Notes
to Condensed Financial Statements
September
30, 2022
(Unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
American
Noble Gas, 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 Company’s 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 (the “Common Stock”), (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 (the “Series A Convertible Preferred Stock”), 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 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 Convertible Preferred Stock automatically represents, without any action of the predecessor’s stockholders,
the same number of shares of Common Stock or Series A Convertible 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 December 7, 2021, the 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
as filed in the State of Nevada and the Company’s Bylaws.
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.”
Nature
of Operations
The Company has assessed various opportunities and strategic alternatives involving the acquisition,
exploration and development of oil and gas oil producing 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 are now involved with the following oil and gas producing properties:
Central
Kansas Uplift - On April 1, 2021, we completed the acquisition of the Central Kansas Uplift Properties, for a purchase price of
$900,000. The Central Kansas Uplift Properties include 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”). 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.
Hugoton
Gas Field Farm-Out - 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. The Company 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”).
The
Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 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. The Company 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 Hugoton JV believes that its unconventional theory has not previously
been targeted for exploration by historical operations in the field. The initial exploratory well was spud on May 7, 2022 near Garden
City, Kansas, with production casing set after testing and completion logs identified at least two potential zones with substantial gas
and helium reserves. The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations.
The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial
production on August 17, 2022. The Company is evaluating the initial flows of both natural gas and helium.
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.
With
respect to its cash capital contribution, the Company paid a non-refundable cash deposit for the membership interests in the amount
of $50,000 on
May 3, 2022. The Company paid the remainder of the cash contribution for the membership interests, or $800,000,
on May 16, 2022. The remainder of the Company’s capital contribution, or $3,187,500,
was financed by the Bank Loan (as defined below).
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
1.5 million cubic feet of natural gas per day on a gross basis.
GMDOC
is managed by two members: Darrah Oil Company, LLC, and Grand Mesa Operating Company, (collectively the “Managing Members”),
which also serve as the operating companies under the GMDOC Leases.
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 and for the three and nine months ended September 30, 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 COVID-19 pandemic. In particular, the oil and gas market has been severely impacted by the negative 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.
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 nine months ended
September 30, 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 (i) the development of the Properties acquired on April 1, 2021; (ii) our obligations for
exploration and development under the Hugoton Farmout Agreement; (iii) normal day-to-day operations and corporate overhead; and (iv) outstanding
debt and other financial obligations as they become due, as described below. Some of the Company’s outstanding debt and other financial
obligations are currently past due and the Company anticipates that other debt and financial obligations will become past due imminently.
See Note 4. 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 and acquiring oil and gas producing properties
to deploy its new operational strategy during the nine months ended September 30, 2022 and for the year ended December 31, 2021.
The
Company will have significant financial commitments executing 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 Accounting Standards Update (“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 Financial Accounting Standards Board (“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 Accounting Standards Codification (“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.
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 notes payable issued on March 31, 2021 and the 8% convertible notes payable issued on August
30, 2021 (see Note 4). 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 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 of $160,900, a decrease to additional paid in capital of $252,961 and
a decrease to accumulated deficit of $92,061. See Note 4.
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; asset retirement obligations,
our control over equity method investments, 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.
Oil
and gas properties
Central
Kansas Uplift Properties - On April 1, 2021, we completed the acquisition of the Properties, under the terms of the Asset Purchase
Agreement, for 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 September 30, 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 September 30, 2022.
Hugoton
Gas Field Farm-Out -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 initial well in which the Company
has acquired a 40% participation together with three other venture partners was spud on May 7, 2022 with production casing set after
testing and completion logs identified at least two potential zones with substantial gas and helium reserves.
The
initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture
stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production
on August 17, 2022. The Company is evaluating the initial flows of both natural gas and helium.
Full Cost Accounting
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, were zero through September 30, 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.
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 September 30, 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.
Equity
Method Investments
The
Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence,
but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or
loss of these investees is included in our Condensed Statements of Operations. Judgment regarding the level of influence over each equity
method investment includes considering key factors such as the Company’s ownership interest, legal form of the investee, representation
on the board of directors, participation in policy-making decisions and material intra-entity transactions.
The
Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount
of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment
include the length of time and the extent to which the fair value of the equity method investment has been less than cost, the investee’s
financial condition and near-term prospects and the intent and ability to hold the investment for a period of time sufficient to allow
for anticipated recovery. An impairment that is other-than temporary is recognized in the period identified.
The
Company accounts for distributions received from equity method investees under the “nature of the distribution” approach.
Under this approach, distributions received from equity method investees are classified on the basis of the nature of the activity or
activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating
activities) or a return of investment (classified as cash inflows from investing activities).
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 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 its 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 Properties and assumed the
related asset retirement obligation existing at the date of acquisition. The asset retirement obligation assumed for the 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, 2012, 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.
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 notes payable and Series A Convertible Preferred Stock both of which are 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
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 and nine months ended September 30, 2022 and 2021, the
Company had outstanding the following securities that were potentially dilutive: i) Series A Convertible Preferred Stock, ii) various
convertible notes payable (see Note 4), iii) warrants to purchase Common Stock (see Note 7) and iv) options to purchase Common Stock.
All potentially dilutive securities were excluded from the calculation of diluted income (loss) per share for the three and nine months
ended September 30, 2022 and 2021 as all were considered anti-dilutive because of the net loss reported for the three and nine months
ended September 30, 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.
