UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019.
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File Number: 0-17204
INFINITY ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3126427 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
11900 College Blvd, Suite 310, Overland Park, KS 66210
(Address of principal executive offices) (Zip Code)
(913) 948-9512
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | ||
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of capital, as of the latest practicable date:
| Class | Outstanding at May 2, 2019 | |
| Common Stock, $0.0001 par value | 7,712,569 |
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
INFINITY ENERGY RESOURCES, INC.
Condensed Balance Sheets
March 31, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 918 | $ | 1,367 | ||||
| Total current assets | 918 | 1,367 | ||||||
| Total assets | $ | 918 | $ | 1,367 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,076,427 | $ | 6,040,948 | ||||
| Accrued liabilities (including $788,520 due to related party at March 31, 2019 and December 31, 2018) | 3,738,351 | 3,699,747 | ||||||
| Accrued interest | 538,533 | 509,894 | ||||||
| Asset retirement obligations | 1,716,003 | 1,716,003 | ||||||
| Secured convertible note payable-current | 2,197,231 | 2,197,231 | ||||||
| Convertible notes payable-short term | 1,338,125 | 1,338,125 | ||||||
| Total current liabilities | 15,604,670 | 15,501,948 | ||||||
| Derivative liabilities | 133,949 | 65,502 | ||||||
| Total liabilities | 15,738,619 | 15,567,450 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock; par value $.0001 per share, 10,000,000 shares authorized; no shares issued or outstanding as of March 31, 2019 and December 31, 2018 | — | — | ||||||
| Common stock, par value $.0001 per share, authorized 75,000,000 shares, issued and outstanding 7,712,569 shares at March 31, 2019 and December 31, 2018 | 771 | 771 | ||||||
| Additional paid-in capital | 109,080,273 | 109,080,273 | ||||||
| Accumulated deficit | (124,818,745 | ) | (124,647,127 | ) | ||||
| Total stockholders’ deficit | (15,737,701 | ) | (15,566,083 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 918 | $ | 1,367 | ||||
The accompanying notes are an integral part of these condensed financial statements.
| 3 |
INFINITY ENERGY RESOURCES, INC.
Condensed Statements of Operations
(unaudited)
For the Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating expenses: | ||||||||
| General and administrative expenses | $ | 74,533 | $ | 71,434 | ||||
| Total operating expenses | 74,533 | 71,434 | ||||||
| Operating loss | (74,533 | ) | (71,434 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (28,638 | ) | (28,991 | ) | ||||
| Change in derivative fair value | (68,447 | ) | 2,583 | |||||
| Change in fair value of senior convertible note payable | — | (61,636 | ) | |||||
| Total other income (expense) | (97,085 | ) | (88,044 | ) | ||||
| Loss before income taxes | (171,618 | ) | (159,478 | ) | ||||
| Income tax benefit (expense) | — | 150,000 | ||||||
| Net loss | $ | (171,618 | ) | $ | (9,478 | ) | ||
| Net loss per share – basic and diluted | $ | (0.02 | ) | $ | (0.00 | ) | ||
| Weighted average shares outstanding – basic and diluted | 7,712,569 | 7,712,569 | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| 4 |
INFINITY ENERGY RESOURCES, INC.
Condensed Statement of Stockholders’ Deficit
Three months ended March 31, 2019
(unaudited)
| Common Stock | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2018 | 7,712,569 | $ | 771 | $ | 109,080,273 | $ | (124,647,127 | ) | $ | (15,566,083 | ) | |||||||||
| Net loss | — | — | — | (171,618 | ) | (171,618 | ) | |||||||||||||
| Balance, March 31, 2019 | 7,712,569 | $ | 771 | $ | 109,080,273 | $ | (124,818,745 | ) | $ | (15,737,701 | ) | |||||||||
The accompanying notes are an integral part of these condensed financial statements.
| 5 |
INFINITY ENERGY RESOURCES, INC.
Condensed Statements of Cash Flows
(unaudited)
For the Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (171,618 | ) | $ | (9,478 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | 68,447 | (2,583 | ) | |||||
| Change in fair value of senior convertible note | — | 61,636 | ||||||
| Change in operations assets and liabilities: | ||||||||
| Decrease in income taxes payable | — | (150,000 | ) | |||||
| Increase in accounts payable | 35,479 | 31,534 | ||||||
| Increase in accrued liabilities | 38,604 | 38,410 | ||||||
| Increase in accrued interest | 28,639 | 28,990 | ||||||
| Net cash used in operating activities | (449 | ) | (1,491 | ) | ||||
| Cash flows from investing activities | — | — | ||||||
| Net cash provided by (used in) investing activities | — | — | ||||||
| Cash flows from financing activities: | — | — | ||||||
| Net cash provided by (used in) financing activities | — | — | ||||||
| Net decrease in cash and cash equivalents | (449 | ) | (1,491 | ) | ||||
| Cash and cash equivalents: | ||||||||
| Beginning | 1,367 | 6,255 | ||||||
| Ending | $ | 918 | $ | 4,764 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | — | $ | — | ||||
| Cash paid for taxes | $ | — | $ | — | ||||
The accompanying notes are an integral part of these condensed financial statements.
| 6 |
INFINITY ENERGY RESOURCES, INC.
Notes to Condensed Financial Statements
March 31, 2019
(unaudited)
Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
Infinity Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”) has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2019 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature of Operations
We plan to pursue the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately 1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We are assessing various opportunities and strategic alternatives (the “Strategic Alternatives”) involving the acquisition, exploration and development of natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
We must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying its existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further, we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to pursue any Strategic Alternatives we may consider.
Nicaragua
We began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round held by INE in January 2003.
On March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
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The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, its day-to-day operations and corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of December 3, 2018 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the requirements noted above plus finance (i) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement from the Nicaraguan government; (ii) normal day-to-day operations and corporate overhead; and (iii) outstanding debt and other financial obligations as they become due, as described below. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt.
The Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting to obtain extensions of the maturity dates for its debt or compromises of the debt. There can be no assurance that it will be able to obtain such funding or extensions or what terms.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
On May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the “Replacement Note”) representing the remaining principal balance of $2,197,231 to replace the Convertible Note. The Replacement Note provides for a one-year maturity from May 7, 2017, a conversion price of $0.50 per share and is currently in technical default. The Company is continuing to negotiate with the Investor a resolution of this matter regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this regard.
| 8 |
The Note was to mature on the three-year anniversary of its issuance, bore interest at 8% per annum, and was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”). The Note is now in default and the Company has had discussions with the Holder regarding a resolution to the default, but there has been no progress at present. As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing nine months from the date of issuance for a period of seven years from the date of issuance. The Note ranked senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding the Concessions. The proposed Replacement Note would have the same security interest as the Convertible Note.
In addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement.
Going Concern
As reflected in the accompanying condensed statements of operations, the Company has had a history of losses. The Company has a significant working capital deficit, has notes payable that are in default and is experiencing substantial liquidity issues. In addition, the Company’s most significant asset and its primary business plan is the exploration and development of the Nicaraguan Concessions which are now in default and in risk of being terminated.
The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of March 31, 2019 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, as noted above. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking sources of debt and equity capital to fund the substantial needs enumerated above. The Company is also attempting to obtain extensions of the maturity date for its debt. There can be no assurance that it will be successful in these regards.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
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Concentrations
The Company’s business plan consists of developing the Nicaraguan Concessions and it plans to be active in Nicaragua in the future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations. The political climate in Nicaragua is unstable and is subject to radical change over a short period of time. In the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability of the Company to obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under its Nicaraguan Concessions.
