Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Principal
Market and Price Range of Common Stock
Shares of our Common Stock are traded on the OTCQB
Venture Tier Market (OTCQB) under the symbol “AMNI”. Prior to January 20, 2023, our Common Stock was quoted for trading on
the OTCQB under the symbol “IFNY”. The following table sets forth the high and low closing bid prices for AMGAS’s Common
Stock as reported by the OTCQB. The closing price of our Common Stock on May 11, 2023 was $0.05 per share. The quotations reflect interdealer
bid prices without retail markup, markdown or commission and may not represent actual transactions.
| Year Ended December 31, 2022 | |
High | | |
Low | |
| 1st Quarter | |
$ | 0.49 | | |
$ | 0.28 | |
| 2nd Quarter | |
$ | 0.61 | | |
$ | 0.25 | |
| 3rd Quarter | |
$ | 0.35 | | |
$ | 0.09 | |
| 4th Quarter | |
$ | 0.20 | | |
$ | 0.08 | |
| Year Ended December 31, 2021 | |
High | | |
Low | |
| 1st Quarter | |
$ | 0.40 | | |
$ | 0.09 | |
| 2nd Quarter | |
$ | 0.35 | | |
$ | 0.15 | |
| 3rd Quarter | |
$ | 0.35 | | |
$ | 0.21 | |
| 4th Quarter | |
$ | 0.69 | | |
$ | 0.28 | |
Holders
of Common Stock
At
December 31, 2022, there were approximately 161 stockholders of record of our Common Stock.
Dividend
Policy
Holders
of Common Stock are entitled to receive such dividends as may be declared by our Board. We have not declared or paid and do not anticipate
declaring or paying any dividends on our Common Stock in the near future. Any future determination as to the declaration and payment
of dividends will be at the discretion of our Board and will depend on then-existing conditions, including our financial condition, results
of operations, contractual restrictions, capital requirements, business prospects and such other factors as the board deems relevant.
Holders
of Series A Convertible Preferred Stock are entitled to receive the payment of 10% per annum cumulative dividends, in (i) cash, or (ii)
shares of Common Stock, based on the stated/liquidation value of the Series A Convertible Preferred Stock. The holders of such Series
A Convertible Preferred Stock earned dividends in 2022 of $231,619 and $174,449 in 2021.
Securities
Authorized for Issuance under Equity Compensation Plans
At
the Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved the 2021 Plan and we reserved 5,000,000 shares
of Common Stock for issuance under the 2021 Plan. At the Annual Meeting of Stockholders held on September 25, 2015, the stockholders
approved the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and we reserved 500,000 shares of Common Stock
for issuance under the 2015 Plan.
Under
the 2021 Plan and the 2015 Plan, both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors
and consultants. 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
and expire ten years after the date of grant. The Company has issued stock options and restricted stock awards that are outside of a
formal plan with terms similar to the 2021 Plan and 2015 Plan as described in this Annual Report on Form 10-K.
As
of December 31, 2022, an aggregate 5,500,000 shares were available for future grants under the 2021 Plan and the 2015 Plan. All other
Plans have now expired.
The
following table sets forth certain information regarding our stock option plans as of December 31, 2022:
| | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights | | |
Weighted-average exercise price of outstanding options, warrants and rights | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| Plan category | |
(a) | | |
(b) | | |
(c) | |
| Equity compensation plans approved by stockholders | |
| — | | |
$ | — | | |
| 5,500,000 | |
| Option grants not issued under a plan approved by stockholders | |
| 1,442,000 | | |
| 2.38 | | |
| n/a | |
| Total | |
| 1,442,000 | | |
$ | 2.38 | | |
| 5,500,000 | |
Recent
Issuances of Unregistered Securities
During
the last three (3) years, we have sold the following unregistered securities:
On
August 19, 2020, we entered into a securities purchase agreement (the “August Purchase Agreement”) with one investor (the
“August Investor”), pursuant to which we issued to the August Investor, in consideration for an aggregate of $325,000, (i)
a senior unsecured convertible note payable due August 19, 2021 (the “August Note”), which was, subject to certain conditions,
convertible into an aggregate of 3,943,820 shares of Common Stock, at a price of $0.10 per share; and (ii) a common stock purchase warrant
(the “August Warrant”), which is immediately exercisable upon issuance and on a cashless basis if the August Warrant has
not been registered 180 days after the date of issuance for up to 800,000 shares of Common Stock at an exercise price of $0.50 per share,
subject to customary adjustments. Pursuant to the August Purchase Agreement, the August Note and August Warrant were issued to the August
Investor in a private placement transaction pursuant to an exemption from the registration requirements of the Securities Act provided
in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder. Pursuant to the August Purchase Agreement, the August
Investor was also granted certain piggy-back registration rights, whereby we agreed to register the resale of the shares of Common Stock
underlying the August Warrant and the August Note. We repaid the August Note on March 26, 2021. On August 5, 2021, the Company has filed
a registration statement on Form 424B4 to register for resale all of the shares of Common Stock issuable upon exercise of the August
Warrant issued to the August Investor.
The
exercise of the August Warrant is subject to a beneficial ownership limitation such that the August Investor may not exercise the August
Warrant to the extent that such exercise would result in the August Investor being the beneficial owner in excess of 4.99% (or, upon
election of the August Investor, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock issuable upon such exercise, which beneficial ownership limitation may be increased or decreased up
to 9.99% upon notice to us, provided that any increase in such limitation will not be effective until 61 days following notice to us.
Additionally,
pursuant to the August Purchase Agreement, for so long as the August Note or August Warrant is outstanding, the August Investor has a
right to participate in any issuance of the Common Stock, Common Stock Equivalents (as defined in the August Purchase Agreement), conventional
debt, or a combination of such securities and/or debt (a “Subsequent Financing”), up to an amount equal to 35% of the Subsequent
Financing.
We
used the proceeds of the August Note to pay off $60,125 in principal balance of notes payable that were in default, to pay the $100,000
required by the SKM Exchange Agreement (as defined below) and for general working capital.
On
August 19, 2020, we granted certain of our executive officers, directors and affiliate thereof and consultant, outside of our existing
equity compensation plans, and pursuant to the August 2020 Restricted Stock Agreements, an aggregate of 5,000,000 shares of Common Stock,
subject to the restrictions contained therein, as compensation for their services to the Company. Such individuals were granted such
shares pursuant to the exemption provided by Section 4(a)(2) of the Securities Act.
On
September 24, 2020, we entered into an exchange and settlement agreement (the “SKM Exchange Agreement”) with SKM Partnership,
Ltd. (“SKM”), pursuant to which SKM agreed to exchange an 8% promissory note issued by us to SKM, dated as of December 27,
2013, in the original principal amount of $1,050,000, representing outstanding principal balance of $1,000,000 and accrued and unpaid
interest thereon of $481,000, for (i) a cash payment in the amount of $100,000 and (ii) 737,532 newly issued shares of Common Stock.
The issuance of the 737,532 shares is being made without any restrictive legends upon reliance on the exemptions from the registration
requirements of the Securities Act afforded by Section 3(a)(9) of the Securities Act and Rule 144 promulgated thereunder. The closing
of the exchange occurred on September 24, 2020.
On
March 26, 2021, we entered into securities purchase agreements (collectively, the “March Purchase Agreements”) with certain
investors (the “March Investors”), pursuant to which, in consideration for an aggregate of $2,050,000, we issued an aggregate
of 22,776 shares of Series A Preferred Stock and common stock purchase warrants (the “March Warrants”) exercisable for up
to 5,256,410 shares of Common Stock six (6) months following issuance and for five (5) years after such date. Holders of the March Warrants
may exercise them on a cashless basis pursuant to the formula provided in the March Warrants if there is not an effective registration
statement for the sale of the shares of Common Stock underlying the March Warrants within six (6) months following the Closing Date,
as defined in the March Warrants. Such securities were issued to March Investors in a private placement transaction pursuant to an exemption
from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities Act and/or Regulation D promulgated
thereunder.
In
connection with the March Purchase Agreement, we and the March Investors entered into that certain registration rights agreement (the
“Registration Rights Agreement”), pursuant to which we agreed to file a registration statement to register such shares of
Common Stock issuable upon conversion of the Series A Preferred Stock and such shares of Common Stock underlying the March Warrants.
In order to satisfy such obligations, on August 5, 2021, the Company filed a registration statement to register for resale all of the
Preferred Shares and Warrant Shares issuable upon conversion of the shares of Series A Preferred Stock and upon exercise of the March
Warrants issued to the March Investors.
The
closing of the private placement in connection with the March Purchase Agreements took place on March 26, 2021.
We
used the proceeds of the offering of the Series A Preferred Stock to complete the acquisition of the Properties and intend to use the
remaining proceeds to complete development of the Properties, to pay-off all outstanding convertible notes payable and for general working
capital.
On
March 31, 2021, we entered into entered into the Debt Settlement Agreements with six creditors of the Company (collectively, the “Creditors”),
pursuant to which the Creditors agreed to extinguish an aggregate of $2,866,497 of debt and liabilities of the Company owed to such Creditors
in consideration for the issuance to each Creditor of (i) an aggregate of approximately $28,665 in the 3% Notes , which are, subject
to certain conditions, convertible at any time at the option of the Creditors into an aggregate of 65,930 shares of Common Stock (including
accruable interest), at a price of $0.50 per share and (ii) common stock purchase warrants (the “Creditor Warrants”) which
are immediately exercisable for up to an aggregate of 5,732,994 shares of Common Stock and for five (5) years thereafter. We also granted
the Creditors certain piggy-back registration rights pursuant to the Notes and the Creditor Warrants, which were satisfied by the Company
filing the registration statement on Form 424B4 on August 5, 2021. Such securities were issued to the Creditors in a private placement
transaction pursuant to an exemption from the registration requirements of the Securities Act provided in Section 4(a)(2) of the Securities
Act.
The
3% Notes bear interest at a rate of 3% per annum, may be voluntarily repaid in cash in full or in part by us at any time in an amount
equal to the face amount plus any accrued and unpaid interest on the 3% Notes (or portion thereof) being prepaid, and mature on March
30, 2026.
On
April 1, 2021, the Company and the holder of a $50,000 outstanding convertible note (the “April 2021 Creditor #1”) entered
into a settlement agreement pursuant to which the Company issued to such holder 145,000 shares of Common Stock in consideration for the
extinguishment of the outstanding principal and accrued interest on such note and the cancellation of common stock purchase warrants
of the Company issued in connection with the issuance of such note. The 145,000 shares of Common Stock issued to such holder pursuant
to such settlement agreement were valued at $40,600 based on the closing market price of the Common Stock on the date of such extinguishment
and cancellation. Such securities were issued to the April 2021 Creditor #1 in a private placement transaction pursuant to an exemption
from the registration requirements of the Securities Act provided in Section 3(a)(9) of the Securities Act.
Also
on April 1, 2021, the Company and the holder of a $35,000 outstanding convertible note (the “April 2021 Creditor #2”) entered
into a settlement agreement pursuant to which the Company issued to such holder 100,000 shares of Common Stock in consideration for the
extinguishment of the outstanding principal and accrued interest on such note and the cancellation of common stock purchase warrants
of the Company issued in connection with the issuance of such note. The 100,000 shares of Common Stock issued to such holder pursuant
to such settlement agreement were valued at $28,000 based on the closing market price of the Common Stock on the date of such extinguishment
and cancellation. Such securities were issued to the April 2021 Creditor #2 in a private placement transaction pursuant to an exemption
from the registration requirements of the Securities Act provided in Section 3(a)(9) of the Securities Act.
On
June 4, 2021, our Board authorized the grant of stock options to purchase up to (i) 500,000 shares of Common Stock to Mr. Ross, (ii)
100,000 shares of Common Stock to Mr. Richie, (iii) 100,000 shares of Common Stock to Mr. Hutchins, (iv) 350,000 shares of Common Stock
to Mr. Loeffelbein, and (v) a total of 750,000 shares of Common Stock to three Company consultants. All such stock options vest on June
4, 2022, contingent upon the holder of such options continuing to serve the Company on such date, have 10-year terms and are exercisable
at $0.50 per share. Such individuals were granted such stock options pursuant to the exemption provided by Section 4(a)(2) of the Securities
Act in consideration for the time and efforts such individuals devoted to assisting the acquisition of the Properties and its drilling
program.
On
August 30, 2021, the Company entered into an agreement with an accredited investor (the “8% Note Investor”) for the Company’s
8% Note, with an aggregate principal face amount of $100,000. The 8% Note is, subject to certain conditions, convertible into an aggregate
of 200,000 shares of Common Stock, at a price of $0.50 per share. The Company also issued a five-and-one-half-year common stock purchase
warrant to purchase up to 200,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments (the
“8% Note Warrant”), which is 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. 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 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 120 days after the closing date of such transaction.
The
8% Note bears interest at a rate of 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 8% Note and any accrued and unpaid interest. 50% of the 8% Note shall be mandatorily
repaid in cash in an amount equal to 120% of the principal amount of the 8% 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 and 100% of the 8% Note, 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, so long as the 8% Note remains outstanding, the Company cannot enter into any financing transactions pursuant to which the Company
sells its securities at a price lower than $0.50 per share without written consent of the 8% Note Investor.
The
conversion of the 8% Note and the exercise of the 8% Note Warrant are each subject to its applicable beneficial ownership limitation.
The
8% Note and the 8% Note Warrant were issued to the 8% Note Investor pursuant to Section 4(a)(2) of the Securities Act, because the 8%
Note Investor represented that it had sufficient sophistication and knowledge of the Company, and the issuance did not involve any form
of general solicitation or general advertising. Furthermore, the 8% Note Investor made representations that the securities issued to
extinguish the obligations were taken for investment purposes and not with a view to resale.
On
October 29, 2021, the Company entered into a securities purchase agreement (the “November Purchase Agreement”) with three
additional accredited investors (the “November Investors”) for the Company’s Senior Unsecured Convertible Promissory
Notes due October 29, 2022 (the “November Notes”), with an aggregate principal face amount of $550,000. The November Notes
are, subject to certain conditions, convertible into 1,100,000 shares (the “November Conversion Shares”) of Common Stock,
at a price per share of $0.50 (“November Conversion Price”). Pursuant to the November Purchase Agreement, the Company also
issued a five-and-one-half-year common stock purchase warrant (the “November Warrant”) to purchase up to 1,650,000 shares
of Common Stock (the “November Warrant Shares” and collectively with the November Notes, the November Conversion Shares,
and the November Warrant, the “November Securities”) at an exercise price of $0.50 per share, subject to customary adjustments.
