% of the proceeds of the sale on the closing date.
In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide us a first
right of refusal to acquire such asset.
We
must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying our
existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there
can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further,
we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to exercise the Option.
Nicaragua
We
began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built
relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research
that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round
held by INE in January 2003.
On
March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan
Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental
study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired
over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact
Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic
data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D
and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
We relied on raising debt and equity capital
to fund our ongoing maintenance/expenditure obligations under the Nicaraguan Concession, our day-to-day operations and corporate
overhead because we have generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See
Note 3) matured in April 2016 and is currently in default and three other notes payable with principal balances of $104,125 as
of December 31, 2019 are now either due on demand or currently in default. In 2020 we abandoned the Concessions.
Going
Concern
The
Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund
the (i) acquisition of the Properties under the Option; (ii) normal day-to-day operations and corporate overhead; and (iii) outstanding
debt and other financial obligations as they become due, as described below. These are substantial operational and financial issues
that must be successfully addressed during 2020.
The
Company is seeking new sources of debt and equity capital to fund the needs enumerated above. The Company is attempting to obtain
extensions of the maturity dates for its debt or compromises of the debt. In addition, the Company will seek offers from industry
operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and
development operations or other joint venture arrangement. The Company has restructured certain obligations that were in default
during 2019; however, there can be no assurance that it will be able to obtain such funding, extensions or additional restructurings
or on what terms.
Due
to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue
as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include
the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note
payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
Recently
issued accounting pronouncements
In
June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting,” which modifies the accounting for share-based payment awards issued to nonemployees to largely align
it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods
beginning January 1, 2019. The adoption of the standard had no impact on our financial position or results of operations for the
years ended December 31, 2019 and 2018.
In
February 2016, the FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize
almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB
retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current
model but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback
guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is
effective for fiscal years beginning after December 15, 2018. The adoption of the standard had no impact on our financial position
or results of operations for the years ended December 31, 2019 and 2018.
The
Company has evaluated all other recent accounting pronouncements and believes that none of them will have a material effect on
the Company’s financial position, results of operations or cash flows.
Concentrations
The Company’s business plan had consisted
of developing the Nicaraguan Concessions in addition to potential domestic oil and gas projects and it may become active in Nicaragua
in the future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations.
In 2020 the Company decided not pursue development of the Concessions and has focused on the Option
to purchase the Properties.
Foreign
Currency
The
United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and
exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities
are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures
in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included
in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign
currencies.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the
Company had minimal cash as of December 31, 2019 and 2018, its policy is that all highly liquid investments with a maturity of
three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents.
Oil
and Gas Properties
The
Company will follow 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 will be capitalized. Overhead related to development activities will also be capitalized during the acquisition
phase.
Depletion
of proved oil and gas properties will be 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 will be 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, 2019 and 2018 relate to the Nicaraguan Concessions.
In assessing the unproved property costs for impairment, the Company takes into consideration various information including: (i)
the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements,
(iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall environment
related to oil and gas exploration and development projects for unproven targets in unproven regions of the world, (vi) the availability
of financing for financial and strategic partners, and (vii) other factors that would impact the viability of a significant long-term
oil and gas exploration and development project.
The current environment for oil and gas development
projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity
prices for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development
projects. These were substantial impediments for the Company to obtain adequate financing to fund the exploration and development
of its Nicaraguan Concessions. The Company performed its impairment tests as of December 31, 2019 and 2018 and has concluded that
a full impairment reserve should be provided on the costs capitalized for the Nicaraguan Concessions oil and gas properties. All
costs related to the Nicaraguan Concessions from January 1, 2016 through December 31, 2019 have been charged to operating expenses
as incurred.
Pursuant
to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that
capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of
(1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the
arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative
instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement
obligations that have been accrued on the 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, 2019 and 2018, the Company did not have any proved oil and gas properties, and all unproved property costs relate to its Nicaraguan
Concessions.
Proceeds
from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized,
unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas,
in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss.
Asset
Retirement Obligations
The
Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities
to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability
is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging
of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted
as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic
oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to
the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations
to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation
related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in
Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas
producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and
its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned
wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related
to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized
since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included
in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not
perform its obligations to reclaim abandoned wells in a timely manner.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging.
ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the 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, 2019 and 2018 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, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value
recognized in operations.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts payable, accrued liabilities and short-term notes represent the estimated fair
value due to the short-term nature of the accounts.