Foreign Currency
The United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign currencies.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the Company had minimal cash as of March 31, 2019 and December 31, 2018, it is the Company’s policy that all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents.
Oil and Gas Properties
The Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead related to development activities is also capitalized during the acquisition phase.
Depletion of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when the impairment is recognized. All unproved property costs as of March 31, 2019 and December 31, 2018 relate to the Nicaraguan Concessions. In assessing the unproved property costs for impairment, the Company takes into consideration various information including: (i) the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements, (iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall environment related to oil and gas exploration and development projects for unproven targets in unproven regions of the world, (vi) the availability of financing for financial and strategic partners, and (vii) other factors that would impact the viability of a significant long-term oil and gas exploration and development project.
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The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has performed its impairment tests as of March 31, 2019 and December 31, 2018 and has concluded that a full impairment reserve should be provided on the costs capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from January 1, 2016 through March 31, 2019 have been charged to operating expenses as incurred.
Pursuant to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the condensed balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of March 31, 2019 and December 31, 2018, the Company did not have any proved oil and gas properties, and all unproved property costs relate to its Nicaraguan Concessions.
Proceeds from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss.
Asset Retirement Obligations
The Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not perform its obligations to reclaim abandoned wells in a timely manner.
Derivative Instruments
The Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging. ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the condensed statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
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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 March 31, 2019 and December 31, 2018 and during the periods then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes 2, 3, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in operations.
Fair Value of Financial Instruments
The carrying values of the Company’s accounts payable, accrued liabilities and short term notes represent the estimated fair value due to the short-term nature of the accounts.
In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| ● | Level 1 — | Quoted prices in active markets for identical assets and liabilities. | |
| ● | Level 2 — | Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). | |
| ● | Level 3 — | Significant unobservable inputs (including the Company’s own assumptions in determining the fair value. |
The estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant derivatives as of March 31, 2019 and December 31, 2018 were classified under the fair value hierarchy as Level 3.
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
| March 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Senior convertible note payable | $ | — | $ | — | $ | 2,197,231 | $ | 2,197,231 | ||||||||
| Derivative liabilities | — | — | 133,949 | 133,949 | ||||||||||||
| $ | — | $ | — | $ | 2,331,180 | $ | 2,331,180 | |||||||||
| December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Senior convertible note payable | $ | — | $ | — | $ | 2,197,231 | $ | 2,197,231 | ||||||||
| Derivative liabilities | — | — | 65,502 | 65,502 | ||||||||||||
| $ | — | $ | — | $ | 2,262,733 | $ | 2,262,733 | |||||||||
There were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods ended March 31, 2019 and December 31, 2018.
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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 March 31, 2019 and December 31, 2018.
The Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability for unrecognized tax benefit was recorded as of March 31, 2019. During the three months March 31, 2018 the Company determined that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore it reversed the liability and recognized an income tax benefit as described in the following section.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward because the Company had not previously paid the AMT tax but rather it recorded the income tax liability on the accompanying condensed balance sheet.
| 13 |
Net Income (Loss) per Share
Pursuant to FASB ASC Topic 260, Earnings per Share, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
Note 2 – Secured Convertible Note Payable
Secured Convertible Note (the “Note) payable consists of the following at March 31, 2019 and December 31, 2018:
| March 31, 2019 | December 31, 2018 | |||||||
| Secured convertible note payable, at fair value | $ | 2,197,231 | $ | 2,197,231 | ||||
| Less: Current maturities | (2,197,231 | ) | (2,197,231 | ) | ||||
| Secured convertible note payable, long-term | $ | — | $ | — | ||||
Following is an analysis of the activity in the Note during the three months December 31, 2018:
| Amount | ||||
| Balance at December 31, 2018 | $ | 2,197,231 | ||
| Funding under the Investor Note during the period | — | |||
| Principal repaid during the period by issuance of common stock | — | |||
| Change in fair value of secured convertible note during the period | — | |||
| Balance at March 31, 2019 | $ | 2,197,231 | ||
On May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note (the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The placement agent for the Company in the transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the Investor. The May 2015 Private Placement was made pursuant to an exemption from registration under such Act. At the closing, the Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash, with an aggregate initial principal amount of $9,550,000 (the “Investor Note”).
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the “Replacement Note”) with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and is due in monthly installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the Replacement Note at its maturity and it is now in technical default. The Replacement Note is to be secured to the same extent as the Convertible Note. The Company is continuing to negotiate a resolution of this matter with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
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Description of the Secured Convertible Note
The Note is senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The Note was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”). The Note was to mature on the three-year anniversary of its issuance date. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the Conversion Price then in effect, the then current Conversion Price will be decreased to equal such lower price. The foregoing adjustments to the Conversion Price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
On the first business day of each month beginning on the earlier of the (i) effectiveness of a registration statement the Company files to register the shares of common stock issuable upon conversion of the Note or exercise of the Warrant, as defined below, or (ii) sixth month following the date of the Note through and including the maturity date (the “Installment Dates”), the Company will pay to the Note holder an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the Note (or the principal outstanding on the Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to such principal plus (iii) the accrued and unpaid late charges (if any) with respect to such principal and interest. The Investor has the ability to defer or accelerate such monthly payments in its sole discretion.
Prior to the maturity date, the Note bore interest at 8% per annum (or 18% per annum during an event of default) with interest payable in cash or in shares of Common Stock monthly in arrears on the first business day of each calendar month following the issuance date.
Each monthly payment may be made in cash, in shares of the Company’s common stock, or in a combination of cash and shares of its common stock. The Company’s ability to make such payments with shares of its common stock will be subject to various equity conditions, including the existence of an effective registration statement covering the resale of the shares issued in payment (or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant, as defined below, for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations) and certain minimum trading price and trading volume. Such shares will be valued, as of the date on which notice is given by the Company that payment will be made in shares, at the lower of (1) the then applicable Conversion Price and (2) a price that is 80.0% of the arithmetic average of the three lowest weighted average prices of the Company’s common stock during the twenty-trading day period ending two trading days before the applicable determination date (the “Measurement Period”). If the Company elects to pay such monthly payment in shares of the Company’s stock, it is required to pre-deliver shares of its common stock and is required to deliver additional shares, if any, to true-up such number of shares to the number of shares required to be delivered on the applicable Installment Date pursuant to the calculation above.
At any time after the issuance date, the Company had the right to redeem all or any portion of the outstanding principal balance of the Note plus all accrued but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i) the arithmetic average of the closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds 200% of the Conversion Price and (ii) among other conditions, there is an effective registration statement covering the resale of the shares issued in payment or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations. The Investor has the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
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Upon the occurrence of an event of default under the Note, the Investor may, so long as the event of default is continuing, require the Company to redeem all or a portion of its Note. Each portion of the Note subject to such redemption must be redeemed by the Company, in cash, at a price equal to the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid interest, and accrued and unpaid late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the event of default and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period.
Subject to certain conditions, the Investor may also require the Company to redeem all or a portion of its Note in connection with a transaction that results in a Change of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such redemption in cash at a price equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and unpaid interest, and accrued and unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the earlier to occur of (i) the consummation of the Change of Control and (ii) the public announcement of such Change of Control and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period.
Description of the Warrant.
As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing nine months from the date of issuance and the exercise prices for the Warrant is subject to adjustment for certain events, such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the exercise price then in effect, the exercise price of the Warrant will be decreased to equal such lesser price. Upon each such adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately. The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99% Restriction on Conversion of Note and Exercise of Warrant
The Investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result in the Investor being the beneficial owner in excess of 9.99% of the Company’s common stock. The Company was required to hold a meeting of its shareholders to approve an increase to the number of its authorized shares to meet its obligations under the Purchase Agreement to have reserved 200% of the shares issuable upon conversion of the Note and exercise of the Warrant. The Company held its Annual Meeting of Shareholders on September 25, 2015 and the shareholders approved the reverse split of the Company’s common stock issued and outstanding shares, which satisfied this requirement.