The November Investors purchased the November Securities for an aggregate purchase price of $850,000. The Company has also granted the
November Investors certain piggy-back registration rights whereby the Company has agreed to register the resale by the November Investors
of the November Warrant Shares and November Conversion Shares. The Company relied on the exemption from the registration requirements
of the Securities Act, provided in Section 4(a)(2) of the Securities Act.
The
November Notes bear interest at a rate of 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 November Note and any accrued
and unpaid interest, and shall be mandatorily repaid in cash in an amount equal to a) 50% of the then outstanding principal amount equal
to 120% of the principal amount of each November 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) 100% of the then outstanding principal amount equal to 120% of the principal amount of a November
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 November Notes, so long
as a November Note remains outstanding, the Company shall not enter into any financing transactions pursuant to which the Company sells
its securities at a price lower than the November Conversion Price, subject to certain adjustments, without written consent of the November
Investors.
The
conversion of the November Notes and the exercise of the November Warrants are each subject to Beneficial Ownership Limitation.
Pursuant
to the November Purchase Agreement, for a period of twelve (12) months after the Closing Date (as defined in the November Purchase Agreement),
the November Investors have a right to participate in Subsequent Financing, up to an amount equal to thirty-five percent (35%) of the
Subsequent Financing. The transaction completed by the November Purchase Agreement closed on November 1, 2021.
On
November 9, 2021, the Company entered into a USNG Letter Agreement, pursuant to which USNG will provide consulting services to the Company
for exploration, testing, refining, production, marketing and distribution of various potential reserves of noble gases and rare earth
element/minerals on the Properties. The USNG Letter Agreement would cover all of the noble gas, specifically helium, and rare earth elements/minerals
potentially existing on the Properties and the future acquisitions of the Company, if any.
The
USNG Letter Agreement required the Company to establish a four-member Board of Advisors, which will help attract both industry partners
and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region
where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers
and exploration and development companies from the energy industry. The financial partners may include large family offices or small
institutions.
The
Company also is required to pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and
sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that AMGAS receives cash receipts in
excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals.
In
consideration of the foregoing and pursuant to the terms of the USNG Letter Agreement, on November 9, 2021, the Company also issued warrants
(the “November 9 Warrants”), exercisable for five (5) years, to purchase, in the aggregate, 2,000,000 shares of Common Stock,
at an exercise price of $0.50 per share, subject to customary adjustments (the “November 9 Exercise Price”) to three of USNG’s
principal consultants. The Company also issued November 9 Warrants to purchase, in the aggregate, 1,200,000 shares of Common Stock at
the November 9 Exercise Price to the four members of the Board of Advisors and options to acquire 60,000 shares of Common Stock to various
support personnel at the November 9 Exercise Price. The Company therefore granted a total of 3,260,000 November 9 Warrants to purchase
its Common Stock for a price of approximately $1.6 million in connection with the USNG Letter Agreement and the arrangements described
therein. In issuing the November 9 Warrants, the Company relied on an exemption from registration under Section 4(a)(2) of the Securities
Act. Each holder of the November 9 Warrants has advised the Company that they are sophisticated and can bear the risks associated with
the November 9 Warrants, and the Company has not engaged in general solicitation in connection with the offer or sale of the November
9 Warrants.
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
note has matured and therefore the remaining unamortized discount relative to the June 2022 Notes was $-0- as of December 31, 2022.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $450,000 (including the June 2022 Note), which the Company did not pay by their maturity dates. The Company
and the holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging
the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon
issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes
payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to
$0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior
convertible notes payable.
In
May 2022 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.
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.
With
respect to the two May 2022 Notes with an aggregate outstanding principal balance of $312,500 as of December 31, 2022 the Company has
reached an agreement with the two Investors. On January 10, 2023, the Company amended each of those notes by entering into a letter agreement
between the Investors and the Company. The Letter Agreement
modifies the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the
extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided
in each of the notes.
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.
Item
6. [Reserved.]
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The
following information should be read in conjunction with the Financial Statements and Notes presented elsewhere in this Annual Report
on Form 10-K. See Note 1 – “Summary of Significant Accounting Policies,” to the Financial Statements for the
Years Ended December 31, 2022 and 2021.
Overview
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 we have 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, including the exploration for the existence of new oil
and gas zones and other mineral reserves, in particular, the noble gas reserves that the Properties may hold.
During the year ended December 31, 2022, the
Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production.
The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated
operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production
wells as of December 31, 2022 and is considering the deepening of the conventional wells on the property to explore for helium and other
noble gases that may be present in deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to
reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022.
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 and sales of natural gas,
natural gas liquids and helium on August 17, 2022. The Company is continuing to evaluate the initial flows of both natural gas,
natural gas liquids and helium to determine its plan for additional wells on the farmout.
The
Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project.
The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December
31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs
related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022.
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.
Name
Change and Reincorporation Matters
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, changing the Company’s name to American Noble Gas Inc. The
stockholders also approved an amendment to the Company’s Certificate of Incorporation, removing
the provision providing that any action taken by the stockholders by written consent in lieu of a meeting requires that all of the Company’s
stockholders entitled to vote on such action consent in writing thereto. Finally, the stockholders approved the 2021 Plan and we reserved 5,000,000 shares of the Company’s Common Stock, par value
$0.0001 per share (the “Common Stock”) for issuance under the 2021 Plan.
Reincorporation
in Nevada
On
December 7, 2021, pursuant to the 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’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 the Predecessor’s common stock automatically converted into
one share of Common Stock of AMGAS-Nevada, (ii) each outstanding share of the predecessor’s Series A Convertible Preferred Stock
automatically converted into one share of Series A Convertible Preferred Stock, par value $0.0001 per share, of AMGAS-Nevada (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 common stock of the Predecessor prior to the merger, the shares of Common Stock were 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 immediately prior to the merger became the directors
and officers of AMGAS-Nevada and continued their respective directorship or services with the Company on the same terms as their respective
directorship or services with the predecessor immediately prior to the merger.
As
a result of the merger, the internal affairs of the Company ceased to be subject to the Delaware General Corporation Law or governed
by the predecessor’s Certificate of Incorporation, as amended, and its bylaws. As of December 7, 2021, effective date of the merger,
the Company is now subject to the Nevada Revised Statutes and is governed by the Company’s Articles of Incorporation as filed in
the State of Nevada and the Company’s Bylaws.
All
references to the Company in this Annual Report on Form 10-K refer to the predecessor prior to the merger, and AMGAS-Nevada subsequent
to the merger.
2023
Operational and Financial Objectives
COVID–19
PANDEMIC
The
financial statements contained in this Annual Report on Form 10-K 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 year ended December
31, 2022. Economies throughout the world have been and 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 adversely impacted by the effects of the COVID-19 pandemic because of the substantial and abrupt decrease in the demand
for oil and gas globally followed by the recent resurgence in oil and natural gas prices. In addition, the capital markets have experienced
periods of disruption and our efforts to raise necessary capital in the future may be adversely impacted by the continuing effects of
the COVID-19 pandemic and investor sentiment and we cannot forecast with any certainty when the lingering uncertainty caused by the COVID-19
pandemic will cease to impact our business and the results of our operations. In reading this Annual Report on Form 10-K, including our
discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused
by the COVID-19 pandemic.
Corporate
Activities
The
Company’s 2023 operating objectives are focused on: 1) raising the necessary funds to finance exploration and development of the
Hugoton Gas Field through the Hugoton JV, 2) raising the necessary funds for repayment of obligations that become due, or are in default and/or
past due, 3) raising the funds necessary to explore and develop the Properties, including testing and evaluation of noble gas reserves
in additional to the oil and gas producing zones, 4) raising the funds necessary to allow the Company to compete for new oil and gas
properties that become available for acquisition purposes, and 5) funding our daily operations and the repayment of other obligations
that become due, or are in default and/or past due.
Recent
financings –
Issuance
of Series B Convertible Preferred Stock
May 2023 Issuance - On May 4, 2023, the Company
entered into a securities purchase agreement with three (3) accredited investors providing for an aggregate investment of $750,000 by
the investors for the issuance by the Company to them of (i) 7,500 shares of Series B Convertible Preferred Stock with a stated/liquidation
value of $100 per share (the “May 2023 Series B 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 15,000,000 shares of Common Stock at
an exercise price of five ($0.05) cents per share, subject to customary adjustments thereunder. The 7,500 shares of May 2023 Series B
Convertible Preferred Stock are convertible into an aggregate of up to 15,000,000 shares of Common Stock. Holders of the warrants may
exercise the warrants 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. The Company intends to use the proceeds of the May 2023
Series B Convertible Preferred Stock offering for development of Hugoton Gas Field and Central Kansas Uplift Properties 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 May 2023 Series B Convertible Preferred Stock transaction, to register the shares of Common Stock
issuable upon the conversion of the May 2023 Series B Convertible Preferred Stock and the 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
issuance of the May 2023 Series B Convertible Preferred Stock.
On May 5, 2022, Ozark Capital, LLC (“Ozark”)
acquired 2,500 shares of Series B Preferred Stock (convertible into 5,000,000 shares of Common Stock), together with warrants to acquire
5,000,000 shares of Common Stock at five cents ($0.05) per share for a total cash contribution of $250,000. Ozark and its affiliates hold
over 10% of the shares of the Company’s Common Stock as of December 31, 2022. Accrued dividends on the Class A Convertible Preferred
Stock attributable to Ozark were $11,080 and $8,523 for the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $5,601 and $ — relative to Ozark’s Series A Preferred Stock as of December
31, 2022 and 2021, respectively.
Issuances
of Series A Convertible Preferred Stock
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 preferred dividends totaling $199,300 and $174,449 relative to the March 2021 Series A Convertible Preferred Stock
which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $44,805 and $ — relative to the March 2021 Series A Convertible Preferred Stock
as of December 31, 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 year ended December 31, 2022. The holders exercised their
rights to convert a total of 700 shares of March 2021 Series A Convertible Preferred Stock into 218,750 shares of Common Stock during
the year ended December 31, 2021.
On
March 26, 2021, Ozark 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 and its affiliates hold over 10% of the shares of the Company’s Common Stock as of December
31, 2022. Accrued dividends attributable to Ozark were $11,080 and $8,523 for the years ended December 31, 2022 and 2021
respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $2,800 and $ — relative to the Ozark’s Series A Convertible Preferred Stock as of December 31, 2022 and 2021, respectively.
The holders converted a total of 3,000 and 700 shares
of Series A Preferred Stock into common stock during the years ended December 31, 2022 and 2021, respectively.
All
holders of the March 2021 Series A Convertible Preferred Stock, including Ozark, 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 $500,000. The Company used the proceeds of the June 2022 Series A Convertible Preferred Stock offering
to pay-off certain outstanding convertible notes payable 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
holders 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 $27,260 and $-0- relative to the June 2022 Series A Convertible Preferred Stock which
was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $27,260 and $ — relative to the June 2022 Series A Convertible Preferred Stock
as of December 31, 2022 and 2021, respectively.
There were no conversions during the years ended December
31, 2022 and 2021.
August/September
2022 Issuances – During August and September 2022, the Company entered into a securities purchase agreement 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 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 $5,059 and $-0- relative to the August/September 2022 Series A Convertible Preferred
Stock which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has
outstanding accrued and unpaid preferred dividends totaling $5,059 and $ — relative to the August/September 2022 Series A Convertible
Preferred Stock as of December 31, 2022 and 2021, respectively.
There were no conversions during the years ended December
31, 2022 and 2021.
Issuances
of Convertible Notes Payable
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 payable due September 15, 2022 (the “June 2022 Note”), with an aggregate principal face amount
of approximately $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 did not pay the principal balance due on the June 2022 Note upon its maturity on September 15, 2022 and the remaining
balance remains due and payable and is therefore in technical default as of December 31, 2022.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate
principal face amount of approximately $450,000 (including the June 2022 Note), which the Company did not pay by their maturity
dates. The Company and the holder of the two convertible notes payable entered into a new convertible promissory note (the
“New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a
maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the
repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of
the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New
Note are the same as those of the prior convertible notes payable.
8%
Convertible Notes Payable due June 29, 2022 (in default) - The Company entered into a securities purchase agreement with two accredited
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 was 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. With
respect to the two May 2022 Notes with an aggregate outstanding principal balance of $312,500 as of December 31, 2022 the Company
has reached an agreement with the two investors. On January 10, 2023, the Company amended each of those notes by entering into a
letter agreement between the investors and the Company. The Letter Agreement modifies the terms of the May 2022 Notes by extending
each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed
Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
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 payable 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%
Notes 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 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 as of December 31, 2022. With respect to the two October 8%
Notes with an outstanding aggregate principal balance of $550,000 as of December 31, 2022, the Company has reached an agreement with the
two October 8% Note Investors. On January 10, 2023, the Company amended each of these October 8% Notes by entering into Letter Agreement
between the October 8% Investors and the Company. The Letter Agreement modifies the terms of the October 8% Notes by extending
each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion
Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
On May 5, 2023, the Company reached
an agreement with
the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000 (including
$100,000 principal balance of the notes payable due October 29, 2022 and $350,000 principal balance of the note payable due
September 15, 2022), which the Company did not pay by their maturity dates. The Company and the holder of the two convertible
notes payable entered into the New Note, exchanging the outstanding principal amount of the old convertible notes payable into the
New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were
cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The
conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other
significant terms of the New Note are the same as those of the prior convertible notes payable.
3%
Convertible Notes Payable due March 31, 2026 - 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 holder, into shares of the Common
Stock at any time after the issue date and prior to the close of business on the business day preceding the Maturity Date at the rate
of fifty cents ($0.50) per share, subject to normal and customary adjustments. The 3% Note Warrants were valued at $1,605,178 using the
Black-Scholes methodology.
Extinguishment
of liabilities –
Debt
Settlement Agreements - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of
which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance
of $28,665 in principal balance of the 3% Notes with detachable warrants to purchase 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 the Maturity Date. The 3% Notes are convertible
as to principal and any accrued interest, at the option of holder of the 3% Notes, into shares of the Common Stock at any time after
the issue date and prior to the close of business on the business day preceding March 30, 2026 at the rate of fifty cents ($0.50) per
share, subject to normal and customary adjustment. The 3% Note Warrants were valued at $1,605,178 using the Black-Scholes methodology.