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
●
|
Level
1 —
|
Quoted
prices in active markets for identical assets and liabilities.
|
|
●
|
Level
2 —
|
Other
significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
|
|
|
|
|
|
●
|
Level
3 —
|
Significant
unobservable inputs (including the Company’s own assumptions in determining the fair value.
|
The
estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants
issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest
rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants
as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant
derivatives as of December 31, 2019 and 2018 were classified under the fair value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of December 31, 2019 and 2018:
December 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1,116
|
|
|
|
1,116
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,116
|
|
|
$
|
1,116
|
|
December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
|
$
|
2,197,231
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
65,502
|
|
|
|
65,502
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,262,733
|
|
|
$
|
2,262,733
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the years
ended December 31, 2019 and 2018.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and
tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset
to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses
the realizability of the Company’s deferred income tax assets, and a valuation allowance is recognized if it is determined
that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making
such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such
factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not
to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can
project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the
Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can
be no assurance that facts and circumstances will not materially change and require the Company to adjust its deferred income
tax asset valuation allowance in a future period. The Company recognized a deferred tax asset, net of valuation allowance, of
$-0- at December 31, 2019 and 2018.
The
Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves
dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes
certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that
the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability
for unrecognized tax benefit was recorded as of December 31, 2019. During the year ended December 31, 2018 the Company determined
that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore
it reversed the liability and recognized an income tax benefit as described in the following section.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective
for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year,
the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after
2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable
and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable.
The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income
taxes payable on the Company’s balance sheet and the corresponding deferred tax asset was fully reserved based on all available
evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based
on the provisions of the new Act, the Company now considers it more likely than not that all the AMT tax credit carryforward will
be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the year ended December 31, 2018 as it
reduced the corresponding income taxes payable to zero as of December 31, 2018. The Company will receive no cash from the elimination
of this AMT tax credit carryforward because the Company had not previously paid the AMT tax but rather it recorded the income tax
liability on the accompanying balance sheet.
Net
Income (Loss) per Share
Pursuant
to FASB ASC Topic 260, Earnings per Share, basic net income (loss) per share is computed by dividing the net income (loss)
by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in
which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations,
as the inclusion of common share equivalents would have an anti-dilutive effect.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at December 31, 2019 and 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Secured convertible note payable, at fair value
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
Less: Current maturities
|
|
|
|
|
|
|
(2,197,231
|
)
|
|
|
|
|
|
|
|
|
|
Secured convertible note payable, long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Following
is an analysis of the activity in the Note during the year ended December 31, 2019:
|
|
Amount
|
|
Balance at December 31, 2018
|
|
$
|
2,197,231
|
|
Funding under the Investor Note during the period
|
|
|
—
|
|
Principal repaid during the period by issuance of common stock
|
|
|
—
|
|
Change in fair value of secured convertible note during the period
|
|
|
—
|
|
Exchange of secured convertible note payable for common stock
|
|
|
(2,197,231
|
)
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
—
|
|
On
May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note
(the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The
placement agent for the Company in the transaction received a fee of 6% of cash proceeds, or $600,000, if and when the Company
receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted
a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and an
institutional investor (the “Investor”). The May 2015 Private Placement was made pursuant to an exemption from registration
under such Act. At the closing, the Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured
promissory note, secured by cash, with an aggregate initial principal amount of $9,550,000 (the “Investor Note”).
On
May 4, 2017, the Investor notified the Company that it elected to affect an Investor Optional Offset under Section 7(a) of the
Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal
outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal
of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had
an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to
deliver a new convertible note (the “Replacement Note”) with respect to the remaining principal balance of $2,197,231
to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an
approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company
had recorded the fair value of the Replacement Note assuming that the remaining par value was $2,197,231 as asserted by the Investor.
The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and was due in monthly
installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the Replacement Note
at its maturity and it was therefore in technical default. The Replacement Note was to be secured to the same extent as the Convertible
Note. The Company and the Investor have negotiated a resolution of these outstanding matters regarding the default status and
the issuance of the Replacement Note under the terms of the financing.
On
May 23, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange
Agreement and Side-Letter Agreement as described below:
Exchange
Agreement: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued
in the May 2015 Private Placement (the “Original Securities”), including: (i) the Convertible Note, subject to the
Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231; (ii) the related accrued interest under
the Convertible Note, with a balance of $28,643; (iii) the Warrant; (iv) the Security and Pledge Agreement entered into
by the Company and the Investor in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor
in connection with the May 2015 Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and
the Investor in connection with the May 2015 Private Placement, for 770,485 fully paid and nonassessable shares of Common Stock
and certain rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional
shares of Common Stock.
As
a result of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including any
rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s
ownership of the Original Securities.