Recent
Accounting Pronouncements
Business
Combinations - In October 2021, FASB issued ASU 2021-08 Business Combinations (“Topic
805”): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires contract assets and
contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance
with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance,
such assets and liabilities were recognized by the acquirer at fair value on the acquisition date. The ASU is effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We are currently evaluating
the impact of adopting this ASU on our condensed 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 and Equipment
Oil
and gas properties and equipment is comprised of the following at September 30, 2022 and December 31, 2021:
Schedule of Oil and Gas Properties and Equipment
| |
September
30,
2022 | | |
December
31,
2021 | |
Oil and gas production equipment | |
$ | 913,425 | | |
$ | 913,425 | |
Proven developed and undeveloped oil and gas properties | |
| 15,224 | | |
| — | |
Hugoton Gas Field participation agreement initial well drilling and completion costs subject to adjustment to actual costs | |
| 314,753 | | |
| — | |
| |
| | | |
| | |
Subtotal | |
| 1,243,402 | | |
| 913,425 | |
Less: Accumulated depreciation, depletion and amortization | |
| (188,463 | ) | |
| (92,502 | ) |
Oil and gas properties and equipment, net | |
$ | 1,054,939 | | |
$ | 820,923 | |
Great
Bend Properties - On April 1, 2021, the Company completed the previously announced acquisition of certain oil and gas properties
and interests from Core Energy, LLC (“Core”), effective as of January 1, 2021 (the “Great Bend 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 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 Great Bend Properties Acquisition for $900,000 in cash. The Great Bend Properties
Acquisition qualifies as an asset acquisition. As such, the Company 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 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.
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 Properties:
Schedule of Assets and Liabilities Properties Acquired
| |
Amount | |
Properties, subject to depreciation, depletion and amortization | |
$ | 913,425 | |
Asset retirement obligation assumed | |
| (13,425 | ) |
Total purchase price of the Properties | |
$ | 900,000 | |
Hugoton
Gas Field Participation Agreement - 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. The
Company has joined three other parties in the Hugoton JV to explore for and
develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement.
The Farmout Agreement covers drilling
and completion of up to 50 wells, with the first exploratory well spudded on May 7, 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 believes that its unconventional theory has not previously been targeted for exploration by historical operations in the
field. The initial exploratory well was spud on May 7, 2022 near Garden City, Kansas with production casing set after testing and
completion logs identified at least two potential zones with substantial gas and helium reserves. The initial well was completed
upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed
in two stages during June 2022. The well was connected to the pipeline and commenced commercial production on August 17, 2022. The
Company is evaluating the initial flows of both natural gas and helium.
The Company
has paid a total of $314,753 for its participation in the drilling and completion of the initial exploratory well. Such amount was an
estimate and will be adjusted to actual drilling and completion cost expenditures when the well is connected to the pipeline and the
production of gas commences.
Note
3 – Investment in unconsolidated subsidiary – GMDOC
A
summary of the Company’s investment in unconsolidated subsidiary-GMDOC during the three and nine months ended September 30,
2022 follows:
Schedule
of Investment Unconsolidated Subsidiary
| |
Three months ended | | |
Nine months ended | |
| |
September 30, 2022 | | |
September 30, 2022 | |
Investment in unconsolidated subsidiary-GMDOC, at beginning of period | |
$ | 964,336 | | |
$ | — | |
Purchase of membership interests in GMDOC | |
| — | | |
| 850,000 | |
Equity in earnings of GMDOC | |
| 209,297 | | |
| 323,633 | |
Distributions during period | |
| — | | |
| — | |
Impairment charges | |
| — | | |
| — | |
| |
| | | |
| | |
Investment in unconsolidated subsidiary-GMDOC at end of period | |
$ | 1,173,633 | | |
$ | 1,173,633 | |
The
following table presents summarized balance sheet financial information of the Company’s unconsolidated subsidiary – GMDOC as of September 30, 2022 and December 31, 2021:
Schedule
of Unconsolidated Subsidiary Balance Sheet Financial Information
| |
September 30,
2022 | | |
December 31,
2021 | |
Assets: | |
| | | |
| | |
Cash | |
$ | 591,067 | | |
$ | — | |
Accrued revenue & prepaid expenses | |
| 490,002 | | |
| — | |
Oil and gas properties and equipment, net | |
| 7,439,743 | | |
| — | |
| |
| | | |
| | |
Total assets | |
$ | 8,520,812 | | |
$ | — | |
| |
| | | |
| | |
Liabilities and Member’s Equity: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 229,211 | | |
$ | — | |
Mortgage note payable, net | |
| 5,493,214 | | |
| — | |
Asset Retirement Obligations | |
| 865,344 | | |
| — | |
Member’s equity | |
| 1,933,043 | | |
| — | |
| |
| | | |
| | |
Total liabilities and member’s equity | |
$ | 8,520,812 | | |
$ | — | |
The
following table presents summarized income statement financial information of the Company’s unconsolidated subsidiary – GMDOC for the three and nine months ended September 30, 2022:
Schedule of Unconsolidated Subsidiary Financial Information
| |
Three months ended | | |
Nine months ended | |
| |
September 30, 2022 | | |
September 30, 2022 | |
| |
| | |
| |
Oil and gas revenues | |
$ | 929,505 | | |
$ | 1,718,468 | |
Lease operating expenses | |
| (300,881 | ) | |
| (545,157 | ) |
Production related taxes | |
| (27,830 | ) | |
| (50,743 | ) |
Ad valorem taxes | |
| (10,755 | ) | |
| (21,510 | ) |
Depreciation expense | |
| (137,644 | ) | |
| (269,157 | ) |
Accretion of asset retirement obligation | |
| (16,987 | ) | |
| (33,974 | ) |
General and administrative expenses | |
| (4,187 | ) | |
| (105,847 | ) |
Interest expense | |
| (86,497 | ) | |
| (159,037 | ) |
| |
| | | |
| | |
Net income | |
| 344,724 | | |
| 533,043 | |
AMGAS member’s percentage | |
| 60.7143 | % | |
| 60.7143 | % |
| |
| | | |
| | |
Equity in earnings of unconsolidated subsidiary – GMDOC | |
$ | 209,297 | | |
$ | 323,633 | |
The
Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence,
but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence
over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee,
its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
On
May 3, 2022, the Company entered into the Operating Agreement pursuant to which the Company acquired
17 (or 60.7143%) of 28 limited liability membership Interests in GMDOC, for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.
