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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022.

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________.

 

Commission File Number: 000-17204

 

AMERICAN NOBLE GAS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   87-3574612

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

15612 College Blvd, Lenexa, KS 66219

(Address of principal executive offices) (Zip Code)

 

(913) 948-9512

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
   

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of Exchange Act.

 

  Large accelerated filer ☐   Accelerated filer ☐
  Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of May 9, 2022, the registrant had 19,465,140 shares of common stock, $0.0001 par value per share outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets: March 31, 2022 (Unaudited) and December 31, 2021 3
Condensed Statements of Operations: Three months ended March 31, 2022 and 2021 (Unaudited) 4
Condensed Statement of Changes in Stockholders’ Deficit: Three months ended March 31, 2022 and 2021 (Unaudited) 5
Condensed Statements of Cash Flows: Three months ended March 31, 2022 and 2021 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
Item 4. Controls and Procedures 50
PART II - Other Information  
Item 1. Legal Proceedings 51
Item 1A Risk Factors 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51
Signatures 52

 

  2  

 

 

PART I - FINANCIAL INFORMATION

 

AMERICAN NOBLE GAS INC

(formerly Infinity Energy Resources, Inc.)

Condensed Balance Sheets

 

    March 31, 2022     December 31, 2021  
      (Unaudited)          
ASSETS                
Current assets:                
Cash and cash equivalents   $ 148,384     $ 260,590  
Account receivable     14,797       10,998  
Prepaid expenses     9,590       13,090  
                 
Total current assets     172,771       284,678  
Oil and gas properties and equipment:                
Oil and gas properties and equipment     922,559       913,425  
Accumulated depreciation, depletion and impairment     (123,336 )     (92,502 )
                 
Property and equipment, net     799,223       820,923  
                 
Total assets   $ 971,994     $ 1,105,601  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current liabilities:                
Accounts payable   $ 1,138,668     $ 975,842  
Accrued liabilities     1,159,403       1,159,403  
Accrued interest ($767 and $578 payable to related parties at March 31, 2022 and December 31, 2021, respectively)     853       643  
Convertible notes payable, net of unamortized discount     456,941       376,274  
                 
Total current liabilities     2,755,865       2,512,162  
                 
Asset retirement obligations     1,730,543       1,730,264  
Convertible promissory notes, net of unamortized discount ($25,777 payable to related parties at March 31, 2022 and December 31, 2021)     28,665       28,665  
                 
Total liabilities     4,515,073       4,271,091  
Commitments and contingencies (Note 11)     -       -  
                 
Stockholders’ deficit:                
Preferred stock; par value $.0001 per share, 10,000,000 shares authorized; Series A Convertible – 27,778 shares authorized with stated/liquidation value of $100 per share, 21,276 and 22,076 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively     2       2  
Common stock, par value $.0001 per share, 500,000,000 shares authorized, 19,262,015 shares issued and outstanding at March 31, 2022 and 19,012,015 shares issued and outstanding at December 31, 2021     1,926       1,901  
Additional paid-in capital     115,699,972       115,522,952  
Accumulated deficit     (119,244,979 )     (118,690,345 )
Total stockholders’ deficit     (3,543,079 )     (3,165,490 )
Total liabilities and stockholders’ deficit   $ 971,994     $ 1,105,601  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  3  

 

 

AMERICAN NOBLE GAS, INC.

(formerly Infinity Energy Resources, Inc.)

Condensed Statements of Operations

(Unaudited)

 

    2022     2021  
    Three months ended March 31,  
    2022     2021  
             
Revenues   $ 25,305     $  
                 
Operating expenses:                
Oil and gas lease operating expense     86,536        
Depreciation, depletion and amortization     30,834        
Accretion of asset retirement obligation     279        
Oil and gas production related taxes     28        
Other general and administrative expenses     368,706       200,970  
                 
Total operating expenses     486,383       200,970  
                 
Operating loss     (461,078 )     (200,970 )
                 
Other (expense) income:                
Interest expense     (93,556 )     (34,225 )
Gain on exchange and extinguishment of liabilities           31,372  
Change in derivative fair value           199  
                 
Total other expense     (93,556 )     (2,654 )
                 
Loss before income taxes     (554,634 )     (203,624 )
Income tax (expense) benefit            
                 
Net loss     (554,634 )     (203,624 )
                 
Convertible preferred stock dividends     (52,861 )     (3,744 )
                 
Net loss attributable to common stockholders   $ (607,495 )   $ (207,368 )
                 
Basic and diluted net loss attributable to common stockholders per share:                
Basic   $ (0.03 )   $ (0.01 )
Diluted   $ (0.03 )   $ (0.01 )
Weighted average shares outstanding – basic and diluted     19,213,560       18,548,265  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  4  

 

 

AMERICAN NOBLE GAS, INC.

(formerly Infinity Energy Resources, Inc.)

Condensed Statements of Changes in Stockholders’ Deficit

(Unaudited)

 

    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
    Preferred Stock     Common Stock     Additional Paid-in     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Deficit  
Balance, December 31, 2020                 18,548,265     $ 1,855     $ 110,352,302     $ (117,178,645 )   $     (6,824,488 )
                                                         
Cumulative effect of adoption of ASU 2020-06                             (252,961 )     92,061       (160,900 )
                                                         
Stock-based compensation                             81,250             81,250  
                                                         
Issuance of preferred stock with detachable warrants to purchase common stock     22,776       2                   1,929,087             1,929,089  
                                                         
Issuance of warrants to purchase common stock pursuant to debt settlement agreements                             1,605,178             1,605,178  
                                                         
Extinguishment of liabilities with related parties pursuant to debt settlement agreements                             1,108,477             1,108,477  
                                                         
Accrual of Series A Convertible Preferred Stock dividends                             (3,744 )           (3,744 )
                                                         
Net loss                                   (203,624 )     (203,624 )
                                                         
Balance, March 31, 2021     22,776     $ 2     18,548,265     $ 1,855     $ 114,819,589     $ (117,290,208 )   $ (2,468,762 )
Ending Balance     22,776     $ 2     18,548,265     $ 1,855     $ 114,819,589     $ (117,290,208 )   $ (2,468,762 )
                                                         
Balance, December 31, 2021     22,076     $ 2       19,012,015     $ 1,901     $ 115,522,952     $ (118,690,345 )   $ (3,165,490 )
Beginning Balance     22,076     $ 2       19,012,015     $ 1,901     $ 115,522,952     $ (118,690,345 )   $ (3,165,490 )
                                                         
Stock-based compensation -                             229,906             229,906  
                                                         
Issuance of common stock pursuant to conversion of preferred stock     (800 )           250,000       25       (25 )            
                                                         
Series A Convertible Preferred Stock dividends                             (52,861 )           (52,861 )
                                                         
Net loss                                   (554,634 )     (554,634 )
                                                         
Balance, March 31, 2022     21,276     $ 2       19,262,015     $ 1,926     $ 115,699,972     $ (119,244,979 )   $ (3,543,079 )
Ending Balance     21,276     $ 2       19,262,015     $ 1,926     $ 115,699,972     $ (119,244,979 )   $ (3,543,079 )

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  5  

 

 

AMERICAN NOBLE GAS INC

(formerly Infinity Energy Resources, Inc.)

Statements of Cash Flows

(unaudited)

 

    2022     2021  
   

For the Three Months Ended

March 31,

 
    2022     2021  
Cash flows from operating activities:                
Net loss   $ (554,634 )   $ (203,624 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of derivative liability           (199 )
Stock-based compensation     229,906       81,250  
Depreciation, depletion and amortization     30,834        
Accretion of asset retirement obligations     279        
Gain on settlement of litigation           (23,000 )
Gain on exchange and extinguishment of liabilities           (124,177 )
Loss on retirement of convertible note payable           115,805  
Expiration and charge-off of deposit to acquire oil and gas properties           75,000  
Amortization of discount on convertible note payable     80,667       25,823  
Change in operating assets and liabilities:                
                 
Increase in accounts receivable     (3,799 )      
Decrease in prepaid expenses     3,500        
Increase (decrease) in accounts payable     162,826       (31,592 )
Increase in accrued liabilities           3,406  
Increase in accrued interest     210       8,402  
Net cash used in operating activities     (50,211 )     (72,906 )
                 
Cash flows from investing activities:                
Acquisition of oil and gas properties and equipment     (9,134 )      
Net cash used in investing activities     (9,134 )      
                 
Cash flows from financing activities:                
Cash dividends paid on preferred stock     (52,861 )      
Repayment of convertible note payable           (453,539 )
Net proceeds from issuance of convertible preferred stock           1,929,089  
                 
Net cash (used in) provided by financing activities     (52,861 )     1,475,550  
                 
Net (decrease) increase in cash and cash equivalents     (112,206 )     1,402,644  
                 
Cash and cash equivalents:                
Beginning     260,590       11,042  
Ending   $ 148,384     $ 1,413,686  
Supplemental cash flow information:                
Cash paid for interest   $ 12,679     $ 17,448  
Cash paid for taxes   $     $  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Conversion of Preferred Stock to Common Stock   $ 25     $  
Issuance of convertible promissory notes pursuant to debt settlement agreements   $     $ 28,665  
Issuance of detachable common stock purchase warrants pursuant to debt settlements agreements   $     $ 1,605,178  
Capital contribution attributable to related party debt extinguishment   $     $ 1,108,477  
Accrual of Series A Convertible Preferred Stock dividends   $     $ 3,744  
Cumulative effect of adoption of ASU 2020-06   $     $ 160,900  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

  6  

 

 

AMERICAN NOBLE GAS, INC.

(formerly Infinity Energy Resources, Inc.)

Notes to Condensed Financial Statements

March 31, 2022

(Unaudited)

 

Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies

 

Unaudited Interim Financial Information

 

American Noble Gas, Inc., formerly Infinity Energy Resources, Inc., has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed balance sheets, statements of operations, statements of stockholders’ deficit and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the remainder of 2022 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.

 

Name change

 

At the Annual Meeting of Stockholders held on October 13, 2021 the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, changing the Company’s name from Infinity Energy Resources, Inc. to American Noble Gas Inc “AMGAS,” the “Company,” “we,” “us” and “our” refers collectively to American Noble Gas Inc, (formerly Infinity Energy Resources, Inc.), its predecessors and subsidiaries or one or more of them as the context may require.

 

Reincorporation in Nevada

 

On December 7, 2021, pursuant to an Agreement and Plan of Merger, American Noble Gas, Inc., a Delaware corporation, merged with and into its wholly owned subsidiary, American Noble Gas Inc, a Nevada corporation (“AMGAS-Nevada” and/or the “Company”) with AMGAS-Nevada continuing as the surviving corporation. In conjunction with the merger, AMGAS-Nevada succeeded to the assets, continued the business and assumed the rights and obligations of the predecessor Delaware corporation existing immediately prior to the merger. The merger was consummated by the filing of a certificate of merger on December 7, 2021 with the Secretary of State of the State of Delaware and articles of merger with the Secretary of State of the State of Nevada. The Agreement and Plan of Merger and transactions contemplated thereby were adopted by the holders of a majority of the outstanding shares of the predecessor company’s common stock, par value, $0.0001 per share and/or Series A Convertible Preferred Stock, par value $0.0001 per share, on an as-converted common stock basis, by written consent in lieu of a special meeting of stockholders, in accordance with the Delaware General Corporation Law.

 

Pursuant to the Agreement and Plan of Merger, (i) each outstanding share of predecessor’s common stock automatically converted into one share of common stock, par value $0.0001 per share, of AMGAS-Nevada, (ii) each outstanding share of the predecessor’s series A convertible preferred stock automatically converted into one share of series A convertible preferred stock, par value $0.0001 per share of AMGAS-Nevada, and (iii) each outstanding option, right or warrant to acquire shares of predecessor common stock converted into an option, right or warrant to acquire an equal number of shares of AMGAS-Nevada common stock under the same terms and conditions as the original options, rights or warrants.

 

Similar to the shares of predecessor common stock prior to the merger, the shares of AMGAS-Nevada common stock are quoted on the OTCQB tier operated by the OTC Markets Group Inc. under the symbol “IFNY”. In accordance with the Agreement and Plan of Merger, each outstanding certificate previously representing shares of the predecessor’s common stock or series A preferred stock automatically represents, without any action of the predecessor’s stockholders, the same number of shares of AMGAS-Nevada common stock or series A preferred stock, as applicable.

 

Pursuant to the Agreement and Plan of Merger, the directors and officers of the predecessor company immediately prior to the merger became the directors and officers of AMGAS-Nevada and continued their respective directorship or services with the Company on the same terms as their respective directorship or service with the predecessor registrant immediately prior to the merger.

 

As a result of the merger, the internal affairs of the Company ceased to be subject to the Delaware General Corporation Law or governed by the predecessor’s Delaware Certificate of Incorporation, as amended and its bylaws. As of the December 7, 2021 merger date, the Company is now subject to the Nevada Revised Statutes and is governed by the Company’s Articles of Incorporation and Bylaws as filed in the State of Nevada.

 

Quotation of Common Stock on OTCQB

 

Effective July 13, 2021, the Company’s Common Stock was approved for quotation on the OTCQB® Venture Market under the symbol “IFNY.”

 

  7  

 

 

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. Civil unrest within Nicaragua and difficulties encountered with negotiations on extensions and the issuance of permits to drill with the Nicaraguan government made the exploration and development of the underlying concessions problematic. In addition, the Company was in technical default of the certain terms of the Nicaraguan Concession and the Nicaraguan government terminated both of the underlying Concessions. As a result, the Company abandoned all of its efforts to explore and develop the Nicaraguan Concessions effective January 1, 2020.

 

We sold our wholly-owned subsidiary, Infinity Oil and Gas of Texas, Inc. (“Infinity Texas”) in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc. (“Infinity Wyoming”), was administratively dissolved in 2009.

 

Subsequent to the termination of the Nicaraguan Concessions, we began assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of 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 and 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 non-refundable deposit of $50,000 to bind the 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. On September 2, 2020, the Company acquired a new Option from Core under similar terms as the previous Option, however the newly acquired Option permitted the Company to purchase the Properties at a reduced price of $900,000 at any time prior to November 1, 2020 and the Company agreed to immediately conduct a capital raise of between approximately $2-10 million to fund its acquisition and development of the Properties. On December 14, 2020 the parties executed an Asset Purchase and Sale Agreement which extended the new Option to January 11, 2021, which expired.

 

We, Core, and Seller entered into the Side Letters on September 2, 2020 and March 31, 2021, pursuant to which we and Core agreed to set the closing date of the acquisition of the Properties under the Asset Purchase Agreement to April 1, 2021. Pursuant to the Side Letters, the Company is responsible for reimbursing Core for certain prorated revenues and expenses from January 1, 2021 through April 1, 2021.

 

On April 1, 2021 we completed the acquisition of the Properties, under the same terms of the Asset Purchase Agreement which provided a purchase price of $900,000. The Company raised approximately $2.05 million on March 26, 2021 through the issuance of Convertible Preferred Stock with detachable common stock purchase warrants. The funds raised pursuant to the Convertible Preferred Stock issuance were used to complete the acquisition of the Properties on April 1, 2021 and to retire all outstanding Convertible Notes Payable.