Side-letter
Agreement: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement,
dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the
Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an
increase in the Number of Fully-Diluted Shares Outstanding (as defined below) of the Company from the execution date of the Exchange
Agreement to the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up
Shares, if any, shall provide the Investor with Rights to acquire additional Right Shares (as defined in the Exchange Agreement)
to be calculated according to the following formula:
|
●
|
A-B=
aggregate number of Right Shares
|
|
●
|
A
= 9.99% of shares of Common Stock outstanding on November 23, 2019 (calculated based on the Number of Fully-Diluted Shares
Outstanding (as defined below))
|
|
●
|
B
= The shares of Common Stock Issued to the Investor contemporaneously with the Exchange Agreement
|
For
the purposes of the Side-Letter Agreement, “Number of Fully-Diluted Shares Outstanding” means, as of any time of determination,
the sum of (i) the aggregate number of issued and outstanding shares of Common Stock as of such time of determination; (ii) the
aggregate maximum number of shares of Common Stock issuable on an as-converted and as-exchanged basis, as applicable (excluding
any exercise of warrants to purchase Common Stock), pursuant to all capital stock and all other securities of the Company or any
of its subsidiaries (excluding any warrants to purchase Common Stock and all Rights issued pursuant to the Exchange Agreement)
outstanding as of such time of determination (or issuable pursuant to agreements in effect as of such time) that are at any time
and under any circumstances (after issuance thereof, if applicable), directly or indirectly, convertible into or exchangeable
for, or which otherwise entitles the holder thereof to acquire, Common Stock (assuming, for such purpose, that each such security
is convertible or exchangeable, as applicable, at the lowest price per share for which one share of Common Stock is at any time,
directly or indirectly, issuable upon the conversion or exchange, as applicable, of any such security and without regards to any
limitations on conversion or exchange applicable thereto); and (iii) without duplication with clause (ii) above, the aggregate
maximum number of shares of Common Stock issuable pursuant to any agreement (excluding any warrants to purchase Common Stock and
all Rights issued pursuant to the Exchange Agreement) of any person with the Company or any of its subsidiaries in effect as of
such time of determination (assuming, for such purpose, that the shares of Common Stock, directly or indirectly, issued pursuant
to such agreement is issued at the lowest price per share for which one share of Common Stock is at any time, directly or indirectly,
issuable pursuant to such agreement).
Notwithstanding
the foregoing, if any warrants to purchase Common Stock are outstanding (or issuable upon conversion or exchange of securities
outstanding) as of such six-month anniversary (each, an “Outstanding Warrant”), on such six-month anniversary, the
Company shall issue the Investor an additional Right to acquire a warrant (the “New Warrant”) exercisable for up to
9.99% of the shares of Common Stock issuable upon exercise of all Outstanding Warrants as of such six-month anniversary (the “New
Warrant Shares”). The New Warrant Shares shall be of like tenor to the Outstanding Warrants.
Pursuant
to the Side-Letter Agreement, the Company also agreed that from the execution date of the Exchange Agreement until twelve (12)
months from such date, the Company will not raise capital at a price that is below $0.10 per share of Common Stock (as adjusted
for stock splits, stock dividends, stock combinations, recapitalizations and similar events) without the Investor’s consent.
On
May 30, 2019, the Company and the Investor entered into Amendment No. 1 to Exchange Agreement (the “Amendment”). Following
execution of the Exchange Agreement on May 23, 2019, the Company and the Investor became aware of an inadvertent error regarding
the number of shares of Common Stock to be issued to the Investor pursuant to the Exchange Agreement. The Company and the Investor
agreed to amend the Exchange Agreement so it reflects the correct number of shares of Common Stock to be issued and to ensure
that the Investor does not beneficially own in excess of 9.99% of the shares of Common Stock outstanding immediately following
the effective date of the Exchange Agreement. Pursuant to the Amendment, the Company and the Investor agreed that the number of
shares of Common Stock to be issued to the Investor would be an aggregate of 605,816 shares, instead of the 770,485 shares stated
in the Exchange Agreement.
Consistent
with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter
Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement
the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant
to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
Description
of the Financial Accounting and Reporting
At
inception, the Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including
its embedded conversion feature, were estimated together at each periodic reporting date through May 23, 2019 which was the date
the parties entered into the exchange agreement which extinguished the Note and related warrants as previously described. The
Note was revalued to its estimated fair value at each periodic reporting date with any changes in the Note’s fair value
being charged/credited to the statement of operations.
The
Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting
purposes due to its ratchet and anti-dilution provisions. The estimated fair value of the warrant derivative as of May 23, 2019,
the date of the exchange agreement was $116,731 representing a change of $59,639 from December 31, 2018, which is included in
changes in derivative fair value in the accompanying statement of operations for the year ended December 31, 2019. See Note 5.
The
Exchange Agreement was treated an extinguishment of debt on the date it was entered May 23, 2019. Under the Exchange Agreement,
the Investor exchanged all of its rights under the original securities issued in the May 2015 Private Placement, including: (i)
the Convertible Note, subject to the Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231;
(ii) the related accrued interest under the Convertible Note, with an unpaid and accrued balance of $28,643; (iii) the
Warrant with an estimated fair value of $116,731; (iv) the Security and Pledge Agreement entered into by the Company and the Investor
in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in connection with the May 2015
Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with
the May 2015 Private Placement, for 605,816 fully paid and nonassessable shares of Common Stock and certain rights granted in
the Side-Letter to acquire additional securities in the future, which may be exercised for additional shares of Common Stock.