Participation Rights
If, during the period beginning on the closing date and ending on the four (4) year anniversary of the closing date, the Company offers, sells, grants any option to purchase, or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent securities (a “Subsequent Placement”), the Investor will have the right to participate for 50% of any such future Subsequent Placement.
Description of the Financial Accounting and Reporting
The Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including its embedded conversion feature, were estimated together utilizing the Black-Scholes model at March 31, 2019 and December 31, 2018.
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The Company received $450,000 of proceeds at the date of issuance and after repayments and additional funding the net principal balance was $129,960 as of March 31, 2019 and December 31, 2018. The fair market value of the Note was estimated to be $682,400 as of the issuance date, $2,197,231 at December 31, 2018 and at March 31, 2019. The net change in fair market value of the Note of $61,636 during the three month period ended March 31, 2018 is included in change in fair value of senior secured convertible note payable in the accompanying condensed statement of operations for the three months ended March 31, 2018.
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company is negotiating with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
The Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions. The estimated fair value of the warrant derivative as of March 31, 2019 was $116,731, representing a change of $59,639 from December 31, 2018, which is included in changes in derivative fair value in the accompanying condensed statement of operations for the three months ended March 31, 2019. See Note 5.
The warrant to purchase 240,000 shares issued as part of the placement fee in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative liability totaled $7,991 (increase in the derivative liability) through March 31, 2019, which is included in changes in derivative fair value in the accompanying condensed statement of operations for the three months ended March 31, 2019. The warrant derivative liability balance related to such warrants was $15,564 and $7,573 as of March 31, 2019 and December 31, 2018, respectively. See Note 5.
The Company is required to make monthly installment payments in the form of cash, common stock or a combination of both. The Holder suspended such installments during the third and fourth quarters of 2016 and the suspension continued through March 31, 2019.
Note 3 – Debt
Debt consists of the following at March 31, 2019 and December 31, 2018:
| March 31, 2019 | December 31, 2018 | |||||||
| Convertible notes payable, short term: | ||||||||
| Note payable, (in default) | $ | 1,000,000 | $ | 1,000,000 | ||||
| Note payable (in default) | 200,000 | 200,000 | ||||||
| Note payable (in default) | 40,000 | 40,000 | ||||||
| Note payable, (in default) | 50,000 | 50,000 | ||||||
| Note payable (in default) | 35,000 | 35,000 | ||||||
| Note payable (due on demand) | 13,125 | 13,125 | ||||||
| Total notes payable, short-term | $ | 1,338,125 | $ | 1,338,125 | ||||
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Note Payable – Short-term
On December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase 100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the Note on or before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remained the same. The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability. The discount is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired as of March 31, 2019 and is no longer exercisable.
In connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August 7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note payable and amortized ratably over the extended term of the note.
In connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and (iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the December 2013 Note on or before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the warrant remained the same. The warrant has expired as of March 31, 2019 and is no longer exercisable. The December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note. The December 2013 Note is in default and the Company is pursuing a resolution to this default including seeking an extension of the maturity date of this Note (See Note 11) from the holder; however, there can be no assurances such efforts will be successful.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability. The Warrant expired as of March 31, 2019 and can no longer be exercised. The discount has been amortized ratably through the original maturity date and each of the extended maturity dates. The Company recognized the value of the 20,000 shares of common stock issued ($104,000) and the increased value of the outstanding warrants due to the decrease in their exercise price ($68,716) as an additional discount on the note payable to be amortized ratably over the extended term of the underlying note.
Other than the December 2013 Note described above, during the three months March 31, 2019 the Company had short-term notes outstanding with entities or individuals as follows:
| ● | On November 8, 2016 the Company borrowed a total of $200,000 from an individual under a convertible note payable with the conversion rate of $5.00 per share. The note requires no principal or interest payments until its maturity date of November 7, 2017 and bears interest at 8% per annum. The note was not paid on its original maturity date. The Company is pursuing a resolution of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will be successful in this regard. |
| 18 |
| ● | On April 20, 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April 19, 2018 and bears interest at 8% per annum. The note was not paid on its maturity date. The Company is pursuing a resolution of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will be successful in this regard. | |
| ● | On July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. The Company and its lender are pursuing a resolution of this default. There can be no assurance that the Company will be successful in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase 5,000 shares of common stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire in five years. The value of the 5,000 newly issued warrants issued on January 7, 2016 totaled $379 and $131 on May 7, 2016 both of which were amortized over the extension period (through October 7, 2016). The related warrant derivative liability balance was $973 and $492 as of March 31, 2019 and December 31, 2018, respectively. See Note 5. | |
| ● | On July 15, 2015, the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is currently pursuing a resolution of this default including an additional extension from the Holder. There can be no assurance that the Company will be successful in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase an aggregate of 3,500 shares of common stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire in five years. The value of the 3,500 newly issued warrants on January 15, 2016 totaled $267 and $74 on May 15, 2016, both of which were amortized over the extension period (through October 15, 2016). The related warrant derivative liability balance was $681 and $345 as of March 31, 2019 and December 31, 2018, respectively. See Note 5. | |
| ● | On May 21, 2018, the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum. |
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Note 4 – Stock Options
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted, and is estimated in accordance with the provisions of ASC 718.
In May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005, the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans; however, such Plans have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc. 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As of March 31, 2019, 500,000 shares were available for future grants under the 2015 Plan. All other Plans have now expired.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates. There were no stock options granted during the periods ended March 31, 2019 and December 31, 2018.
The following table summarizes stock option activity for the three months March 31, 2019:
| Number of Options | Weighted
Average Exercise Price Per Share |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||
| Outstanding at December 31, 2018 | 338,200 | $ | 41.24 | 3.1 years | $ | — | ||||||||
| Granted | — | — | ||||||||||||
| Exercised | — | — | ||||||||||||
| Forfeited | — | — | ||||||||||||
| Outstanding at March 31, 2019 | 338,200 | $ | 41.24 | 3.0 years | $ | — | ||||||||
| Outstanding and exercisable at March 31, 2019 | 338,200 | $ | 41.24 | 3.0 years | $ | — | ||||||||
The Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0- during the three months ended March 31, 2019 and 2018, respectively.
The intrinsic value as of March 31, 2019 related to the vested and unvested stock options as of that date was $-0. The unrecognized compensation cost as of March 31, 2019 related to the unvested stock options as of that date was $-0-.
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Note 5 – Derivative Instruments
Derivatives – Warrants Issued Relative to Notes Payable
The estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk factors, among other items (ASC 820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3). The detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note payable will remain in effect until such time as the underlying warrant is exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date.