Extinguishment
of Convertible Note Payable - On March 26, 2021, the Company exercised its right to retire a convertible note payable originally
issued in August 2020 (the “August 2020 Note”) in conjunction with the issuance of the March 2021 Series A Convertible Preferred
Stock. In accordance with the prepayment provisions contained in the August 2020 Note, the Company paid $453,539 to retire all principal,
accrued interest and the 15% prepayment premium.
Extinguishment
of Notes Payable – On April 1, 2021, the Company and the 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 extinguishment of the debt obligations resulted in a gain of $55,230, which was recorded in the year ended December 31, 2021.
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-care 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 helium, and rare earth elements/minerals potentially existing on the Properties and the Company’s future acquisitions,
if any, including the Hugoton Gas Field.
The
USNG Letter Agreement also provided that USNG would supply a large vessel designed for flows up to 5,000 barrels of water per day at
low pressures, known as a gas extraction/separator unit. The gas extraction/separator unit is a dewatering vessel that the Company may
use for multiple wells in the future.
The
USNG Letter Agreement required the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised
of various experts in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and
financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region
where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers
and exploration and development companies from the energy industry. The financial partners may include large family offices or small
institutions.
Pursuant
to the USNG Letter Agreement, the Company will pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals
production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that 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
through December 31, 2022.
The
USNG Letter Agreement has an initial term of 5 years, which shall thereafter continue for successive one-year periods, provided that
there is no uncured breach, unless otherwise terminated by either party upon a written notice of intent to non-renew.
In
consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants
to purchase, in the aggregate, 2,060,000 shares of Common Stock, at an exercise price of fifty ($0.50) to three of USNG’s principal
consultants and four third-party service providers. The Company also issued warrants to purchase, in the aggregate, 1,200,000 shares
of Common Stock at 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.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on our financial
conditions, changes in our financial conditions, or our results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses except as follows:
Investment
in Unconsolidated Subsidiary – 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 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.
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.
For
the Years Ended December 31, 2022 and 2021
Results
of Operations
Revenue
The
Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1,
2021. Revenues totaled $117,125 and $79,002 for the years ended December 31, 2022 and 2021, respectively. The $38,123 or 48%
increase in revenues during the year ended December 31, 2022 as compared to the same period in 2021 reflects the commencement of
natural gas and helium sales from the initial Hugoton Gas Field which was connected to the pipeline on August 17, 2022 as well as
the timing of the purchase of the Properties. The Company expects its revenues to continue to improve as the price of WTI crude oil
remains strong and the Company increases the volume of natural gas and helium gas sold as it continues its drill and complete wells
pursuant to its Hugoton Gas Field participation agreement.
During
the year ended December 31, 2022, our revenue was substantially impacted by inflation, the COVID-19 pandemic and the Russian war in Ukraine,
which has restricted the world supply of oil and gas and thereby increased the average WTI crude oil price. We expect this trend to continue
during 2023 and perhaps beyond.
Oil
and Gas Lease Operating Expenses
The
Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1,
2021. Total oil and gas lease operating expenses totaled $279,067 and $530,118 for the years ended December 31, 2022 and 2021,
respectively. The decrease in oil and gas lease operating expenses during the year ended December 31, 2022 as compared to the same
period in 2021 is attributable to significant repairs and rework performed in the year ended December 31, 2022 that did not recur
during the year ended December 31, 2021.
Upon
completion of our acquisition of the Properties on April 1, 2021, we commenced rework of the existing production wells on the Properties
in order to restore the three producing wells to full operational condition. All such rework costs were expensed as routine maintenance
instead of capitalized to oil and gas properties and equipment under the full-cost method. In addition, we have performed certain exploration,
including testing and evaluation for the existence of noble gas reserves on the Properties, including helium, argon and other rare earth
minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company
has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing
oil and gas reserves on the Properties while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves
and specifically the noble gas reserves that the Properties may hold.
During
the year ended December 31, 2022, our oil and gas lease operating expenses have been substantially impacted by inflation, the COVID-19
pandemic and the Russian war in Ukraine, which has restricted the supply of production pipe and other materials used in the drilling
and rework of oil and gas wells. In addition, experienced oil and gas service professionals have been in high demand in the oil and gas
service sector and thereby increasing the cost of oil and gas well services. We expect this trend to continue during the 2023 and perhaps
beyond.
Depreciation,
Depletion and Impairment
Depreciation, depletion and amortization expense totaled
$1,035,827 and $92,502 during the years ended December 31, 2022 and 2021, respectively. Depreciation and depletion expenses were $130,253 and $92,502 for the years
ended December 31, 2022 and 2021, respectively. Impairment charges totaled $905,574 and $— for the years ended December 31, 2022
and 2021, respectively.
The Company began generating revenues from the production
and sale of natural gas and helium from the Hugoton Gas Field on August 17, 2022 and crude oil since the acquisition of the Properties
on April 1, 2021, which was acquired for $900,000 cash plus the assumption of asset retirement obligations of $13,425. The Company allocated
the purchase price of $913,425 to oil and gas properties and equipment, which is subject to depreciation, depletion and amortization as
the acquisition qualified as an asset acquisition. The Company began generating revenues from the production and sale of natural gas and
helium from the Hugoton Gas Field on August 17, 2022, which also marked the beginning of the related depreciation, depletion and amortization.
During the year ended December 31, 2022, the Company
changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production.
The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated
operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production
wells as of December 31, 2022 and is considering the deepening of the conventional wells on the property to explore for helium and other
noble gases that may be present in deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to
reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022.
The Company performed the ceiling test to assess
potential impairment of the capitalized costs relative to its Hugoton Gas Field Project. The ceiling test indicated an impairment charge
of $192,762 was required to reduce the total capitalized costs to $88,687 as of December 31, 2022. Accordingly, the Company has recorded
an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs related to its Hugoton Gas Field properties
to $88,687 as of December 31, 2022.
Accretion
of Asset Retirement Obligation
Total
expense for the accretion of asset retirement obligations was $2,222 and $836 for the years ended December 31, 2022 and 2021, respectively.
The Company determined the amount of the asset retirement obligation assumed to be $13,425 as of April 1, 2021, the date of the acquisition
of the Properties. In addition, the Company commenced production from the Hugoton Gas Field well which began the accretion of
its related asset retirement obligations. The obligation relates to legal requirements associated with the retirement of long-lived assets
that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement
to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.
Oil
and Gas Production Related Taxes
Oil and gas production related taxes totaled $164
and $1,060 for the years ended December 31, 2022 and 2021, respectively. Such taxes are deducted from gross oil and gas revenue by the
crude oil purchaser upon payment to the Company and include primarily severance taxes imposed by the State of Kansas, and Kansas conservation
assessment fees. Revenues totaled $117,125 for the year ended December 31, 2022, which resulted in the deduction of $164 in production
related taxes. Revenues totaled $79,002 for the year ended December 31, 2021, which resulted in the deduction of $1,060 in production
related taxes primarily due to severance taxes paid in 2021. During the year ended December 31, 2021, the Company received a notice from
the State of Kansas that exempted the Company from paying severance taxes due to the existing wells’ production levels. Therefore,
production related taxes declined as a percentage of revenue during the year ended December 31, 2022 as compared to the same period in
2021.
Other
General and Administrative Expenses
Other
general and administrative expenses were $1,500,504 for the year ended December 31, 2022, an increase of $463,508, or 45%, from other
general and administrative expenses of $1,036,996 for the year ended December 31, 2021. The increase in other general and administrative
expenses is primarily attributable to an increase of $549,561 in stock-based compensation due to the noncash compensation awarded to
the Company’s executives, members of the Board of Directors, the USNG Letter Agreement, which awarded compensatory warrants to advisory
members of the Board of Advisors and other consultants in 2022 and in late 2021. The increase in stock-based compensation was offset
by a $75,000 charge-off of one option to acquire a property during the year ended December 31, 2021 that did not recur in the comparable
period in 2022.
Equity
in earnings of unconsolidated subsidiary – GMDOC
The
Company reported equity in earnings of unconsolidated subsidiary of $251,461 for the year ended December 31, 2022, compared to $-0- for
the year ended December 31, 2021. Such income resulted from the Company acquiring a 60.7143% membership interest in GMDOC in May 2022.
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.
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 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, LLC generated
$414,171 of net income on $2,397,406 of oil and gas revenues during the year ended December 31, 2022. The Company owns a 60.7143% membership
interest in such net income or $251,461 which it has reported as equity in earnings of unconsolidated subsidiary – GMDOC during
the year ended December 31, 2022.
Interest
Expense
Interest
expense increased to $913,608 for the year ended December 31, 2022, compared to $108,052 for the year ended December 31, 2021. The
increase in interest expense during the year ended December 31, 2022 was attributable to $218,680 of default interest accrued on the
convertible notes that were in default at December 31, 2022. Management believes that it will be able to negotiate the waiver of
such default interest when it negotiates amendments to the notes in default during 2023. In addition the increase was attributable
to the issuance of the various convertible notes payable issued in 2022 and in 2021 that were outstanding during the year ended
December 31, 2022 and not outstanding during the year ended December 31, 2021.
Gain
on Extinguishment of Liabilities
The
Company reported a gain on exchange and extinguishment of liabilities of $-0- and $86,602 in the years ended December 31, 2022 and 2021,
respectively.
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 year ended December 31, 2021.
On
March 31, 2021, the Company recorded a net gain on extinguishment of liabilities totaling $31,372, which was attributable to six transactions
that extinguished outstanding liabilities as of that date. The Debt Settlement Agreements extinguished accounts payable and accrued liabilities
with a total outstanding balance of $2,866,497, for the issuance of $28,665 in principal balance of the 3% Notes. Such 3% Notes were
issued with the 3% Warrants, which were valued at $1,605,178. The transaction resulted in a total gain of $1,232,654 of which $124,177
was reported as a gain on extinguishment of liabilities and $1,108,477 was reported as a capital contribution during the year ended December
31, 2021. The $23,000 gain from settlement of litigation extinguished $33,000 of trade payables for a cash payment of $10,000. The loss
of $115,805 is related to the early retirement of $365,169 principal balance of the August 2020 Note. There were no similar transactions
during the year ended December 31, 2022.
Change
in Warrant Derivative Fair Value
The
change in warrant derivative liability was an expense of $577,269 during the year ended December 31, 2022, as compared to a gain of
$199 during the year ended December 31, 2021. The estimated fair value of the Company’s derivative liabilities, all of which
were related to the detachable warrants issued in connection with the issuance of Series A Convertible Preferred Stock, were
estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments,
estimated volatility of the price of the Company’s common stock and current interest rates. The detachable warrants issued in
connection with the issuance of certain Series A Convertible Preferred Stock contained a provision allowing the holder to require cash settlement in certain situations were fundamental
transaction, as defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the
Holder’s ability to utilize such provisions, therefore the derivative liability was recognized on December 31, 2022.
The
conversion feature in certain outstanding notes payable and Common Stock purchase warrants issued in connection with short-term notes
outstanding during the year ended December 31, 2021 were treated as derivative instruments because such notes payable and warrants contained
ratchet and anti-dilution provisions. The mark-to-market process resulted in a gain of $199 during the year ended December 31, 2021.
There were no similar derivatives outstanding during the year ended December 31, 2022. All short-term notes and their related derivative
warrants were terminated on April 1, 2021.
Income
Tax
The
Company recorded no income tax benefit (expense) in the years ended December 31, 2022 and 2021. The Company has been in a cumulative
tax loss position and has substantial net operating loss carryforwards available for its utilization at December 31, 2022. The Company
has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense or benefit on its income
(loss) before income taxes during the years ended December 31, 2022 and 2021.
Net
Loss
The
Company reported a net loss of $3,940,075 for the year ended December 31, 2022, compared to a net loss of $1,603,761 for the year
ended December 31, 2021. This represents an increase in net loss of $2,336,314 for the year December 31, 2022 compared to the year
ended December 31, 2021.
Series
A Convertible Preferred Stock Dividends
The
Company recorded $231,619 and $174,449 in convertible preferred stock dividends in the years ended December 31, 2022 and 2021, respectively.
On March 26, 2021, the Company issued and classified its Series A Convertible Preferred Stock as equity securities on its balance sheet.
During 2022, the Company issued additional shares of Series A Convertible Preferred Stock, therefore, there were more shares of Series
A Convertible Preferred Stock outstanding during the year ended December 31, 2022 as compared to the year ended December 31, 2021. All shares
of Series A Convertible Preferred Stock bear a cumulative dividend at a 10% rate based on its stated/liquidation value.
Net
Loss Applicable to Common Stockholders
The
Series A Convertible Preferred Stock issued in 2022 and 2021 have dividend and/or distribution preferences over our Common Stock
and, therefore, such accrued dividend amounts have been deducted from net loss to report net loss applicable to common stockholders
of $4,171,694 and $1,778,210 for the years ended December 31, 2022 and 2021, respectively.
Basic
and Diluted Net Loss Attributable to Common Stockholders per Share
Basic
net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the
weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss attributable to common stockholders
per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common
Stock and dilutive Common Stock Equivalents outstanding during the period. Common Stock Equivalents included in the diluted net loss
attributable to common stockholders per share computation represent shares of Common Stock issuable upon the assumed conversion of convertible
notes payable, Series A Convertible Preferred Stock and the assumed exercise of stock options and warrants using the treasury stock and
“if converted” method. For periods in which net losses attributable to common stockholders are incurred, weighted average
shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of Common Stock Equivalents would
have an anti-dilutive effect.
The
Company incurred a net loss attributable to common stockholders during the year ended December 31, 2022, and 2021, therefore all Common
Stock Equivalents were considered anti-dilutive and excluded from diluted net loss attributable to common stockholders per share computations.
The basic and diluted net loss attributable to common stockholders per share were $(0.20) and $(0.09) for the years ended December 31,
2022 and 2021, respectively.
Potential
Common Stock Equivalents as of December 31, 2022 totaled 32,688,238 shares of Common Stock, which included 2,838,580 shares of Common
Stock underlying the convertible notes payable, 7,976,875 shares of Common Stock underlying the conversion of Series A Convertible Preferred
Stock, 20,430,783 shares of Common Stock underlying outstanding warrants and 1,442,000 shares of Common Stock underlying outstanding
stock options.
Liquidity
and Capital Resources; Going Concern–
We have had a history of losses and have generated
little or no operating revenues for a number of years. In 2020, we began assessing various opportunities and strategic alternatives involving
the acquisition, exploration and development of gas and oil properties in the United States, including the possibility of acquiring businesses
or assets that provide support services for the production of oil and gas in the United States. As a result, we: 1) acquired the Properties,
2) entered into the Hugoton JV and 3) entered into the GMDOC venture.