With
respect to its cash capital contribution, the Company paid a non-refundable cash deposit for the membership interests in the amount of
$50,000 on May 3, 2022. The Company paid the remainder of the cash contribution for the membership interests, or $800,000, on May 16,
2022. The remainder of the Company’s capital contribution, or $3,187,500, was financed by the Bank Loan (as defined below).
GMDOC
had previously acquired 70%
of the working interests in the GMDOC Leases from
Castelli Energy, L.L.C., an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000
acres located in Central and Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels
of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis.
GMDOC is managed by two Managing Members, 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 commercial bank, secured by
GMDOC’s property, in the aggregate amount of $6,045,000 (the “Bank Loan”).
The principal of the Bank Loan is to be repaid in 84 varying monthly installments, ranging from $170,000
at the beginning to $40,500
at the end of the loan term, with the first installment on July 1, 2022. The Bank Loan bears a variable interest beginning at an
initial rate of 6%
per annum with one rate adjustment after 36 months subject to a 6%
minimum interest rate. Initial working capital requirements was financed by a loan to GMDOC from the Managing Members, in the
maximum aggregate amount of $400,000
(the “Member Loan”), which was repaid during the nine months ended September 30, 2022.
Note
4 – Debt Obligations
Debt
obligations are comprised of the following at September 30, 2022 and December 31, 2021:
Schedule of Debt Outstanding
| |
September 30, 2022 | | |
December 31, 2021 | |
Notes payable: | |
| | | |
| | |
| |
$ | 28,665 | | |
$ | 28,665 | |
3%
convertible notes payable due March
30, 2026 (the 3% Notes) | |
$ | 28,665 | | |
$ | 28,665 | |
8%
convertible notes payable due October
29, 2022 (less discount of $27,191
and $273,726
as of September 30, 2022 and December 31, 2021, respectively) (the 8%
Note and the October 8%
Notes) (in default) | |
| 622,809 | | |
| 376,274 | |
8%
Convertible promissory notes payable due September
15, 2022 (the June 2022 Note) (in default) | |
| 350,000 | | |
| — | |
8%
Convertible promissory notes payable due June
29, 2022 (the May 2022 Notes) (in default) | |
| 312,500 | | |
| — | |
| |
| | | |
| | |
Total notes payable | |
| 1,313,974 | | |
| 404,939 | |
Less: Long-term portion | |
| 28,665 | | |
| 28,665 | |
Notes payable, short-term | |
$ | 1,285,309 | | |
$ | 376,274 | |
Debt
obligations become due and payable as follows:
Schedule of Debt Obligations Maturities
Years ended | |
Principal balance due | |
| |
| |
2022 (October 1, 2022 through December 31, 2022) | |
$ | 1,285,309 | |
2023 | |
| — | |
2024 | |
| — | |
2025 | |
| — | |
2026 | |
| 28,665 | |
2027 | |
| — | |
Total | |
$ | 1,313,974 | |
3%
Convertible 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 notes payable (the “3% Notes”) with detachable warrants to purchase 5,732,994
shares of Common Stock for fifty cents ($0.50)
per share (the “3% Note Warrants”). 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 “Maturity Date”). The 3% Notes are convertible as to principal and any accrued interest, at
the option of the holder, into shares of 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.
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% Notes and the 3% Note Warrants to purchase 5,155,454
shares of Common Stock in exchange for the extinguishment of their respective debt obligations. See Note 13.
The 3% Note Warrants 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:
Schedule of Fair Value of Warrants Estimated Valuation Assumptions
|
|
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 |
|
8%
Convertible Notes Payable due October 29, 2022 (in default)
On
August 30, 2021, the Company issued to an accredited investor (the “8% Note Investor”) 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 fifty cents ($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 fifty cents ($0.50)
per share, subject to customary adjustments (the “8% Note Warrant”) 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 issued to three accredited investors (the “October 8% Note Investors”) unsecured
convertible notes payable due October
29, 2022 (the “October 8% Notes”), 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 fifty cents ($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%
Note 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 Investor.
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.
The
Company, the 8% Note Investor and the October 8% Note Investors have agreed that for so long as the underlying warrants remain
outstanding, the investors 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:
Schedule of Proceeds from Debt Obligations
| |
Amount | |
| |
| |
Proceeds allocated to the 8% 8% Note and the October 8% Notes | |
$ | 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 are 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% Notes in August and October of 2021:
Schedule of Fair Value of Detachable Warrants to Purchase Common Stock Granted
| |
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 | |
The following
is a summary of activity relative to the 8% Note and October 8% Notes for the nine months ended September 30, 2022:
Schedule of Convertible Debt
| |
Amount | |
Balance December 31, 2021 – 8% Note and October 8% Notes | |
$ | 376,274 | |
Amortization of discount during the period to interest expense | |
| 246,535 | |
| |
| | |
Balance September 30, 2022 - 8% Note and October 8% Notes | |
$ | 622,809 | |
The
remaining unamortized discount relative to the 8% Notes and the October 8% Notes was $27,191 and $273,726 as of September 30, 2022 and December 31,
2021 respectively.
The
Company did not pay the principal balance due on the 8% Notes and the October 8% Notes upon their maturity on October 29, 2022 and
the remaining balance remains due and payable and is therefore in technical default. The parties are negotiating a resolution to
such technical default including an extension and a roll-over of the principal into other Company securities, although there can be
no assurance that the parties will reach a mutually agreeable resolution.