 

The purchase of the Properties included 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 commenced rework of the existing production wells after completion of the acquisition of the Properties and have performed testing and evaluation of the existence of noble gas reserves on the Properties including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the Properties existing oil and gas reserves while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.

 

On April 4, 2022, the Company acquired a 40% participation in a Farmout Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. AMGAS has joined three other parties to explore for and develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement (collectively the “Hugoton JV”) .

 

  8  

 

 

The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on April 28, 2022. The Hugoton JV will utilize Scout’s existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices.

 

The Hugoton JV also acquired the right to all brine minerals subject to a ten percent (10%) royalty to Scout, across Finney and Haskell Counties. Brine minerals are harvested from the formation water produced from active, and to be drilled, oil and gas wells and may include a variety of dissolved minerals including bromine and iodine. The Hugoton JV plans to target brine minerals with commercial quantities of bromine and iodine. AMGAS through the Hugoton JV is currently developing proprietary technology to recover brine minerals, particularly with respect to bromine, which is well underway and has demonstrated recovery efficiency and is expected to be available for use in existing and future development wells.

 

The first exploratory well commenced on May 7, 2022 near Garden City, Kansas with a goal to evaluate its unconventional theory of where substantial oil, natural gas and noble gases may be present in the Hugoton Gas Field. The Hugoton JV believes that its unconventional theory has not previously been targeted for exploration by historical operations in the field.

 

The exploration and development activity will be directed and coordinated under the terms of the USNG Letter Agreement entered in November 2021 with input from the newly formed Advisory Board of directors whose members all have extensive experience in developing shale resources and noble gas and rare earth mineral reserves.

 

We may find it necessary to obtain new sources of debt and/or equity capital to fund the exploration and development of the Properties enumerated above, as well as satisfying our existing debt obligations. We can provide no assurance that we will be able to obtain sufficient new debt/equity capital to fund our planned development of the Properties.

 

COVID–19 Pandemic

 

The financial statements contained in this Quarterly Report on Form 10-Q as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of March 31, 2022. Economies throughout the world continue to suffer disruptions 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) including the recent rise of the new Omicron variant. 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 followed by the recent resurgence in oil and natural gas prices. In addition, the capital markets have experienced periods of disruption and our efforts to raise necessary capital in the future may be adversely impacted by the pandemic and investor sentiment and we cannot forecast with any certainty when the lingering uncertainty caused by the COVID-19 pandemic will cease to impact our business and the results of our operations. In reading this Quarterly Report on Form 10-Q, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the outbreak of COVID-19.

 

Going Concern

 

The Company has incurred losses from operations, has a net stockholders’ deficit, incurred net cash used in operating activities and has a significant working capital deficit as of and for the three months ended March 31, 2022 and for the year ended December 31, 2021. The Company must raise substantial amounts of debt and equity capital from other sources in the future in order to fund the (i) development of the Properties acquired on April 1, 2021; (ii) funding our obligations for exploration and development under the Hugoton Farmout Agreement (see Note 14); (iii) normal day-to-day operations and corporate overhead; and (iv) 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 2022 and beyond.

 

The Company has made substantial progress in resolving many of its existing financial obligations during the three months ended March 31, 2022 and for the year ended December 31, 2021.

 

  9  

 

 

The Company will have significant financial commitments to execute its planned exploration and development of the Properties and the Hugoton Gas Field. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development activities and may 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. There can be no assurance that it will be able to obtain such new funding or be able to reach agreements with industry operators and other third parties 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 unaudited condensed 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.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and the series of related accounting standard updates that followed, using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not change the Company’s amount and timing of revenues.

 

The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. To date, such revenues have only included the sale of oil however the Company expects to begin generating revenues from the sale of natural gas and noble gases in the future. The Company recognizes revenue from its interests in the sales of oil and gas in the period that its performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of product, when the Company has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable. The sales of oil and gas are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and gas production from one to three months after delivery. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in trade receivables, net in the balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received, however, differences have been and are insignificant. The Company’s oil is typically sold at delivery points under contracts terms that are common in our industry.

 

Convertible Instruments

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)” which is intended to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.

 

  10  

 

 

The amendments in ASU 2020-06 are effective for public entities that meet the definition of an SEC filer, excluding smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

 

The Company early adopted ASU 2020-06 effective January 1, 2021 and has applied its effects to the 3% Convertible Promissory Notes issued on March 31, 2021 and the 8% Convertible Promissory Note issued on August 30, 2021(See Note 3). The Company elected to adopt ASU 2020-06 using the modified retrospective method which enables entities to apply the transition requirements in this ASU at the effective date of ASU 2020-06 (rather than as of the earliest comparative period presented) with the effect of initially adopting ASU 2020-06 recognized as a cumulative-effect adjustment to retained earnings (accumulated deficit) on the first day of the period adopted. Therefore, this transition method applies the amendments in ASU 2020-06 to outstanding financial instruments as of the beginning of the fiscal year of adoption (January 1, 2021), with the cumulative effect of the change recognized as an adjustment to the opening balance of retained earnings (accumulated deficit) as of the date of adoption. In accordance with the modified retrospective method, no adjustment was made to the comparative-period information including earnings (loss) per share.

 

The Company applied ASU-2020-06 to all outstanding financial instruments as of January 1, 2021, (the date of adoption of ASU 2020-06). The convertible notes payable issued on August 19, 2020 was the only outstanding financial instrument effected by this new accounting standard as of January 1, 2021. Therefore the application of ASU-2020-06 to this convertible note payable was used to determine the cumulative effect of the adoption of the new accounting standard. The cumulative effect of the adoption of the new accounting standard was determined and recognized as an adjustment to the opening balance of retained earnings (accumulated deficit) which resulted in an increase to the carrying value of convertible notes payable as of January 1, 2021 by $160,900, a decrease to additional paid in capital of $252,961 and a decrease to accumulated deficit of $92,061. See Note 3.

 

Prior to the adoption of ASU 2020-06, the Company applied the existing accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

 

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

 

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 include, but are not limited to, oil and gas reserves; depreciation, depletion and amortization of proved oil and gas properties; future cash flows from oil and gas properties; impairment of long-lived assets; fair value of derivatives; fair value of equity compensation; warrants issued in connection with convertible debt; the realization of deferred tax assets; fair values of assets acquired and liabilities assumed in business combinations.

 

  11  

 

 

Oil and gas properties

 

On April 1, 2021 we completed the acquisition of the Properties, under the terms of the Asset Purchase Agreement which provided a purchase price of $900,000. The purchase of the Properties included 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 Company has performed workovers of the wells subsequent to the Properties purchase which was necessary to put the lease back into production status. Therefore, these tangible and intangible workover costs were expensed as lease operating expenses rather than capitalized in the full cost pool through March 31, 2022. In addition, the Company is currently evaluating the Properties for oil and gas reserves and specifically the potential for noble gas reserves such as helium, argon and krypton. Based on these evaluations, the Company may redirect its efforts to the production of noble gases rather than crude oil on the Properties. These noble gas evaluation costs have also been expensed as lease operating costs through March 31, 2022.

 

The accounting for, and disclosure of, oil and gas producing activities require that we choose between two GAAP alternatives: the full cost method or the successful efforts method. We adopted and use the full cost method of accounting, which involves capitalizing all exploration, exploitation, development and acquisition costs. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. Our unproved property costs, which include unproved oil and gas properties, properties under development, and major development projects, which were zero through March 31, 2022, and are not subject to depletion. We review our unproved oil and gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost pool during that time. The full cost pool is comprised of intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved leaseholds.

 

When we acquire significant amounts of undeveloped acreage, we capitalize interest on the acquisition costs in accordance with FASB ASC Subtopic 835-20 for Capitalization of Interest. We capitalize interest upon identification and development of shale resource opportunities in the Haynesville and Marcellus areas. When the unproved property costs are moved to proved developed and undeveloped oil and gas properties, or the properties are sold, we cease capitalizing interest.

 

Capitalized costs to acquire oil and natural gas properties are depreciated and depleted on a units-of-production basis based on estimated proved reserves. Capitalized costs of exploratory wells and development costs are depreciated and depleted on a units-of-production basis based on estimated proved developed reserves. Under this method, the sum of the full cost pool, excluding the book value of unproved properties, and all estimated future development costs are divided by the total estimated quantities of proved reserves. This rate is applied to our total production for the quarter, and the appropriate expense is recorded. Support equipment and other property, plant and equipment related to oil and gas producing activities, as well as property, plant and equipment unrelated to oil and gas producing activities, are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets.

 

Sales, dispositions and other oil and gas property retirements are accounted for as adjustments to the full cost pool, with no recognition of gain or loss, unless the disposition would significantly alter the amortization rate and/or the relationship between capitalized costs and Proved Reserves.

 

Pursuant to Rule 4-10(c)(4) of Regulation S-X, at the end of each quarterly period, companies that use the full cost method of accounting for their oil and gas properties must compute a limitation on capitalized costs, or ceiling test. The ceiling test involves comparing the net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling is less than the full cost pool, we must record a ceiling test write-down of our oil and gas properties to the value of the full cost ceiling. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from our proved reserves by applying average prices as prescribed by the SEC Release No. 33-8995, less estimated future expenditures (based on current costs) to develop and produce the proved reserves, discounted at 10%, plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects.

 

  12  

 

 

The ceiling test is computed using the simple average spot price for the trailing twelve-month period using the first day of each month. The trailing twelve-month reference price was $67.99 per barrel for the West Texas Intermediate oil at Cushing, Oklahoma through December 31, 2021. This reference price for oil is further adjusted for quality factors and regional differentials to derive estimated future net revenues. Under full cost accounting rules, any ceiling test write-downs of oil and gas properties may not be reversed in subsequent periods. There were no ceiling test write-downs through March 31, 2022.

 

The ceiling test calculation is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered.

 

Issuance of Debt Instruments With Detachable Stock Purchase Warrants

 

Proceeds from the issuance of a debt instrument with stock purchase warrants (detachable call options) are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants are recorded as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction. Such issuances generally result in a discount (or, occasionally, a reduced premium) relative to the debt instrument, which is amortized to interest expense using the effective interest rate method.

 

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.

 

During April 2021, the Company acquired the Kansas Properties and assumed the related asset retirement obligation existing at the date of acquisition. The asset retirement obligation assumed for the Kansas Properties relates to the plug and abandonment costs when the wells acquired are no longer useful. The Company determined the value of the liability by obtaining quotes for this service and estimated the increased costs that the Company will face in the future. We then discounted the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future, however, we monitor the costs of the abandoned wells and we will adjust this liability if necessary.

 

As of December 31, 2021, the Company had divested all of its domestic oil properties that contained operating and abandoned wells in Texas, Colorado and Wyoming. 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.

 

  13  

 

 

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.

 

Basic and Diluted Income (Loss) Per Share

 

Net income (loss) per share is calculated in accordance with FASB ASC 260, Earnings Per Share, for the periods presented. Basic net loss per share is based upon the weighted average number of shares of Common Stock outstanding. Diluted net earnings (loss) per share is based on the assumption that all dilutive convertible shares, warrants and stock options were converted or exercised or excluded from the calculations if their inclusion would be antidilutive. Dilution is computed by applying the if-converted/treasury stock method. Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase shares of Common Stock at the average market price during the period. The Company has outstanding convertible promissory notes payable and Convertible Preferred Stock both of which is potentially dilutive. Such potential dilutive effect is included in diluted earnings (loss) per share at the beginning of the period (or at the time of issuance, if later) if they have a dilutive effect or such potentially dilutive securities are excluded from the calculations if their inclusion would be antidilutive.

 

The Company has outstanding convertible promissory notes payable and convertible preferred stock both of which is potentially dilutive. The adoption of ASU 2020-06 requires the Company to assume share settlement when an instrument can be settled in cash or shares at the entity’s option. This applies both to convertible instruments and freestanding arrangements that could result in cash or share settlement. ASU 2020-06 also stipulates that an average market price for the period should be used in the computation of the diluted earnings (loss) per share denominator in cases when the exercise price of an instrument may change based on an entity’s share price or changes in the entity’s share price may affect the number of shares that would be used to settle a financial instrument. Lastly, an entity should use the weighted-average share count from each quarter when calculating the year-to-date weighted average share count for all potentially dilutive securities.

 

During the three months ended March 31, 2022 and 2021, the Company had outstanding the following securities that were potentially dilutive; 1) Series A Convertible Preferred Stock, 2) Convertible Note Payable through its retirement on March 26, 2021, 3) 3% Convertible Promissory Notes issued on March 31, 2021, 4) 8% Convertible Promissory Note issued on August 30, 2021, 5) 8% Convertible Promissory Notes issued on October 29, 2021, 6) Warrants to purchase common stock and 7) options to purchase common stock. All potentially dilutive securities were excluded from the calculation of diluted income (loss) per share for the three months ended March 31, 2022 and 2021 as all were considered anti-dilutive because of the net loss reported for the three months ended March 31, 2022 and 2021.

 

Gain on Extinguishment of Liabilities / Troubled Debt Restructuring:

 

In accordance with ASC 470, the Company assesses restructuring of debt as troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grant a concession to the debtor that it would not otherwise consider. The Company records a gain on restructuring of payables when it transfers its assets to a creditor to fully settle a payable. The gain is measured by the excess of the carrying amount of the payable over the fair value of the assets transferred or fair value of equity interest granted.

 

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Recent Accounting Pronouncements

 

Reference Rate Reform. - In March 2020, the Financial Accounting Standard Board (the “FASB”) issued an accounting standard update which provides optional expedients and expectations for applying GAAP to contracts, hedging relationships and other transactions to ease financial reporting burdens to the expected market transition from the London Interbank Offered Rate (“LIBOR”) or another reference rate to alternative reference rates. The amendments in this accounting standards update became effective March 12, 2020, and an entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on the Company’s financial statements.

 

Income Taxes – Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued an accounting standard update which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This accounting standards update removes the following exceptions: (i) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (ii) exception to the requirements to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (iii) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (iv) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the accounting standards update also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The guidance became effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted the guidance effective January 1, 2021, with all of the anticipated and applicable effects to be required on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

 

Note 2 – Oil and Gas Properties Acquired

 

Oil and gas properties and equipment is comprised of the following at March 31, 2022 and December 31, 2021:

 

    March 31, 2022     December 31,2021  
Oil and gas production equipment   $ 913,425     $ 913,425  
Proven developed and undeveloped oil and gas properties     9,134        
Subtotal     922,559       913,425  
Less: Accumulated depreciation, depletion and amortization     (123,336 )     (92,502 )
Oil and gas properties and equipment, net   $ 799,223     $ 820,923  

 

On April 1, 2021, the Company completed the previously announced acquisition of certain oil and gas properties and interests from Core Energy, LLC, effective as of January 1, 2021 (the “Oil and Gas Properties Acquisition”). On December 14, 2020, the Company entered into an asset purchase and sale agreement (the “Agreement”) with Core Energy, as well as all of the members of Core, Mandalay LLC and Coal Creek Energy, LLC, to purchase certain oil and gas properties in the Central Kansas Uplift geological formation, covering over 11,000 contiguous acres, including, among other things, the production and mineral rights to and a leasehold interest in the Oil and Gas Properties and all contracts, agreements and instruments. The Agreement provided for an aggregate purchase price consisting of $900,000 in cash at closing.