The
planned development of the development projects previously identified will require us to raise additional capital to accomplish our operating
plan, which cannot be assured. Historically, we financed our operations through the issuance of equity and various short and long-term
debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation.
Capital
Raised
Historically,
we have raised funds through various equity and debt instruments through private transactions. The following summarizes the sources of
significant liquidity raised during the years ended December 31, 2022 and 2021:
| | |
Year ended December 31, 2022 | |
| Capital raised: | |
| | |
| Issuance of convertible notes payable together with the issuance of 425,000 shares of Common Stock | |
$ | 850,000 | |
| Issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants | |
| 645,000 | |
| Issuance of convertible notes payable with detachable Common Stock purchase warrants | |
| 350,000 | |
| | |
| | |
| Total capital raised | |
$ | 1,845,000 | |
| | |
Year ended
December 31, 2021 | |
| Capital raised: | |
| | |
| Issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants | |
$ | 1,929,089 | |
| Issuance of convertible notes payable with detachable Common Stock purchase warrants | |
| 650,000 | |
| | |
| | |
| Total capital raised | |
$ | 2,579,089 | |
The
Company was able to raise liquidity during 2022 and 2021 through the issuance of debt and equity in private transactions with accredited
investors. These financial instruments generally require the Company to register the Common Stock underlying the conversion of the Series
A Convertible Preferred Stock, the Common Stock purchase warrants and the convertible notes payable. These issuances generally provide
the holders with a right to participate in future capital raises and require their approval for the future issuance of securities at
rates less than their purchase price. The holders have also agreed that the conversion of the Series A Convertible Preferred Stock, the
convertible notes payable and the exercise of the underlying warrants are generally subject to beneficial ownership limitations such
that each holder of the financial instruments individually may not convert the underlying Series A Convertible Preferred Stock, convertible
notes payable or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the holders individually
being the beneficial owner in excess of 4.99% (or, upon election of the holders, 9.99%) of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial
ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation
will not be effective until 61 days following notice to the Company.
We
will likely continue to issue such convertible notes payable with detachable warrants to acquire Common Stock to fund our operational
and capital expenditure plans for 2023.
Capital
Expenditures
As
of December 31, 2022, we had: 1) acquired the Properties, 2) entered into the Hugoton JV and 3) entered into the GMDOC venture as more
fully described elsewhere in this Annual Report on Form 10-K.
Going
Concern
The
Company has incurred losses from operations, has a stockholders’ deficit, incurred net cash used in operating activities and
has a significant working capital deficit as of and for the years ended December 31, 2022 and 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. 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. These are substantial operational and financial issues that must be successfully addressed during 2023 and
beyond.
The
Company has made substantial progress in resolving many of its existing financial obligations during the years ended December 31, 2022
and 2021.
The
Company will have significant financial commitments to execute its planned exploration and development of the Properties and the Hugoton
Gas Field. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development
activities and may seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and
a carried interest in exploration and development operations or other joint venture arrangement. There can be no assurance that it will
be able to obtain such new funding or be able to reach agreements with industry operators and other third parties or on what terms.
Due
to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The financial statements do not include
any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going concern.
Cash
and cash equivalents balances-
As
of December 31, 2022, we had cash and cash equivalents with an aggregate balance of $10,163, a decrease from a balance of $260,590 as
of December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of
the $250,427 net decrease in cash during the year ended December 31, 2022:
| |
● |
Operating
activities: |
$249,841
of net cash used in operating activities. Net cash used in operating activities was $249,841 and $801,553 for the years
ended December 31, 2022 and 2021, respectively, an improvement in net cash used in operating activities of $551,712. The improvement
in net cash used in operating activities was primarily the result of an increase in non-cash expenses including the change in warrant
derivative liability, discount amortization on debt and stock-based compensation, the impairment charge to oil and gas properties, an increase in accounts payable and accrued
interest reflected in our cash flows from operating activities for the year ended December 31, 2022 compared to the same period in
2021. |
| |
|
|
|
| |
● |
Investing
activities: |
$1,153,591
of net cash used in investing activities. Cash used in investing activities was $1,153,591 for the year ended December
31, 2022 compared to $900,000 for the year ended December 31, 2021. We utilized funds during 2022 to acquire our membership interest
in GMDOC and to drill the initial exploratory well pursuant to the Hugoton Gas Field participation agreement. We utilized funds during
2021 to acquire the Properties. |
| |
|
|
|
| |
● |
Financing
activities: |
$1,153,005
of net cash provided by financing activities. Cash provided by financing activities for the year ended December 31, 2022
was $1,153,005 compared to cash provided by financing activities of $1,951,101 for the year ended December 31, 2021. We raised a
total of $1,200,000 from the issuance of convertible notes payable and $645,000 from the issuance of Series A Convertible Preferred
Stock with detachable warrants during the year ended December 31, 2022. These financing cash inflows were offset by the repayment
of $537,500 principal balance of convertible notes payable and the payment of dividends totaling $154,495 on the Series A Convertible
Preferred Stock during the year ended December 31, 2022. The Company raised $1,929,089 through the issuance of Series A Convertible
Preferred Stock and $650,000 in convertible notes payable, which was offset by the repayment of $453,539 principal balance of convertible
debt and the payment of dividends totaling $174,449 on the Series A Convertible Preferred Stock during the year ended December 31,
2021. |
The
net result of these activities was a $250,427 decrease in cash and cash equivalents from $260,590 as of December 31, 2021 to $10,163
as of December 31, 2022.
Commitments:
Capital
Expenditures. We had no material commitments for capital expenditures at December 31, 2022. However, we are required by the Hugoton
Gas Field Farmout Agreement to drill at least three additional gas production wells in 2023 and 2024 in order to maintain the Hugoton JV. We drilled and completed the first Hugoton Gas Field production well in May 2022, which was connected to the pipeline and
commenced production on August 17, 2022. We estimate that the expenses related to the drilling program to be approximately $300,000 for
drilling and completion of each additional exploratory well.
Repayment
of Debt. Debt obligations are comprised of the following at December 31, 2022:
| | |
December 31, 2022 | |
| Convertible notes payable: | |
| | |
| | |
| | |
| 8% convertible notes payable due October 29, 2022 (in default) | |
$ | 650,000 | |
| 8% convertible notes payable due September 15, 2022 (the June 2022 Note) (in default) | |
| 350,000 | |
| 8% convertible notes payable due June 29, 2022 (the May 2022 Notes) (in default) | |
| 312,500 | |
| 3% convertible notes payable (the 3% Notes) | |
| 28,665 | |
| | |
| | |
| Total convertible notes payable | |
| 1,341,165 | |
| Less: Long-term portion | |
| 28,665 | |
| Convertible notes payable, short-term | |
$ | 1,312,500 | |
Debt
obligations become due and payable as follows:
| Years ended | |
Principal balance due | |
| | |
| |
| 2023 | |
$ | 1,312,500 | |
| 2024 | |
| — | |
| 2025 | |
| — | |
| 2026 | |
| 28,665 | |
| 2027 | |
| — | |
| 2028 | |
| — | |
| Total | |
$ | 1,341,165 | |
With respect
to two of the 8% convertible notes payable due October 29, 2022 with an outstanding aggregate
principal balance of $500,000 as of December 31, 2022, the Company has reached an agreement with the two Investors. On January 10, 2023,
the Company amended each of those notes by entering into a letter agreement between the Investors and the Company. The Letter
Agreement modifies the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration
for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments
as provided in each of the notes.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $450,000 (including $100,000 principal balance of the notes payable due October 29, 2022 and $350,000 principal
balance of the note payable due September 15, 2022), which the Company did not pay by their maturity dates. The Company and the
holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the
outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon
issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes
payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to
$0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior
convertible notes payable.
With respect
to the 8% convertible notes payable due June 29, 2022 with an outstanding aggregate principal
balance of $312,500 as of December 31, 2022, the Company has reached an agreement with the two Investors. On January 10, 2023, the Company
amended each of those notes by entering into a letter agreement between the Investors and the Company. The Letter Agreement modifies
the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension,
the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each
of the notes.
With respect to the other
notes that were not amended or exchanged on January 10, 2023 and May 5, 2023, 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.
Open
Litigation.
The nature of
the Company’s business exposes its properties, the Company, the Hugoton JV and its interest in GMDOC to the risk of claims and litigation
in the normal course of business. Other than as noted above in Part I, Item 3 of this Annual Report on Form 10-K, in our Notes to the
Financial Statements or routine litigation arising out of the ordinary course of business, the Company is not presently subject to any
material litigation nor, to its knowledge, is any material litigation threatened against the Company.
Contractual
Obligations
USNG
Letter Agreement - Pursuant to the USNG Letter Agreement, the Company is required to pay USNG a $8,000 monthly cash fee beginning
at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due
and payable for any month that 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 through December 31, 2022.
Farmout
Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field - On
April 4, 2022, the Company acquired a 40% interest in a Farm-Out Agreement by and between Sunflower Exploration, LLC 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 Farmout Agreement covers drilling and completion of up to 50 wells and the Company has joined three other entities 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 Farm-Out Agreement.
The
Hugoton JV will utilize Scout Energy Partner’s existing infrastructure assets, including water disposal, gas gathering and
helium processing. In addition, 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, located in Grant County, Kansas, which will enable the Hugoton JV to market and sell
the helium produced at prevailing market prices. The first exploratory well was completed and commenced production and sales of
natural gas, natural gas liquids and helium on August 17, 2022 near Garden City, Kansas, The Company is continuing
to evaluate the initial flows of both natural gas, natural gas liquids and helium to determine its plan for additional wells on the farmout.
Inflation
and Seasonality
Inflation
in general has had a material effect on us during the year ended December 31, 2022 and we do believe that inflation will continue
to significantly impact our business during 2023 and perhaps beyond. We do not believe that our business is seasonal in nature.
In
addition, our oil and gas lease operating expenses have been substantially impacted by the COVID-19 pandemic and the Russian war in Ukraine,
which has restricted the supply of production pipe and other materials used in the drilling and rework of oil and gas wells. In addition,
experienced oil and gas service professionals have been in high demand in the oil and gas service sector and thereby increasing the cost
of oil and gas well services. We expect this trend to continue during 2023 and perhaps beyond.
Critical
Accounting Policies
A
critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires
management to make difficult, subjective, or complex judgments that could have a material effect on our financial condition and results
of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about
matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in
the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates
and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience
and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new
events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor
and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting
policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial
statements are fairly stated in accordance with accounting principles generally accepted in the United States and present a meaningful
presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our
more significant estimates and assumptions used in the preparation of our financial statements:
Note
1 – Going Concern Analysis - In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation
of Financial Statements- Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about our ability to continue as a going concern within one year after the date that our financials are issued. When management
identifies conditions or events that raise substantial doubt about their ability to continue as a going concern it should consider whether
its plans to mitigate those relevant conditions or events will alleviate the substantial doubt. If conditions or events raise substantial
doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of management’s
plans, the entity should disclose information that enables user of financial statements to understand the principal events that raised
the substantial doubt, management’s evaluation of the significance of those conditions or events, and management’s plans
that alleviated substantial doubt about the entity’s ability to continue as a going concern.
We
performed the analysis and our overall assessment was there were conditions or events, considered in the aggregate, which raised substantial
doubt about our ability to continue as a going concern within the next year, but such doubt was not adequately mitigated by our plans
to address the substantial doubt as disclosed in Note 1 of the Notes to the Financial Statements.
Note
2 – Oil and Gas Properties and Equipment – The Company was required to perform an allocation of the purchase price
for the acquisition of the Properties and to provide the estimated useful lives assigned to the related equipment purchased.
In
addition, the accounting for, and disclosure of, oil and gas producing activities require that we choose between two alternatives under
accounting principles generally accepted in the United States (“GAAP”): 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 December 31, 2022, and are not subject to depletion. We review our unproved oil and gas property costs on
a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries
from drilling operations or determination that no proved reserves are attributable to such costs. We expect these costs to be evaluated
in one to seven years and transferred to the depletable portion of the full cost pool during that time. The full cost pool is comprised
of intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved
leaseholds.
Note
3 – Investment in unconsolidated subsidiary – GMDOC - The Company’s investment in its unconsolidated subsidiary
- GMDOC requires that the Company assess its control over the operations of GMDOC.
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.
Note
4 – Debt Obligations – The Company has issued various debt and equity securities that require the Company to estimate
the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities issued. Management
must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt securities between
its debt and equity components.
Note
6 – Stock Options - The Company follows the fair value recognition provisions of Accounting Standards Codification (“ASC”)
718. Stock-based compensation expense is recognized in the financial statements for granted, modified, or settled stock options based
on estimated fair values. 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.
Note
7 – Warrants - The Company has issued various debt and equity securities (including detachable warrants) that require the Company
to estimate the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities
issued. Management must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt
securities between its debt and equity components.
Note
8 – Income Taxes - Accounting for income taxes requires significant estimates and judgments on the part of management. Such
estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected
to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and
net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.
Note
11 – Warrant Derivative Liabilities - Accounting for warrant derivative liabilities requires significant estimates and judgments
on the part of management. The estimated fair value of the Company’s warrant derivative liabilities, all of which were related
to the detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model
utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common
stock and current interest rates.
Item
8. Financial Statements and Supplementary Data.
American
Noble Gas Inc.
Financial
Statements and Accompanying Notes
December
31, 2022 and 2021
Table
of Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
American
Noble Gas Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of American Noble Gas Inc. (the “Company”)
as of December 31, 2022 and 2021, and the related statements of operations, stockholders’ deficit, and cash flows for each of the
two years in the period ended December 31, 2022, and the related notes and schedules (collectively referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022,
in conformity with accounting principles generally accepted in the United States of America.
Substantial
doubt about the Company’s Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
1 to the accompanying financial statements, the Company must raise significant funds in order to pay its outstanding debt and meet its
other obligations, has a stockholders’ deficit and has a significant working capital deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and
management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical
Audit Matters
Critical
audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and
(2) involved our especially challenging, subjective, or complex judgments.
We
determined that there are no critical audit matters.
/s/
RBSM LLP
We
have served as the Company’s auditor since 2014.
New
York, NY
May 15, 2023
PCAOB
ID Number 587
AMERICAN
NOBLE GAS INC
Balance
Sheets
The
accompanying notes are an integral part of these financial statements.