8%
Convertible Notes Payable due September 15, 2022 (in default)
On
June 8, 2022, the Company issued to an accredited investor an unsecured convertible note due September 15, 2022 (the “June
2022 Note”), with an aggregate principal face amount of $350,000.
The June 2022 Note is, subject to certain conditions, convertible into an aggregate of 700,000
shares of Common Stock, at a price of fifty cents ($0.50)
per share. The Company also issued a five-year Common Stock purchase warrant to purchase up to 700,000
shares of Common Stock at an exercise price of fifty cents ($0.50)
per share, subject to customary adjustments (the “June 2022 Warrants”) which are immediately exercisable. The investor
purchased the June 2022 Note and June 2022 Warrant from the Company for an aggregate purchase price of $350,000
and the proceeds were used for drilling and completion costs on the initial well drilled under the Hugoton Gas Field participation
agreement and general working capital purposes. The Company also granted the investor certain piggy-back registration rights whereby
the Company has agreed to register for resale the shares of Common Stock underlying the June 2022 Warrant and the conversion of the
June 2022 Note unless the shares of the Company commence 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
June 2022 Note bears 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 the remaining principal amount of the underlying note and any accrued and unpaid interest.
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.
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 June 2022 Note. As a result, the June 2022 Note was 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 June 2022 Note. Accordingly, the Company allocated the proceeds of the June 22 Note as follows:
Schedule of Proceeds from Debt Obligations
| |
Amount | |
| |
| |
Proceeds allocated to 8% June 2022 Note | |
$ | 213,426 | |
Proceeds allocated to detachable warrants to purchase Common Stock | |
| 136,574 | |
| |
| | |
Total proceeds | |
$ | 350,000 | |
The
June 2022 Note was recorded at its 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 are the assumptions used in calculating the estimated
grant-date fair value of the detachable warrants to purchase Common Stock granted in connection with the June 2022 Note:
Schedule of Fair Value of Detachable Warrants to Purchase Common Stock Granted
| |
As of June 8, 2022 (issuance date) | |
| |
| |
Volatility – range | |
| 344.7 | % |
Risk-free rate | |
| 3.03 | % |
Contractual term | |
| 5.0 years | |
Exercise price | |
$ | 0.50 | |
Number of warrants in aggregate | |
| 700,000 | |
The following
is a summary of activity relative to the June 2022 Note for the nine months ended September 30, 2022:
Schedule of Convertible Debt
| |
Amount | |
Balance December 31, 2021 – June 2022 Note | |
$ | — | |
Proceeds allocated to the May 2022 Notes (defined below) | |
| 213,426 | |
Principal payments | |
| — | |
Amortization of discount during the period to interest expense | |
| 136,574 | |
| |
| | |
Balance September 30, 2022 - June 2022 Notes | |
$ | 350,000 | |
The
note has matured and therefore the remaining unamortized discount relative to the June 2022 Notes was $-0- as of September 30, 2022.
The parties are negotiating a resolution to such technical default including an extension and a roll-over of the principal into other
Company securities, although there can be no assurance that the parties will reach a mutually agreeable resolution.
8%
Convertible Notes Payable due June 29, 2022 (in default)
The
Company entered into a securities purchase agreement with two accredited investors (the “Investors”) for the
Company’s 8% convertible notes payable due June
29, 2022 (the “May 2022 Notes”),
with an aggregate principal amount of $850,000.
The May 2022 Notes are, subject to certain conditions, convertible into an aggregate of 2,125,000 shares of Common Stock, at a price
of forty cents ($0.40) per share. The Company also issued an aggregate of 425,000 shares
of Common Stock as commitment shares (“Commitment Shares” and, together with the May 2022 Notes and Conversion Shares,
the “Securities”) to the Investors as additional consideration for the purchase of the May 2022 Notes. The closing of
the offering of the Securities occurred on May 13, 2022, when the Investors purchased the Securities for an aggregate purchase price
of $850,000.
The Company has also granted the Investors certain automatic and piggy-back registration rights whereby the Company has agreed to
register the resale by the Investors of the Conversion Shares. The proceeds of this offering of Securities were used to purchase the
Company’s membership interests in GMDOC.
The
May 2022 Notes 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 (subject to the occurrence of an event of default) in an amount equal to 120% of the principal amount of each May 2022 Note
and any accrued and unpaid interest, and shall be mandatorily repaid in cash in an amount equal to a) fifty percent (50%) of the then
outstanding principal amount equal to 120% of the principal amount of each May 2022 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 $2,000,000 but not greater than $3,000,000; or b) one hundred percent (100%) of the then outstanding principal amount
equal to 120% of the principal amount of a May 2022 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 in excess of $3,000,000.
In addition, pursuant to the May 2022 Notes, so long as such May 2022 Notes remain outstanding, the Company shall not enter into any
financing transactions pursuant to which the Company sells its securities at a price lower than the $0.40 per share conversion price,
subject to certain adjustments, without the written consent of the Investors.
The
conversion of the May 2022 Notes are each subject to beneficial ownership limitations such that the Investors may not convert the May
2022 Notes to the extent that such conversion or exercise would result in an Investor being the beneficial owner in excess of 4.99% (or,
upon election of the 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, 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.
Pursuant
to the purchase agreement for the Securities, for a period of twelve (12) months after the closing date, the Investors have a right
to participate in any issuance of the Company’s Common Stock, Common Stock equivalents, conventional debt, or a combination of
such securities and/or debt, up to an amount equal to thirty-five percent (35%) of the subsequent financing.
The Company also entered into that certain registration rights side letter,
pursuant to which, in the event the Company’s shares of Common Stock have not commenced trading 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, and, thereafter, the Company agreed to file a registration statement under the Securities Act to register
the offer and sale, by the Company, of Common Stock underlying the May 2022 Notes in the event that such notes are not repaid prior to
such 120-day period.
The
Company paid half of the May 2022 Notes principal balance upon its maturity on June 29, 2022 and an additional $112,500 in September
2022 and the remaining balance remains due and payable and is therefore in technical default. The parties are negotiating a resolution
to such technical default including an extension and a roll-over of the principal into other Company securities, although there can be
no assurance that the parties will reach a mutually agreeable resolution.