 

The following represents the purchase price allocation for the Oil and Gas Properties Acquisition for $900,000 in cash. The Oil and Gas Property Acquisition qualify as an asset acquisition. As such, AMGAS recognized the assets acquired and liabilities assumed at their fair values as of April 1, 2021, the date of closing. The fair value of the Oil and Gas Properties acquired approximate the value of the consideration paid, and the asset retirement obligation to be assumed, which management has concluded approximates the fair value that would be paid by a typical market participant. As a result, neither goodwill nor a bargain purchase gain will be recognized related to the acquisition.

 

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The Company determined the amount of the asset retirement obligation assumed to be $13,425 as of the date of acquisition. The obligation relates to legal requirements associated with the retirement of long-lived assets that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.

 

The following table summarizes the allocation of the assets acquired and the liabilities assumed related to the Oil and Gas Properties:

 

    Amount  
Oil and gas properties, subject to depreciation, depletion and amortization   $ 913,425  
Asset retirement obligation assumed     (13,425 )
Total purchase price of the Oil and Gas Properties   $ 900,000  

 

Note 3 – Debt Obligations

 

Debt obligations is comprised of the following at March 31, 2022 and December 31, 2021:

 

    March 31, 2022     December 31, 2021  
Notes payable:                
                 
  $ 28,665     $ 28,665  
3% Convertible promissory notes payable   $ 28,665     $ 28,665  
8% Convertible promissory notes payable (less discount of $193,059 and $273,726 as of March 31, 2022 and December 31, 2021, respectively)     456,941       376,274  
                 
Total notes payable     485,606       404,939  
Less: Long-term portion     28,665       28,665  
Notes payable, short-term   $ 456,941     $ 376,274  

 

Debt obligations become due and payable as follows:

 

Years ended  

Principal

balance due

 
       
2022   $ 456,941  
2023      
2024      
2025      
2026     28,665  
2027      
Total   $ 485,606  

 

3% Convertible Promissory Notes Payable

 

On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of 3% Convertible Promissory Notes (the “3% Notes”) with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share. The 3% Notes allow for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on March 30, 2026 (“Maturity Date”). The 3% Notes are convertible as to principal and any accrued interest, at the option of the holder, into shares of the Company’s Common Stock at any time after the issue date and prior to the close of business on the business day preceding the Maturity Date at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustment.

 

  16  

 

 

An aggregate of $2,577,727 of the total accounts payable and accrued liabilities that were extinguished were with five related parties. Such related parties were issued $25,777 principal balance of the 3% Convertible Promissory Notes and warrants to purchase 5,155,454 shares of Common Stock in exchange for the extinguishment of their respective debt obligations. See Note 10.

 

8% Convertible Promissory Notes Payable

 

On August 30, 2021, the Company and an accredited investor (the “8% Note Investor”) agreed whereby the Company issued an unsecured convertible note due October 29, 2022 (the “8% Note”), with an aggregate principal face amount of approximately $100,000. The 8% Note is, subject to certain conditions, convertible into an aggregate of 200,000 shares of Common Stock, at a price of $0.50 per share. The Company also issued a five and one half-year common stock purchase warrant to purchase up to 200,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments (the “8% Note Warrants”) which are immediately exercisable. The 8% Note Investor purchased the 8% Note and 8% Note Warrant from the Company for an aggregate purchase price of $100,000 and the proceeds were used for general working capital purposes. The Company also granted the 8% Note Investor certain piggy-back registration rights whereby the Company has agreed to register for resale the shares underlying the 8% Note Warrant and the conversion of the 8% Note unless the shares of the Company commences to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the Closing Date.

 

On October 29, 2021, the Company and three accredited investors (the “October 8% Note Investors”) agreed whereby the Company issued an unsecured convertible note due October 29, 2022 (the “October 8% Note”), with an aggregate principal face amount of approximately $550,000. The October 8% Notes are, subject to certain conditions, convertible into an aggregate of 1,100,000 shares of Common Stock, at a price of $0.50 per share. The Company also issued five and one half-year common stock purchase warrants to purchase up to 1,650,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments (the “October 8% Note Warrants”) which are immediately exercisable. The October 8% Note Investors purchased the October 8% Notes and October 8% Note Warrants from the Company for an aggregate purchase price of $550,000 and the proceeds were used for general working capital purposes. The Company also granted the October 8% Note Investors certain piggy-back registration rights whereby the Company has agreed to register for resale the shares underlying the October 8% Note Warrants and the conversion of the October 8% Notes unless the shares of the Company commences to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the Closing Date.

 

The 8% Note and the October 8% Notes all bear interest at a rate of eight percent (8%) per annum, may be voluntarily repaid in cash in full or in part by the Company at any time in an amount equal to 120% of the principal amount of the underlying notes and any accrued and unpaid interest. Fifty percent (50%) of the 8% Note and the October 8% Notes shall be mandatorily repaid in cash in an amount equal to 120% of the principal amount of the underlying notes and any accrued and unpaid interest in the event of the consummation by the Company of any public or private offering or other financing pursuant to which the Company receives gross proceeds of at least $2,000,000 and one-hundred percent (100%) of the underlying notes plus accrued interest shall be mandatorily repaid in an amount equal to 120% of outstanding principal and interest in cases in which the Company receives gross proceeds of at least $3,000,000. In addition, pursuant to the 8% Notes and the October 8% Notes, so long as the underlying notes remain outstanding, the Company cannot enter into any financing transactions pursuant to which the Company sells its securities at a price lower than $0.50 cents per share without the written consent of the 8% Note Investors.

 

The conversion of the 8% Note and the October 8% Notes and the exercise of the underlying warrants are each subject to beneficial ownership limitations such that the 8% Note Investor and the October 8% Note Investors may not convert the underlying notes or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the investors being the beneficial owner in excess of 4.99% (or, upon election of the investors, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.

 

  17  

 

 

The Company and the 8% Note Investor and the October 8% Note Investors agreed that for so long as the underlying warrants remain outstanding, the investor have the right to participate in any issuance of Common Stock, conventional debt, or a combination of such securities and/or debt, up to an amount equal to thirty-five percent (35%) of such subsequent financing.

 

The underlying notes and warrants contain customary events of default, representations, warranties, agreements of the Company and the investors and customary indemnification rights and obligations of the parties thereto, as applicable.

 

As described in Note 1 the Company elected to early adopt ASU 2020-06 using the modified retrospective method which enables entities to apply the transition requirements in this ASU at the effective date of ASU 2020-06 (rather than as of the earliest comparative period presented) with the effect of initially adopting ASU 2020-06 recognized as a cumulative-effect adjustment to retained earnings (accumulated deficit) on the first day of the period adopted.

 

The Company has applied ASU-2020-06 to all outstanding financial instruments as of January 1, 2021, (the date of adoption of ASU 2020-06) and those entered into after January 1, 2021 including the 8% Note. As a result, the 8% Note and October 8% Notes were required to be separated into its debt and equity components based on their relative fair values because of the issuance of detachable warrants together with the 8% Note and the October 8% Notes. Accordingly, the Company allocated the proceeds of the 8% note as follows:

 

    Amount  
Proceeds allocated to 8% convertible note   $ 314,104  
Proceeds allocated to 8% convertible note   $ 314,104  
Proceeds allocated to detachable warrants to purchase common stock     335,896  
         
Total proceeds   $ 650,000  

 

The 8% Note and October 8% Notes were recorded at their par value less the discount established at its origination date. The note discount is amortized over the term of the convertible note utilizing the level-interest method. The following is the assumptions used in calculating the estimated grant-date fair value of the detachable warrants to purchase common stock granted in connection with the 8% Note and the October 8% Note during the August and October of 2021:

 

   

As of
August 30, 2021

(issuance date)

   

As of
October 30, 2021

(issuance date)

 
             
Volatility – range     369.4 %     367.7 %
Risk-free rate     0.77 %     1.18 %
Contractual term     5.5 years       5.5 years  
Exercise price   $ 0.50     $ 0.50  
Number of warrants in aggregate     200,000       1,650,000  

 

Following is a summary of activity relative to the 8% Note and October 8% Notes as for the three months ended March 31, 2022:

 

    Amount  
Balance December 31, 2021 – 8% Convertible Notes   $ 376,274  
Amortization of discount during the period to interest expense     80,667  
         
Balance March 31, 2022 - 8% Convertible Notes   $ 456,941  

 

The remaining unamortized discount relative to the 8% Convertible Notes was $193,059 and $273,726 as of March 31, 2022 and December 31, 2021 respectively.

 

  18  

 

 

Convertible Note Payable

 

On August 19, 2020, the Company entered into a securities purchase agreement with an accredited investor (the “August Investor”) for the Company’s senior unsecured convertible note due August 19, 2021 (the “August Note”), with an aggregate principal face amount of approximately $365,169. The August Note was, subject to certain conditions, convertible into an aggregate of 3,943,820 shares of Common Stock, at a price of $0.10 per share. The Company also issued a five-year common stock purchase warrant to purchase up to 800,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments (the “August Warrant”). The August Warrant is immediately exercisable and on a cashless basis if the shares underlying such warrant have not been registered within 180 days after the date of issuance. The August Investor purchased such securities from the Company for an aggregate purchase price of $325,000. The Company also granted the August Investor certain automatic and piggy-back registration rights whereby the Company has agreed to register the resale by the August Investor of the shares underlying the August Warrant and the conversion of the August Note.

 

The August Note bore interest at a rate of eight percent (8%) per annum with 12 months guaranteed, may be voluntarily repaid in cash in full or in part by the Company at any time in an amount equal to 115% of the principal amount of the August Note and any accrued and unpaid interest, and shall be mandatorily repaid in cash in an amount equal to 115% of the principal amount of the August Note and any accrued and unpaid interest in the event of the consummation by the Company of any public or private offering or other financing pursuant to which the Company receives gross proceeds of at least $2,500,000. In addition, pursuant to the August Note, so long as the August Note remained outstanding, the Company could not enter into any financing transactions pursuant to which the Company sells its securities at a price lower than ten cents per share without written consent of the August Investor.

 

The conversion of the August Note and the exercise of the August Warrant are each subject to beneficial ownership limitations such that the August Investor may not convert the August Note or exercise the August Warrant to the extent that such conversion or exercise would result in the August Investor being the beneficial owner in excess of 4.99% (or, upon election of the August Investor, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.

 

The Company and the August Investor agreed that for so long as the August Note and August Warrant remains outstanding, the August Investor has a right to participate in any issuance of Common Stock, conventional debt, or a combination of such securities and/or debt, up to an amount equal to thirty-five percent (35%) of such subsequent financing.

 

The August Note and August Warrant each contain customary events of default, representations, warranties, agreements of the Company and the August Investor and customary indemnification rights and obligations of the parties thereto, as applicable.

 

As described in Note 1 the Company elected to early adopt ASU 2020-06 using the modified retrospective method which enables entities to apply the transition requirements in this ASU at the effective date of ASU 2020-06 (rather than as of the earliest comparative period presented) with the effect of initially adopting ASU 2020-06 recognized as a cumulative-effect adjustment to retained earnings (accumulated deficit) on the first day of the period adopted.

 

The Company applied ASU-2020-06 to all outstanding financial instruments as of January 1, 2021, (the date of adoption of ASU 2020-06). The convertible notes payable issued on August 19, 2020 was the only outstanding financial instrument effected by this new accounting standard as of January 1, 2021. Therefore the application of ASU-2020-06 to this convertible note payable was used to determine the cumulative effect of the adoption of the new accounting standard. The cumulative effect of the adoption of the new accounting standard was determined and recognized as an adjustment to the opening balance of retained earnings (accumulated deficit) which resulted in an increase to the carrying value of convertible notes payable as of January 1, 2021 by $160,900, a decrease to additional paid in capital of $252,961 and a decrease to accumulated deficit of $92,061. See Note 1.

 

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On March 26, 2021, the Company exercised its right to retire the August Note in conjunction with the issuance of Convertible Preferred Stock (See Note 3 and 10). In accordance with the prepayment provisions contained in the August Note, the Company paid all principal, accrued interest and the 15% prepayment premium as follows:

 

    Amount  
Principal balance at par   $ 365,169  
Remaining discount included in principal balance     (44,883 )
Accrued interest     17,448  
Prepayment premium (including remaining discount due to early retirement)     115,805  
         
Total payment to retire the August Note   $ 453,539  

 

The prepayment premium was charged to non-operating expense as a loss from retirement of convertible note payable (See Note 9).

 

Following is a summary of the August Note as for the year ended December 31, 2021:

 

    Amount  
Balance December 31, 2020 - August Note   $ 133,563  
Cumulative effect of adoption of ASU 2020-06     160,900  
Amortization of discount through the March 26, 2021 retirement date     25,823  
Remaining discount recognized as a loss from retirement of convertible note payable     44,883  
Retirement of August Note at par value on March 26, 2021     (365,169 )
         
Balance December 31, 2021 - August Note   $  

 

Other notes payable

 

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 such note was for a period of 90 days and bears interest at 8% per annum. In connection with the loan and subsequent extensions, the Company issued the individual 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 such note and/or extensions. The ratchet provision in such warrant requires that such warrant be accounted for as derivative liability. The related warrant derivative liability balance was $72 and $189 as of April 1, 2021 (the extinguishment date) and December 31, 2020, respectively. See Note 6.
     
    On April 1, 2021, the Company and the holder of the $50,000 note payable that was in default reached a settlement whereby the Company issued a total of 145,000 shares of Common stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated common stock purchase warrants which totaled $72,874 as of April 1, 2021. The 145,000 shares issued to extinguish the debt obligations were valued at $40,600 based on the closing market price on the date of the extinguishment. The extinguishment of the debt obligations resulted in a gain of $32,274 which was recorded in the three months ended June 30, 2021.
     
  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 such note was for a period of 90 days and bears interest at 8% per annum. In connection with the loan and subsequent extensions, the Company issued the individual 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 such note and/or extensions. The ratchet provision in such warrant requires that such warrant be accounted for as derivative liability. The related warrant derivative liability balance was $50 and $132 as of April 1, 2021 (the extinguishment date) and December 31, 2020, respectively. See Note 6.
     
    On April 1, 2021, the Company and the holder of the $35,000 note payable that was in default reached a settlement whereby the Company issued a total of 100,000 shares of Common stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated common stock purchase warrants which totaled $50,956 as of April 1, 2021. The 100,000 shares issued to extinguish the debt obligations were valued at $28,000 based on the closing market price on the date of the extinguishment. The extinguishment of the debt obligations resulted in a gain of $22,956 which was recorded in the three months ended June 30, 2021.

 

  20  

 

 

Note 4 – Accrued liabilities

 

Accrued liabilities consist of the following at March 31, 2022 and December 31, 2021:

 

    March 31, 2022     December 31, 2021  
Accrued rent   $ 614,918     $ 614,918  
Accrued Nicaragua Concession fees     544,485       544,485  
                 
Total accrued liabilities   $ 1,159,403     $ 1,159,403  

 

The accrued rent balances relate to unpaid rent for the Company’s previous headquarters in Denver Colorado and represents unpaid rents and related costs for the period June 2006 through November 2008. The Company has not had any correspondence with the landlord for several years and will seek to settle and/or negotiate the matter when it has the financial resources to do so.