The Company has issued warrants to purchase an aggregate of 2,074,000 shares of common stock in connection with various outstanding debt instruments which require derivative accounting treatment as of March 31, 2019 and December 31, 2018. A comparison of the assumptions used in calculating estimated fair value of such derivative liabilities as of March 31, 2019 is as follows:
As of March 31, 2019 |
||||
| Volatility – range | 239.8% - 275.7 | % | ||
| Risk-free rate | 2.23% - 2.31 | % | ||
| Contractual term | 1.25 - 3.1 years | |||
| Exercise price | $5.00 - $5.60 | |||
| Number of warrants in aggregate | 2,074,000 | |||
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
| Amount | ||||
| Balance at December 31, 2018 | $ | 65,502 | ||
| Warrants issued to originate or extend notes payable (recorded as discount on note payable) -Note 3 | — | |||
| Unrealized derivative gains included in other expense for the period | 68,447 | |||
| Transition of derivative liability to equity | — | |||
| Balance at March 31, 2019 | $ | 133,949 | ||
The warrant derivative liability consists of the following at March 31, 2019 and December 31, 2018:
| March 31, 2019 | December 31, 2018 | |||||||
| Warrant issued to holder of Secured convertible note (Note 2) | $ | 116,731 | $ | 57,092 | ||||
| Warrant issued to placement agent (Note 2) | 15,564 | 7,573 | ||||||
| Warrants issued to holders of notes payable - short term (Note 3) | 1,654 | 837 | ||||||
| Total warrant derivative liability | $ | 133,949 | $ | 65,502 | ||||
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Note 6 – Warrants
The following table summarizes warrant activity for the three months March 31, 2019:
| Number
of Warrants |
Weighted Average Exercise Price Per Share |
|||||||
| Outstanding and exercisable at December 31, 2018 | 2,365,563 | $ | 5.01 | |||||
| Issued | — | — | ||||||
| Exercised/forfeited | — | — | ||||||
| Outstanding and exercisable at March 31, 2019 | 2,365,563 | $ | 5.01 | |||||
The weighted average term of all outstanding common stock purchase warrants was 2.8 years as of March 31, 2019. The intrinsic value of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero as of March 31, 2019.
Note 7 – Income Taxes
The provision for income taxes consists of the following:
| For the Three months Ended | ||||||||
| March 31, | ||||||||
| 2019 | 2018 | |||||||
| Current income tax expense (benefit) | $ | — | $ | (150,000 | ) | |||
| Deferred income tax benefit | — | — | ||||||
| Total income tax expense (benefit) | $ | — | $ | (150,000 | ) | |||
The effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward as the Company had not previously paid the AMT tax rather it recorded the income tax liability on the accompanying condensed balance sheet.
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The Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March 31, 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000, which expire from 2025 through 2038.
The Company has not completed the filing of tax returns for the tax years 2012 through 2018. Therefore, all such tax returns are open to examination by the Internal Revenue Service.
Note 8 – Commitments and Contingencies
The Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact on the Company’s condensed financial statements.
Nicaraguan Concessions
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking debt and equity capital in order to fund the substantial needs enumerated above; however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary to cure the defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to drilling the exploratory wells. The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
The following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions in order for the Company to retain them unless it is successful in obtaining extensions, renewals or the renegotiation of the entire Concessions Agreements for the Perlas and Tyra blocks.
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Minimum Work Program – Perlas
Block Perlas – Exploration Minimum Work Commitment and Relinquishments
| Exploration Period (6 Years) | Duration (Years) | Work Commitment | Relinquishment | Irrevocable Guarantee | ||||||
| Sub-Period1 | 2 | - Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D) | 26km2 | $ | 443,100 | |||||
| Sub-Period 2 Optional | 1 | - Acquisition, processing & interpretation of 200km2 of 3D seismic | 53km2 | $ | 1,356,227 | |||||
| Sub-Period 3 Optional | 1 | - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower | 80km2 | $ | 10,220,168 | |||||
| Sub-Period 4 Optional | 2 | - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis | All acreage except areas with discoveries | $ | 10,397,335 | |||||
Minimum Work Program – Tyra
Block Tyra – Exploration Minimum Work Commitment and Relinquishments
| Exploration Period (6 Years) | Duration (Years) | Work Commitment | Relinquishment | Irrevocable Guarantee | ||||||
| Sub-Period1 | 1.5 | - Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new 2D seismic (or equivalent in 3D) | 26km2 | $ | 408,450 | |||||
| Sub-Period 2 Optional | 0.5 | - Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period | 40km2 | $ | 278,450 | |||||
| Sub-Period 3 Optional | 2 | - Acquisition, processing & interpretation of 250km2 of new 3D seismic | 160km2 | $ | 1,818,667 | |||||
| Sub-Period 4 Optional | 2 | - Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis | All acreage except areas with discoveries | $ | 10,418,667 | |||||
Contractual and Fiscal Terms
| Training Program | US $50,000 per year, per block | |||||
| Area Fee | Years 1-3 | $ | 0.05/hectare | |||
| Years 4-7 | $ | 0.10/hectare | ||||
| Years 8 & forward | $ | 0.15/hectare | ||||
| Royalties | Recovery Factor 0 – 1.5 | Percentage 5 | % | |||
| 1.5 – 3.0 | 10 | % | ||||
| >3.0 | 15 | % | ||||
| Natural Gas Royalties | Market value at production | 5 | % | |||
| Corporate Tax | Rate no higher than 30% | |||||
| Social Contribution | 3%
of the net profit (1.5% for each autonomous region) |
|||||
| Investment Protection | ICSID arbitration OPIC insurance | |||||
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Revenue Sharing Commitments
On March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently converted the subordinated promissory note to common stock.
Under the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs.
The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and directors.
The Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions.
Lack of Compliance with Law Regarding Domestic Properties
Infinity has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas were disposed of well prior to March 31, 2019; however, the Company may remain liable for certain asset retirement costs should the new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003 as of March 31, 2019 and December 31, 2018 are sufficient to cover any potential noncompliance liabilities relative to the plugging of abandoned wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former oil and gas properties. The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced any oil & gas properties for a number of years.
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Litigation
The Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying condensed financial statements.
The Company is currently involved in litigation as follows:
| ● | In October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties. The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss the matter. |
| Pending satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company. Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included in the asset retirement obligation on the accompanying condensed balance sheets. | |
| ● | Cambrian Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719, on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources to do so. |
| ● | Torrey Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000 per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000 and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of March 31, 2019 and December 31, 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
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Note 9 – Related Party Transactions
The Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services (for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s accounting for such support services and was not billed for any such services during the three months ended March 31, 2019 and 2018. The amount due to the CFO’s firm for services previously provided was $762,407 at March 31, 2019 and December 31, 2018, and is included in accrued liabilities at both dates.
On June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any rights in the Nicaraguan Concessions for officers and directors.
In connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes the former managing partner of Offshore.
As of March 31, 2019 and December 31, 2018, the Company had accrued compensation to its officers and directors of $1,829,208. The Board of Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Note 10 – Subsequent Events
The Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The Company continues to attempt to negotiate extensions, waivers or a new Concession agreement with the Nicaraguan Government; however, there can be no assurance that the Company will be successful in that regard. The Company is pursuing meetings with Nicaraguan Government officials to address the pending defaults; however, the political situation in Nicaragua has complicated this task.
The Company has not resolved the contingencies regarding its various notes payable related to their default status as described in Notes 2 and 3. The Company continues to pursue resolutions of these defaults including to negotiate extensions, waivers or new note agreements; however, there can be no assurance that the Company will be successful in that regard.
During April and May 2019, the Company borrowed an additional $50,500 from the same private third party lender who previously loaned the Company $13,125 under an unsecured promissory note which is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum.
**********************
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward Looking Statements
This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included in this report.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this quarterly report on Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law.
As used in this quarterly report, “Infinity,” the “Company,” “we,” “us” and “our” refer collectively to Infinity Energy Resources, Inc., its predecessors and subsidiaries or one or more of them as the context may require.