The Side-Letter rights/obligations represent a derivative and accordingly, its fair value was estimated and recorded at the date
of Exchange Agreement and will continue to be revalued and adjusted to its estimated fair value at each periodic reporting date
until it expires and/or the underlying securities are issued to the Holder.
Following
is an analysis of gain on exchange of the debt and warrant obligations pursuant to the Exchange Agreement during the year ended
December 31, 2019:
|
|
Amount
|
|
Obligations extinguished on the date of exchange, May 23, 2019:
|
|
|
|
|
Convertible Note balance at the date of exchange, May 23, 2019
|
|
$
|
2,197,231
|
|
Accrued interest on the Convertible Note at the date of exchange, May 23, 2019
|
|
|
28,643
|
|
Fair value of Warrant Derivative at the date of exchange, May 23, 2019
|
|
|
116,731
|
|
Securities issued in exchange for the obligations extinguished on the date of Exchange, May 23, 2019 and the finalization of the Side-Letter Agreement at November 23, 2019:
|
|
|
|
|
605,816 Common shares issued on the date of exchange, May 23, 2019 valued at $0.121 per share, the closing market price on May 23, 2019
|
|
|
(73,304
|
)
|
567,348 Common shares issued pursuant to the finalization of the Side-Letter agreement on November 23, 2019
|
|
|
(68,082
|
)
|
|
|
|
|
|
Issuance of warrants to purchase 61,380 common shares issued pursuant to the finalization of the Side-Letter agreement on November 23, 2019
|
|
|
(7,358
|
)
|
|
|
|
|
|
Gain on exchange of debt and warrant obligations
|
|
$
|
2,193,861
|
|
In
addition, the Company issued a warrant in May 2015 to purchase 240,000 shares issued as part of the placement fee in connection
with the Note. The warrant contained an expiration date of May 7, 2022 and an exercise price of $5.00 per share and is subject
to certain price protection and dilution provisions. Such warrant was treated as a derivative liability for accounting purposes
due to its ratchet and anti-dilution provisions.
On
June 4, 2019, the Company entered into an exchange agreement with the warrant holder to extinguish the original warrant including
its certain price protection and dilution provisions, for a new warrant to purchase up to 50,000 common shares with a termination
date of June 4, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions.
The
estimated fair value of the original warrant derivative as of May 23, 2019, the date of the exchange agreement, was $37,368 representing
a change of $29,795 from December 31, 2018, which is included in changes in derivative fair value in the accompanying statement
of operations for the year ended December 31, 2019. See Note 5.
As
a result of the exchange agreement, the Company extinguished the derivative liability of $37,368 attributable to the original
warrant and recognized the estimated value of the new warrant of $7,985 as of June 4, 2019, the date of the exchange agreement.
The resulting $29,383 difference been the estimated fair value of the old warrant extinguished and the new warrant issued to the
holder has been recorded as a gain on exchange of debt and warrant obligations in the accompanying statement of operations for
the year ended December 31, 2019.
Note
3 – Debt
Debt
consists of the following at December 31, 2019 and 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Convertible notes payable, short term:
|
|
|
|
|
|
|
|
|
Note payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note payable (extinguished through exchange agreement)
|
|
|
—
|
|
|
|
200,000
|
|
Note payable (extinguished through exchange agreement)
|
|
|
—
|
|
|
|
40,000
|
|
Note payable, (in default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note payable (in default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Note payable (due on demand)
|
|
|
19,125
|
|
|
|
13,125
|
|
Total notes payable, short-term
|
|
$
|
1,104,125
|
|
|
$
|
1,338,125
|
|
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company failed to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remained the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability.
The discount is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired
as of December 31, 2019 and is no longer exercisable.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the December 2013 Note on or
before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops
to $0.75 per share. All other terms of the warrant remained the same. The warrant expired as of December 31, 2019. The December
2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future senior
indebtedness, as such terms are defined in the Note. The December 2013 Note is in default and the Company is pursuing a resolution
to this default, including completing the extinguishment of the note balance, accrued interest and revenue sharing agreement through
an exchange agreement which is further described below; however, there can be no assurances such efforts will be successful.
The
Warrant was treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a
derivative liability and as a discount on the note payable. The warrant liability was revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability.
The Warrant expired as of December 31, 2019. The discount was amortized ratably through the original maturity date and each of
the extended maturity dates. The Company recognized the value of the 20,000 shares of common stock issued ($104,000) and the increased
value of the outstanding warrants due to the decrease in their exercise price ($68,716) as an additional discount on the note
payable to be amortized ratably over the extended term of the underlying note.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid
principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies
regarding the December 2013 Note through an exchange agreement. Under the proposed terms the Company will make a cash payment
of $100,000 within 60 days of the execution of an Exchange Agreement and will issue 740,500 shares of common stock to the holder
in exchange for and cancellation of the following obligations:
|
●
|
December
2013 Note with an original principal balance of $1,050,000 and current principal balance of $1,000,000;
|
|
●
|
Accrued
and unpaid interest of approximately $481,000 as of December 31, 2019 related to the December 2013 Note;
|
|
●
|
Common
Stock Purchase Warrant issued December 27, 2013 to acquire 100,000 shares of common stock with an exercise price of $5.00
per share;
|
|
●
|
Preemptive
Rights Agreement dated December 27, 2013; and
|
|
●
|
Revenue
Sharing Agreement issued May 30, 2014 representing one half of one percent (1/2%) of the gross revenue derived from the share
of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions.