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 May 2022 Notes. As a result, the May 2022 Notes were required to be separated
into its debt and equity components based on their relative fair values because of the issuance of commitment shares together with the May 2022 Notes. Accordingly, the Company allocated the proceeds of the May 2022 Notes as follows:
Schedule of Proceeds from Debt Obligations
| |
Amount | |
| |
| |
Proceeds allocated to the May 2022 Notes | |
$ | 653,846 | |
Proceeds allocated to Commitment Shares | |
| 196,154 | |
| |
| | |
Total proceeds | |
$ | 850,000 | |
The
May 2022 Notes were recorded at their par value less the discount established at its origination date. The note discount is amortized
over the term of each May 2022 Note (June 29, 2022) utilizing the level-interest method. The following is a summary of activity relative
to the May 2022 Notes for the nine months ended September 30, 2022:
Schedule of Convertible Debt
| |
Amount | |
Balance December 31, 2021 – May 2022 Notes | |
$ | — | |
Proceeds allocated to the May 2022 Notes | |
| 653,846 | |
Principal payments | |
| (537,500 | ) |
Amortization of discount during the period to interest expense | |
| 196,154 | |
| |
| | |
Balance September 30, 2022 - May 2022 Notes | |
$ | 312,500 | |
The
remaining unamortized discount relative to the May 2022 Notes were $-0- as of September 30, 2022.
Note
5 – Accrued liabilities
Accrued
liabilities consisted of the following at September 30, 2022 and December 31, 2021:
Schedule of Accrued Liabilities
| |
September 30, 2022 | | |
December 31, 2021 | |
Accrued rent | |
$ | 614,918 | | |
$ | 614,918 | |
Accrued Nicaragua Concession fees | |
| 544,485 | | |
| 544,485 | |
Accrued preferred stock dividends payable (see Note 12) | |
| 16,061 | | |
| — | |
| |
| | | |
| | |
Total accrued liabilities | |
$ | 1,175,464 | | |
$ | 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.
Note
6 – Stock Options
Total
stock-based compensation is comprised of the following for the three and nine months ended September 30, 2022 and 2021:
Schedule of Stock-based Compensation
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Stock-based compensation – stock option grants | |
$ | — | | |
$ | 76,499 | | |
$ | 127,499 | | |
$ | 101,999 | |
| |
| | | |
| | | |
| | | |
| | |
Stock-based compensation – restricted stock grants | |
| 174,375 | | |
| 81,250 | | |
| 511,250 | | |
| 243,750 | |
| |
| | | |
| | | |
| | | |
| | |
Stock-based compensation – warrants issued for services pursuant to USNG
Letter Agreement (defined below) | |
| 71,716 | | |
| — | | |
| 215,589 | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total stock-based compensation | |
$ | 246,091 | | |
$ | 157,749 | | |
$ | 854,338 | | |
$ | 345,749 | |
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 Company’s Annual Meeting of Stockholders held on September 25, 2015, the stockholders approved the 2015 Stock Option and Restricted
Stock Plan (the “2015 Plan”) and the Company reserved 500,000 shares for issuance under the 2015 Plan. At the Company’s
Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved the 2021 Stock Option and Restricted Stock Plan (the
“2021 Plan”) and the Company reserved 5,000,000
shares for issuance under the 2021 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 Plan and the 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 September 30, 2022, 5,500,000 shares were available for future grants under the 2021 Plan and the 2015 Plan.
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 nine months ended September 30, 2022 and 2021:
Summary of Stock Option Activity
| |
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 | |
| 1,800,000 | | |
| 0.50 | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Forfeited | |
| (115,000 | ) | |
| (64.24 | ) | |
| | | |
| | |
Outstanding at September 30, 2021 | |
| 2,017,000 | | |
$ | 3.67 | | |
| 8.75 years | | |
$ | — | |
Outstanding and exercisable at September 30, 2021 | |
| 217,000 | | |
$ | 30.00 | | |
| 1.03 years | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2021 | |
| 1,892,000 | | |
$ | 1.93 | | |
| 9.07 years | | |
$ | — | |
Granted | |
| — | | |
| — | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Forfeited | |
| (450,000 | ) | |
| 0.50 | | |
| | | |
| | |
Outstanding at September 30, 2022 | |
| 1,442,000 | | |
$ | 2.38 | | |
| 8.21 years | | |
$ | — | |
Outstanding and exercisable at September 30, 2022 | |
| 1,442,000 | | |
$ | 2.38 | | |
| 8.21 years | | |
$ | — | |
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 September 30, 2022:
Summary of Exercise Prices and Weighted Average Remaining Contractual Life
| | |
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 | | |
| 1,350,000 | | |
| 8.68 years | | |
| 1,350,000 | | |
| 8.68 years |
$ | 30.00 | | |
| 92,000 | | |
| 1.28 years | | |
| 92,000 | | |
| 1.28 years |
| | | |
| | | |
| | | |
| | | |
| |
| Total | | |
| 1,442,000 | | |
| 8.21 years | | |
| 1,442,000 | | |
| 8.21 years |
The
following is the assumptions used in calculating the estimated grant-date fair value of the stock options granted during 2021:
Schedule of Stock Option Valuation Assumption
| |
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 $-0- and $76,499
for the three months ended September 30, 2022 and 2021, respectively, and $127,499 and $101,999 for the nine months ended September 30,
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 nine months ended September 30, 2022.
The
intrinsic value as of September 30, 2022 related to the vested and unvested stock options as of that date was $-0-. There is no unrecognized
compensation cost as of September 30, 2022 related to the unvested stock options as of that date.
Restricted
stock grants.
During
May 2022, the Board of Directors granted 1,550,000 shares of restricted stock awards to our officers, directors and consultants. In addition,
during August 2020 the Board of Directors granted 5,000,000 shares of restricted stock awards to our officers, directors and a consultant.
Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically
vest over a period of time generally corresponding to yearly anniversaries of the grant date. Unvested shares of restricted stock awards
may be forfeited upon the termination of service of employment with the Company, depending upon the circumstances of termination. Except
for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s
rights, including voting rights and the right to receive cash dividends.