2019 Operational and Financial Objectives
Corporate Activities
The Nicaraguan Concessions represent our most substantial asset and are the focal point of our business plan. The Company is in default of various provisions of the 30-year Concession for both the Perlas and Tyra blocks as of March 31, 2019, as noted above.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. The Company has encountered challenges in this regard because of the political situation in Nicaragua. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the foregoing requirements plus normal day-to-day operations and corporate overhead and outstanding debt and other financial obligations as they become due, including the $1.0 million December 2013 Note, and the five notes payable totaling $338,125, which are either due on demand or currently in default and the Replacement Note, if issued. In light of the foregoing, the Company is considering Strategic Alternatives.
These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
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The Company is seeking new outside sources of debt and equity capital to fund the substantial needs enumerated above, as well as satisfying its existing debt obligations. The Company is attempting to obtain extensions of the maturity date for its debt; however, there can be no assurance that it will be able to do so or what the final terms will be if the lenders agree to such extensions.
The Company is also assessing various Strategic Alternatives involving the acquisition, exploration and development of natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
For the Three Months Ended March 31, 2019 and 2018
Results of Operations
Revenue
The Company had no revenues in either 2019 or 2018 because it focused on the pursuit of the exploration, development, financing and maintenance of the Nicaraguan Concessions.
Production and Other Operating Expenses (income)
The Company had no production related operating expenses in either 2019 or 2018. The Company sold its investment in Infinity-Texas in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2019 and 2018.
The Company has no current or planned domestic exploration and development activities. It is not actively working on any domestic property, focusing instead on the exploration, development and financing of the Nicaraguan Concessions.
General and Administrative Expenses
General and administrative expenses of $74,533 for the three months ended March 31, 2019 increased $3,099, or 4.3%, from $71,434 in the same period in 2018. The increase in general and administrative expenses is primarily attributable to a $3,000 increase in audit fees associated with the Company’s regulatory filings with the Securities and Exchange Commission.
Interest expense
Interest expense decreased slightly from $28,991 for the three months ended March 31, 2018 to $28,638 for the three months ended March 31, 2019. The interest expense is related to various short-term notes outstanding in both periods. These short-term notes have matured and the Company was seeking extensions as of March 31, 2019.
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The Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore, the Company will need to continue with these types of short-term borrowings with high effective interest rates.
Change in Derivative Fair Value
The conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and the Secured Convertible Note outstanding during 2019 and 2018 are treated as derivative instruments because the promissory notes and warrants contain ratchet and anti-dilution provisions. Accordingly, the Company adjusted the value of the outstanding derivative liabilities to their estimated fair value as of March 31, 2019 and December 31, 2018. The mark-to-market process resulted in a loss of $68,447 during the three months ended March 31, 2019 and a gain of $2,583 during the three months ended March 31, 2018. The loss recognized in the 2019 period is primarily the result of the increase in the closing market price of the common stock between the December 31, 2018 ($0.04 per share) and March 31, 2019 ($0.08 per share), which increased the estimated fair value of the underlying derivatives.
Change in Fair Value of Secured Convertible Note
The Company issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair value basis. On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note representing the remaining principal balance of $2,197,231 to replace the Convertible Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor at its maturity date in May 2018. The resulting change in the estimated fair value was $61,636 during the three months ended March 31, 2018. There was no change in fair value during the three months ended March 31, 2019 as the Convertible Note matured in May 2018. The Company plans to continue to negotiate with the Investor regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this regard.
Income Tax
The Company recorded an income tax benefit of $150,000 in the three months ended March 31, 2018 compared to $-0- for the three months ended March 31, 2019 primarily due to the Tax Cuts and Jobs Act (the “Act”) that became law on December 22, 2017. The Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in January 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000, which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, because the Company considered it more likely than not that all the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018.
For income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000 as of December 31, 2018, which expire from 2025 through 2038. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
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Net loss
As a result of the above, we reported a net loss of $171,618 for the three months ended March 31, 2019 compared to a net loss of $9,478 for the three months ended March 31, 2018. This represents a deterioration of $162,140.
Basic and Diluted Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses from continuing operations are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
The basic and diluted loss per share was $0.02 for the three months ended March 31, 2019, for the reasons previously noted. The basic and diluted loss per share was $-0- for the three months ended March 31, 2018. All outstanding stock options and warrants to purchase common stock were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the three months ended March 31, 2019 and 2018 because the exercise prices of the stock options and warrants were substantially higher than market price in 2019 and 2018 and the net loss reported for both years. Potential shares of common stock as of March 31, 2019 that have been excluded from the computation of diluted net loss per share amounted to 2,703,763 shares, which included 2,365,563 outstanding warrants and 338,200 outstanding stock options.
Liquidity and Capital Resources; Going Concern
We have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the world. Historically, we financed our operations through the issuance of redeemable preferred stock 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 should we be successful exploring our Nicaraguan Concessions.
On December 27, 2013 the Company borrowed $1,050,000 under the December 2013 Note, which is an unsecured credit facility with a private, third-party lender. Effective April 7, 2015 the Company and the lender agreed to extend the maturity date of the December 2013 Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May 2015 Private Placement in the principal amount of $9,550,000 (the “New Maturity Date”). All other terms of the Note remained the same and the remaining principal balance was reduced to $1,000,000 as of September 30, 2016 after the $50,000 principal repayment required by the extension agreement.
The December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the December 2013 Note. The December 2013 Note matured in April 2016 and is currently in default. The Company is seeking an extension of the maturity date; however, there can be no assurance that it will be able to obtain such extension or what the final terms will be if the lender agrees to such an extension.
On May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
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On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company plans to continue to negotiate with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
In July 2015, the Company issued two promissory notes for total cash proceeds of $85,000. The maturity dates of the promissory notes have been extended several times, but they matured in October 2016 and are currently in default. In connection with the origination and extension of the notes, the Company issued warrants exercisable to purchase shares of common stock at an exercise price of $5.60 per share. The warrants are immediately exercisable and terminate five years from their dates of issuance. The Company is seeking an extension of the maturity date of these notes; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
In November 2016, the Company issued a $200,000 convertible promissory note which requires no principal or interest payments until its November 2017 maturity date and bears 8% interest. The proceeds of this note were used to retire the Company’s line-of-credit upon its maturity in November 2016 and for general working capital purposes. This note was not retired at its maturity and is now in default. The Company is negotiating with the Holder to resolve this default.
In April 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April 19, 2018 and bears interest at 8% per annum. The note is in default and the Company is negotiating with the Holder to resolve this default.
On May 21, 2018, the Company borrowed $13,125 under an unsecured promissory note with a private third party lender, which is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum.
In summary, as of March 31, 2019, the following debt was outstanding: (i) $40,000 on our convertible promissory note, which matured on April 19, 2018 and is in default; (ii) $200,000 on our convertible promissory note, which matured on November 7, 2017 and is currently in default; (iii) the two promissory notes in the total principal amount of $85,000, which matured in October 2016 and are in default; (iv) the Convertible Note with a fair value of $2,197,231 which matured in May 2018 and is currently in default; (v) the December 2013 Note in the principal amount of $1,000,000, which was due in April 2016 and is in default; and (vi) $13,125 convertible promissory note, which is due on demand.
The Company is in default of various provisions of the 30-year Concessions for both Perlas and Tyra blocks as of March 31 31, 2019, as noted earlier. The Company is pursuing negotiations with Nicaraguan Government officials to address the pending defaults.
The Company must raise substantial amounts of debt and equity capital from available sources in the immediate future in order to fund the requirements related to the Nicaraguan Concessions and fund (i) its normal day-to-day operations and corporate overhead, (ii) pay its outstanding debt and other financial obligations as they become due including the $1.0 million December 2013 Note, the $2,197,231 due in 2018 representing the May 2015 Private Placement and the various short-term notes payable totaling $338,125, which are either due on demand or are currently in default. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
| 32 |
The Company will need to obtain funding in 2019 to fund the substantial needs enumerated above; however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary to cure the foregoing defaults. The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan Concessions and meet its other financial requirements.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Not Applicable)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of March 31, 2019, the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective in assuring that financial statement presentation and disclosure are in conformity with those which are required to be included in our periodic SEC filings.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.