|
The
term sheet is non-binding until such time as the cash payment is made and the common stock are issued to the holder and there
can be no assurance that the Company will successfully complete the Exchange Agreement. The Company did not make the required
$100,000 cash payment within the contractual 60-day time period and therefore the term sheet is not binding on the parties. The
parties are attempting to resolve the payment default and otherwise complete the Exchange Agreement as described above.
The
following notes were extinguished on June 19, 2019:
|
●
|
On
November 8, 2016 the Company borrowed a total of $200,000 from an individual under a convertible note payable with the conversion
rate of $5.00 per share. The note required no principal or interest payments until its maturity date of November 7, 2017 and
bore interest at 8% per annum. The note was not paid on its original maturity date.
|
|
|
|
|
●
|
On
April 20, 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is
convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April
19, 2018 and bore interest at 8% per annum. The note was not paid on its maturity date.
|
On
June 19, 2019, the Company and the holder of these two convertible notes entered into an exchange agreement whereby the two convertible
notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. Under the
exchange agreement the Company issued the individual a new warrant exercisable to purchase up to 570,000 shares of common stock
at an exercise price of $0.50 per share with a termination date of June 19, 2026 without any price protection or dilution provisions
in exchange for the extinguishment of the two convertible notes and related accrued interest. The Black-Scholes valuation of the
warrant issued to the holder on June 19, 2019 totaled $62,564.
Following
is an analysis of gain on extinguishment of the obligations pursuant to the Exchange Agreement during the year ended December
31, 2019:
|
|
Amount
|
|
Obligations extinguished on the date of exchange, June 19, 2019:
|
|
|
|
|
Convertible Notes balance at the date of exchange, June 19, 2019
|
|
$
|
240,000
|
|
Accrued interest on the Convertible Notes at the date of exchange, June 19, 2019
|
|
|
45,020
|
|
|
|
|
|
|
Securities issued in exchange for the obligations extinguished on the date of the exchange, June 19, 2019:
|
|
|
|
|
Value of the stock purchase warrant issued on the date of exchange, June 19, 2019
|
|
|
(62,564
|
)
|
|
|
|
|
|
Gain on exchange of debt and warrant obligations
|
|
$
|
222,456
|
|
Other
than the December 2013 Note, at December 31, 2019 the Company had short-term notes outstanding with entities or individuals as
follows:
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. The
Company and its lender are pursuing a resolution of this default. There can be no assurance that the Company will be successful
in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase 5,000
shares of common stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable
and expire in five years. The value of the 5,000 newly issued warrants issued on January 7, 2016 totaled $379 and $131 on
May 7, 2016, both of which were amortized over the extension period (through October 7, 2016). The related warrant derivative
liability balance was $662 and $492 as of December 31, 2019 and 2018, respectively. See Note 5.
|
|
●
|
On
July 15, 2015, the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is pursuing a
resolution of this default including an additional extension from the holder. There can be no assurance that the Company will
be successful in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable
to purchase an aggregate of 3,500 shares of common stock on each extension date at an exercise price of $5.60 per share, which
warrants were immediately exercisable and expire in five years. The value of the 3,500 newly issued warrants on January 15,
2016 totaled $267 and $74 on May 15, 2016, both of which were amortized over the extension period (through October 15, 2016).
The related warrant derivative liability balance was $454 and $345 as of December 31, 2019 and 2018, respectively.
See Note 5.
|
|
●
|
On
May 21, 2018 the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible
into common stock at a rate of $0.50 per share. During June 2019 and August 2019 the Company borrowed an additional $50,500
and $5,500, respectively from this same third-party lender under the same terms. The note is due on demand and bears interest
at 8% per annum. In October 2019 the Company repaid $50,000 in principal on this demand note. The outstanding principal on
the demand notes totaled $19,125 and $13,125 as of December 31, 2019 and 2018 respectively.
|
Note
4 – Stock Based Compensation
The
Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans; however, such Plans
have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase
of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately
or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also
has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
At
the Annual Meeting of Stockholders held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of December 31, 2019, 500,000 shares were available for future grants under the 2015 Plan. All other Plans have now expired.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the years ended December 31, 2019 and 2018.
The
following table summarizes stock option activity for the year ended December 31, 2019:
|
|
Number of Options
|
|
|
Weighted Average Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
|
3.1 years
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,200
|
)
|
|
|
(7.80
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
|
2.29 years
|
|
|
$
|
—
|
|
Outstanding and exercisable at December 31, 2019
|
|
|
332,000
|
|
|
$
|
41.86
|
|
|
|
2.29 years
|
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0-
during the years ended December 31, 2019 and 2018, respectively.