 

The accrued Nicaraguan Concession fees were accrued during the time the Concessions had lapsed and the Company was attempting to negotiate extensions to the underlying concessions with the Nicaraguan government which were unsuccessful. The Company abandoned all efforts to negotiate an extension to the Concessions effective January 1, 2020 and ceased the accrual of all related fees at that time.

 

On March 31, 2021, the Company and six creditors entered into Debt Settlement Agreements which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of 3% Convertible Promissory Notes with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share. (See Note 3, 7 and 13)

 

Note 5 – Stock Options

 

Total stock-based compensation is comprised of the following for the three months ended March 31, 2022 and 2021:

 

    Three Months Ended
March 31,
 
    2022     2021  
Stock-based compensation – stock option grants   $ 76,500     $  
                 
Stock-based compensation – restricted stock grants     81,250       81,250  
                 
Stock-based compensation – warrants issued for services pursuant to USNG Letter Agreement (See Note 7)     72,156        
                 
Total stock-based compensation   $ 229,906     $ 81,250  

 

  21  

 

 

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.

 

At the Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved the 2021 Plan and the Company reserved 5,000,000 shares for issuance under the 2021 Plan. At the Annual Meeting of Stockholders held on September 25, 2015, the stockholders approved the 2015 Plan and the Company reserved 500,000 shares for issuance under the 2015 Plan.

 

The 2021 Plan and the 2015 Plan provide for under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 5,500,000 shares of the Company’s Common Stock is reserved for issuance under the 2021 and 2015 Plan. Options granted under the 2021 Plan and 2015 Plan allow for the purchase of shares 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 has issued stock options and restricted stock awards that are not pursuant to a formal plan with terms similar to the 2021 and 2015 Plans.

 

As of March 31, 2022, 5,500,000 shares were available for future grants under the 2021 Plan and 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 based on historical volatility. 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 1,800,000 options granted during June 2021.

 

Stock option grants

 

The following table summarizes stock option activity for the three months ended March 31, 2022 and 2021:

 

    Number of Options    

Weighted Average Exercise

Price Per

Share

   

Weighted

Average

Remaining
Contractual
Term

   

Aggregate

Intrinsic

Value

 
Outstanding at December 31, 2020     332,000     $ 41.86       1.28 years     $  
Granted                            
Exercised                            
Forfeited     (55,000 )     (50.25 )                
Outstanding at March 31, 2021     277,000     $ 39.75       1.27 years     $  
Outstanding and exercisable at March 31, 2021     277,000     $ 39.75       1.27 years     $  
                                 
Outstanding and exercisable at December 31, 2021     1,892,000     $ 1.93       9.07 years     $  
Granted                            
Exercised                            
Forfeited                            
Outstanding at March 31, 2022     1,892,000     $ 1.93       8.82 years     $  
Outstanding and exercisable at March 31, 2022     92,000     $ 30.00       1.79 years     $  

 

  22  

 

 

The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable options under the Company’s option plans as of March 31, 2022:

 

          Outstanding options     Exercisable options  
  Exercise price per share       Number of options     Weighted average remaining contractual life     Number of options       Weighted average remaining contractual life  
                                 
$ 0.50       1,800,000     9.18 years            
$ 30.00       92,000     1.79 years     92,000       1.79 years  
                                 
  Total       1,892,000     8.82 years     92,000       1.79 years  

 

The following is the assumptions used in calculating the estimated grant-date fair value of the stock options granted during 2021:

 

   

As of

June 4, 2021

(issuance date)

 
       
Volatility – range     286.6 %
Risk-free rate     1.56 %
Contractual term     10.0 years  
Exercise price   $ 0.50  
Number of options in aggregate     1,800,000  

 

The Company recorded stock-based compensation expense in connection with the vesting of stock options granted aggregating $76,500 and $-0- for the three months ended March 31, 2022 and 2021, respectively.

 

The total grant date fair value of the 1,800,000 stock options issued during 2021 was $305,997 in total or $0.17 per share and there were no stock options granted during the three months ended March 31, 2022.

 

The intrinsic value as of March 31, 2022 related to the vested and unvested stock options as of that date was $-0-. The unrecognized compensation cost as of March 31, 2022 related to the unvested stock options as of that date was $51,000 which will be amortized over the next two months in accordance with the respective vesting scale.

 

Restricted stock grants.

 

During August 2020 the Board of Directors granted 5,000,000 shares of restricted stock awards to our officers, directors and a consultant. During October 2019 the Board of Directors granted 2,000,000 shares of 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.

 

  23  

 

 

A summary of all restricted stock activity under the equity compensation plans for the three months ended March 31, 2022 and 2021 is as follows:

 

   

Number of

Restricted

shares

   

Weighted

average

grant date

fair value

 
Nonvested balance, December 31, 2020     3,750,000     $ 0.13  
Granted            
Vested     (625,000 )     (0.13 )
Forfeited            
Nonvested balance, March 31, 2021     3,125,000     $ 0.13  
                 
Nonvested balance, December 31, 2021     1,250,000     $ 0.13  
Granted            
Vested     (625,000 )     (0.13 )
Forfeited            
Nonvested balance, March 31, 2022     625,000     $ 0.13  

 

The Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted stock grants aggregating $81,250 and $81,250 during the three months ended March 31, 2022 and 2021, respectively.

 

The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of March 31, 2022, there were $81,250 of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next three months in accordance with the respective vesting scale.

 

The nonvested balance of restricted stock vests as follows:

 

Years ended  

Number of

shares

 
       
2022     625,000  
2023      

 

Note 6 – Derivative Instruments

 

The estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection with various notes payable that have now been paid off or settled, 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 and current interest rates. The detachable warrants issued in connection with the two other short-term notes payable (See Note 3) contained ratchet and anti-dilution provisions that remain in effect during the term of the warrants while the ratchet and anti-dilution provisions of the other notes payable cease when the related note payable is extinguished.

 

On April 1, 2021, the outstanding warrants treated as derivatives and the related notes payable containing such ratchet and anti-dilution provisions were extinguished through an exchange transaction as described in Note 3. Therefore, the derivative liability was adjusted to fair value and extinguished as of April 1, 2021.

 

A summary of the assumptions used in calculating estimated fair value of such derivative liabilities as of March 31, 2021 is as follows:

 

   

As of

March 31, 2021

 
       
Volatility – range     373.9 %
Risk-free rate     0.92 %
Contractual term     0.2 years  
Exercise price   $ 5.60  
Number of warrants in aggregate     8,500  

 

  24  

 

 

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, 2020   $ 321  
Unrealized derivative gains included in other income/expense for the period     (199 )
Balance at March 31, 2021   $ 122  
Balance at December 31, 2021   $  
Unrealized derivative gains included in other income/expense for the period    
Balance at March 31, 2022   $  

 

Note 7 – Warrants

 

The following table summarizes warrant activity for the three months ended March 31, 2022 and 2021:

 

   

Number of

Warrants

   

Weighted

Average

Exercise Price

Per Share

 
Outstanding and exercisable at December 31, 2020     1,528,380     $ 0.65  
Issued in connection with issuance of Series A convertible preferred
stock (See Note 3)
    5,256,410       0.39  
Issued in connection with issuance of 3% convertible promissory
notes (see Note 3 and 13)
    5,732,994       0.50  
Forfeited/expired     (18,500 )     (5.28 )
Outstanding and exercisable at March 31, 2021     12,499,284     $ 0.46  
                 
Outstanding and exercisable at December 31, 2021     17,580,784     $ 0.47  
Forfeited/expired            
                 
Outstanding and exercisable at March 31, 2022     17,580,784     $ 0.47  

 

The weighted average term of all outstanding common stock purchase warrants was 4.3 years and 4.6 years as of March 31, 2022 and December 31, 2021, respectively. The intrinsic value of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero as of March 31, 2022 and December 31, 2021.

 

The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase common shares as of March 31, 2022:

 

          Outstanding and exercisable warrants  
  Exercise price per share         Number of warrants          

Weighted average

remaining

contractual life

 
$ 0.39       5,256,410        4.5 years     
$ 0.50       12,324,374        4.2 years     
                     
  Total       17,580,784        4.3 years     

 

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Warrants issued pursuant to USNG Letter Agreement

 

On November 9, 2021, the Company entered into a letter agreement (the “USNG Letter Agreement”) with U.S. Noble Gas, LLC (“USNG”), pursuant to which USNG will provide consulting services to the Company for exploration, testing, refining, production, marketing and distribution of various potential reserves of noble gases and rare earth element/minerals on the Company’s recently acquired 11,000-acre oil and gas properties in the Otis Albert Field located on the Central Kansas Properties. The USNG Letter Agreement would cover all of the noble gas, specifically including helium, and rare earth elements/minerals potentially existing on the Central Kansas Properties and the Company’s future acquisitions, if any.

 

The USNG Letter Agreement also provides that USNG will supply a large vessel designed for flows up to 5,000 barrels of water per day at low pressures, known as a gas extraction/separator unit. The gas extraction/separator unit is a dewatering vessel that the Company may use for multiple wells in the future.

 

The USNG Letter Agreement requires the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised of various experts involved in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers and exploration and development companies from the energy industry. The financial partners may include large family offices or small institutions.

 

The Company will pay USNG a monthly cash fee equal to $8,000 per month beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that AMGAS receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore there has been no payment or accrual liability relative to this cash fee provision as of March 31, 2022.

 

In consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants to purchase, in the aggregate, 2,060,000 shares of its common stock, par value $0.0001 per share (the “Common Stock”), at an exercise price of $0.50 (the “Exercise Price”) to three of USNG’s principal consultants and four third-party service providers. The Company was also required to issue warrants to purchase, in the aggregate, 1,200,000 shares of Common Stock at $0.50 per share exercise price to three members of the Board of Advisors. The Company granted a total of 3,260,000 warrants to purchase its Common Stock with an exercise price of $0.50 per share in connection with the USNG Letter Agreement and the arrangements described therein. The warrants expire five years after the date of the USNG Letter Agreement.

 

The fair value of the warrants to purchase common stock in consideration for services to be rendered under the USNG Letter Agreement with USNG 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 warrant, 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 warrants granted, the Company considered the historical pattern of warrant exercises behavioral traits and determined that the expected term should be 5 years. Expected volatilities used in the valuation model are based on the expected volatility based on historical volatility. 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.

 

  26  

 

 

The following is the assumptions used in calculating the estimated grant-date fair value of the warrants issued pursuant to the USNG Letter Agreement granted on November 9, 2021:

 

   

As of

November 9, 2021

(issuance date)

 
       
Volatility – range     359.3 %
Risk-free rate     1.08 %
Expected term     5.0 years  
Exercise price   $ 0.50  
Number of warrants in aggregate     3,260,000  

 

The Company recognized $72,156 and $-0- of compensation expense relative to the 3,260,000 warrants to purchase common stock issued pursuant to the USNG Letter Agreement during the three months ended March 31, 2022 and 2021, respectively. There have been no exercises or forfeitures of the warrants to purchase common stock relative to the USNG Letter during the three months ended March 31, 2022 and 2021.

 

The total grant date fair value of the 3,260,000 warrants to purchase common stock issued pursuant to the USNG Letter Agreement on November 9, 2021 was $1,434,313 in total or $0.44 per share. Total unrecognized compensation cost related to the 3,260,000 warrants to purchase common stock issued pursuant to the USNG Letter Agreement, as of March 31, 2022 was $1,314,786 which will be amortized over the next fifty-five months.

 

Note 8 – Income Taxes

 

The effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily due to the net operating loss history of the Company maintaining a full reserve on all net deferred tax assets during the three months ended March 31, 2022 and 2021.

 

The Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at March 31, 2022. 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 $62,980,000 in accordance with its 2021 Federal Income tax return as filed. Approximately $61,045,000 of such net operating loss carry-forwards expire from 2028 through 2037 while $1,935,000 of such net operating loss carry-forwards have an indefinite carryforward period in accordance with the Tax Cuts and Jobs Act. In addition, the Tax Cuts and Jobs Act limits the usage of net operating loss carryforwards to 80% of taxable income per year.

 

The Company has recently completed the filing of its tax returns for the tax years 2012 through 2021. 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 completed its review of whether such ownership changes have occurred, and based upon such review, management believes that the Company is not currently subject to an annual limitation or the possibility of the complete elimination of the net operating loss carry- forwards. In addition, the Company may be limited by additional ownership changes which may occur in the future.

 

  27  

 

 

 

Note 9 – Gain on Exchange and Extinguishment of Liabilities

 

During the three months ended March 31, 2022 and 2021, the Company recorded gains on the extinguishment of liabilities through the negotiation of settlements with certain creditors and through the operation of law as follows:

 

   

Three months ended

March 31,

 
    2022     2021  
             
Gain (loss) on Exchange and Extinguishment of Liabilities:                
Gain on exchange and extinguishment of liabilities   $     $ 124,177  
Gain from settlement of litigation (See Note 11)           23,000  
Loss from retirement of convertible note payable (See Notes 3)           (115,805 )
                 
Total   $     $ 31,372  

 

Gain on exchange and extinguishment of liabilities - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of 3% Convertible Promissory Notes (the “3% Notes”) with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share. The 3% Notes allows for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on March 30, 2026. The 3% Notes are convertible as to principal and any accrued interest, at the option of holder, into shares of the company’s Common Stock at any time after the issue date and prior to the close of business on the business day preceding the Maturity Date at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustment.

 

The warrants to purchase 5,732,994 shares of common stock issued pursuant to the Debt Settlement Agreements were valued at $1,605,178 using the black-scholes methodology. The following assumptions were used in calculating the estimated fair value of the warrants as of March 31, 2021, their date of issuance:

 

   

As of

March 31,

2021

 
       
Volatility – range     374.0 %
Risk-free rate     0.92 %
Contractual term     5.0 years  
Exercise price   $ 0.50  
Number of warrants in aggregate     5,732,994  

 

An aggregate of $2,577,727 of the total accounts payable and accrued liabilities that were extinguished were with five related parties. Such related parties were issued $25,777 principal balance of the 3% Convertible Promissory Notes and warrants to purchase 5,155,454 shares of Common Stock in exchange for the extinguishment of their respective debt obligations. The Company recognized a gain on extinguishment of liabilities for the portion of the extinguishment with non-related parties. Furthermore, it recognized the portion of the gain on extinguishment of liabilities with related parties as a contribution of capital.