AMERICAN
NOBLE GAS INC
Statements
of Operations
The
accompanying notes are an integral part of these financial statements.
AMERICAN
NOBLE GAS INC
Statements
of Changes in Stockholders’ Deficit
The
accompanying notes are an integral part of these financial statements.
AMERICAN
NOBLE GAS INC
Statements
of Cash Flows
| | |
| | |
| |
| | |
For the Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Cash flows from operating activities: | |
| | | |
| | |
| Net loss | |
$ | (3,940,075 | ) | |
$ | (1,603,761 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Equity in earnings of unconsolidated subsidiary – GMDOC, LLC | |
| (251,461 | ) | |
| — | |
| Change in fair value of derivative liability | |
| 577,269 | | |
| (199 | ) |
| Stock-based compensation | |
| 1,100,429 | | |
| 550,868 | |
| Impairment charge on oil and gas properties | |
| 905,574 | | |
| — | |
| Depreciation, depletion and amortization | |
| 130,253 | | |
| 92,502 | |
| Accretion of asset retirement obligations | |
| 2,222 | | |
| 836 | |
| Gain on settlement of litigation | |
| — | | |
| (23,000 | ) |
| Gain on exchange and extinguishment of liabilities | |
| — | | |
| (179,407 | ) |
| Loss on retirement of convertible note payable | |
| — | | |
| 115,805 | |
| Expiration and charge-off of deposit to acquire oil and gas properties | |
| — | | |
| 75,000 | |
| Amortization of discount on convertible note payable | |
| 606,454 | | |
| 87,993 | |
| Change in operating assets and liabilities: | |
| | | |
| | |
| Increase in accounts receivable | |
| (36,425 | ) | |
| (10,998 | ) |
| Increase in prepaid expenses | |
| 473 | | |
| (13,090 | ) |
| Increase in accounts payable | |
| 412,051 | | |
| 97,303 | |
| Increase (decrease) in accrued liabilities | |
| — | | |
| (450 | ) |
| Increase in accrued interest | |
| 243,395 | | |
| 9,045 | |
| Net cash used in operating activities | |
| (249,841 | ) | |
| (801,553 | ) |
| | |
| | | |
| | |
| Cash flows from investing activities: | |
| | | |
| | |
| Investment in unconsolidated subsidiary – GMDOC, LLC | |
| (850,000 | ) | |
| — | |
| Investment in Hugoton Gas Field participation agreement | |
| (288,366 | ) | |
| — | |
| Investment in oil and gas properties and equipment | |
| (15,225 | ) | |
| (900,000 | ) |
| Net cash used in investing activities | |
| (1,153,591 | ) | |
| (900,000 | ) |
| | |
| | | |
| | |
| Cash flows from financing activities: | |
| | | |
| | |
| Cash dividends paid on preferred stock | |
| (154,495 | ) | |
| (174,449 | ) |
| Net proceeds from issuance of convertible notes payable | |
| 1,200,000 | | |
| 650,000 | |
| Repayment of convertible note payable | |
| (537,500 | ) | |
| (453,539 | ) |
| Net proceeds from issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants | |
| 645,000 | | |
| 1,929,089 | |
| Net cash provided by financing activities | |
| 1,153,005 | | |
| 1,951,101 | |
| | |
| | | |
| | |
| Net (decrease) increase in cash and cash equivalents | |
| (250,427 | ) | |
| 249,548 | |
| | |
| | | |
| | |
| Cash and cash equivalents: | |
| | | |
| | |
| Beginning | |
| 260,590 | | |
| 11,042 | |
| Ending | |
$ | 10,163 | | |
$ | 260,590 | |
| Supplemental cash flow information: | |
| | | |
| | |
| Cash paid for interest | |
$ | 63,759 | | |
$ | 17,737 | |
| Cash paid for taxes | |
$ | — | | |
$ | — | |
| | |
| | | |
| | |
| Supplemental disclosure of non-cash investing and financing activities: | |
| | | |
| | |
| Accrual of dividends on Series A Convertible Preferred Stock | |
$ | 77,124 | | |
$ | — | |
| Conversion of Series A Convertible Preferred Stock to Common Stock | |
$ | 94 | | |
$ | 22 | |
| Issuance of restricted Common Stock | |
$ | 155 | | |
$ | — | |
| Issuance of restricted Common Stock attributable to issuance of convertible notes payable | |
$ | 196,154 | | |
$ | — | |
| Issuance of detachable Common Stock warrants attributable to issuance of convertible notes payable | |
$ | 136,574 | | |
$ | 335,896 | |
| Cumulative effect of adoption of ASU 2020-06 | |
$ | — | | |
$ | 160,900 | |
| Issuance of convertible promissory notes pursuant to debt settlement agreements | |
$ | — | | |
$ | 28,665 | |
| Issuance of detachable Common Stock purchase warrants pursuant to debt settlements agreements | |
$ | — | | |
$ | 1,605,178 | |
| Capital contribution attributable to related party debt extinguishment | |
$ | — | | |
$ | 1,108,477 | |
| Issuance of Common Stock pursuant to debt settlement agreements | |
$ | — | | |
$ | 68,600 | |
| Assumption of asset retirement obligation related to purchase of oil and gas properties | |
$ | — | | |
$ | 13,425 | |
The
accompanying notes are an integral part of these financial statements.
AMERICAN
NOBLE GAS, INC.
Notes
to Financial Statements
December
31, 2022
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
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.
During
the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash
flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022
compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The
Company has shut down the horizontal production wells as of December 31, 2022 and is considering the deepening of the conventional wells
on the property to explore for helium and other noble gases that may be present in deeper producing zones. Accordingly, the Company has
recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift
properties to zero as of December 31, 2022.
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 (“Scout”)
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 and sales of natural gas,
natural gas liquids and helium on August 17, 2022. The Company is continuing to evaluate the initial flows of both natural gas and
helium to determine its plan for additional wells on the farmout.
The
Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project.
The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December
31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs
related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022.
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 (“Castelli”). 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 Annual Report on Form 10-K 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 year ended December
31, 2022. Economies throughout the world continue to suffer disruptions by the effects of the quarantines, business closures and the
reluctance of individuals to leave their homes as a result of the 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 Annual Report on Form 10-K, including our discussion
of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the COVID-19
pandemic.
Going
Concern
The
Company has incurred losses from operations, has a stockholders’ deficit, incurred net cash used in operating activities and
has a significant working capital deficit as of and for the years ended December 31, 2022 and 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. Most of the
Company’s outstanding debt and other financial obligations are currently past due and the Company must negotiate forbearance and/or
restructuring agreements with the holders of such debt. These are substantial operational and financial issues that must be successfully
addressed during 2023 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 years ended December 31, 2022 and 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 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.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. The Company’s
policy is that all highly liquid investments with an original maturity of three months or less when purchased would be cash equivalents
and would be included along with cash as cash and equivalents.
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that
at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits
with several financial institutions if necessary to remain below the federally insured limit of $250,000 per bank. At December 31, 2022
and December 31, 2021, the uninsured balance amounted to $-0- and $10,504, respectively.
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.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging. ASC
815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge,
the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded
in other comprehensive earnings (loss) and are recognized in the statement of earnings when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives
that do not qualify for hedge treatment are recognized in earnings.
The
purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices
and to manage the exposure to commodity price risk. As of December 31, 2022 and 2021 and during the years then ended, the Company had
no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Note 4 and
13), those warrants were required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in
operations.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts payable, accrued liabilities and short-term notes represent the estimated fair value
due to the short-term nature of the accounts.
In
accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the
market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a
business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
The following is a brief description of those three levels:
| |
● |
Level
1 — |
Quoted
prices in active markets for identical assets and liabilities. |
| |
|
|
|
| |
● |
Level
2 — |
Other
significant observable inputs (including quoted prices in active markets for similar assets or liabilities). |
| |
|
|
|
| |
● |
Level
3 — |
Significant
unobservable inputs (including the Company’s own assumptions in determining the fair value. |
The
estimated fair value of warrant derivative liabilities, which are related to detachable warrants issued in connection with the
Series A Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, and
current interest rates. The fair values for the warrant derivatives as of December 31, 2022 and 2021 were classified under the fair
value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring
basis as of December 31, 2022 and 2021:
Schedule
of Assets and Liabilities Measured at Fair Value on Recurring Basic
| December
31, 2022 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant
derivative liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
577,269 |
|
|
$ |
577,269 |
|
| |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
577,269 |
|
|
$ |
577,269 |
|
| December
31, 2021 |
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
|
Total |
|
| Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Warrant
derivative liabilities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the years ended
December 31, 2022 and 2021.
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 December 31, 2022. In addition, the Company is currently evaluating the Properties for oil and gas reserves
and specifically the potential for noble gas reserves such as helium, argon and krypton. Based on these evaluations, the Company may
redirect its efforts to the production of noble gases rather than crude oil on the Properties. These noble gas evaluation costs have
also been expensed as lease operating costs through December 31, 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 continuing to evaluate the initial flows of both natural gas and helium to determine its plan for
additional wells on the farmout.
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 December 31, 2022, and are not subject to depletion.
We review our unproved oil and gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved
properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable
to such costs. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost
pool during that time. The full cost pool is comprised of intangible drilling costs, lease and well equipment and exploration and development
costs incurred plus acquired proved and unproved leaseholds.
When
we acquire significant amounts of undeveloped acreage, we capitalize interest on the acquisition costs in accordance with FASB ASC Subtopic
835-20 for Capitalization of Interest. 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. We recognized an impairment
charge of $905,574 as of December 31, 2022 which is attributable to changing our strategy to exploring for noble gases and away from
crude oil production at our Central Kansas Uplift properties which resulted in a large decrease in estimated future cash flows. The
accumulated impairment charges relative to ceiling test write-downs of our oil and gas properties was $905,574 through
December 31, 2022.
The
ceiling test calculation is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities
of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are
often different from the quantities of oil and gas that are ultimately recovered.
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 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.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets
and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management
assesses the utilization of such assets to be more likely than not. Management routinely assesses the realizability of the Company’s
deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully
utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments and assumptions
are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future
utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided
to reduce the recorded deferred tax asset. When the Company can project that a portion of the deferred tax asset can be realized through
application of a portion of tax loss carryforward, the Company will record that utilization as a deferred tax benefit and recognize a
deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require
the Company to adjust its deferred income tax asset valuation allowance in a future period. The Company recognized a deferred tax asset,
net of valuation allowance, of $-0- at December 31, 2022 and 2021.
The
Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing
with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes certain
income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that the payment of
these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability for unrecognized
tax benefit was recorded as of December 31, 2022 and 2021.
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.
Related
Party Transactions
The
Company’s financial statements include disclosures of material related party transactions, other than compensation
arrangements, expense allowances and similar items in the ordinary course of business. Disclosure of related party transactions
include: 1) the nature of the relationships involved, 2) a description of the transactions, including transactions to which no
amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented and such other
information deemed necessary to an understanding of the effects of the transactions on the financial statements, 3) the dollar
amounts of the transactions for each periods for which income statements are presented and the effects of any change in the method
of establishing the terms from that used in the preceding period, and 4) amounts due from or to related parties as of the date of
each balance sheet presented and if not otherwise apparent , the terms of settlement.
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 years ended December 31, 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 years ended December 31, 2022 and 2021 as all were considered anti-dilutive because of the net loss reported for the
years ended December 31, 2022 and 2021.
Gain
on Extinguishment of Liabilities / Troubled Debt Restructuring:
In
accordance with ASC 470, the Company assesses restructuring of debt as troubled debt restructuring if the creditor for economic or legal
reasons related to the debtor’s financial difficulties grant a concession to the debtor that it would not otherwise consider. The
Company records a gain on restructuring of payables when it transfers its assets to a creditor to fully settle a payable. The gain is
measured by the excess of the carrying amount of the payable over the fair value of the assets transferred or fair value of equity interest
granted.
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 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 December 31, 2022 and 2021:
Schedule
of Oil and Gas Properties and Equipment
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Central Kansas Uplift - Oil and gas production equipment | |
$ | 913,425 | | |
$ | 913,425 | |
| Hugoton Gas Field - Oil and gas production equipment | |
| 96,831 | | |
| — | |
| Central Kansas Uplift – Leasehold costs | |
| 15,225 | | |
| — | |
| Hugoton Gas Field – Leasehold costs | |
| 191,535 | | |
| | |
| | |
| | | |
| | |
| Subtotal | |
| 1,217,016 | | |
| 913,425 | |
| Less: Accumulated impairment | |
| (905,574 | ) | |
| — | |
| Less: Accumulated depreciation, depletion and amortization | |
| (222,755 | ) | |
| (92,502 | ) |
| Oil and gas properties and equipment, net | |
$ | 88,687 | | |
$ | 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 Oil and Gas 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 | |
During
the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash
flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022
compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The
Company has shut down the horizontal production wells as of December 31, 2022 and is considering the deepening of the conventional wells
on the property to explore for helium and other noble gases that may be present in deeper producing zones. Accordingly, the Company has
recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift
properties to zero as of December 31, 2022.
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 and sales of natural gas,
natural gas liquids and helium on August 17, 2022. The Company is continuing to evaluate the initial flows of both natural gas and
helium to determine its plan for additional wells on the farmout.
The
Company has paid a total of $288,366 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.
The
Company performed the ceiling test to assess for potential impairment of the capitalized costs relative to the Hugoton Gas Field Project.
The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December
31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs
related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022.