The
intrinsic value as of December 31, 2019 related to the vested and unvested stock options as of that date was $-0-. The unrecognized
compensation cost as of December 31, 2019 related to the unvested stock options as of that date was $-0-.
Restricted
stock grants. During the year ended December 31, 2019 the Board of Directors granted restricted stock awards to our new
Chief Operating Officer. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient.
Restricted stock awards typically vest over a period of time generally corresponding to yearly anniversaries of the grant date.
Unvested shares of restricted stock awards may be forfeited upon the termination of service of employment with the Company, depending
upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested
restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the year ended December 31, 2019 is as follows:
|
|
Number of
Restricted
shares
|
|
|
Weighted
average
grant date
fair
value
|
|
Nonvested balance, January 1, 2019
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
2,000,000
|
|
|
|
0.13
|
|
Vested
|
|
|
(1,250,000
|
)
|
|
|
(0.13
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Nonvested balance, December 31, 2019
|
|
|
750,000
|
|
|
$
|
0.13
|
|
The
Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted granted aggregating $186,274
and $-0- during the years ended December 31, 2019 and 2018, respectively.
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant.
As of December 31, 2019, there were $73,726 of total unrecognized compensation costs related to all remaining non-vested restricted
stock grants, which will be amortized over the next 10 months in accordance with the respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Years ended
|
|
Number of
shares
|
|
|
|
|
|
|
2020
|
|
|
750,000
|
|
Note
5 – Derivative Instruments
Derivatives
– Warrants Issued Relative to Notes Payable
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued
in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing
model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s
common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment
to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk
factors, among other items (ASC 820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3). The
detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and
the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during
the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note
payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative
liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity
as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note
payable will remain in effect until such time as the underlying warrant is exercised or terminated and the resulting derivative
liability will be transitioned from a liability to equity as of such date.
The
Company issued warrants to purchase an aggregate of 34,000 shares of common stock, respectively in connection with various outstanding
debt instruments which require derivative accounting treatment as of December 31, 2019 and 2018. A comparison of the assumptions
used in calculating estimated fair value of such derivative liabilities as of December 31, 2019 is as follows:
|
|
As of
December 31, 2019
|
|
|
|
|
|
Volatility – range
|
|
|
316.2
|
%
|
Risk-free rate
|
|
|
1.69
|
%
|
Contractual term
|
|
|
0.5 – 1.3 years
|
|
Exercise price
|
|
$
|
5.60
|
|
Number of warrants in aggregate
|
|
|
34,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance at December 31, 2018
|
|
$
|
65,502
|
|
Unrealized derivative losses included in other expense for the period
|
|
|
89,714
|
|
Extinguishment of derivative liability in exchange
transactions
|
|
|
(154,100
|
)
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
1,116
|
|
The
warrant derivative liability consists of the following at December 31, 2019 and 2018:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Warrant issued to holder of Secured convertible note (Note 2)
|
|
$
|
—
|
|
|
$
|
57,092
|
|
Warrant issued to placement agent (Note 2)
|
|
|
—
|
|
|
|
7,573
|
|
Warrants issued to holders of notes payable - short term (Note 3)
|
|
|
1,116
|
|
|
|
837
|
|
Total warrant derivative liability
|
|
$
|
1,116
|
|
|
$
|
65,502
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the year ended December 31, 2019:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
2,365,563
|
|
|
$
|
5.01
|
|
Issued pursuant to exchange agreements
|
|
|
681,380
|
|
|
|
0.50
|
|
Cancelled pursuant to exchange agreements
|
|
|
(2,040,000
|
)
|
|
|
(5.00
|
)
|
Exercised/forfeited
|
|
|
(60,000
|
)
|
|
|
(5.00
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2019
|
|
|
946,943
|
|
|
$
|
1.78
|
|
The
weighted average term of all outstanding common stock purchase warrants was 4.8 years as of December 31, 2019. The intrinsic value
of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero
as of December 31, 2019.
Note
7 – Supplemental Oil and Gas Information
Estimated
Proved Oil and Gas Reserves (Unaudited)
As
of December 31, 2019 and 2018, 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, 2019 in connection with the Company’s oil and gas acquisition, exploration and
development activities are shown below.
|
|
Year ended
December 31, 2019
|
|
Property acquisition costs:
|
|
|
|
|
Proved
|
|
$
|
—
|
|
Unproved
|
|
|
|
|
Total property acquisition costs
|
|
|
—
|
|
Development costs
|
|
|
—
|
|
Exploration costs
|
|
|
77,784
|
|
Total costs
|
|
$
|
77,784
|
|
Exploration costs during the year ended December
31, 2019 primarily related to area concession and training fees to be paid to the Nicaraguan Government for 2019. In addition
to the $77,784 expenses described above, the Company expensed all of the costs related to the option to purchase the Properties
totaling $76,415 which expired on December 31, 2019. The Company expensed all costs related to the Option upon its
expiration although the Company continues to negotiate an extension and revision of the Option to acquire the Properties.