 

The gain on extinguishment of liabilities from the Debt Settlement Agreements was determined as follows:

 

    Amount  
       
Total accounts payable and accrued liabilities extinguished   $ 2,866,497  
Less: Principal balance of 3% Convertible Promissory Notes issued     (28,665 )
Less: Fair value of warrants to purchase common stock issued     (1,605,178 )
         
Total gain on extinguishment of liabilities   $ 1,232,654  
Less: Related party amounts reported as a capital contribution     (1,108,477 )
         
Gain on extinguishment of liabilities   $ 124,177  

 

  28  

 

 

Note 10 – Asset Retirement Obligations

 

The Company’s asset retirement obligations primarily relate to the Company’s portion of future plugging and abandonment costs for wells and related facilities. The following table presents the changes in the asset retirement obligations for the three months ended March 31, 2022 and 2021:

 

    Amount  
       
Asset retirement obligation at December 31, 2020   $ 1,716,003  
Additions      
Accretion expense during the period      
Asset retirement obligation at March 31, 2021   $ 1,716,003  
         
Asset retirement obligation at December 31, 2021   $ 1,730,264  
Additions      
Accretion expense during the period     279  
         
Asset retirement obligation at March 31, 2022   $ 1,730,543  

 

The $1,716,003 asset retirement obligation existing at March 31, 2021 and in years prior to 2020 represented the remaining potential liability for wells AMGAS had owned in Texas and Wyoming prior to their sales/disposal in 2012. AMGAS was not in compliance with then existing federal, state and local laws, rules and regulations for its previously owned Texas and Wyoming domestic oil and gas properties. Regardless, that all previously owned domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas being disposed of in 2012 and prior years; the Company may remain liable for certain asset retirement costs should the new owners not complete their asset retirement obligations. Management believes the asset retirement obligations recorded relative to these Texas and Wyoming wells of $1,716,003 as of March 31, 2022 and December 31, 2021 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 assumed a $13,425 asset retirement obligation pursuant to an acquisition on April 1, 2021 and recorded $279 of accretion expense during the three months ended March 31, 2022 related to the acquisition of the Oil and Gas Properties as further described in Note 2.

 

Note 11 – Commitments and Contingencies

 

Lack of Compliance with Law Regarding Domestic Properties

 

AMGAS was not in compliance with then existing federal, state and local laws, rules and regulations for domestic oil and gas properties owned and disposed of in 2012 and in years prior to 2012 and could have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of AMGAS. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas were disposed of in 2012 and prior; 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 for these prior matters of $1,716,003 as of March 31, 2022 and December 31, 2021 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.

 

Litigation

 

The Company is subject to various 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.

 

  29  

 

 

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 the Company 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 the Company, 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 March 31, 2022 and December 31, 2021, which management believes is sufficient to provide for the ultimate resolution of this dispute.
   
Joseph Ryan (“Ryan”) filed an action in the District Court of Johnson County, Kansas, number 20CV01493, on March 20, 2020 against the Company resulting from certain professional consulting services Ryan alleges he performed for Social, Environmental and Economic Impact Assessments during July 2012 through September 2015 on the Nicaraguan Concessions. Ryan alleges that such services were provided pursuant to oral agreements with AMGAS. Ryan claims breach of contract for failure to pay $12,000 amounts invoiced and due. On December 23, 2020, Ryan filed a Motion for Default Judgment for $12,000 in unpaid invoices plus legal, fees, statutory interest and any expert testimony fees.

 

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On February 10, 2021, the parties agreed to a full and complete settlement of the matter with prejudice. The terms of the settlement required the Company to pay a total of $10,000 to extinguish accounts payable to Ryan totaling $33,000. As a result, the Company recorded a $23,000 gain from settlement of litigation during the year ended December 31, 2021 (See note 9).

 

USNG Letter Agreement

 

On November 9, 2021, the Company entered into a letter agreement (the “USNG Letter Agreement”) with U.S. Noble Gas, LLC (“USNG”), pursuant to which USNG will provide consulting services to the Company for exploration, testing, refining, production, marketing and distribution of various potential reserves of noble gases and rare earth element/minerals on the Company’s recently acquired 11,000-acre oil and gas properties in the Otis Albert Field located on the Central Kansas Properties. The USNG Letter Agreement would cover all of the noble gas, specifically including helium, and rare earth elements/minerals potentially existing on the Central Kansas Properties and the Company’s future acquisitions, if any.

 

The USNG Letter Agreement also provides that USNG will supply a large vessel designed for flows up to 5,000 barrels of water per day at low pressures, known as a gas extraction/separator unit. The gas extraction/separator unit is a dewatering vessel that the Company may use for multiple wells in the future.

 

The USNG Letter Agreement requires the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised of various experts involved in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers and exploration and development companies from the energy industry. The financial partners may include large family offices or small institutions.

 

The Company will pay USNG a monthly cash fee equal to $8,000 per month beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that AMGAS receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore there has been no payment or accrual liability relative to this cash fee provision as of March 31, 2022.

 

Note 12 – Stockholder’s Deficit

 

Name change

 

At the Annual Meeting of Stockholders held on October 13, 2021 the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, changing the Company’s name to American Noble Gas, Inc.

 

Stockholder Written Consent Amendment

 

At the Annual Meeting of Stockholders held on October 13, 2021 the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, removing the provision providing that any action taken by the stockholders by written consent in lieu of a meeting requires that all of the Company’s stockholders entitled to vote on such action consent in writing thereto.

 

2021 American Noble Gas, Inc. Stock Option and Restricted Stock Plan

 

At the Annual Meeting of Stockholders held on October 13, 2021 and the stockholders approved the 2021 Plan and the Company reserved 5,000,000 shares for issuance under the 2021 Plan.

 

Reincorporation in Nevada

 

On December 7, 2021, pursuant to an Agreement and Plan of Merger, American Noble Gas, Inc., a Delaware corporation, merged with and into its wholly owned subsidiary, American Noble Gas Inc, a Nevada corporation (“AMGAS-Nevada” and/or the “Company”) with AMGAS-Nevada continuing as the surviving corporation. In conjunction with the merger, AMGAS-Nevada succeeded to the assets, continued the business and assumed the rights and obligations of the predecessor Delaware corporation existing immediately prior to the merger. The merger was consummated by the filing of a certificate of merger on December 7, 2021 with the Secretary of State of the State of Delaware and articles of merger with the Secretary of State of the State of Nevada. The Agreement and Plan of Merger and transactions contemplated thereby were adopted by the holders of a majority of the outstanding shares of the predecessor company’s common stock, par value, $0.0001 per share and/or Series A Convertible Preferred Stock, par value $0.0001 per share, on an as-converted common stock basis, by written consent in lieu of a special meeting of stockholders, in accordance with the Delaware General Corporation Law.

 

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Pursuant to the Agreement and Plan of Merger, (i) each outstanding share of predecessor’s common stock automatically converted into one share of common stock, par value $0.0001 per share, of AMGAS-Nevada, (ii) each outstanding share of the predecessor’s series A convertible preferred stock automatically converted into one share of series A convertible preferred stock, par value $0.0001 per share of AMGAS-Nevada, and (iii) each outstanding option, right or warrant to acquire shares of predecessor common stock converted into an option, right or warrant to acquire an equal number of shares of AMGAS-Nevada common stock under the same terms and conditions as the original options, rights or warrants.

 

Similar to the shares of predecessor common stock prior to the merger, the shares of AMGAS-Nevada common stock are quoted on the OTCQB tier operated by the OTC Markets Group Inc. under the symbol “IFNY”. In accordance with the Agreement and Plan of Merger, each outstanding certificate previously representing shares of the predecessor’s common stock or series A preferred stock automatically represents, without any action of the predecessor’s stockholders, the same number of shares of AMGAS-Nevada common stock or series A preferred stock, as applicable.

 

Pursuant to the Agreement and Plan of Merger, the directors and officers of the Predecessor company immediately prior to the merger became the directors and officers of AMGAS-Nevada and continued their respective directorship or services with the Company on the same terms as their respective directorship or service with the predecessor registrant immediately prior to the merger.

 

As a result of the merger, the internal affairs of the Company ceased to be subject to the Delaware General Corporation Law or governed by the predecessor’s Delaware Certificate of Incorporation, as amended and its bylaws. As of the December 7, 2021 merger date, the Company is now subject to the Nevada Revised Statutes and is governed by the Company’s Articles of Incorporation and Bylaws as filed in the State of Nevada.

 

Common Stock

 

At the Annual Meeting of Stockholders held on October 13, 2021 the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, increasing the Company’s authorized shares of common stock from 75,000,000 shares to 500,000,000 shares.

 

As of March 31, 2022 and December 31, 2021 the Company is authorized to issue up to 500,000,000 common shares with a par value of $0.0001 per share.

 

Series A Convertible Preferred Stock

 

As of March 31, 2022 and December 31, 2021, the Company is authorized to issue up to 10,000,000 preferred shares with a par value of $0.0001 per share.

 

The following summarizes the activity in Series A Convertible Preferred Stock for the three months ended March 31, 2022 and 2021:

 

   

Number of

Shares

 
Outstanding at December 31, 2020      
Issued     22,776  
Converted to common stock      
         
Outstanding at March 31, 2021     22,776  
         
Outstanding at December 31, 2021     22,076  
Issued      
Converted to common stock     (800 )
         
Outstanding at March 31, 2022     21,276  

 

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On March 16, 2021, the Company approved and filed a Certificate of Designation of Preferences, Rights and Limitations of the Series A Convertible Preferred Stock (“COD”). The COD provides for the issuance of up to 27,778 shares of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per share. Pursuant to the provisions of the COD, the Series A Convertible Preferred Stock is convertible, at the option of the holders thereof, at any time, subject to certain beneficial ownership limitations, into shares of Common Stock determined on a per share basis by dividing the $100 stated/liquidation value of such share of Convertible Preferred Stock by the $0.32 per share conversion price, which conversion price is subject to certain adjustments. In addition, the COD provides for the payment of 10% per annum cumulative dividends, in (i) cash, or (ii) shares of Common Stock, to the holders of the Series A Convertible Preferred Stock based on the stated/liquidation value, until the earlier of (i) the date on which the shares of Series A Convertible Preferred Stock are converted to common stock or (ii) date the Company’s obligations under the COD have been satisfied in full. The shares of Series A Convertible Preferred Stock also (i) vote on an as-converted to Common Stock basis, subject to certain beneficial ownership limitations, (ii) are subject to mandatory conversion into Common Stock upon the closing of any equity financing transaction consummated after the original issue date, pursuant to which the Company raises gross proceeds of not less than $5,000,000, (iii) rank senior to the Common Stock and any class or series of capital stock created after the Series A Convertible Preferred Stock and (iv) have a special preference upon the liquidation of the Company.

 

On March 26, 2021 the Company entered into a securities purchase agreement with five (5) accredited investors providing for an aggregate investment of $2,050,000 by the investors for the issuance by the Company to them of (i) 22,776 shares of Series A Convertible Preferred Stock, par value $0.0001 per share, with a stated/liquidation value of $100 per share; and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 5,256,410 shares of Common Stock at an exercise price of $0.39 per share, subject to customary adjustments thereunder. The Series A Convertible Preferred stock is convertible into an aggregate of up to 7,117,500 shares of Common Stock. Holders of the Warrants may exercise them by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the Warrant Shares within six (6) months following the Closing Date, as defined in the Warrants, by exercising on a cashless basis pursuant to the formula provided in the Warrants. Net proceeds from the issuance of Series A Convertible Preferred Stock totaled $1,929,089 after deducting the placement agent fee and other expenses of the offering. The Company intends to use the proceeds of the Series A Convertible Preferred Stock offering to complete the acquisition and development of the Properties, to pay-off the outstanding convertible notes payable (See Note 3) and for general working capital purposes.

 

The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the acquisition of the Properties which occurred on April 1, 2021 to register the conversion shares and the warrant Shares. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90th) calendar day following the closing of the acquisition of the Properties which occurred on April 1, 2021.

 

The holders of the Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its Series A Convertible Preferred Stock and/or exercise its common stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days advance notice to the Company.

 

The Company has accrued and paid preferred dividends totaling $52,861 and $3,744 relative to the Series A Convertible Preferred Stock which was charged to additional paid in capital as during the three months ended March 31, 2022 and 2021, respectively.

 

On January 4, 2022, a holder of Series A Convertible Preferred Stock exercised its right to convert 500 shares of Series A Convertible Preferred Stock into 156,250 shares of common stock. In addition, on February 11, 2022, a holder of Series A Convertible Preferred Stock exercised its right to convert 300 shares of Series A Convertible Preferred Stock into 93,750 shares of common stock.

 

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Note 13 – Related Party Transactions

 

The Company’s Chief Operating Officer was a non-controlling member of Core. The Company acquired an Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a non-refundable deposit of $50,000 in 2019 to bind the original 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. On September 2, 2020, the Company acquired a new Option from Core under similar terms as the previous Option, however the newly acquired Option permitted the Company to purchase the Properties at a reduced price of $900,000 at any time prior to November 1, 2020 and the Company agreed to immediately conduct a capital raise of between approximately $2-10 million to fund its acquisition and development of the Properties. On December 14, 2020 the parties executed an asset purchase and sale agreement which extended the new Option to January 11, 2021, which expired. The parties entered into the Second Side Letter agreement on March 31, 2021, pursuant to which we and Core agreed to set the closing date on which the Properties would be purchased to April 1, 2021. Pursuant to the Second Side Letter, the Company is responsible for reimbursing Core for certain prorated revenues and expenses from January 1, 2021 through the April 1, 2021 closing date. On April 1, 2021 we completed the acquisition of the Properties, under the same terms of the asset purchase agreement executed on December 14, 2020 which provided a purchase price of $900,000. The Company raised approximately $2.05 million on March 26, 2021 through the issuance of convertible preferred stock with detachable common stock purchase warrants. The funds raised pursuant to the Series A Convertible Preferred Stock issuance were used to complete the acquisition of the Properties on April 1, 2021, to retire the outstanding convertible note payable and for working capital purposes.

 

The Company does not have any employees other than its Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. In previous years, certain general and administrative services (for which payment is deferred) had been provided by the Company’s Chief Financial Officer’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 its Chief Financial Officer’s accounting firm for such support services and was not billed for any such services during the years ended December 31, 2021 and 2020. On March 31, 2021 the parties entered into a Debt Settlement Agreement whereby all amounts due to such firm for services totaling $762,407 were extinguished upon the issuance of $7,624 principal balance of 3% Note and the issuance of warrants to purchase 1,524,814 shares of Common Stock as further described in Notes 3, 7 and 9. Total amounts due to the related party was $-0- as of March 31, 2022 and December 31, 2021.

 

The Company had accrued compensation to its officers and directors in years prior to 2018. The Board of Directors authorized the Company to cease the accrual of compensation for its officers and directors, effective January 1, 2018. On March 31, 2021 the parties entered into Debt Settlement Agreements whereby all accrued amounts due for such services totaling $1,789,208 were extinguished upon the issuance of $17,892 principal balance of 3% Convertible Promissory Note and the issuance of warrants to purchase 3,578,416 shares of Common Stock as further described in Notes 3, 7 and 9. Total amounts due to the officers and directors related to accrued compensation was $-0- as of March 31, 2022 and December 31, 2021.

 

Offshore Finance, LLC was owed financing costs in connection with a subordinated loan to the Company which was converted to common shares in 2014. 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. On March 31, 2021, the parties entered into a Debt Settlement Agreement whereby all amounts due for such services totaling $26,113 were extinguished upon the issuance of $261 principal balance of 3% Convertible Promissory Note and the issuance of warrants to purchase 52,226 shares of common stock as further described in Notes 3, 7 and 9. Total amounts due to this related party was $-0- as of March 31, 2022 and December 31, 2021.