Note
3 – Investment in unconsolidated subsidiary – GMDOC
A
summary of the Company’s investment in unconsolidated subsidiary-GMDOC during the year ended December 31, 2022 follows:
Schedule
of Investment Unconsolidated Subsidiary
| | |
Year ended | |
| | |
December 31, 2022 | |
Investment in unconsolidated subsidiary-GMDOC,
at beginning of period | |
$ | — | |
| Purchase of membership interests in GMDOC | |
| 850,000 | |
| Equity in earnings of GMDOC | |
| 251,461 | |
| Distributions during period | |
| — | |
| Impairment charges | |
| — | |
| | |
| | |
Investment in unconsolidated subsidiary-GMDOC at end of period | |
$ | 1,101,461 | |
The
following table presents summarized balance sheet financial information of the Company’s unconsolidated subsidiary – GMDOC
as of December 31, 2022:
Schedule
of Unconsolidated Subsidiary Balance Sheet Financial Information
| | |
December 31, 2022 | |
| Assets: | |
| | |
| Cash | |
$ | 208,450 | |
| Accrued revenue & prepaid expenses | |
| 320,212 | |
| Oil and gas properties and equipment, net | |
| 7,359,905 | |
| | |
| | |
| Total assets | |
$ | 7,888,567 | |
| | |
| | |
| Liabilities and Member’s Equity: | |
| | |
| Accounts payable and accrued liabilities | |
$ | 207,244 | |
| Mortgage note payable, net | |
| 4,984,821 | |
| Asset Retirement Obligations | |
| 882,331 | |
| Member’s equity | |
| 1,814,171 | |
| | |
| | |
| Total liabilities and member’s equity | |
$ | 7,888,567 | |
The
following table presents summarized income statement financial information of the Company’s unconsolidated subsidiary – GMDOC
for the year ended December 31, 2022:
Schedule
of Unconsolidated Subsidiary Financial Information
| | |
| |
| | |
Year ended | |
| | |
December 31, 2022 | |
| | |
| |
| Oil and gas revenues | |
$ | 2,397,406 | |
| Lease operating expenses | |
| (1,080,616 | ) |
| Production related taxes | |
| (68,049 | ) |
| Ad valorem taxes | |
| (32,265 | ) |
| Depreciation expense | |
| (401,794 | ) |
| Accretion of asset retirement obligation | |
| (50,961 | ) |
| General and administrative expenses | |
| (110,856 | ) |
| Interest expense | |
| (238,694 | ) |
| | |
| | |
| Net income | |
| 414,171 | |
| AMGAS member’s percentage | |
| 60.7143 | % |
| | |
| | |
| Equity in earnings of unconsolidated subsidiary – GMDOC | |
$ | 251,461 | |
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 year ended December 31, 2022.
Note
4 – Debt Obligations
Debt
obligations were comprised of the following at December 31, 2022 and 2021:
Schedule
of Debt Outstanding
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Notes payable: | |
| | | |
| | |
| | |
| | | |
| | |
| 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 $ — and $273,726 as of December 31, 2022 and 2021, respectively) (the 8% Note and the October 8% Notes) (in default) | |
| 650,000 | | |
| 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 | |
| 1,341,165 | | |
| 404,939 | |
| Less: Long-term portion | |
| 28,665 | | |
| 28,665 | |
| Notes payable, short-term | |
$ | 1,312,500 | | |
$ | 376,274 | |
Debt
obligations become due and payable as follows:
Schedule
of Debt Obligations Maturities
| Years ended | |
Principal balance due | |
| | |
| |
| 2023 | |
$ | 1,312,500 | |
| 2024 | |
| — | |
| 2025 | |
| — | |
| 2026 | |
| 28,665 | |
| 2027 | |
| — | |
| 2028 | |
| — | |
| Total | |
$ | 1,341,165 | |
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 14.
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% 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 year ended December 31, 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 | |
| 273,726 | |
| | |
| | |
| Balance December 31, 2022 - 8% Note and October 8% Notes | |
$ | 650,000 | |
The
remaining unamortized discount relative to the 8% Notes and the October 8% Notes was $ — and $273,726 as of December 31, 2022 and
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 as of December 31, 2022. With
respect to the two October 8% Notes with an outstanding aggregate principal balance of $550,000
as of December
31, 2022, the Company has reached an agreement with the two October 8% Note Investors. On January 10, 2023, the Company amended each
of these October 8% Notes by entering into a Letter Agreement between the October 8% Note Investors and the Company. The
Letter Agreement modifies the terms of the October 8% Notes by extending each note’s respective maturity date to September 30,
2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10,
subject to any future adjustments as provided in each of the notes.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $450,000 (including $100,000 outstanding principal balance of the 8% Note), which the Company did not pay by their
maturity dates. The Company and the holder of the two convertible notes payable entered into a new convertible promissory note
(the “New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with
a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the repayment
defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was
reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as
those of the prior convertible notes payable.
The Company has accrued
default interest aggregating $138,680 as of December 31, 2022 related to the repayment default on these notes.
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 Obligation
| | |
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 year ended December 31, 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 December 31, 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 December 31, 2022.
On May 5, 2023, the Company reached
an agreement with
the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000
(including the June 2022 Note), which the Company did not pay by their maturity dates. The Company and the holder of the two
convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the outstanding
principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance
of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes
payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50
per share to $0.40
per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible
notes payable.
The Company has accrued default interest aggregating $8,208 as of December 31, 2022 related to the repayment default
on these notes.
8%
Convertible Notes Payable due June 29, 2022 (in default)
The
Company entered into a securities purchase agreement with two accredited 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.
With
respect to the two May 2022 Notes with an aggregate outstanding principal balance of $312,500 as of December 31, 2022 the Company has
reached an agreement with the two investors. On January 10, 2023, the Company amended each of those notes by entering into a Letter Agreement
between the investors and the Company. The Letter Agreement
modifies the terms of the May 2022 Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the
extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided
in each of the notes.
With
respect to one of the May 2022 Notes, on May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes
payable in the aggregate principal face amount of approximately $450,000 (including $100,000 principal balance of the May 2022 Notes),
which the Company did not pay by their maturity dates. The Company and the holder of the two convertible notes payable entered
into a new convertible promissory note (the “New Note”), exchanging the outstanding principal amount of the old convertible
notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes
payable were cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note.
The conversion price of the New Note was reduced from $0.50 per share to
$0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable.
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 year ended December 31, 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 December 31, 2022 - May 2022 Notes | |
$ | 312,500 | |
The
remaining unamortized discount relative to the May 2022 Notes were $-0- as of December 31, 2022.
The
Company has accrued default interest aggregating $69,183 as of December 31, 2022 related to the repayment default on these notes.
Note
5 – Accrued liabilities
Accrued
liabilities consisted of the following at December 31, 2022 and 2021:
Schedule
of Accrued Liabilities
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Accrued rent | |
$ | 614,918 | | |
$ | 614,918 | |
| Accrued Nicaragua Concession fees | |
| 544,485 | | |
| 544,485 | |
| | |
| | | |
| | |
| Total accrued liabilities | |
$ | 1,159,403 | | |
$ | 1,159,403 | |
The
accrued rent balances relate to unpaid rent for the Company’s previous headquarters in Denver, Colorado and represents unpaid rents
and related costs for the period June 2006 through November 2008. The Company has not had any correspondence with the landlord for several
years and will seek to settle and/or negotiate the matter when it has the financial resources to do so.
From 2009 to 2020, the Company had
pursued the exploration of potential oil and gas resources in the United States and in the Perlas and Tyra concession blocks in
offshore Nicaragua in the Caribbean Sea (the “Concessions”), which contain a total of approximately 1.4 million acres.
In January 2020, the Company decided to cease its activities, exploration and production in the Concessions. 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 years ended December 31, 2022 and 2021:
Schedule
of Stock- based Compensation
| | |
2022 | | |
2021 | |
| | |
Year ended
December 31, | |
| | |
2022 | | |
2021 | |
| Stock-based compensation – stock option grants | |
$ | 127,500 | | |
$ | 178,498 | |
| | |
| | | |
| | |
| Stock-based compensation – restricted stock grants | |
| 686,065 | | |
| 325,000 | |
| | |
| | | |
| | |
| Stock-based compensation – warrants issued for services pursuant to USNG Letter Agreement (defined below) | |
| 286,864 | | |
| 47,370 | |
| | |
| | | |
| | |
| Total stock-based compensation | |
$ | 1,100,429 | | |
$ | 550,868 | |
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 December 31, 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 years ended December 31, 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 | |
| (240,000 | ) | |
| (46.41 | ) | |
| | | |
| | |
| Outstanding at December 31, 2021 | |
| 1,892,000 | | |
$ | 1.93 | | |
| 9.07 years | | |
$ | — | |
| Outstanding and exercisable at December 31, 2021 | |
| 92,000 | | |
$ | 30.00 | | |
| 2.03 years | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | |
| Outstanding at December 31, 2021 | |
| 1,892,000 | | |
$ | 1.93 | | |
| 9.07 years | | |
$ | — | |
| Granted | |
| — | | |
| — | | |
| | | |
| | |
| Exercised | |
| — | | |
| — | | |
| | | |
| | |
| Forfeited | |
| (450,000 | ) | |
| 0.50 | | |
| | | |
| | |
| Outstanding at December 31, 2022 | |
| 1,442,000 | | |
$ | 2.38 | | |
| 7.96 years | | |
$ | — | |
| Outstanding and exercisable at December 31, 2022 | |
| 1,442,000 | | |
$ | 2.38 | | |
| 7.96 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 December 31, 2022:
Summary
of Exercise Price 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 | | |
| 8.43 years | | |
| 1,350,000 | | |
| 8.43 years | |
| $ | 30.00 | | |
| 92,000 | | |
| 1.03 years | | |
| 92,000 | | |
| 1.03 years | |
| | | | |
| | | |
| | | |
| | | |
| | |
| | Total | | |
| 1,442,000 | | |
| 7.96 years | | |
| 1,442,000 | | |
| 7.96 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 $127,500 and $178,498
for the years ended December 31, 2022 and 2021, respectively.
The
total grant date fair value of the 1,800,000 stock options issued during 2021 was $305,997 in total or $0.17 per share and there were
no stock options granted during the year ended December 31, 2022.
The
intrinsic value as of December 31, 2022 related to the vested and unvested stock options as of that date was $-0-. There is no unrecognized
compensation cost as of December 31, 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 years ended December 31, 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 | |
| (2,500,000 | ) | |
| (0.13 | ) |
| Forfeited | |
| — | | |
| — | |
| Nonvested balance, December 31, 2021 | |
| 1,250,000 | | |
$ | 0.13 | |
| | |
| | | |
| | |
| Nonvested balance, December 31, 2021 | |
| 1,250,000 | | |
$ | 0.13 | |
| Granted | |
| 1,550,000 | | |
| 0.45 | |
| Vested | |
| (2,412,500 | ) | |
| (0.28 | ) |
| Forfeited | |
| — | | |
| — | |
| Nonvested balance, December 31, 2022 | |
| 387,500 | | |
$ | 0.45 | |
The
Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted stock grants aggregating $686,065
and $325,000 during the years ended December 31, 2022 and 2021, respectively.
The
Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of
December 31, 2022, there were $174,375 of total unrecognized compensation costs related to all remaining non-vested restricted stock
grants, which will be amortized over the next three months in accordance with the respective vesting scale.
The
nonvested balance of restricted stock vests as follows:
Schedule
of Nonvested Restricted Stock Unit Activity
| Years ended | |
Number of Shares | |
| | |
| |
| 2023 | |
| 387,500 | |
| 2024 | |
| — | |
Note
7 – Warrants
The
following table summarizes warrant activity for the years ended December 31, 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 13) | |
| 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% Note and the October 8% Notes (see Note 4) | |
| 1,850,000 | | |
| 0.50 | |
| Issued in connection with issuance of 3% Notes (see Note 4) | |
| 3,260,000 | | |
| 0.50 | |
| Forfeited/expired | |
| (47,000 | ) | |
| (5.22 | ) |
| Outstanding and exercisable at December 31, 2021 | |
| 17,580,784 | | |
$ | 0.47 | |
| | |
| | | |
| | |
| 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 13) | |
| 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 December 31, 2022 | |
| 20,430,783 | | |
$ | 0.45 | |
The
weighted average term of all outstanding Common Stock purchase warrants was 3.8 years as of December 31, 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 December
31, 2022 and 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 December 31, 2022:
Summary of Warrant Range of Exercise
Price 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 | | |
5.1 years |
| $ | 0.39 | | |
| 5,256,410 | | |
3.7 years |
| $ | 0.50 | | |
| 13,024,374 | | |
3.6 years |
| | | | |
| | | |
|
| | Total | | |
| 20,430,783 | | |
3.8 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 $ 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 December 31, 2022.
The
USNG Letter Agreement has an initial term of 5 years, which shall thereafter continue for successive one-year periods, provided that
there is no uncured breach, unless otherwise terminated by either party upon a written notice of intent to non-renew.
In
consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants
to purchase, in the aggregate, 2,060,000 shares of 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 $286,864
and $47,370
of compensation expense relative to the 3,260,000
warrants to purchase Common Stock issued pursuant
to the USNG Letter Agreement during the years ended December 31, 2022 and 2021, respectively. There have been no
exercises or forfeitures of the warrants to purchase
Common Stock relative to the USNG Letter during the years ended December 31, 2022 and 2021.
The
total grant date fair value of the 3,260,000 warrants to purchase Common Stock issued pursuant to the USNG Letter Agreement on November
9, 2021 was $1,434,313 in total or $0.44 per share. Total unrecognized compensation costs related to the 3,260,000 warrants to purchase
Common Stock issued pursuant to the USNG Letter Agreement, as of December 31, 2022 was $1,099,639 which will be amortized over the next
forty-six months.
Note
8 – Income Taxes
The
provision for income taxes consists of the following:
Schedule
of Provision for Income Taxes
| | |
| 2022 | | |
| 2021 | |
| | |
| For the Year Ended December 31, | |
| | |
| 2022 | | |
| 2021 | |
| | |
| | | |
| | |
| Current income tax expense (benefit) | |
$ | — | | |
$ | — | |
| Deferred income tax benefit | |
| — | | |
| — | |
| Total income tax expense (benefit) | |
$ | — | | |
$ | — | |
The
effective income tax rate on continuing operations varies from the statutory federal income tax rate as follows:
Schedule
of Income Statutory Federal Income Tax Rate
| | |
For the Years Ended December 31, | |
| | |
2022 | | |
2021 | |
| Federal income tax rate | |
| 21.0 | % | |
| 21.0 | % |
| State income tax rate | |
| 4.7 | | |
| 4.7 | |
| Stock-based compensation | |
| (3.9 | ) | |
| (32.6 | ) |
| Exchange of debt for equity instruments | |
| — | | |
| (38.7 | ) |
| Change in valuation allowance | |
| (20.2 | ) | |
| 43.8 | |
| Other, net | |
| (1.6 | ) | |
| 1.8 | |
| | |
| | | |
| | |
| Effective tax rate | |
| — | % | |
| — | % |
The
significant temporary differences and carry-forwards and their related deferred tax asset (liability) and deferred tax asset valuation
allowance balances are as follows:
Schedule
of Deferred Tax Asset and Liability
| | |
2022 | | |
2021 | |
| | |
For the Years Ended December 31, | |
| | |
2022 | | |
2021 | |
| | |
| |
| Deferred tax assets: | |
| | | |
| | |
| Depreciation, depletion, impairment and amortization | |
$ | 190,000 | | |
$ | — | |
| Accruals and other | |
| 300,000 | | |
| 294,000 | |
| Asset retirement obligations | |
| 450,000 | | |
| 435,000 | |
| Stock-based compensation | |
| 535,000 | | |
| 340,000 | |
| Warrant derivative liability | |
| 150,000 | | |
| — | |
| Net operating loss carry-forward | |
| 16,760,000 | | |
| 16,000,000 | |
| | |
| | | |
| | |
| Gross deferred tax assets | |
| 18,385,000 | | |
| 17,069,000 | |
| Depreciation, depletion, impairment and amortization | |
| — | | |
| (14,000 | ) |
| Investment in unconsolidated subsidiary – GMDOC, LLC | |
| (535,000 | ) | |
| — | |
| Net deferred tax assets | |
| 17,850,000 | | |
| 17,055,000 | |
| Less valuation allowance | |
| (17,850,000 | ) | |
| (17,055,000 | ) |
| | |
| | | |
| | |
| Deferred tax asset | |
$ | — | | |
$ | — | |
The
effective income tax rate on earnings (loss) before income tax benefit varies from the 21% statutory federal income tax rate primarily
due to Company providing a 100% reserve on its net deferred tax assets as of December 31, 2022 and 2021.