All costs related to the Nicaraguan Concessions have been expensed as incurred during the year ended December 31, 2019 as
the Concessions were in default status and the Nicaraguan Concession assets were considered to be impaired and fully
reserved as of December 31, 2019 and 2018.
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Proved oil and gas properties
|
|
$
|
—
|
|
|
$
|
—
|
|
Unproved oil and gas properties
|
|
|
11,254,557
|
|
|
|
11,176,773
|
|
Total
|
|
|
11,254,557
|
|
|
|
11,176,773
|
|
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 as of December 31, 2015
|
|
|
(9,720,666
|
)
|
|
|
(9,720,666
|
)
|
Less amounts charged directly to operations since January 1, 2016
|
|
|
(569,153
|
)
|
|
|
(491,369
|
)
|
Less accumulated depreciation, depletion and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net capitalized costs
|
|
$
|
—
|
|
|
$
|
—
|
|
Management has performed its impairment tests
on its oil and gas properties as of December 31, 2019 and 2018, has concluded that a full impairment reserve should be provided
on the costs capitalized for its unproved oil and gas properties consisting of the Nicaraguan Concessions and its Option
to acquire the Properties which expired on December 31, 2019. Therefore, an impairment charge of $9,720,666 was charged
to operations during the year ended December 31, 2015 which reduced the carrying amount of Nicaragua Concession oil and gas properties
to zero. The Nicaraguan Concessions remained fully impaired as of December 31, 2019 and 2018. The Company abandoned the Concessions
project in 2020.
Costs
Not Being Amortized
Oil
and gas property costs not being amortized at December 31, 2019, (all accumulated costs have been reserved through an impairment
charge as of December 31, 2015 and through direct expense for January 1, 2016 and after) costs by year that the costs were incurred,
are as follows:
Year Ended December 31,
|
|
|
|
2019 (expensed directly)
|
|
$
|
77,784
|
|
2018 (expensed directly)
|
|
|
155,584
|
|
2017 (expensed directly)
|
|
|
170,274
|
|
2016 (expensed directly)
|
|
|
165,511
|
|
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
|
|
$
|
11,254,557
|
|
The
above unevaluated costs relate to the Company’s approximate 1,400,000 acre Nicaraguan Concessions.
The
Company anticipates that these unproved costs in the table above will be reclassified to proved costs within the next five years.
Note
8 – Income Taxes
The
provision for income taxes consists of the following:
|
|
For
the Year Ended
|
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Current
income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
Deferred
income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Total
income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
The
effective income tax rate on continuing operations varies from the statutory federal income tax rate as follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Federal
income tax rate
|
|
|
21.0
|
%
|
|
|
(21.0
|
)%
|
State
income tax rate
|
|
|
4.7
|
|
|
|
(4.4
|
)
|
Stock-based
compensation
|
|
|
(17.7
|
)
|
|
|
—
|
|
Change
in valuation allowance
|
|
|
(12.9
|
)
|
|
|
26.4
|
|
AMT
Credit carryforward
|
|
|
—
|
|
|
|
(34.3
|
)
|
Other,
net
|
|
|
(4.9
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
—
|
%
|
|
|
(34.3
|
)%
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Accruals
and other
|
|
$
|
980
|
|
|
$
|
940
|
|
Asset
retirement obligations
|
|
|
435
|
|
|
|
435
|
|
Note
payable discounts and derivatives
|
|
|
—
|
|
|
|
(510
|
)
|
Stock-based
compensation
|
|
|
801
|
|
|
|
1,190
|
|
Alternative
minimum tax credit carry-forward
|
|
|
—
|
|
|
|
—
|
|
Net
operating loss carry-forward
|
|
|
17,006
|
|
|
|
16,930
|
|
Gross
deferred tax assets
|
|
|
19,222
|
|
|
|
18,985
|
|
Less
valuation allowance
|
|
|
(19,222
|
)
|
|
|
(18,985
|
)
|
Deferred
tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily
due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Act significantly changed U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s balance sheet
and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely
than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company
now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has
recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income taxes
payable to zero as of December 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward
as the Company had not previously paid the AMT tax rather it recorded the income tax liability on the accompanying balance sheet.
The
Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at December
31, 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore,
it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue
to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its
ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is
more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,950,000, which expire from 2025 through
2039.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2019. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Management has
not completed its review of whether such ownership changes have occurred, and whether the Company currently is subject to an annual
limitation or the possibility of the complete elimination of the net operating loss carry- forwards might have occurred. In addition,
the Company may be further limited by additional ownership changes which may occur in the future.