 

Note 14 – Subsequent Events

 

Resignation of Chief Operating Officer

 

On April 18, 2022, John Loeffelbein resigned from his position as Chief Operating Officer with American Noble Gas, Inc. with such resignation to be effective immediately. Mr. Loeffelbein’s resignation as an officer did not result from any disagreement with the Board.

 

Farmout Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field

 

On April 4, 2022, the Company acquired a 40% interest in a Farmout Agreement with an entity that controls significant oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. AMGAS will participate with three other partners in the Farm-Out Agreement to explore and develop its interests in Haskell and Finney County, Kansas (the “Hugoton Farm-Out Venture”).

 

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The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 2022 and is expected to be completed in May 2022. The Hugoton Farm-Out Venture will utilize existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the Hugoton Farm-Out Venture with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the Hugoton Farm-Out Venture to market and sell the helium produced at prevailing market prices.

 

The Hugoton Farm-Out Venture also acquired the right to all brine minerals subject to a ten percent (10%) royalty to the counter-party, across Finney and Haskell Counties. Brine minerals are harvested from the formation water produced from active, and to be drilled, oil and gas wells and may include a variety of dissolved minerals including bromine and iodine. The Hugoton Farm-Out Venture plans to target brine minerals with commercial quantities of bromine and iodine. AMGAS is currently developing proprietary technology to recover brine minerals, particularly with respect to bromine, which is well underway and has demonstrated recovery efficiency and is expected to be available for use in existing and future development wells.

 

The first exploratory well commenced on May 7, 2022 near Garden City, Kansas with a goal to evaluate two Chase group formations. The Hugoton Farm-Out Venture is testing an unconventional theory regarding these two Chase group formations that have not previously been targeted for exploration by historical operations in the field.

 

The exploration and development activity will be directed and coordinated under the terms of the USNG Letter Agreement entered in November 2021 with input from the newly formed Advisory Board of directors whose members all have extensive experience in developing shale resources and noble gas and rare earth mineral reserves.

 

John Loeffelbein, the Company’s previous Chief Operating Officer was granted a 3% carried interest through drilling in the Hugoton Farmout Venture. Such carried interest was burdened only to the three other partners in the Hugoton Farm-Out Venture and not the Company’s interest.

 

Letter of Engagement

 

On April 1, 2022, the Company engaged Univest Securities, LLC (“Univest”) to act as the exclusive financial advisor, and the lead underwriter in a public offering (the “Offering”), to the Company. The size of the Offering is expected to be between $10,000,000 to $15,000,000, with a goal to up-list the Company onto the Nasdaq Capital Market upon closing of the Offering. The price per share will be determined by mutual agreement of the Company and Univest and will be determined at the signing of the final Underwriting Agreement, which will based on, among other things, market conditions at the time of the Offering.

 

Pursuant to the Underwriting Agreement, Univest will act as principal, or the representative of a number of broker-dealers that will offer the securities in a public offering. The Letter of Engagement anticipates that Univest will receive a gross discount equal to eight percent (8%) of the public offering price on each of the securities being offered. Univest has agreed to negotiate in good faith with other underwriters who, acting severally, could contract to act as an Underwriter in connection with the sale of the securities being offered. Univest will also have the right to re-offer all or any part of the securities being offered to broker- dealers. Univest will be entitled to warrants to purchase common stock representing 5% of the amount of securities sold in the Offering with an exercise price determined to be 110% of the Offering Price.

 

The Company also agreed to reimburse Univest, at and out of the proceeds of the Offering closings, for all of its reasonable, out-of-pocket expenses (including, but not limited to, travel, due diligence expenses, reasonable fees and expenses of its legal counsel, roadshow and background check on the Company’s principals) in connection with the performance of its services hereunder not to exceed an aggregate of $150,000. In addition, at the closing of the Offering, the Company agreed to reimburse Univest one percent (1%) of the actual amount of the Offering as nonaccountable expense of the offering.

 

The term of the Letter of Engagement Agreement expires upon the earlier to occur of (i) six (6) months from the date of execution or (ii) the mutual written agreement of the Company and Univest.

 

Investment in GMDOC, LLC

 

On May 3, 2022, the Company entered into an operating agreement (the “Operating Agreement”) pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited liability membership interests (the “Interests”) in GMDOC, LLC, a Kansas limited liability company (“GMDOC”), for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.

 

GMDOC had previously acquired 70% of the working interests (the “Acquisition”) in certain oil and gas leases (the “GMDOC Leases”) from Castelli Energy, L.L.C, an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels of oil per day and 1.2 million cubic feet of natural gas per day, on a gross basis.

 

GMDOC is managed by two other members – Darrah Oil Company, LLC, a Kansas limited liability company, and Grand Mesa Operating Company, a Kansas corporation (the “Managing Members”) – each of which also serve as the operating companies under the GMDOC Leases.

 

Pursuant to the terms of the Operating Agreement, each member agreed to pay GMDOC, as its capital contribution, $50,000 in cash per Interest, with the remainder to be financed, in part, by a loan to GMDOC from a bank, secured by GMDOC’s property, in the aggregate amount of $5,400,000, which is to be repaid in 84 equal monthly installments and bears interest at a rate of 6% per annum. The remainder of each member’s capital contribution and initial working capital for GMDOC will be financed, in part, by a loan to GMDOC from a Managing Member, in the aggregate amount of $400,000, which is to be repaid equally over 12 months and bears interest at a rate of 6% per annum.

 

With respect to its cash capital contribution, the Company paid a non-refundable cash deposit for the Interests in the amount of $50,000 on May 3, 2022 and the Company will pay the remainder of the cash contribution for the Interests, or $800,000, on or before the close of business on May 17, 2022. The remainder of the Company’s capital contribution, or $3,187,500, will be financed by the bank loan and the member loan.

 

Conversion of Series A Convertible Preferred Stock to Common Stock.

 

On April 28, 2022, a holder of Series A Convertible Preferred Stock exercised its right to convert 650 shares of Series A Convertible Preferred Stock into 203,125 shares of common stock.

  

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Note Regarding Forward Looking Statements

 

This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 in this report.

 

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 quarterly report on Form 10-Q 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.

 

As used in this quarterly report, “AMGAS,” the “Company,” “we,” “us” and “our” refer collectively to American Noble Gas, Inc., formerly Infinity Energy Resources, Inc., its predecessors and subsidiaries or one or more of them as the context may require.

 

Overview

 

The Company is an oil and gas exploration, development and production company, which is primarily in the business of drilling and operating oil and gas wells. From 2009 to 2020, the Company had pursued the exploration of potential oil and gas resources in the Concession – Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea, containing a total of approximately 1.4 million acres. However, in January 2020, the Company abandoned the Concessions.

 

On April 1, 2021, we completed the acquisition of the Properties, under the same terms of the Asset Purchase Agreement which provided a purchase price of $900,000. The Company raised approximately $2.05 million on March 26, 2021 through the issuance of Series A Convertible Preferred Stock with detachable common stock purchase warrants.

 

The purchase of the Properties included 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.

 

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We have commenced rework of the existing production wells immediately after the acquisition of the Properties and have performed testing and evaluation of the existence of noble gas reserves on the Properties, including helium, argon and other rare earth minerals and gases. Testing of the Properties for noble gas reserves has provided encouraging but not yet conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing oil and gas reserves on the Properties, while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.

 

We may find it necessary to obtain new sources of debt and/or equity capital to fund the exploration and development of the Properties enumerated above, as well as to satisfy our existing debt obligations. We can provide no assurance that we will be able to obtain sufficient new debt/equity capital to fund our planned development of the Properties.

 

Name Change and Reincorporation Matters

 

At the Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved an amendment to the Company’s Certificate of Incorporation, changing the Company’s name to American Noble Gas, Inc. The stockholders also approved an amendment to the Company’s Certificate of Incorporation, removing the provision providing that any action taken by the stockholders by written consent in lieu of a meeting requires that all of the Company’s stockholders entitled to vote on such action consent in writing thereto. Finally, the stockholders approved the 2021 Plan and we reserved 5,000,000 shares of Common Stock for issuance under the 2021 Plan.

 

Reincorporation in Nevada

 

On December 7, 2021, pursuant to the Agreement and Plan of Merger, the Predecessor merged with and into its wholly owned subsidiary, AMGAS-Nevada with AMGAS-Nevada continuing as the surviving corporation. In conjunction with the merger, AMGAS-Nevada succeeded to the assets, continued the business and assumed the rights and obligations of the Predecessor existing immediately prior to the merger. The merger was consummated by the filing of a Certificate of Merger on December 7, 2021 with the Secretary of State of the State of Delaware and Articles of Merger with the Secretary of State of the State of Nevada. The Agreement and Plan of Merger and transactions contemplated thereby were adopted by the holders of a majority of the outstanding shares of the Predecessor’s Common Stock and/or Series A Convertible Preferred Stock on an as-converted common stock basis, by written consent in lieu of a special meeting of stockholders, in accordance with the Delaware General Corporation Law.

 

Pursuant to the Agreement and Plan of Merger, (i) each outstanding share of the Predecessor’s common stock automatically converted into one share of common stock, par value $0.0001 per share, of AMGAS-Nevada, (ii) each outstanding share of the Predecessor’s Series A Convertible Preferred Stock automatically converted into one share of Series A Convertible Preferred Stock, par value $0.0001 per share, of AMGAS-Nevada, and (iii) each outstanding option, right or warrant to acquire shares of the Predecessor common stock converted into an option, right or warrant to acquire an equal number of shares of AMGAS-Nevada common stock under the same terms and conditions as the original options, rights or warrants.

 

Similar to the shares of common stock of the Predecessor prior to the merger, the shares of AMGAS-Nevada common stock are quoted on the OTCQB tier operated by the OTC Markets Group Inc. under the symbol “IFNY”. In accordance with the Agreement and Plan of Merger, each outstanding certificate previously representing shares of the Predecessor’s common stock or Series A Preferred Stock automatically represents, without any action of the Predecessor’s stockholders, the same number of shares of AMGAS-Nevada common stock or Series A Preferred Stock, as applicable.

 

Pursuant to the Agreement and Plan of Merger, the directors and officers of the Predecessor immediately prior to the merger became the directors and officers of AMGAS-Nevada and continued their respective directorship or services with the Company on the same terms as their respective directorship or services with the Predecessor immediately prior to the merger.

 

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As a result of the merger, the internal affairs of the Company ceased to be subject to the Delaware General Corporation Law or governed by the Predecessor’s Certificate of Incorporation and bylaws. As of the December 7, 2021, effective date of the merger, the Company is now subject to the Nevada Revised Statutes and is governed by the Company’s Articles of Incorporation.

 

All references to the Company in this Quarterly Report on Form 10-Q refer to the Predecessor prior to the merger, and AMGAS-Nevada subsequent to the merger.

 

2022 Operational and Financial Objectives

 

COVID–19 PANDEMIC

 

The financial statements contained in this Quarterly Report on Form 10-Q as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of March 31, 2022. Economies throughout the world have been and continue to be disrupted by the continuing effects of the COVID-19 pandemic, including the recent rise of the new Omicron variant. In particular, the oil and gas market has been severely adversely impacted by the effects of the COVID-19 pandemic because of the substantial and abrupt decrease in the demand for oil and gas globally followed by the recent resurgence in oil and natural gas prices. In addition, the capital markets have experienced periods of disruption and our efforts to raise necessary capital in the future may be adversely impacted by the continuing effects of the COVID-19 pandemic and investor sentiment and we cannot forecast with any certainty when the lingering uncertainty caused by the COVID-19 pandemic will cease to impact our business and the results of our operations. In reading this Quarterly Report on Form 10-Q, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the COVID-19 pandemic.

 

Corporate Activities

 

The Company’s 2022 operating objectives are focused on: 1) raising the necessary funds to finance exploration and development of the Hugoton Gas Field Farm-Out Venture, 2) raise the funds necessary to explore and develop the Properties, including testing and evaluation of noble gas reserves in additional to the oil and gas producing zones and 3) to raise the funds necessary to allow the Company to compete for new oil and gas properties that become available for acquisition purposes 3) to fund our daily operations and the repayment of obligations that become due, or are in default and/or past due.

 

Recent financings

 

Issuance of Series A Convertible Preferred Stock - On March 26, 2021, the Company issued Series A Convertible Preferred Stock, with an aggregate principal face amount of up to approximately $2,500,000 subject to a 10% original issue discount. The Series A Convertible Preferred Stock is, subject to certain conditions, convertible into shares of Common Stock at a rate of $0.32 per share and will be subject to a 10% dividend rate per annum, payable quarterly in cash or registered Common Stock, subject to equity conditions. The holders were also granted demand registration rights. The Company also issued warrants along-side of the Convertible Preferred Stock investors to purchase up to 6,410,250 shares (assuming the $2.5 million offering is fully subscribed) of Common Stock at an exercise price of $0.39 per share, subject to customary adjustments. The common stock purchase warrants are exercisable commencing six (6) months after issuance on a cashless basis at the holders’ discretion with a term of five (5) years. On March 26, 2021, investors purchased Series A Convertible Preferred Stock with an aggregate cash purchase price of $2,050,000 together with warrants to purchase a total of 5,256,410 shares of Common Stock.

 

Net proceeds from the issuance of Series A Convertible Preferred Stock was $1,929,089 after deducting the placement agent fee and other expenses of the offering. The Company used the proceeds of the Series A Convertible Preferred Stock offering to complete the acquisition and development of the Properties, to pay-off all outstanding convertible notes payable and for general working capital.

 

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Issuance of 8% Note with Detachable Warrants On August 30, 2021, the Company entered into a securities purchase agreement with the 8% Note Investor for the Company’s 8% Note, with an aggregate principal face amount of approximately $100,000. The 8% Note is, subject to certain conditions, convertible into an aggregate of 200,000 shares of Common Stock, at a price of $0.50 per share. The Company also issued a 8% Note Warrant to purchase up to 200,000 shares of Common Stock at an exercise price of $0.50 per share. 8% Note Investor purchased the 8% Note and 8% Note Warrant from the Company for an aggregate purchase price of $100,000. The Company also granted the 8% Note Investor certain piggy-back registration rights whereby the Company has agreed to register the resale by the 8% Note Investor of the shares underlying the 8% Note Warrant and the conversion of the 8% Note unless the Company commences to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the Closing Date, as defined in the 8% Note and 8% Note Warrant.

 

Issuance of 3% Notes with Detachable Warrants - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of the 3% Notes with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share. The 3% Notes allows for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on March 30, 2026. The 3% Notes are convertible as to principal and any accrued interest, at the option of holder, into shares of the Common Stock at any time after the issue date and prior to the close of business on the business day preceding March 30, 2026 at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustments. The warrants to purchase 5,732,994 shares of Common Stock issued pursuant to the Debt Settlement Agreements were valued at $1,605,178 using the Black-Scholes methodology.