A
summary of all restricted stock activity under the equity compensation plans for the nine months ended September 30, 2022 and 2021 is
as follows:
Schedule of Restricted Stock Unit Activity
| |
Number of restricted shares | | |
Weighted average grant date fair value | |
Nonvested balance, December 31, 2020 | |
| 3,750,000 | | |
$ | 0.13 | |
Granted | |
| — | | |
| — | |
Vested | |
| (1,875,000 | ) | |
| (0.13 | ) |
Forfeited | |
| — | | |
| — | |
Nonvested balance, September 30, 2021 | |
| 1,875,000 | | |
$ | 0.13 | |
| |
| | | |
| | |
Nonvested balance, December 31, 2021 | |
| 1,250,000 | | |
$ | 0.13 | |
Granted | |
| 1,550,000 | | |
| 0.45 | |
Vested | |
| (2,025,000 | ) | |
| (0.25 | ) |
Forfeited | |
| — | | |
| — | |
Nonvested balance, September 30, 2022 | |
| 775,000 | | |
$ | 0.45 | |
The
Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted stock grants aggregating $174,375
and $81,250 during the three months ended September 30, 2022 and 2021, respectively, and $511,250 and $243,750 during the nine months
ended September 30, 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
September 30, 2022, there were $348,750 of total unrecognized compensation costs related to all remaining non-vested restricted stock
grants, which will be amortized over the next six months in accordance with the respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Schedule of Nonvested Restricted Stock Unit Activity
Years ended | |
Number of Shares | |
| |
| |
2022 | |
| 387,500 | |
2023 | |
| 387,500 | |
Note
7 – Warrants
The
following table summarizes warrant activity for the nine months ended September 30, 2022 and 2021:
Summary of Warrant Activity
| |
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 12) | |
| 5,256,410 | | |
| 0.39 | |
Issued in connection with issuance of 3% Notes (see Note 4) | |
| 5,732,994 | | |
| 0.50 | |
Issued in connection with issuance of 8% convertible promissory
Note and the October 8% Notes (see Note 4) | |
| 200,000 | | |
| 0.50 | |
Forfeited/expired | |
| (47,000 | ) | |
| (5.22 | ) |
| |
| | | |
| | |
Outstanding and exercisable at September 30, 2021 | |
| 12,670,784 | | |
$ | 0.45 | |
| |
| | | |
| | |
Outstanding and exercisable at December 31, 2021 | |
| 17,580,784 | | |
$ | 0.47 | |
Issued in connection with issuance of Series A Convertible Preferred Stock
(see Note 12) | |
| 2,149,999 | | |
| 0.30 | |
Issued in connection with issuance of 8% Note and October 8% Notes (see
Note 4) | |
| 700,000 | | |
| 0.50 | |
Forfeited/expired | |
| — | | |
| — | |
| |
| | | |
| | |
Outstanding and exercisable at September 30, 2022 | |
| 20,430,783 | | |
$ | 0.45 | |
The
weighted average term of all outstanding Common Stock purchase warrants was 4.0 years as of September 30, 2022. 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 September
30, 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 September 30, 2022:
Summary of Warrant Range of Exercise Prices and Weighted Average Remaining Contractual Life
| | |
Outstanding and exercisable warrants | |
Exercise price per share | | |
Number of warrants | | |
Weighted average remaining contractual life | |
$ | 0.30 | | |
| 2,149,999 | | |
| 5.2 years | |
$ | 0.39 | | |
| 5,256,410 | | |
| 4.0 years | |
$ | 0.50 | | |
| 13,024,374 | | |
| 3.8 years | |
| | | |
| | | |
| | |
| Total | | |
| 20,430,783 | | |
| 4.0 years | |
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 provides 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 Properties. The USNG Letter Agreement would cover all of
the noble gases, specifically including helium, and rare earth elements/minerals potentially existing on Properties
and the Company’s future acquisitions, if any, including the Hugoton Gas Field.
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.
Pursuant
to the USNG Letter Agreement, 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 the Company 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 September 30, 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 its Common Stock at an exercise price of fifty cents ($0.50)
to three of USNG’s principal consultants and four third-party service providers. The Company issued warrants to purchase, in
the aggregate, 1,200,000 shares
of Common Stock at fifty cents ($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 fifty cents ($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.
The
following are 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:
Schedule of Warrants Valuation Assumption
| |
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 $71,716 and $215,589 of compensation expense relative to the 3,260,000 warrants to purchase Common Stock issued pursuant
to the USNG Letter Agreement during the three and nine months ended September 30, 2022, respectively. There have been no exercises or
forfeitures of the warrants to purchase Common Stock relative to the USNG Letter during the nine months ended September 30, 2022. The
USNG warrants were not outstanding during the three and nine months ended September 30, 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 costs related to the 3,260,000 warrants to purchase
Common Stock issued pursuant to the USNG Letter Agreement, as of September 30, 2022 was $1,171,354 which will be amortized over the next
forty-nine 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 nine months ended
September 30, 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 September 30,
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 of 2017, as amended (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 completed the filing of its federal income tax returns
for all tax years through 2021. The Federal income tax returns for the years 2012 through 2021 remain open to examination by the U.S. Internal Revenue Service.
The
Internal Revenue Code of 1986, as amended, 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.
Note
9 – Gain on Exchange and Extinguishment of Liabilities
During
the three and nine months ended September 30, 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:
Schedule of Estimated Gain on Exchange and Extinguishment of Debt
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three months ended September 30, | | |
Nine months ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Gain (loss) on exchange and extinguishment of liabilities: | |
| | |
| | |
| | |
| |
Gain on exchange and extinguishment of notes payable | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 55,230 | |
Gain on exchange and extinguishment of liabilities | |
| — | | |
| — | | |
| — | | |
| 124,177 | |
Gain from settlement of litigation (see Note 12) | |
| — | | |
| — | | |
| — | | |
| 23,000 | |
Loss from retirement of convertible note payable (see Note 4) | |
| — | | |
| — | | |
| — | | |
| (115,805 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total gain on exchange and extinguishment of liabilities | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 86,602 | |
Gain on exchange and extinguishment of notes payable – On April 1, 2021, the Company and the holders of two notes
payable aggregating $85,000 that were in default reached a settlement whereby the Company issued a total of 245,000 shares of Common
Stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated Common Stock purchase warrants
which totaled $123,830, as of April 1, 2021. The 245,000 shares issued to extinguish the debt obligations resulted in a gain of $55,230
which was recorded in the nine months ended September 30, 2021.