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
9 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for a number of years. The Company is
not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
The Company was in default of various provisions
of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2019, including (1) the drilling of at least one
exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry
of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra
block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the
Perlas and Tyra which total approximately $194,485; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required
for both the Perlas and Tyra totaling approximately $350,000. The Company had been seeking a resolution of these defaults
including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government
to cure the defaults; however, the political climate and domestic issues caused the Company to halt such efforts and to abandon
the Concessions in 2020.
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore
Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000
and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently
converted the subordinated promissory note to common stock.
Under
the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from
the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the
point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional
costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser
of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation
for Infinity to maintain or develop the Nicaraguan Concessions and does not create any rights in the Nicaraguan Concessions for
Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On
June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs.
The
RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production
during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to
maintain or develop the Nicaraguan Concessions and does not create any rights in the Nicaraguan Concessions for officers and directors.
The
Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any
exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing
Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing
and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic
oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures,
earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of well prior to December 31, 2019; however, the Company may remain liable for certain asset retirement costs should
the new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003
as of December 31, 2019 and 2018 are sufficient to cover any potential noncompliance liabilities relative to the plugging of abandoned
wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former oil and gas properties.
The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced any oil &
gas properties for a number of years.
Binding
Term Sheet to Acquire Domestic Oil and Gas Properties
On July 31, 2019 the Company acquired the
“Option” from Core to purchase the production and mineral rights/leasehold for the Properties. The Company
paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties for $2.5
million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties
are currently negotiating an extension of such option and a reduction of the purchase price, although there can be no assurance
that the parties will reach an agreement to do so. The Company has expensed all costs related to the Option to acquire
the Properties as of December 31, 2019 as the Option is now expired.
The
purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic
data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater
disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand zone with an approximate
depth of 3,600 feet.
The
Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior
to our exercise of the Option. If such a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the
closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide
the Company a first right of refusal to acquire such asset.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying
financial statements.
The
Company is currently involved in litigation as follows:
●
|
In
October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties.
The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
|
|
|
|
Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates
that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas
operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included
in the asset retirement obligation on the accompanying balance sheets.
|
●
|
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
|
●
|
Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of December 31, 2019 and
2018, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
10 – Related Party Transactions
The
Company does not have any employees other than the CEO, COO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the years ended December 31, 2019 and 2018.
The amount due to the CFO’s firm for services previously provided was $762,407 at December 31, 2019 and 2018 and is included
in accrued liabilities at both dates.
On
June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue
received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue
Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any
rights in the Nicaraguan Concessions for officers and directors.
In
connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan
Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing
partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate
purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes
the former managing partner of Offshore.
On July 31, 2019 we acquired the Option
Core to purchase the production and mineral rights/leasehold the Properties. We paid a nonrefundable deposit of $50,000 to
bind the purchase option, which provided us the right to acquire the Properties for $2.5 million prior to December 31, 2019. The
Company was not able to exercise the option prior to December 31, 2019 and the parties are currently negotiating an extension
of such Option and reduction of the purchase price. Mr. Loeffelbein, our COO is a member of Core Energy, LLC.
As
of December 31, 2019 and 2018, the Company had accrued compensation to its officers and directors of $1,829,208. The Board of
Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Note
11 – Subsequent Events
Covid
– 19 Pandemic
The consolidated financial statements contained
in this Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the
status of our business and the results of our operations as of December 31, 2019. Since that date, economies throughout the world
have been severely disrupted by the effects of the quarantines, business closures and the reluctance of individuals to leave their
homes as a result of the outbreak of the coronavirus (Covid-19). In particular, the oil and gas market has been severely
impacted by the negative effects of the coronavirus because of the substantial and abrupt decrease in the demand for oil and gas
globally. In addition, the capital markets have been disrupted and our efforts to raise necessary capital will likely be adversely
impacted by the outbreak of the virus and we cannot forecast with any certainty when the disruptions caused by it will cease to
impact our business and the results of our operations. In reading this report on Form 10-K, including our discussion of our ability
to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the outbreak of
Covid-19.
NICARAGUA
CONCESSIONS
The Company has not resolved the various contingencies
related to the default status of its Nicaraguan Concessions (See Note 8). The Company had been seeking a resolution of these defaults
including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government
to cure the defaults; however, the political climate and domestic issues caused the Company to halt such efforts in 2020 and
abandon the project relating to the Concessions.
DEBT
OBLIGATIONS
The
Company has not resolved the contingencies regarding its various notes payable related to their default status as described in
Notes 3 other than the December 2013 Note described above. The Company continues to pursue resolutions of these defaults including
to negotiate extensions, waivers or new note agreements; however, there can be no assurance that the Company will be successful
in that regard.
On
July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which had an unpaid
principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies
regarding the December 2013 Note through an exchange agreement. See Note 3, Debt.”
OIL
AND GAS PROPERTY ACQUISITION
On July 31, 2019 the Company acquired an the
Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company
paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties for $2.5
million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the
parties are negotiating an extension of such Option and a reduction of the purchase price, although there can be
no assurance that the parties will reach an agreement to do so.
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