The Company is currently involved in litigation as follows:
| ● | In October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties. The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss the matter. |
| 33 |
| Pending satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company. Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included in the asset retirement obligation on the accompanying condensed balance sheets. | |
| ● | Cambrian Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719, on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources to do so. |
| ● | Torrey Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000 per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000 and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of March 31, 2019 and December 31, 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default regarding various obligations of the Senior Convertible Note with an unpaid balance of $2,197,231 as of March 31, 2019 (See Note 2). The Senior Convertible Note matured on May 7, 2018 and was not retired by the Company. The Company is pursuing a resolution of these defaults with the Holder, including to negotiate extensions, waivers or a new note agreement; however, there can be no assurance that the Company will be successful in that regard.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
| 34 |
(c) Exhibits.
| 35 |
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Signature | Capacity | Date | ||
| /s/ Stanton E. Ross | Chief Executive Officer | May 3, 2019 | ||
| Stanton E. Ross | (Principal Executive Officer) | |||
| /s/ Daniel F. Hutchins | Chief Financial Officer | May 3, 2019 | ||
| Daniel F. Hutchins | (Principal Financial and Accounting Officer) |
| 36 |
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Company has no subsidiaries.
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Stanton E. Ross, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period(s) in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Stanton E. Ross | |
| Stanton E. Ross | |
| Chief Executive Officer | |
| May 3, 2019 |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Daniel F. Hutchins, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Infinity Energy Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period(s) in which this quarterly report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Daniel F. Hutchins | |
| Daniel F. Hutchins | |
| Chief Financial Officer | |
| May 3, 2019 |
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Infinity Energy Resources, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies to the best of his knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Stanton E. Ross | |
| Stanton E. Ross | |
| Chief Executive Officer | |
| May 3, 2019 | |
| /s/ Daniel F. Hutchins | |
| Daniel F. Hutchins | |
| Chief Financial Officer | |
| May 3, 2019 |
Document and Entity Information - shares |
3 Months Ended | |
|---|---|---|
Mar. 31, 2019 |
May 02, 2019 |
|
| Document And Entity Information | ||
| Entity Registrant Name | INFINITY ENERGY RESOURCES, INC | |
| Entity Central Index Key | 0000822746 | |
| Document Type | 10-Q | |
| Document Period End Date | Mar. 31, 2019 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --12-31 | |
| Entity Filer Category | Non-accelerated Filer | |
| Entity Small Business Flag | true | |
| Entity Emerging Growth Company | false | |
| Entity Ex Transition Period | false | |
| Entity Common Stock, Shares Outstanding | 7,712,569 | |
| Trading Symbol | IFNY | |
| Document Fiscal Period Focus | Q1 | |
| Document Fiscal Year Focus | 2019 |
Condensed Balance Sheets (Parenthetical) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Due to related party | $ 788,520 | $ 788,520 |
| Preferred stock, par value | $ .0001 | $ .0001 |
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
| Preferred stock, shares issued | ||
| Preferred stock, shares outstanding | ||
| Common stock, par value | $ .0001 | $ .0001 |
| Common stock, shares authorized | 75,000,000 | 75,000,000 |
| Common stock, shares issued | 7,712,569 | 7,712,569 |
| Common stock, shares outstanding | 7,712,569 | 7,712,569 |
Condensed Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
|
| Operating expenses: | ||
| General and administrative expenses | $ 74,533 | $ 71,434 |
| Total operating expenses | 74,533 | 71,434 |
| Operating loss | (74,533) | (71,434) |
| Other income (expense): | ||
| Interest expense | (28,638) | (28,991) |
| Change in derivative fair value | (68,447) | 2,583 |
| Change in fair value of senior convertible note payable | (61,636) | |
| Total other income (expense) | (97,085) | (88,044) |
| Loss before income taxes | (171,618) | (159,478) |
| Income tax benefit (expense) | 150,000 | |
| Net loss | $ (171,618) | $ (9,478) |
| Net loss per share - basic and diluted | $ (0.02) | $ (0.00) |
| Weighted average shares outstanding - basic and diluted | 7,712,569 | 7,712,569 |
Condensed Statement of Stockholders' Deficit (Unaudited) - 3 months ended Mar. 31, 2019 - USD ($) |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Accumulated Deficit [Member] |
Total |
|---|---|---|---|---|
| Balance at Dec. 31, 2018 | $ 771 | $ 109,080,273 | $ (124,647,127) | $ (15,566,083) |
| Balance, shares at Dec. 31, 2018 | 7,712,569 | |||
| Net loss | (171,618) | (171,618) | ||
| Balance at Mar. 31, 2019 | $ 771 | $ 109,080,273 | $ (124,818,745) | $ (15,737,701) |
| Balance, shares at Mar. 31, 2019 | 7,712,569 |
Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies |
Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
Infinity Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”) has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2019 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature of Operations
We plan to pursue the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately 1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We are assessing various opportunities and strategic alternatives (the “Strategic Alternatives”) involving the acquisition, exploration and development of natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
We must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying its existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further, we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to pursue any Strategic Alternatives we may consider.
Nicaragua
We began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round held by INE in January 2003.
On March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, its day-to-day operations and corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of December 3, 2018 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the requirements noted above plus finance (i) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement from the Nicaraguan government; (ii) normal day-to-day operations and corporate overhead; and (iii) outstanding debt and other financial obligations as they become due, as described below. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt.
The Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting to obtain extensions of the maturity dates for its debt or compromises of the debt. There can be no assurance that it will be able to obtain such funding or extensions or what terms.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
On May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the “Replacement Note”) representing the remaining principal balance of $2,197,231 to replace the Convertible Note. The Replacement Note provides for a one-year maturity from May 7, 2017, a conversion price of $0.50 per share and is currently in technical default. The Company is continuing to negotiate with the Investor a resolution of this matter regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this regard.
The Note was to mature on the three-year anniversary of its issuance, bore interest at 8% per annum, and was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”). The Note is now in default and the Company has had discussions with the Holder regarding a resolution to the default, but there has been no progress at present. As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing nine months from the date of issuance for a period of seven years from the date of issuance. The Note ranked senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding the Concessions. The proposed Replacement Note would have the same security interest as the Convertible Note.
In addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement.
Going Concern
As reflected in the accompanying condensed statements of operations, the Company has had a history of losses. The Company has a significant working capital deficit, has notes payable that are in default and is experiencing substantial liquidity issues. In addition, the Company’s most significant asset and its primary business plan is the exploration and development of the Nicaraguan Concessions which are now in default and in risk of being terminated.
The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of March 31, 2019 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, as noted above. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking sources of debt and equity capital to fund the substantial needs enumerated above. The Company is also attempting to obtain extensions of the maturity date for its debt. There can be no assurance that it will be successful in these regards.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
Concentrations
The Company’s business plan consists of developing the Nicaraguan Concessions and it plans to be active in Nicaragua in the future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations. The political climate in Nicaragua is unstable and is subject to radical change over a short period of time. In the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability of the Company to obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under its Nicaraguan Concessions.
Foreign Currency
The United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign currencies.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the Company had minimal cash as of March 31, 2019 and December 31, 2018, it is the Company’s policy that all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents.