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 the 3% Notes with the 3% Note Warrants. The 3% Notes allows for prepayment at any time with all principal and
accrued interest becoming due and payable at maturity on the Maturity Date. 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.
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%
Notes and the 3% Note Warrants 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:
Schedule of Gain on Extinguishment of Liabilities
| |
Amount | |
| |
| |
Total accounts payable and accrued liabilities extinguished | |
$ | 2,866,497 | |
Less: Principal balance of 3% Notes issued | |
| (28,665 | ) |
Less: Fair value of 3% Note Warrants | |
| (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 | |
Loss
from retirement of convertible note payable - On March 26, 2021, the Company exercised its right to retire a convertible
note payable originally issued in August 2020 (the “August 2020 Note”) in conjunction with the issuance of March 2021
Series A Convertible Preferred Stock (see Note 12). In accordance with the prepayment provisions contained in the August 2020
Note, the Company paid all principal, accrued interest and the 15%
prepayment premium as follows:
Schedule
of Prepayment of Note
| |
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 during the nine months
ended September 30, 2021.
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 nine months ended
September 30, 2022 and 2021:
Schedule
of Assets Retirement Obligation
| |
Amount | |
| |
| |
Asset retirement obligation at December 31, 2020 | |
$ | 1,716,003 | |
Additions | |
| 13,425 | |
Accretion expense during the period | |
| 558 | |
| |
| | |
Asset retirement obligation at September 30, 2021 | |
$ | 1,729,986 | |
| |
| | |
Asset retirement obligation at December 31, 2021 | |
$ | 1,730,264 | |
Additions | |
| — | |
Accretion expense during the period | |
| 1,004 | |
| |
| | |
Asset retirement obligation at September 30, 2022 | |
$ | 1,731,268 | |
The
$1,716,003 asset retirement obligation existing at December 31, 2020 and in years prior to 2020 represented the remaining potential liability
for wells the Company had owned in Texas and Wyoming prior to their sales/disposal in 2012. The Company 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. All
domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas were disposed of in 2012 and in years prior to 2012; however, 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 September 30, 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 $302 and $882 of accretion
expense during the three and nine months ended September 30, 2022, respectively, related to the acquisition of the Properties
as further described in Note 1. In addition, the Company drilled and completed its first Hugoton Gas Field well which was placed in service
in August 2022. The Company recorded $122 and $122 of accretion expense during the three and nine months ended September 30, 2022, respectively
related to the new Hugoton Gas Field well.
Note
11 – Commitments and Contingencies
Lack
of Compliance with Law Regarding Domestic Properties
The Company
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 the Company. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of in 2012 and in years prior to 2012; 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 September 30, 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.
USNG
Letter Agreement commitment
Pursuant
to the USNG Letter Agreement (see Note 7), 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 the Company 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
September 30, 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.
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 action 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 Company’s officers
have potential liability regarding the above matter, and the Company’s 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, which management believes is sufficient to provide for the ultimate resolution
of this dispute. |
|
|
● |
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, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
|
|
● |
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 September 30, 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 the Company. 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. |
|
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 nine months ended December 31, 2021 (see Note 9).
|
Note
12 – Stockholder’s Deficit
Series
A Convertible Preferred Stock
As
of September 30, 2022 and December 31, 2021, the Company is authorized to issue up to 10,000,000 preferred stock, par value $0.0001 per share.
The
following summarizes the activity in Series A Convertible Preferred Stock for the nine months ended September 30, 2022 and 2021:
Schedule of Series A Convertible Preferred Stock Activity
| |
Number of Shares | |
Outstanding at December 31, 2020 | |
| — | |
Issued | |
| 22,776 | |
Converted to Common Stock | |
| — | |
| |
| | |
Outstanding at September 30, 2021 | |
| 22,776 | |
| |
| | |
Outstanding at December 31, 2021 | |
| 22,076 | |
Issued | |
| 6,450 | |
Converted to Common Stock | |
| (3,000 | ) |
| |
| | |
Outstanding at September 30, 2022 | |
| 25,526 | |
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”) with the Secretary of State of the State of Delaware. 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 Series A 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.
March
2021 Issuance - 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 with a stated/liquidation value of $100 per
share (the “March 2021 Series A Convertible Preferred Stock”); 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 thirty-nine ($0.39) per
share, subject to customary adjustments thereunder. The March 2021 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 shares of Common Stock underlying the warrants 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 March 2021 Series A Convertible Preferred Stock totaled $1,929,089 after
deducting the placement agent fee and other expenses of the offering. The Company used the proceeds of the March 2021 Series A
Convertible Preferred Stock offering to complete the acquisition and development of the Properties, to pay-off
certain outstanding convertible notes payable (see Note 4) 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
shares of Common Stock underlying the warrants. 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 Company completed the required registration
of these shares on Form S-1, which the Securities and Exchange Commission declared effective on August 4, 2021.
The
holders of the March 2021 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the
investors’ ability to convert its March 2021 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 $154,495 and $117,936 relative to the March 2021 Series A Convertible Preferred
Stock which was charged to additional paid in capital during the nine months ended September 30, 2022 and 2021, respectively.
The
holders of March 2021 Series A Convertible Preferred Stock exercised their rights to convert a total of 3,000
shares of March 2021 Series A Convertible Preferred Stock into 937,500
shares of Common Stock during the nine months ended September 30, 2022. There were no conversions during the nine months ended
September 30, 2021.