 

Issuance of August Notes - On August 19, 2020, we entered into the August Purchase Agreement with the August Investor for August Note, with an aggregate principal face amount of approximately $365,169. The August Note is, subject to certain conditions, convertible into an aggregate of 3,943,820 shares of Common Stock, at a price of $0.10 per share (the “Fixed Conversion Price”). We also issued the five-year August Warrant to purchase up to 800,000 shares of Common Stock at an exercise price of $0.50 per share. The August Investor purchased such securities from the Company for an aggregate purchase price of $325,000. We also granted the August Investor certain automatic and piggy-back registration rights whereby we agreed to register the resale by the August Investor of the shares underlying the August Warrant and the conversion of the August Note, which was satisfied on August 5, 2021 by filing a registration statement on Form 424B4 to register for resale all of the shares of Common Stock issuable upon exercise of the August Warrant issued to the August Investor

 

The August Note bears interest at a rate of eight percent (8%) per annum with 12 months guaranteed, may be voluntarily repaid in cash in full or in part by us at any time in an amount equal to 115% of the principal amount of the August Note and any accrued and unpaid interest, and shall be mandatorily repaid in cash in an amount equal to 115% of the principal amount of the August Note and any accrued and unpaid interest in the event of the consummation by us of any public or private offering or other financing pursuant to which we receive gross proceeds of at least $2,500,000. The August Note is convertible at any time by the August Investor and we shall have the right to request that the August Investor convert the August Note in full or in part at the Fixed Conversion Price in the event that the VWAP (as defined in the August Note) of the Common Stock exceeds $0.75 for twenty consecutive trading days. In addition, pursuant to the August Note, so long as the August Note remains outstanding, we shall not enter into any financing transactions pursuant to which the Company sells its securities at a price lower than the Fixed Conversion Price, without written consent of the August Investor.

 

The conversion of the August Note and the exercise of the August Warrant are each subject to beneficial ownership limitations such that the August Investor may not convert the August Note or exercise the August Warrant to the extent that such conversion or exercise would result in the August Investor being the beneficial owner in excess of 4.99% (or, upon election of the August Investor, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to us, provided that any increase in such limitation will not be effective until 61 days following notice to us.

 

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We used the proceeds of the August Note to pay off $60,125 in principal balance of notes payable that were in default, to pay the $100,000 required by the SKM Exchange Agreement and for general working capital.

 

On March 26, 2021, the Company exercised its right to retire the August Note in conjunction with the issuance of Series A Convertible Preferred Stock. In accordance with the prepayment provisions contained in the August Note, the Company paid all principal, accrued interest and the 15% prepayment premium which totaled $453,539.

 

Extinguishment of liabilities

 

Debt Settlement Agreements - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of 3% Notes with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share. The 3% Notes allow for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on March 30, 2026. The 3% Notes are convertible as to principal and any accrued interest, at the option of holder of the 3% Notes, into shares of the Common Stock at any time after the issue date and prior to the close of business on the business day preceding March 30, 2026 at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustment. The warrants to purchase 5,732,994 shares of Common Stock issued pursuant to the Debt Settlement Agreements were valued at $1,605,178 using the Black-Scholes methodology.

 

Extinguishment of Convertible Note Payable - On March 26, 2021, the Company exercised its right to retire the August Note issued in August 2020 in conjunction with the issuance of the Series A Convertible Preferred Stock. In accordance with the prepayment provisions contained in the August Note, the Company paid $453,539 to retire all principal, accrued interest and the 15% prepayment premium.

 

Extinguishment of Notes Payable – On April 1, 2021, the Company and the holder of a $50,000 outstanding convertible note reached a settlement, pursuant to which the Company issued to such holder a total of 145,000 shares of Common Stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated common stock purchase warrants, which totaled $72,874 as of April 1, 2021. The 145,000 shares of Common Stock issued to extinguish the debt obligations were valued at $40,600 based on the closing market price on the date of the extinguishment. The extinguishment of the debt obligations resulted in a gain of $32,274, which was recorded in the year ended December 31, 2021.

 

On April 1, 2021, the Company and the holder of the $35,000 outstanding convertible note reached a settlement, pursuant to which the Company issued a total of 100,000 shares of Common Stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated common stock purchase warrants, which totaled $50,956 as of April 1, 2021. The 100,000 shares issued to extinguish the debt obligations were valued at $28,000 based on the closing market price on the date of the extinguishment. The extinguishment of the debt obligations resulted in a gain of $22,956, which was recorded in the year ended December 31, 2021.

 

Acquisition of Oil and Gas Properties

 

On July 31, 2019, we acquired the Option from Core to purchase the production and mineral rights/leasehold for the Properties. We paid a non-refundable deposit of $50,000 to bind the 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. On September 2, 2020, the Company acquired a new option from Core under similar terms as the Option. The newly acquired option, however, now permits the Company to purchase the Properties at a reduced price of $900,000 at any time prior to November 1, 2020 and the Company has agreed to immediately conduct a capital raise of between approximately $2 to $10 million to fund its acquisition and development of the Properties. On December 14, 2020, the parties executed the Asset Purchase and Sale Agreement, which extended the new option to January 11, 2021, which has expired.

 

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We, Core, and Seller entered into the Side Letters on September 2, 2020 and March 31, 2021, pursuant to which we and Core agreed to set the closing date of the acquisition of the Properties under the Asset Purchase Agreement to April 1, 2021. Pursuant to the Side Letters, the Company is responsible for reimbursing Core for certain prorated revenues and expenses from January 1, 2021 through April 1, 2021.

 

On April 1, 2021, we completed the acquisition of the Properties, under the same terms of the Asset Purchase Agreement, which provided a purchase price of $900,000.

 

The acquisition included 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.

 

Following the acquisition, we have commenced rework of the existing production wells and have performed testing and evaluation of the existence of noble gas reserves on the Properties, including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing oil and gas reserves on the Properties while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.

  

On November 9, 2021, the Company entered into a letter agreement the USNG Letter Agreement with U.S. Noble Gas, LLC (“USNG”), pursuant to which USNG would provide consulting services to the Company for exploration, testing, refining, production, marketing and distribution of various potential reserves of noble gases and rare earth element/minerals on the Properties. The USNG Letter Agreement would cover all of the noble gas, specifically helium, and rare earth elements/minerals potentially existing on the Properties and the future acquisitions of the Company, if any, including the Hugoton Gas Field.

 

The USNG Letter Agreement also provided that USNG would supply a large vessel designed for flows up to 5,000 barrels of water per day at low pressures, known as a gas extraction/separator unit. The gas extraction/separator unit is a dewatering vessel that the Company may use for multiple wells in the future.

 

The USNG Letter Agreement required the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised of various experts in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers and exploration and development companies from the energy industry. The financial partners may include large family offices or small institutions.

 

The Company is required to pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that AMGAS receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore there has been no payment or accrual liability relative to this cash fee provision through March 31, 2022.

 

The USNG Letter Agreement has an initial term of 5 years, which shall thereafter continue for successive one-year periods, provided that there is no uncured breach, unless otherwise terminated by either party upon a written notice of intent to non-renew.

 

In consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants to purchase, in the aggregate, 2,060,000 shares of Common Stock, at an exercise price of $0.50 to three of USNG’s principal consultants and four third-party service providers. The Company also issued warrants to purchase, in the aggregate, 1,200,000 shares of Common Stock at $0.50 per share exercise price to three members of the Board of Advisors. The Company granted a total of 3,260,000 warrants to purchase its Common Stock with an exercise price of $0.50 per share in connection with the USNG Letter Agreement and the arrangements described therein. The warrants expire five years after the date of the USNG Letter Agreement.

 

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 a material current or future effect on our financial conditions, changes in our financial conditions, or our results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.

 

For the Three Months Ended March 31, 2022 and 2021

 

Results of Operations

 

Revenue

 

The Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1, 2021. Revenues totaled $25,305 for the three months ended March 31, 2022. The Company had no revenues in the same period in 2021 as it focused on identification of acquisition targets of domestic oil and gas producing properties.

 

On April 1, 2021, we completed the acquisition of the Properties, under the terms of the Asset Purchase Agreement which provided a purchase price of $900,000. The purchase of the Properties included 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.

 

Following the acquisition, we have commenced rework of the existing production wells and have performed testing and evaluation of the existence of noble gas reserves on the Properties including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing oil and gas reserves on the Properties while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.

 

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Oil and Gas Lease Operating Expenses

 

The Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1, 2021. Total oil and gas lease operating expenses totaled $86,536 for the three months ended March 31, 2022.

 

We commenced rework of the existing production wells on the Properties in order to restore the three producing wells to full operational condition. All such rework costs were expensed as routine maintenance instead of capitalized to oil and gas properties and equipment under the full-cost method. In addition, we have performed certain exploration, including testing and evaluation for the existence of noble gas reserves on the Properties, including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing oil and gas reserves on the Properties while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.

 

The Company had no oil and gas lease operating expenses during the three months ended March 31, 2021 as it held no oil and gas producing properties during that period.

 

Depreciation, Depletion and Amortization

 

The Company began generating revenues from the production and sale of crude oil resulting since the acquisition of the Properties on April 1, 2021, which was acquired for $900,000 cash plus the assumption of asset retirement obligations of $13,425. The Company allocated the purchase price of $913,425 to oil and gas properties and equipment, which is subject to depreciation, depletion and amortization as the acquisition qualified as an asset acquisition. Total depreciation, depletion and amortization was $30,834 for the three months ended March 31, 2022. There was no depreciation, depletion and amortization for the three months ended March 31, 2021 as the Company held no properties during that period of time.

 

Capitalized costs to acquire oil and natural gas properties are depreciated and depleted on a units-of-production basis based on estimated proved reserves. Capitalized costs of exploratory wells and development costs are depreciated and depleted on a units-of-production basis based on estimated proved developed reserves. Under this method, the sum of the full cost pool, excluding the book value of unproved properties, and all estimated future development costs are divided by the total estimated quantities of proved reserves. This rate is applied to our total production for the three months ended March 31, 2022, and the appropriate expense is recorded. Support equipment and other property, plant and equipment related to oil and gas producing activities, as well as property, plant and equipment unrelated to oil and gas producing activities, are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets.

 

Accretion of Asset Retirement Obligation

 

Total expense for the accretion of asset retirement obligations was $279 and $-0- for the three months ended March 31, 2022 and 2021, respectively. The Company determined the amount of the asset retirement obligation assumed to be $13,425 as of April 1, 2021, the date of the acquisition of the Properties. The obligation relates to legal requirements associated with the retirement of long-lived assets that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.

 

Oil and Gas Production Related Taxes

 

The Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1, 2021. Oil and gas production related taxes totaled $28 and $-0- for the three months ended March 31, 2022 and 2021, respectively. Such taxes are deducted from gross oil and gas revenue by the crude oil purchaser upon payment to the Company and include primarily severance taxes imposed by the State of Kansas and Kansas conservation assessment fees. Revenues totaled $25,305 for the three months ended March 31, 2022, which resulted in the deduction of $28 in production related taxes. The Company has received notice of an exemption from the State of Kansas, which exempted the Company from paying severance taxes due to the existing wells production levels. Therefore, production related taxes should continue to decline as a percentage of revenue during the remainder of 2022 and beyond. The Company had no revenues in the similar 2021 period and therefore there was no deduction for production related taxes in Kansas.

 

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Other General and Administrative Expenses

 

Other general and administrative expenses were $368,706 for the three months ended March 31, 2022, an increase of $167,736, or 83%, from other general and administrative expenses of $200,970 for the three months ended March 31, 2021. The increase in other general and administrative expenses is primarily attributable to an increase of $148,656 in stock-based compensation due to the noncash compensation for its executives and Board members in 2021. The increase in other general and administrative expenses is also attributable to an increase $47,500 for audit fees as the Company began operating the Properties, which required various capital raises and other filings with the Securities and Exchange Commission. The $148,656 increase in stock-based compensation was related to the amortization of the stock option grants in June 2021, the warrants issued to USNG and the Advisory Board, and the restricted stock grants in August 2020.

 

Interest Expense

 

Interest expense increased to $93,556 for the three months ended March 31, 2022, compared to $34,225 for the three months ended March 31, 2021, an increase of $59,331, or 173%. Interest expense increased during the three months ended March 31, 2022 primarily due to the issuance of the 8% Convertible Notes Payable during August and October 2021 that was outstanding in the 2022 period and not in the 2021 period.

 

On August 30, 2021 and October 29, 2021, the Company entered into two Securities Purchase Agreements with one and three, respectively, accredited investors agreed for the 8% Notes, with an aggregate principal face amount of approximately $650,000. The 8% Notes are, subject to certain conditions, convertible into an aggregate of 1,300,000 shares of Common Stock, at a price of $0.50 per share. The Company also issued five and one half-year common stock purchase warrants to purchase up to 1,850,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments which are immediately exercisable. The investors purchased the 8% Notes and the warrants from the Company for an aggregate purchase price of $650,000 and the proceeds were used for general working capital purposes. The 8% Notes bear interest at 8%, however a discount was recorded for the on the relative estimated fair value of the detachable warrants issued, which will be amortized to interest expense over the term of the 8% Notes using the interest method. Total interest expense related to the 8% Notes was $93,346 during the three months ended March 31, 31, 2022 including $80,667 related to discount amortization and will continue to affect interest expense in future quarters.

 

On March 31, 2021, the Company issued $28,665 principal balance of 3% Notes in connection with the Debt Settlement Agreements, which bear interest at 3%. Interest expense related to the 3% Notes totaled $210 related to these 3% Notes during the three months ended March 31, 2022 and will continue to affect interest expense in future quarters.

 

Gain on Extinguishment of Liabilities

 

The Company reported a gain on exchange and extinguishment of liabilities of $-0- and $31,372 in the three months ended March 31, 2022 and 2021, respectively.

 

On March 31, 2021, the Company recorded a net gain on extinguishment of liabilities totaling $31,372, which was attributable to six transactions that extinguished outstanding liabilities as of that date. The Debt Settlement Agreements extinguished accounts payable and accrued liabilities with a total outstanding balance of $2,866,497, for the issuance of $28,665 in principal balance of the 3% Notes. Such 3% Notes were issued with detachable warrants to purchase 5,732,994 shares of Common Stock for $0.50 per share, which was valued at $1,605,178. The transaction resulted in a total gain of $1,232,654 of which $124,177 was reported as a gain on extinguishment of liabilities and $1,108,477 was reported as a capital contribution. The $23,000 gain from settlement of litigation extinguished $33,000 of trade payables for a cash payment of $10,000. The loss of $115,805 is related to the early retirement of $365,169 principal balance of August 2020 Note.

 

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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 outstanding during the three months ended March 31, 2021 were treated as derivative instruments because such notes and warrants contained ratchet and anti-dilution provisions. The mark-to-market process resulted in a gain of $199 during the three months ended March 31, 2021. There were no similar derivatives outstanding during the three months ended March 31, 2022. All short-term notes and their related derivative warrants were terminated on April 1, 2021.

 

Income Tax

 

The Company recorded no income tax benefit (expense) in the three months ended March 31, 2022 and 2021. The Company has been in a cumulative tax loss position and has substantial net operating loss carryforwards available for its utilization at March 31, 2022. The Company has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense or benefit on its income (loss) before income taxes during the three months ended March 31, 2022 and 2021.