Oil and Gas Properties
The Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead related to development activities is also capitalized during the acquisition phase.
Depletion of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when the impairment is recognized. All unproved property costs as of March 31, 2019 and December 31, 2018 relate to the Nicaraguan Concessions. In assessing the unproved property costs for impairment, the Company takes into consideration various information including: (i) the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements, (iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall environment related to oil and gas exploration and development projects for unproven targets in unproven regions of the world, (vi) the availability of financing for financial and strategic partners, and (vii) other factors that would impact the viability of a significant long-term oil and gas exploration and development project.
The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has performed its impairment tests as of March 31, 2019 and December 31, 2018 and has concluded that a full impairment reserve should be provided on the costs capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from January 1, 2016 through March 31, 2019 have been charged to operating expenses as incurred.
Pursuant to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the condensed balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of March 31, 2019 and December 31, 2018, the Company did not have any proved oil and gas properties, and all unproved property costs relate to its Nicaraguan Concessions.
Proceeds from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss.
Asset Retirement Obligations
The Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not perform its obligations to reclaim abandoned wells in a timely manner.
Derivative Instruments
The Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging. ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the condensed statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. As of March 31, 2019 and December 31, 2018 and during the periods then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes 2, 3, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in operations.
Fair Value of Financial Instruments
The carrying values of the Company’s accounts payable, accrued liabilities and short term notes represent the estimated fair value due to the short-term nature of the accounts.
In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
The estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant derivatives as of March 31, 2019 and December 31, 2018 were classified under the fair value hierarchy as Level 3.
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
There were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods ended March 31, 2019 and December 31, 2018.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses the realizability of the Company’s deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require the Company to adjust its deferred income tax asset valuation allowance in a future period. The Company recognized a deferred tax asset, net of valuation allowance, of $0 at March 31, 2019 and December 31, 2018.
The Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability for unrecognized tax benefit was recorded as of March 31, 2019. During the three months March 31, 2018 the Company determined that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore it reversed the liability and recognized an income tax benefit as described in the following section.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward because the Company had not previously paid the AMT tax but rather it recorded the income tax liability on the accompanying condensed balance sheet.
Net Income (Loss) per Share
Pursuant to FASB ASC Topic 260, Earnings per Share, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect. |
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Secured Convertible Note Payable |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Secured Convertible Note Payable |
Note 2 – Secured Convertible Note Payable
Secured Convertible Note (the “Note) payable consists of the following at March 31, 2019 and December 31, 2018:
Following is an analysis of the activity in the Note during the three months December 31, 2018:
On May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note (the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The placement agent for the Company in the transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the Investor. The May 2015 Private Placement was made pursuant to an exemption from registration under such Act. At the closing, the Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash, with an aggregate initial principal amount of $9,550,000 (the “Investor Note”).
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the “Replacement Note”) with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and is due in monthly installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the Replacement Note at its maturity and it is now in technical default. The Replacement Note is to be secured to the same extent as the Convertible Note. The Company is continuing to negotiate a resolution of this matter with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
Description of the Secured Convertible Note
The Note is senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The Note was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”). The Note was to mature on the three-year anniversary of its issuance date. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the Conversion Price then in effect, the then current Conversion Price will be decreased to equal such lower price. The foregoing adjustments to the Conversion Price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
On the first business day of each month beginning on the earlier of the (i) effectiveness of a registration statement the Company files to register the shares of common stock issuable upon conversion of the Note or exercise of the Warrant, as defined below, or (ii) sixth month following the date of the Note through and including the maturity date (the “Installment Dates”), the Company will pay to the Note holder an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the Note (or the principal outstanding on the Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to such principal plus (iii) the accrued and unpaid late charges (if any) with respect to such principal and interest. The Investor has the ability to defer or accelerate such monthly payments in its sole discretion.
Prior to the maturity date, the Note bore interest at 8% per annum (or 18% per annum during an event of default) with interest payable in cash or in shares of Common Stock monthly in arrears on the first business day of each calendar month following the issuance date.
Each monthly payment may be made in cash, in shares of the Company’s common stock, or in a combination of cash and shares of its common stock. The Company’s ability to make such payments with shares of its common stock will be subject to various equity conditions, including the existence of an effective registration statement covering the resale of the shares issued in payment (or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant, as defined below, for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations) and certain minimum trading price and trading volume. Such shares will be valued, as of the date on which notice is given by the Company that payment will be made in shares, at the lower of (1) the then applicable Conversion Price and (2) a price that is 80.0% of the arithmetic average of the three lowest weighted average prices of the Company’s common stock during the twenty-trading day period ending two trading days before the applicable determination date (the “Measurement Period”). If the Company elects to pay such monthly payment in shares of the Company’s stock, it is required to pre-deliver shares of its common stock and is required to deliver additional shares, if any, to true-up such number of shares to the number of shares required to be delivered on the applicable Installment Date pursuant to the calculation above.
At any time after the issuance date, the Company had the right to redeem all or any portion of the outstanding principal balance of the Note plus all accrued but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i) the arithmetic average of the closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds 200% of the Conversion Price and (ii) among other conditions, there is an effective registration statement covering the resale of the shares issued in payment or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations. The Investor has the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
Upon the occurrence of an event of default under the Note, the Investor may, so long as the event of default is continuing, require the Company to redeem all or a portion of its Note. Each portion of the Note subject to such redemption must be redeemed by the Company, in cash, at a price equal to the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid interest, and accrued and unpaid late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the event of default and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period.
Subject to certain conditions, the Investor may also require the Company to redeem all or a portion of its Note in connection with a transaction that results in a Change of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such redemption in cash at a price equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and unpaid interest, and accrued and unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately preceding the earlier to occur of (i) the consummation of the Change of Control and (ii) the public announcement of such Change of Control and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion Price in effect during such period.
Description of the Warrant.
As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing nine months from the date of issuance and the exercise prices for the Warrant is subject to adjustment for certain events, such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the exercise price then in effect, the exercise price of the Warrant will be decreased to equal such lesser price. Upon each such adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately. The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes. The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99% Restriction on Conversion of Note and Exercise of Warrant
The Investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result in the Investor being the beneficial owner in excess of 9.99% of the Company’s common stock. The Company was required to hold a meeting of its shareholders to approve an increase to the number of its authorized shares to meet its obligations under the Purchase Agreement to have reserved 200% of the shares issuable upon conversion of the Note and exercise of the Warrant. The Company held its Annual Meeting of Shareholders on September 25, 2015 and the shareholders approved the reverse split of the Company’s common stock issued and outstanding shares, which satisfied this requirement.
Participation Rights
If, during the period beginning on the closing date and ending on the four (4) year anniversary of the closing date, the Company offers, sells, grants any option to purchase, or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent securities (a “Subsequent Placement”), the Investor will have the right to participate for 50% of any such future Subsequent Placement.
Description of the Financial Accounting and Reporting
The Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including its embedded conversion feature, were estimated together utilizing the Black-Scholes model at March 31, 2019 and December 31, 2018.
The Company received $450,000 of proceeds at the date of issuance and after repayments and additional funding the net principal balance was $129,960 as of March 31, 2019 and December 31, 2018. The fair market value of the Note was estimated to be $682,400 as of the issuance date, $2,197,231 at December 31, 2018 and at March 31, 2019. The net change in fair market value of the Note of $150,794 during the three month period ended March 31, 2018 is included in change in fair value of senior secured convertible note payable in the accompanying condensed statement of operations for the three months ended March 31, 2018.