On
March 26, 2021, Ozark Capital, LLC acquired 1,111
shares of March 2021 Series A Convertible Preferred Stock (convertible into 347,188
shares of Common Stock), together with warrants to acquire 256,410
shares of Common Stock at fifty cents ($0.50)
per share for a total cash of $100,000.
Ozark Capital, LLC and its affiliates hold over 10%
of the shares of the Company’s Common Stock as of September 30, 2022. Dividends paid to Ozark Capital, LLC were $2,800
and $2,800
for the three months ended September 30, 2022 and 2021, respectively and $8,279
and $5,753
for the nine months ended September 30, 2022 and 2021, respectively.
All
holders of the March 2021 Series A Convertible Preferred Stock, including Ozark Capital, LLC, have 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.
June
2022 Issuance - On June 15, 2022, the Company entered into a securities purchase agreement with an accredited investor providing
for an aggregate investment of $500,000 by
the investor for the issuance by the Company of (i) 5,000 shares
of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per
share (the “June 2022 Series A Convertible Preferred Stock”); 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 1,666,667 shares
of Common Stock at an exercise price of thirty cents ($0.30) per
share, subject to customary adjustments thereunder. The June 2022 Series A Convertible Preferred Stock is convertible into an
aggregate of up to 1,562,500 shares
of Common Stock. The holder 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 shares of Common Stock underlying the warrants 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 warrant. Net
proceeds from the issuance of the June 2022 Series A Convertible Preferred Stock totaled $.
The Company used the proceeds of the June 2022 Series A Convertible Preferred Stock offering to pay-off certain outstanding
convertible notes payable (see Note 4) 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 of the June 2022 Series A Preferred Stock, which occurred on June 15, 2022,
to register the shares of Common Stock underlying the warrants. 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 offering, which occurred on June 15, 2022.
The
holder of the June 2022 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the
investors’ ability to convert its June 2022 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 preferred dividends totaling $14,658 and $-0- relative to the June 2022 Series A Convertible Preferred Stock which
was charged to additional paid in capital during the nine months ended September 30, 2022 and 2021, respectively.
August/September
2022 Issuances – During August and September 2022, the Company entered into a securities purchase agreements with three
accredited investors providing for an aggregate investment of $145,000 by
the investors for the issuance by the Company of (i) 1,450 shares
of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per
share (the “August/September 2022 Series A Convertible Preferred Stock”); 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 483,332 shares
of Common Stock at an exercise price of thirty ($0.30) per
share, subject to customary adjustments thereunder. The August/September 2022 Series A Convertible Preferred Stock is convertible
into an aggregate of up to 453,125 shares
of Common Stock. The 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 shares of Common Stock underlying the warrants 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 warrant. Net
proceeds from the issuance of the August/September 2022 Series A Convertible Preferred Stock totaled $145,000.
The Company used the proceeds of the August/September 2022 Series A Convertible Preferred Stock offering to pay-off certain outstanding
convertible notes payable (see Note 4) and for general working capital purposes.
The
holders of the August/September 2022 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the
investors’ ability to convert its August/September 2022 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 preferred dividends totaling $1,403 and $-0- relative to the August/September 2022 Series A Convertible Preferred Stock which
was charged to additional paid in capital during the nine months ended September 30, 2022 and 2021, respectively.
Note
13 – Related Party Transactions
The
Company’s Previous Chief Operating Officer was a non-controlling member of Core. On April 1, 2021, we completed the acquisition
of the Properties, under the same terms of the Agreement which provided a purchase price of $900,000.
The Company raised approximately $2.05
million on March 26, 2021, through the issuance
of the March 2021 Series A Convertible Preferred Stock with detachable Common Stock purchase warrants. The funds raised pursuant to the
March 2021 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 the 3%
Notes and the issuance of the 3% Note Warrants as further described in Notes 4, 10 and 14. Total amounts due to the related party was
$-0-
as of September 30, 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 the 3% Notes and the issuance of the 3% Note Warrants as further described in Notes 4, 7 and 9. Total amounts due to the
officers and directors related to accrued compensation was $-0-
as of September 30, 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 Chief Financial Officer 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 the 3% Notes and the issuance of the 3% Note Warrants as further described in Notes 4, 7 and 9. Total amounts due to this
related party was $-0-
as of September 30, 2022 and December 31, 2021.
In
connection with the Hugoton Gas Field Farmout Agreement, John Loeffelbein, the Company’s previous Chief Operating Officer,
was granted a 3% carried interest through drilling in the Hugoton JV. Such carried interest was burdened only to the three other
partners in the Hugoton JV and not the Company’s interest. On
April 18, 2022, John Loeffelbein resigned from his position as Chief Operating Officer with the Company.
Note
14 – Subsequent Events
As
further described in Note 4 the Company has certain convertible notes payable that have matured and are in default as of September
30, 2022. In addition, certain notes matured on October 29, 2022 and were not repaid and therefore are currently in default status.
Following is the outstanding principal balance on matured convertible notes that are currently in default:
Schedule
of Outstanding Principal Balance on Matured Convertible Notes
| |
Amounts | |
Notes payable, in default: | |
| | |
Notes payable, in default | |
$ | 1,312,500 | |
8% convertible notes payable due October 29, 2022 | |
$ | 650,000 | |
8% Convertible promissory notes payable due September 15, 2022 | |
| 350,000 | |
8% Convertible promissory notes payable due June 29, 2022 | |
| 312,500 | |
| |
| | |
Notes payable, in default | |
$ | 1,312,500 | |
The
Company did not pay the principal balance due on these Convertible Notes upon their maturity, therefore the remaining balance remains
due and payable and is therefore in technical default. The parties are negotiating a forbearance/resolution to such technical defaults
which include several alternatives. Such negotiations include i) a reduction in the conversion price of the underlying convertible notes,
ii) an extension and a roll-over of the principal into other Company securities, and iii) a combination of the alternatives. The Company
can provide no assurance that the parties will reach a mutually agreeable resolution.
**********************