 

Net Loss

 

The Company reported a net loss of $554,634 for the three months ended March 31, 2022, compared to a net loss of $203,624 for the three months ended March 31, 2021. This represents a deterioration of $351,010 for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

 

Series A Convertible Preferred Stock Dividends

 

The Company recorded $52,861 and $3,744 in convertible preferred stock dividends in the three months ended March 31, 2022 and 2021, respectively. On March 26, 2021, the Company issued and classified its Series A Convertible Preferred Stock as equity securities in the balance sheet. Series A Convertible Preferred Stock bears a cumulative dividend at a 10% rate based on its stated/liquidation value.

 

Net Loss Applicable to Common Stockholders

 

The Series A Convertible Preferred Stock issued on March 26, 2021 has a preference over Common Stock and therefore such accrued dividend amounts have been deducted from net loss to report net loss applicable to common stockholders of $607,495 and $207,368 for the three months ended March 31, 2022 and 2021, respectively.

 

Basic and Diluted Net Loss Attributable to Common Stockholders per Share

 

Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock and dilutive Common Stock Equivalents outstanding during the period. Common Stock Equivalents included in the diluted net loss attributable to common stockholders per share computation represent shares of Common Stock issuable upon the assumed conversion of Convertible Promissory Notes, Convertible Preferred Stock and the assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses attributable to common stockholders are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of Common Stock Equivalents would have an anti-dilutive effect.

 

The Company incurred a net loss attributable to common stockholders during the three months ended March 31, 2022, and 2021, therefore all Common Stock Equivalents were considered anti-dilutive and excluded from diluted net loss attributable to common stockholders per share computations. The basic and diluted net loss attributable to common stockholders per share were $(0.03) and $(0.01) for the three months ended March 31, 2022 and 2021, respectively.

 

Potential Common Stock Equivalents as of March 31, 2022 totaled 27,478,864 shares of Common Stock, which included 1,357,330 shares of Common Stock underlying the Convertible Promissory Notes, 6,648,750 shares of Common Stock underlying the conversion of Series A Convertible Preferred Stock, 17,580,784 shares of Common Stock underlying outstanding warrants and 1,892,000 shares of Common Stock underlying outstanding stock options.

 

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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 the development of our Concessions, which was a long-term, high-risk/reward exploration project in an otherwise unproven part of the world. We abandoned the Concessions in early 2020 due to the challenging economic and political issues in Nicaragua and the oil and gas industry in general. We have been assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of 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, we completed the purchase of the Properties on April 1, 2021 and have commenced certain rework to the existing producing wells and intend to perform workovers and other develop activities on the Properties during 2022. We plan to evaluate the Properties for additional reserves of noble gases, which may change our development plans should we determine that reserves of noble gases exist on the Properties at commercial quantities. The planned development of the Properties will require us to raise additional capital to accomplish our operating plan, which cannot be assured. 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.

 

Capital Raised

 

Historically, we have raised funds through various equity and debt instruments through private transactions. We did not complete any capital raises during the three months ended March 31, 2022. The following summarizes the sources of significant liquidity raised during the year ended December 31, 2021:

 

    2021  
Capital raised:        
Issuance of Series A Convertible Preferred Stock with detachable common stock purchase warrants   $ 1,929,089  
Issuance of Convertible Promissory Notes with detachable common stock purchase warrants     650,000  
         
Total costs   $ 2,579,089  

 

The Company was able to raise liquidity during 2021 through the issuance of debt and equity in private transactions with accredited investors. These financial instruments generally require the Company to register the Common Stock underlying the conversion of the Series A Convertible Preferred Stock, the convertible notes, provide the holders with a right to participate in future capital raises and require their approval for the future issuance of securities at rates less than $0.50 per share. The holders have also agreed that the conversion of the Series A Convertible Preferred Stock, the convertible promissory notes and the exercise of the underlying warrants are generally subject to beneficial ownership limitations such that each holder of the financial instruments individually may not convert the underlying Series A Convertible Preferred Stock, convertible notes or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the holders individually being the beneficial owner in excess of 4.99% (or, upon election of the holders, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.

 

We will likely continue to issue such convertible instruments with detachable warrants to acquire Common Stock to fund our operational and capital expenditure plans for 2022.

 

  45  

 

 

Letter of Engagement

 

On April 1, 2022, the Company engaged Univest Securities, LLC (“Univest”) to act as the exclusive financial advisor, and the lead underwriter in a public offering (the “Offering”), to the Company. The size of the Offering is expected to be between $10,000,000 to $15,000,000, with a goal to up-list the Company onto the Nasdaq Capital Market upon closing of the Offering. The price per share will be determined by mutual agreement of the Company and Univest and will be determined at the signing of the final Underwriting Agreement, which will based on, among other things, market conditions at the time of the Offering.

 

Pursuant to the Underwriting Agreement, Univest will act as principal, or the representative of a number of broker-dealers that will offer the securities in a public offering. The Letter of Engagement anticipates that Univest will receive a gross discount equal to eight percent (8%) of the public offering price on each of the securities being offered. Univest has agreed to negotiate in good faith with other underwriters who, acting severally, could contract to act as an Underwriter in connection with the sale of the securities being offered. Univest will also have the right to re-offer all or any part of the securities being offered to broker- dealers. Univest will be entitled to warrants to purchase common stock representing 5% of the amount of securities sold in the Offering with an exercise price determined to be 110% of the Offering Price.

 

The Company also agreed to reimburse Univest, at and out of the proceeds of the Offering closings, for all of its reasonable, out-of-pocket expenses (including, but not limited to, travel, due diligence expenses, reasonable fees and expenses of its legal counsel, roadshow and background check on the Company’s principals) in connection with the performance of its services hereunder not to exceed an aggregate of $150,000. In addition, at the closing of the Offering, the Company agreed to reimburse Univest one percent (1%) of the actual amount of the Offering as nonaccountable expense of the offering.

 

The term of the Letter of Engagement Agreement expires upon the earlier to occur of (i) six (6) months from the date of execution or (ii) the mutual written agreement of the Company and Univest.

 

Capital Expenditures

 

Acquisition of the Oil and Gas Properties in Central Kansas Uplift - On July 31, 2019, we acquired the option from Core to purchase the production and mineral rights/leasehold for the Properties. We paid a non-refundable deposit of $50,000 to bind the 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. On September 2, 2020, the Company acquired a new option from Core under similar terms as the previous option. the newly acquired option, however, permits the Company to purchase the Properties at a reduced price of $900,000 at any time prior to November 1, 2020 and the Company agreed to immediately conduct a capital raise of between approximately $2-10 million to fund its acquisition and development of the Properties. On December 14, 2020 the parties executed the Asset Purchase Agreement which extended the new option to January 11, 2021, which has expired.

 

We, Core, and Seller entered into the Side Letters on September 2, 2020 and March 31, 2021, pursuant to which we and Core agreed to set the closing date of the acquisition of the Properties under the Asset Purchase Agreement to April 1, 2021. Pursuant to the Side Letters, the Company is responsible for reimbursing Core for certain prorated revenues and expenses from January 1, 2021 through April 1, 2021.

 

On April 1, 2021, we completed the acquisition of the Properties, under the same terms of the Asset Purchase Agreement for $900,000.

 

The purchase of the Properties included 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.

 

Farmout Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field-

 

Effective April 4, 2022, pursuant to the participation agreement by and between SunFlower Exploration, LLC (“SunFlower”) and the Company (the “Participation Agreement”), the Company acquired a 40% participation right in that certain Farmout Agreement, effective as of February 2022 by and between Scout Energy Management, LLC (“Scout”) and SunFlower (the “Farmout Agreement”) with regards to oil, natural gas, helium and brine mineral interests in the Hugoton Gas Field, located in Haskell and Finney counties, Kansas.

 

The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 2022.

 

  46  

 

 

The AMGAS JV will utilize Scout’s existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the AMGAS JV to market and sell the helium produced at prevailing market prices.

 

The AMGAS JV also acquired the right to all brine minerals subject to a ten percent (10%) royalty to Scout, across Finney and Haskell Counties. Brine minerals are harvested from the formation water produced from active, and to be drilled, oil and gas wells and may include a variety of dissolved minerals including bromine and iodine. The AMGAS JV plans to target brine with commercial quantities of bromine and iodine. AMGAS is currently developing proprietary technology to recover brine minerals, particularly with respect to bromine, which is well underway and has demonstrated recovery efficiency and is expected to be available for use in existing and future development wells.

 

We will likely find it necessary to obtain new sources of debt and/or equity capital to fund the exploration and development of the Properties and the Hugoton Gas Field, as well as to satisfy our existing debt obligations. We can provide no assurance that we will be able to obtain sufficient new debt/equity capital to fund our planned development of the Properties or the Hugoton Gas Field.

 

Going Concern

 

The Company has incurred losses from operations, has a net stockholders’ deficit, incurred net cash used in operating activities and has a significant working capital deficit as of and for the three months ended March 31, 2022 and for the year ended December 31, 2021. The Company must raise substantial amounts of debt and equity capital from other sources in the future in order to fund the (i) development of the Properties acquired on April 1, 2021; (ii) funding our obligations for exploration and development under the Hugoton Farmout Agreement (see Note 14); (iii) normal day-to-day operations and corporate overhead; and (iv) 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 2022 and beyond.

 

The Company has made substantial progress in resolving many of its existing financial obligations during the three months ended March 31, 2022 and for the year ended December 31, 2021.

 

The Company will have significant financial commitments to execute its planned exploration and development of the Properties and the Hugoton Gas Field. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development activities and may 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. There can be no assurance that it will be able to obtain such new funding or be able to reach agreements with industry operators and other third parties 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 unaudited condensed 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.

 

Cash and cash equivalents balances-

 

As of March 31, 2022, we had cash and cash equivalents with an aggregate balance of $148,384, a decrease from a balance of $260,590 as of December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $112,206 net decrease in cash during the three months ended March 31, 2022:

 

  Operating activities: $50,211 of net cash used in operating activities. Net cash used in operating activities was $50,211 and $72,906 for the three months ended March 31, 2022 and 2021, respectively, an improvement of $22,695. The improvement was primarily the result of the increase in accounts payable and the increase in non-cash stock compensation reflected in our cash flows from operating activities for the three months ended March 31, 2022 compared to the same period in 2021.

 

  47  

 

 

  Investing activities: $9,134 of net cash used in investing activities. Cash used in investing activities was $9,134 for the three months ended March 31, 2022 compared to $-0- for the three months ended March 31, 2021. We utilized funds during 2022 to acquire geological development plans for the Properties we previously acquired.
       
  Financing activities: $52,861 of net cash used in financing activities. Cash used in financing activities for the three months ended March 31, 2022 was $52,861 compared to cash provided by financing activities of $1,475,550 for the three months ended March 31, 2021. We paid dividends totaling $52,861 on the Series A Convertible Preferred Stock in the 2022 period. The Company raised $1,929,089 through the issuance of Series A Convertible Preferred Stock in the 2021 period.

 

The net result of these activities was a $112,206 decrease in cash and cash equivalents from $260,590 as of December 31, 2021 to $148,384 as of March 31, 2022.

 

Commitments:

 

Capital Expenditures. We had no material commitments for capital expenditures at March 31, 2022. However, subsequent to March 31, 2022, we entered The Farmout Agreement that requires us to drill at least one production well in 2022. We begin drilling operations on May 7, 2022 and estimate that the expenses related to the drilling program to be approximately $350,000 for drilling of the initial well.

 

Repayment of Debt. Debt obligations is comprised of the following at March 31, 2022:

 

    March 31, 2022  
Notes payable:        
         
3% Convertible promissory notes payable   $ 28,665  
8% Convertible promissory notes payable (less discount of $193,059 and $273,726 as of March 31, 2022 and December 31, 2021, respectively)     456,941  
         
Total notes payable     485,606  
Less: Long-term portion     28,665  
Notes payable, short-term   $ 456,941  

 

Debt obligations become due and payable as follows:

 

Years ended  

Principal

balance due

 
       
2022   $ 456,941  
2023      
2024      
2025      
2026     28,665  
2027      
Total   $ 485,606  

 

  48  

 

 

Open Litigation.

 

The Company is subject to various 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 wells in Texas, 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, who may be held personally harmless by indemnification provisions of the Company. Therefore, to the extent liabilities might actually occur, these 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 wells operated by Infinity Texas. Theses related liabilities, less the payment made to the State of Texas in 2012 in the amount of $45,103, are included in the asset retirement obligation on the accompanying balance sheets.
   
On September 26, 2014, Cambrian filed an action in the District Court of Harris County, Texas, against the Company resulting from certain professional consulting services provided for quality control and management of seismic operations during November and December 2013 on the Concessions. Cambrian provided these services pursuant to a master consulting agreement with the Company, 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 notified the Company by a 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. Torrey and the Company entered into a consulting agreement, pursuant to 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 contended 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 contended 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, 2021 and 2020, which management believes is sufficient to provide for the ultimate resolution of this dispute.

 

  49  

 

 

Contractual Obligations

 

USNG Letter Agreement - The Company is required to pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that AMGAS receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore there has been no payment or accrual liability relative to this cash fee provision through March 31, 2022.

 

Farmout Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field - On April 4, 2022, the Company acquired a 40% interest in a Farm-Out Agreement by and between Sunflower Exploration, LLC and Scout Energy Partners with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Farmout Agreement covers drilling and completion of up to 50 wells and the Company has joined three other entities to develop the oil and gas interests subject to the Farm-Out Agreement (the “Hugoton Farm-Out Venture”).

 

The Hugoton Farm-Out Venture will utilize Scout’s existing infrastructure assets, including water disposal, gas gathering and helium processing. In addition, the Farmout Agreement provides the Hugoton Farm-Out Venture with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, located in Grant County, Kansas, which will enable the Hugoton Farm-Out Venture to market and sell the helium produced at prevailing market prices. The first exploratory well commenced on May 7, 2022 near Garden City, Kansas with a goal to evaluate and test an unconventional theory regarding potential new reserves of gas and helium contained in the Hugoton Gas Field. The target zones and the unconventional theory has not previously been targeted for exploration by historical operations in the field.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on their evaluation as of March 31, 2022, the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective in assuring that financial statement presentation and disclosure are in conformity with those which are required to be included in our periodic SEC filings.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

 

  50  

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The information regarding certain legal proceedings in which American Noble Gas, Inc. (the “AMGAS”, “Company”, “we”, “us” or “our”) are involved is set forth in Note 11 of the Notes to the Unaudited Condensed Financial Statements, entitled “Commitments and Contingencies – Litigation”, which is included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and such information is incorporated by reference into this Item 1.

 

In addition to such legal proceedings, we may become involved in various other claims and threatened legal proceedings arising in the normal course of our businesses. At this time, we do not believe any material losses under such other claims and threatened proceedings to be probable. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, it is in the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our financial condition, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(c) Exhibits.

 

31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
     
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
     
32.1*   Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
     
101.INS   Inline XBRL Instance Document.
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document. (Filed herewith.)
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
     
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)
     
   

* This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

American Noble Gas, Inc.    
     
By: /s/ Stanton E. Ross   Dated: May 10, 2022
  Stanton E. Ross    
  Chief Executive Officer    
  (Principal Executive Officer)    
       
By: /s/ Daniel F. Hutchins   Dated: May 10, 2022
  Daniel F. Hutchins    
  Chief Financial Officer    
  (Principal Financial and Accounting Officer)    

 

  52  
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