During
the year ended December 31, 2022, the Company increased its valuation allowance on net deferred tax assets by $795,000 while the valuation
allowance remained at 100% of all net deferred tax assets as of December 31, 2022 and 2021. . 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 $64,710,000 as of December 31, 2022, which expire
from 2025 through 2041.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $64,710,000 in accordance with its 2022 federal
income tax return as filed. Approximately $61,045,000 of such net operating loss carry-forwards expire from 2028 through 2037 while $3,665,000
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 recently completed the filing of tax returns for the tax years 2012 through 2021. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards
in the event that it has experienced a more than 50% change in ownership over a three-year period. Management has completed its review
of whether such ownership changes have occurred, and based upon such review, management believes that the Company is not currently subject
to an annual limitation or the possibility of the complete elimination of the net operating loss carry- forwards. In addition, the Company
may be limited by additional ownership changes which may occur in the future.
Note
9 – Gain on Exchange and Extinguishment of Liabilities
During
the years ended December 31, 2022 and 2021, the Company recorded gains on the extinguishment of liabilities through the negotiation of
settlements with certain creditors and through the operation of law as follows:
Schedule of Estimated Gain on Exchange and Extinguishment of Debt
| | |
2022 | | |
2021 | |
| | |
Year ended
December 31, | |
| | |
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 13) | |
| — | | |
| 23,000 | |
| Loss from retirement of convertible note payable | |
| — | | |
| (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 year ended December 31, 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 13). 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 year ended December
31, 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 years ended December
31, 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 | |
| 836 | |
| | |
| | |
| Asset retirement obligation at December 31, 2021 | |
$ | 1,730,264 | |
| | |
| | |
| Asset retirement obligation at December 31, 2021 | |
$ | 1,730,264 | |
| Additions | |
| — | |
| Accretion expense during the period | |
| 2,222 | |
| | |
| | |
| Asset retirement obligation at December 31, 2022 | |
$ | 1,732,486 | |
The
$1,716,003 asset retirement obligation existing at December 31, 2022 and in years prior to 2022 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 December 31, 2022 and 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 the acquisition of the Properties on April 1, 2021. In addition, the
Company drilled and completed its first Hugoton Gas Field well which was placed in service in August 2022. The Company recorded $2,222
and $836 of accretion expense during the years ended December 31, 2022 and 2021, respectively, related to the acquisition of the Properties
as further described in Note 1 and the Hugoton Gas Field well completed in August 2022.
Note
11 – Warrant Derivative Liability
The
estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection
with Series A Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to
the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates.
The detachable warrants issued in connection with the issuance of certain Series A Convertible Preferred Stock (See Note 13 - March 2021
Issuance) contained a provision allowing the holder to require cash settlement in certain situations were fundamental transaction, as
defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the Holder’s ability to
utilize such provisions therefore the derivative liability was recognized on December 31, 2022.
The following
is a summary of the assumptions used in calculating estimated fair value of such derivative liabilities as of the December 31, 2022:
Schedule of Warrants Valuation Assumption
| | |
As of December 31, 2022 | |
| | |
| |
| Volatility – range | |
| 342.2 | % |
| Risk-free rate | |
| 3.99 | % |
| Contractual term | |
| 3.74
years | |
| Exercise price | |
$ | 0.39 | |
| Number of warrants in aggregate | |
| 5,256,410 | |
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments,
measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
Summary of Changes in Fair Value Derivative Financial Instruments
| | |
Amount | |
| Balance at December 31, 2020 | |
$ | 321 | |
Unrealized derivative gains included in other income/expense for the
period | |
| (199 | ) |
Extinguishment of derivative liability as part of the exchange of debt
for common stock | |
| (122 | ) |
| Balance at December 31, 2021 | |
$ | — | |
Establishment of warrant derivative liability – included in other
income (expense) for the
year | |
| 577,269 | |
| | |
| | |
| Balance at December 31, 2022 | |
$ | 577,269 | |
Note
12 – 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 December 31, 2022 and 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 December 31, 2022.
The
USNG Letter Agreement has an initial term of 5 years, which shall thereafter continue for successive one-year periods, provided that
there is no uncured breach, unless otherwise terminated by either party upon a written notice of intent to non-renew.
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 December 31, 2022 and 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 year ended December 31, 2021 (see Note 9). |
Note
13 – Stockholder’s Deficit
Series
A Convertible Preferred Stock
As
of December 31, 2022 and 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 years ended December 31, 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 | |
| (700 | ) |
| | |
| | |
| Outstanding at December 31, 2021 | |
| 22,076 | |
| | |
| | |
| Outstanding at December 31, 2021 | |
| 22,076 | |
| Issued | |
| 6,450 | |
| Converted to Common Stock | |
| (3,000 | ) |
| | |
| | |
| Outstanding at December 31, 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 preferred dividends totaling $199,300 and $174,449 relative to the March 2021 Series A Convertible Preferred Stock
which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $44,805 and $— relative to the March 2021 Series A Convertible Preferred Stock
as of December 31, 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 year ended December 31, 2022. The holders exercised their
rights to convert a total of 700 shares of March 2021 Series A Convertible Preferred Stock into 218,750 shares of Common Stock during
the year ended December 31, 2021.
On
March 26, 2021, Ozark Capital, LLC (“Ozark”) 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 and its affiliates hold over 10%
of the shares of the Company’s Common Stock as of December 31, 2022. Accrued dividends attributable to Ozark were
$11,080
and $8,523
for the years ended December 31, 2022 and 2021 respectively. The Company has outstanding accrued and unpaid preferred dividends
totaling $2,800
and $ — relative to the Ozark’s Series A Convertible Preferred Stock as of December 31, 2022 and 2021,
respectively.
All
holders of the March 2021 Series A Convertible Preferred Stock, including Ozark, 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 $500,000. 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 $27,260 and $-0- relative to the June 2022 Series A Convertible Preferred Stock which
was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $27,260 and $ — relative to the June 2022 Series A Convertible Preferred Stock
as of December 31, 2022 and 2021, respectively
August/September
2022 Issuances – During August and September 2022, the Company entered into a securities purchase agreement 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 $5,059 and $-0- relative to the August/September 2022 Series A Convertible Preferred
Stock which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has
outstanding accrued and unpaid preferred dividends totaling $5,059 and $ — relative to the August/September 2022 Series A Convertible
Preferred Stock as of December 31, 2022 and 2021, respectively.
Note
14 – Related Party Transactions
The
Company’s previous Chief Operating Officer, John Loeffelbein 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, 2022 and 2021. 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 December 31, 2022.
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 December 31, 2022 and 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 December
31, 2022 and 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
15 –Net Income (Loss) Per Share
The
calculation of the weighted average number of shares outstanding and income (loss) per share outstanding for the years ended December
31, 2022 and 2021 are as follows:
Schedule of Net Earnings Per Share
| | |
| | |
| |
| | |
Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Net loss | |
$ | (3,940,075 | ) | |
$ | (1,603,761 | ) |
| | |
| | | |
| | |
| Convertible preferred stock dividends | |
| (231,619 | ) | |
| (174,449 | ) |
| | |
| | | |
| | |
| Numerator for basic (loss) income per share - Net (loss) income attributable to common stockholders | |
| (4,171,694 | ) | |
| (1,778,210 | ) |
| | |
| | | |
| | |
| Add: Interest expense on convertible debt | |
| — | | |
| — | |
| | |
| | | |
| | |
| Adjusted numerator for diluted (loss) income per share – Net loss income attributable to common stockholders | |
$ | (4,171,694 | ) | |
$ | (1,778,210 | ) |
| | |
| | | |
| | |
| Denominator for basic (loss) income per share – weighted average shares outstanding | |
| 20,913,440 | | |
| 18,741,187 | |
| | |
| | | |
| | |
| Dilutive effect of convertible debt outstanding | |
| — | | |
| — | |
| | |
| | | |
| | |
| Dilutive effect of shares issuable under stock options and warrants outstanding | |
| — | | |
| — | |
| | |
| | | |
| | |
| Denominator for diluted (loss) income per share – adjusted weighted average shares outstanding | |
| 20,913,440 | | |
| 18,741,187 | |
| | |
| | | |
| | |
| Net (loss) income per share: | |
| | | |
| | |
| Basic | |
$ | (0.20 | ) | |
$ | (0.09 | ) |
| Diluted | |
$ | (0.20 | ) | |
$ | (0.09 | ) |
Basic
income (loss) per share is based upon the weighted average number of shares of Common Stock outstanding during the year. For the year
ended December 31, 2022 and 2021, all shares issuable upon conversion of convertible debt, convertible preferred stock and the exercise
of outstanding stock options and warrants were antidilutive, and, therefore, not included in the computation of diluted income (loss)
per share.
Note
16 – Supplemental Oil and Gas Information (Unaudited)
Estimated
Proved Oil and Gas Reserves (Unaudited)
On
April 1, 2021, the Company completed acquisition of certain oil and gas properties and interests from Core Energy, LLC, effective as
of January 1, 2021 (the “Oil & Gas Properties Acquisition”). The Oil & Gas Properties Acquisition included the
purchase of certain oil and gas properties in the Central Kansas Uplift geological formation, covering approximately 11,000
contiguous acres, including, among other things, the production and mineral rights to and a leasehold interest in the Oil & Gas
Properties and all contracts, agreements and instruments. The Company acquired the Oil & Gas Properties for an aggregate
purchase price consisting of $900,000
in cash at closing.
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
Company has paid a total of $288,366 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.
The
following tables summarize the net ownership interest in the proved oil and gas reserves and the standardized measure of discounted
future net cash flows related to the proved oil and gas reserves for the Oil & Gas Properties and the Hugoton Gas Field. The
estimates were prepared by the Company based on the reserve reports prepared for the Company for the years ended December 31, 2022
and 2021. The standardized measure presented here excludes income taxes as the tax basis for the Oil & Gas Properties and the
Hugoton Gas Field is not applicable due to the substantial net operating loss carryforwards available to the Company on a go-forward
basis. The proved oil and gas reserve estimates and other components of the standardized measure were determined in accordance with
the authoritative guidance of the Financial Accounting Standards Board and the SEC.
Proved
Oil and Gas Reserve Quantities
Proved
reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with
reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic
conditions, operating methods, and government regulations. Proved developed reserves are proved reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is
relatively minor compared to the cost of a new well. Proved undeveloped reserves are proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for
recompletion. The net proved oil and gas reserves and changes in net proved oil and gas reserves attributable to the Oil & Gas
Properties with respect to crude oil, and the Hugoton Gas Field which produces natural gas, natural gas liquids and helium all of
which are located in the state of Kansas, are summarized below:
Schedule
of Proved
Oil and Gas Reserve Quantities
| | |
Crude Oil Barrels | | |
Natural Gas MCF (Thousand Cubic Feet) | | |
Natural Gas Liquids Million BTU | | |
Helium Gas MCF (Thousand Cubic Feet) | |
| Proved developed reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2021 | |
| | | |
| | | |
| | | |
| | |
| Proved developed reserves,
beginning of year | |
| | | |
| | | |
| | | |
| | |
| In-place proved developed reserves acquired | |
| 26,185 | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| — | | |
| — | | |
| — | |
| Revisions of previous estimates | |
| — | | |
| — | | |
| — | | |
| — | |
| Production | |
| (3,123 | ) | |
| — | | |
| — | | |
| — | |
| Proved developed reserves - at December 31, 2021 | |
| 23,062 | | |
| — | | |
| — | | |
| — | |
| Proved
developed reserves at end of year | |
| 23,062 | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Proved undeveloped reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2021 | |
| — | | |
| — | | |
| — | | |
| — | |
| Proved undeveloped reserves,
beginning of year | |
| — | | |
| — | | |
| — | | |
| — | |
| In-place proved developed reserves acquired | |
| 403,210 | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| — | | |
| — | | |
| — | |
| Revisions of previous estimates | |
| — | | |
| — | | |
| — | | |
| — | |
| Production | |
| — | | |
| — | | |
| — | | |
| — | |
| Proved undeveloped reserves - at December 31, 2021 | |
| 403,210 | | |
| — | | |
| — | | |
| — | |
| Proved
undeveloped reserves at end of year | |
| 403,210 | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Proved developed and undeveloped reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2021 | |
| — | | |
| — | | |
| — | | |
| — | |
| Proved developed and undeveloped reserves, beginning of year | |
| — | | |
| — | | |
| — | | |
| — | |
| In-place proved developed reserves acquired | |
| 429,395 | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| — | | |
| — | | |
| — | |
| Revisions of previous estimates | |
| — | | |
| — | | |
| — | | |
| — | |
| Production | |
| (3,123 | ) | |
| | | |
| | | |
| | |
| Proved developed and undeveloped reserves – at December 31, 2021 | |
| 426,272 | | |
| — | | |
| — | | |
| — | |
| Proved developed and undeveloped reserves, end of year | |
| 426,272 | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Proved developed reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2022 | |
| 23,062 | | |
| — | | |
| — | | |
| — | |
| Proved developed reserves,
beginning of year | |
| 23,062 | | |
| — | | |
| — | | |
| — | |
| In-place proved developed reserves acquired | |
| — | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| 31,445 | | |
| 86,656 | | |
| 217 | |
| Revisions of previous estimates | |
| (21,842 | ) | |
| — | | |
| — | | |
| — | |
| Production | |
| (1,220 | ) | |
| (9,301 | ) | |
| (19,937 | ) | |
| (15 | ) |
| Proved developed reserves - at December 31, 2022 | |
| — | | |
| 22,144 | | |
| 66,719 | | |
| 202 | |
| Proved
developed reserves at end of year | |
| - | | |
| 22,144 | | |
| 66,719 | | |
| 202 | |
| | |
| | | |
| | | |
| | | |
| | |
| Proved undeveloped reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2022 | |
| 403,210 | | |
| — | | |
| — | | |
| — | |
| Proved undeveloped reserves,
beginning of year | |
| 403,210 | | |
| — | | |
| — | | |
| — | |
| In-place proved developed reserves acquired | |
| — | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| — | | |
| — | | |
| — | |
| Revisions of previous estimates | |
| (403,210 | ) | |
| — | | |
| — | | |
| — | |
| Production | |
| — | | |
| — | | |
| — | | |
| — | |
| Proved undeveloped reserves - at December 31, 2022 | |
| — | | |
| — | | |
| — | | |
| — | |
| Proved
undeveloped reserves at end of year | |
| - | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Proved developed and undeveloped reserves: | |
| | | |
| | | |
| | | |
| | |
| At January 1, 2022 | |
| 426,272 | | |
| — | | |
| — | | |
| — | |
| Proved developed and undeveloped reserves, beginning of year | |
| 426,272 | | |
| — | | |
| — | | |
| — | |
| In-place proved developed reserves acquired | |
| — | | |
| — | | |
| — | | |
| — | |
| Extensions and discoveries | |
| — | | |
| 31,445 | | |
| 86,656 | | |
| 217 | |
| Revisions of previous estimates | |
| (425,052 | ) | |
| — | | |
| — | | |
| — | |
| Production | |
| (1,220 | ) | |
| (9,301 | ) | |
| (19,937 | ) | |
| (15 | ) |
| Proved developed and undeveloped reserves – at December 31, 2022 | |
| — | | |
| 22,144 | | |
| 66,719 | | |
| 202 | |
| Proved developed and undeveloped reserves, end of year | |
| - | | |
| 22,144 | | |
| 66,719 | | |
| 202 | |
Standardized
Measure
The
standardized measure of discounted future net cash flows before income taxes related to the proved oil and gas reserves of the Oil &
Gas Properties is as follows:
Schedule of Standardized Measure of Discounted Future Net Cash Flows
| | |
2022 |
|
|
2021 | |
| | |
December 31, | |
| | |
2022 |
|
|
2021 | |
| Future cash inflows | |
$ |
186,158 |
|
|
$ | 21,955,464 | |
| Future production costs | |
|
(89,815 |
) |
|
| (2,698,409 | ) |
| Future development costs | |
|
— |
|
|
| (4,450,000 | ) |
| | |
|
|
|
|
| — | |
| Future net cash flows | |
|
96,343 |
|
|
| 14,807,055 | |
| Less 10% annual discount to reflect timing of cash flows | |
|
(7,656 |
) |
|
| (11,166,405 | ) |
| | |
|
|
|
|
| | |
| Standard measure of discounted future net cash flows | |
$ |
88,687 |
|
|
$ | 3,640,650 | |
Requirements
for oil and gas reserve estimation and disclosure require that reserve estimates and future cash flows be based on the average market
prices for sales of oil and gas on the first calendar day of each month during the year. The average prices used for the year ended December
31, 2022 and 2021 under these rules were $94.14
and $66.34
for crude oil, respectively. The average prices
used for the year ended December 31, 2022 under these rules were $5.84
per MCF for natural gas and $0.76
per gallon for natural gas liquids and $260.01
per MCF for helium, respectively.
Future
operating expenses and development costs are computed primarily by the Company’s petroleum engineers by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year end costs and assuming
continuation of existing economic conditions. As mentioned above, the standardized measure presented here does not include the effects
of income taxes as the tax basis for the oil & gas properties due to the substantial tax net operating loss carryforwards available
to the Company which makes its use non-applicable on a go-forward basis. A discount factor of 10% was used to reflect the timing of future
net cash flows. The standardized measure of discounted future net cash flows is not intended to represent the replacement cost or fair
value of the Company’s oil & gas properties. An estimate of fair value would also take into account, among other things, the
recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount factor more representative
of the time value of money and the risks inherent in oil and gas reserve estimates.
Costs
Incurred in Oil and Gas Activities
Costs
incurred during the year ended December 31, 2022 and 2021 in connection with the Company’s oil and gas acquisition, exploration
and development activities are shown below.
Schedule of Oil and Gas Acquisition, Exploration and Development Activities
| | |
2022 | | |
2021 | |
| | |
Year Ended December 31, | |
| | |
2022 | | |
2021 | |
| Property acquisition costs: | |
| | | |
| | |
| Proved | |
$ | — | | |
$ | — | |
| Unproved | |
| — | | |
| — | |
| Total property acquisition costs | |
| | | |
| — | |
| Development costs | |
| — | | |
| 272,799 | |
| Exploration costs | |
| 288,366 | | |
| — | |
| | |
| | | |
| | |
| Total costs | |
$ | 288,366 | | |
$ | 272,799 | |
During
2022, the Company incurred $288,366 of exploration costs when it drilled its pilot well in the Hugoton Gas Field which was
successfully completed and is producing and selling commercial quantities of natural gas, natural gas liquids and helium. During
2021 the Company incurred $272,799
in development costs on the Kansas Oil & Gas Properties in 2021 primarily to assess the potential of noble gas and rare earth
mineral reserves. Such exploration included noble gases such as helium and argon and rare earth minerals included bromine, lithium
and iodine. The Company is assessing the results of such tests to determine whether commercial amounts of reserves exist that can be
profitably extracted on the Kansas Oil & Gas Properties.
Aggregate
capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion,
impairment and amortization are as follows:
Schedule
of Capitalized Costs Oil and Gas Information
| | |
December 31, 2022 | | |
December 31, 2021 | |
| Central Kansas Uplift - Oil and gas production equipment | |
$ | 913,425 | | |
$ | 913,425 | |
| Hugoton Gas Field - Oil and gas production equipment | |
| 96,831 | | |
| — | |
| Central Kansas Uplift – Leasehold costs | |
| 15,225 | | |
| — | |
| Hugoton Gas Field – Leasehold costs | |
| 191,535 | | |
| | |
| | |
| | | |
| | |
| Subtotal | |
| 1,217,016 | | |
| 913,425 | |
| Less: Accumulated impairment | |
| (905,574 | ) | |
| — | |
| Less: Accumulated depreciation, depletion and amortization | |
| (222,755 | ) | |
| (92,502 | ) |
| Oil and gas properties and equipment, net | |
$ | 88,687 | | |
$ | 820,923 | |
The $288,366 exploration costs relative
the Hugoton Gas Field pilot well during the year ended December 31, 2022 was allocated to proved oil and gas properties with
$191,535 to leasehold costs and $96,831 representing tangible equipment. The $913,425 acquisition price
of the Properties in 2021 was allocated to tangible equipment and seismic data acquired as part of the acquisition.
During the year ended December 31, 2022, the Company
changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production.
The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated
operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production
wells as of December 31, 2022 and is considering the deepening of the conventional wells on the property to explore for helium and other
noble gases that may be present in deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to
reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022.
The Company performed the ceiling test to assess
potential impairment of the capitalized costs relative to its Hugoton Gas Field Project. The ceiling test indicated an impairment charge
of $192,762 was required to reduce the total capitalized costs to $88,687 as of December 31, 2022. Accordingly, the Company has recorded
an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs related to its Hugoton Gas Field properties
to $88,687 as of December 31, 2022.
Costs
Not Being Amortized
Oil
and gas property costs not being amortized at December 31, 2022 and 2021, costs by year that the costs were incurred, are as follows:
Schedule of Oil and Gas Property Costs Not Being Amortized
| Year Ended December 31, | |
Amount | |
| 2022 | |
$ | — | |
| 2021 | |
| — | |
| 2020 | |
| — | |
| Prior | |
| — | |
| Total costs not being amortized | |
$ | — | |
Note
17 – Subsequent Events
Designation
of Series B Convertible Preferred Stock
On May 3, 2023, the Company filed the Certificate
of Designation (the “ Certificate of Designation”) with the Secretary of State of the State of Nevada (the “Nevada Secretary
of State”), establishing the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series
B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Convertible Preferred Stock”). The Certificate of
Designation became effective upon filing with the Nevada Secretary of State.
Pursuant
to the provisions of the Certificate of Designation of Preferences, Rights and Limitations of the Series B Preferred Stock (the “Certificate
of Designation”) the Company is authorized to issue up to 50,000 shares of Series B Preferred from time to time with a Stated Value/Liquidation
Value of $100 per share. Each share of Series B 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 Stated Value
of such share of Preferred Stock (as such term is defined in the Certificate of Designation) by the Conversion Price (as such term is
defined in the Certificate of Designation), which Conversion Price is subject to certain adjustments. In addition, the Certificate of
Designation also provides for the payment of dividends, in (I) cash, or (ii) shares of Common Stock, to the holders of the Series B Preferred
Stock, of 8% per annum, based on the Stated Value, until the earlier of (i) the date on which the shares of Series B Preferred Stock
are converted to Common Stock or (ii) date the Company’s obligations under the Certificate of Designation have been satisfied in
full. The shares of Series B Preferred Stock also (i) vote on an as-converted to Common Stock basis, subject to certain beneficial ownership
limitations, (ii) are redeemable at the option of the Company at any time, (iii) rank senior to the Common Stock and any class or series
of capital stock created after the Series B Preferred Stock and (iv) have a special preference upon the liquidation of the Company.
Issuance
of Series B Convertible Preferred Stock
May
2023 Issuance - On May 4, 2023, the Company entered into a securities purchase agreement with three (3) accredited investors
providing for an aggregate investment of $750,000
by the investors for the issuance by the Company to them of (i) 7,500
shares of Series B Convertible Preferred Stock with a stated/liquidation value of $100
per share (the “May 2023 Series B 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 15,000,000
shares of Common Stock at an exercise price of five ($0.05)
cents per share, subject to customary adjustments thereunder. The 7,500 shares of May 2023 Series B Convertible Preferred Stock are
convertible into an aggregate of up to 15,000,000
shares of Common Stock. Holders of the warrants may exercise the warrants 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. The Company intends to use the proceeds of the May 2023 Series B Convertible Preferred Stock offering for development of
Hugoton Gas Field and Central Kansas Uplift Properties 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 May 2023 Series B Convertible Preferred Stock transaction, to register the shares
of Common Stock issuable upon the conversion of the May 2023 Series B Convertible Preferred Stock and the 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 issuance of the
May 2023 Series B Convertible Preferred Stock.
On May 5, 2022, Ozark Capital, LLC (“Ozark”)
acquired 2,500 shares of Series B Preferred Stock (convertible into 5,000,000 shares of Common Stock), together with warrants to acquire
5,000,000 shares of Common Stock at five cents ($0.05) per share for a total cash contribution of $250,000. Ozark and its affiliates hold
over 10% of the shares of the Company’s Common Stock as of December 31, 2022. Accrued dividends on the Class A Convertible Preferred
Stock attributable to Ozark were $11,080 and $8,523 for the years ended December 31, 2022 and 2021, respectively. The Company has outstanding
accrued and unpaid preferred dividends totaling $5,601 and $ — relative to Ozark’s Series A Preferred Stock as of December
31, 2022 and 2021, respectively.
The holders of the May 2023 Series B Convertible Preferred Stock agreed to a 4.99%
beneficial ownership cap that limits the investors’ ability to convert its May 2023 Series B 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
Securities Purchase Agreement also contains customary representations, warranties and agreements of the Company and the Investors and
customary indemnification rights and obligations of the parties thereto.
Appointment
of Officers
Resignation
of Stanton E. Ross- On May 5, 2023, in connection with the closing of the May 2023 Series B Convertible Preferred Stock, Stanton E. Ross,
the Company’s Chief Executive Officer and President, resigned from his positions with the Company.
Resignation
of Daniel F. Hutchins- On May 5, 2023, in connection with the closing of the May 2023 Series B Convertible Preferred Stock, Daniel F. Hutchins,
the Company’s Chief Financial Officer, resigned from his position with the Company.
Appointment
of Thomas J. Heckman as Chief Executive Officer and Chief Financial Officer- On May 2, 2023, in connection with the anticipated
closing of the May 2023 Series B Convertible Preferred Stock the Company’s Board of Directors appointed Thomas J. Heckman to
the positions of Chief Executive Office and Chief Financial Officer of the Company to replace Mr. Ross and Mr. Hutchins, effective
May 5, 2023.
Conversion
of 8% Convertible Notes Payable to Common Stock.
On
January 13, 2023, a holder of 8%
Convertible Notes Payable exercised its right to convert $46,296
of principal and $3,704 of accrued interest into
500,000
shares of common stock.
Status
of 8% Convertible Notes Payable in Default as of December 31, 2022.
As
further described in Note 4 the Company has certain convertible notes payable that have matured and are in default as of December 31,
2022. 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 as of December 31, 2022.
With
respect to two of the 8%
convertible notes payable due October
29, 2022 with an outstanding
aggregate principal balance of $500,000
as of December 31, 2022,
the Company has reached an agreement with the two Investors. On January 10, 2023, the Company amended each of those notes by entering
into a letter agreement between the Investors and the Company. The
Letter Agreement modifies the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration
for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10,
subject to any future adjustments as provided in each of the notes.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $450,000 (including $100,000 principal balance of the notes payable due October 29, 2022 and $350,000 principal
balance of the note payable due September 15, 2022), which the Company did not pay by their maturity dates. The Company and the
holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the
outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon
issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes
payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to
$0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior
convertible notes payable.
With
respect to the 8% convertible notes payable due June
29, 2022 with an outstanding aggregate principal balance of $312,500 as of December 31, 2022, the
Company has reached an agreement with the two Investors. On January 10, 2023, the Company amended each of those notes by entering into
a letter agreement between the Investors and the Company. The Letter Agreement modifies the terms of the notes by extending each
note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion
Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
With
respect to the other notes that were not amended or exchanged on January 10, 2023 and May 5, 2023, 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.
**********************