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company is negotiating with the Investor regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
The Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions. The estimated fair value of the warrant derivative as of March 31, 2019 was $116,731, representing a change of $59,639 from December 31, 2018, which is included in changes in derivative fair value in the accompanying condensed statement of operations for the three months ended March 31, 2019. See Note 5.
The warrant to purchase 240,000 shares issued as part of the placement fee in connection with the Note was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative liability totaled $7,991 (increase in the derivative liability) through March 31, 2019, which is included in changes in derivative fair value in the accompanying condensed statement of operations for the three months ended March 31, 2019. The warrant derivative liability balance related to such warrants was $15,564 and $7,573 as of March 31, 2019 and December 31, 2018, respectively. See Note 5.
The Company is required to make monthly installment payments in the form of cash, common stock or a combination of both. The Holder suspended such installments during the third and fourth quarters of 2016 and the suspension continued through March 31, 2019. |
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Debt |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt |
Note 3 – Debt
Debt consists of the following at March 31, 2019 and December 31, 2018:
Note Payable – Short-term
On December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase 100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the Note on or before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remained the same. The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability. The discount is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired as of March 31, 2019 and is no longer exercisable.
In connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August 7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note payable and amortized ratably over the extended term of the note.
In connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and (iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the December 2013 Note on or before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the warrant remained the same. The warrant has expired as of March 31, 2019 and is no longer exercisable. The December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note. The December 2013 Note is in default and the Company is pursuing a resolution to this default including seeking an extension of the maturity date of this Note (See Note 11) from the holder; however, there can be no assurances such efforts will be successful.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability. The Warrant expired as of March 31, 2019 and can no longer be exercised. The discount has been amortized ratably through the original maturity date and each of the extended maturity dates. The Company recognized the value of the 20,000 shares of common stock issued ($104,000) and the increased value of the outstanding warrants due to the decrease in their exercise price ($68,716) as an additional discount on the note payable to be amortized ratably over the extended term of the underlying note.
Other than the December 2013 Note described above, during the three months March 31, 2019 the Company had short-term notes outstanding with entities or individuals as follows:
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Stock Options |
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| Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Options |
Note 4 – Stock Options
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted, and is estimated in accordance with the provisions of ASC 718.
In May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005, the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of 47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans; however, such Plans have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc. 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As of March 31, 2019, 500,000 shares were available for future grants under the 2015 Plan. All other Plans have now expired.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates. There were no stock options granted during the periods ended March 31, 2019 and December 31, 2018.
The following table summarizes stock option activity for the three months March 31, 2019:
The Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0- during the three months ended March 31, 2019 and 2018, respectively.
The intrinsic value as of March 31, 2019 related to the vested and unvested stock options as of that date was $-0. The unrecognized compensation cost as of March 31, 2019 related to the unvested stock options as of that date was $-0-. |
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Derivative Instruments |
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| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments |
Note 5 – Derivative Instruments
Derivatives – Warrants Issued Relative to Notes Payable
The estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk factors, among other items (ASC 820, Fair Value Measurements (“ASC 820”) fair value hierarchy Level 3). The detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note payable will remain in effect until such time as the underlying warrant is exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date.
The Company has issued warrants to purchase an aggregate of 2,074,000 shares of common stock in connection with various outstanding debt instruments which require derivative accounting treatment as of March 31, 2019 and December 31, 2018. A comparison of the assumptions used in calculating estimated fair value of such derivative liabilities as of March 31, 2019 is as follows:
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:
The warrant derivative liability consists of the following at March 31, 2019 and December 31, 2018:
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Warrants |
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| Warrants and Rights Note Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants |
Note 6 – Warrants
The following table summarizes warrant activity for the three months March 31, 2019:
The weighted average term of all outstanding common stock purchase warrants was 2.8 years as of March 31, 2019. The intrinsic value of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero as of March 31, 2019. |
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Income Taxes |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes |
Note 7 – Income Taxes
The provision for income taxes consists of the following:
The effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward as the Company had not previously paid the AMT tax rather it recorded the income tax liability on the accompanying condensed balance sheet.
The Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March 31, 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore, it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000, which expire from 2025 through 2038.
The Company has not completed the filing of tax returns for the tax years 2012 through 2018. Therefore, all such tax returns are open to examination by the Internal Revenue Service. |
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Commitments and Contingencies |
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| Commitments and Contingencies |
Note 8 – Commitments and Contingencies
The Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact on the Company’s condensed financial statements.
Nicaraguan Concessions
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking debt and equity capital in order to fund the substantial needs enumerated above; however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary to cure the defaults existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to drilling the exploratory wells. The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
The following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions in order for the Company to retain them unless it is successful in obtaining extensions, renewals or the renegotiation of the entire Concessions Agreements for the Perlas and Tyra blocks.
Minimum Work Program – Perlas
Block Perlas – Exploration Minimum Work Commitment and Relinquishments
Minimum Work Program – Tyra
Block Tyra – Exploration Minimum Work Commitment and Relinquishments
Contractual and Fiscal Terms
Revenue Sharing Commitments
On March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000 and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently converted the subordinated promissory note to common stock.
Under the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”) equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs.
The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and directors.
The Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions.
Lack of Compliance with Law Regarding Domestic Properties
Infinity has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures, earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas were disposed of well prior to March 31, 2019; however, the Company may remain liable for certain asset retirement costs should the new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003 as of March 31, 2019 and December 31, 2018 are sufficient to cover any potential noncompliance liabilities relative to the plugging of abandoned wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former oil and gas properties. The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced any oil & gas properties for a number of years.
Litigation
The Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying condensed financial statements.
The Company is currently involved in litigation as follows:
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Related Party Transactions |
3 Months Ended |
|---|---|
Mar. 31, 2019 | |
| Related Party Transactions [Abstract] | |
| Related Party Transactions |
Note 9 – Related Party Transactions
The Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services (for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s accounting for such support services and was not billed for any such services during the three months ended March 31, 2019 and 2018. The amount due to the CFO’s firm for services previously provided was $762,407 at March 31, 2019 and December 31, 2018, and is included in accrued liabilities at both dates.
On June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any rights in the Nicaraguan Concessions for officers and directors.
In connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes the former managing partner of Offshore.
As of March 31, 2019 and December 31, 2018, the Company had accrued compensation to its officers and directors of $1,829,208. The Board of Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018. |
Subsequent Events |
3 Months Ended |
|---|---|
Mar. 31, 2019 | |
| Subsequent Events [Abstract] | |
| Subsequent Events |
Note 10 – Subsequent Events
The Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The Company continues to attempt to negotiate extensions, waivers or a new Concession agreement with the Nicaraguan Government; however, there can be no assurance that the Company will be successful in that regard. The Company is pursuing meetings with Nicaraguan Government officials to address the pending defaults; however, the political situation in Nicaragua has complicated this task.
The Company has not resolved the contingencies regarding its various notes payable related to their default status as described in Notes 2 and 3. The Company continues to pursue resolutions of these defaults including to negotiate extensions, waivers or new note agreements; however, there can be no assurance that the Company will be successful in that regard.
During April and May 2019, the Company borrowed an additional $50,500 from the same private third party lender who previously loaned the Company $13,125 under an unsecured promissory note which is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum. |
Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies (Policies) |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unaudited Interim Financial Information |
Unaudited Interim Financial Information
Infinity Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”) has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2019 due to various factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC. |
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| Nature of Operations |
Nature of Operations
We plan to pursue the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately 1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We are assessing various opportunities and strategic alternatives (the “Strategic Alternatives”) involving the acquisition, exploration and development of natural gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
We must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying its existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further, we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to pursue any Strategic Alternatives we may consider.
Nicaragua
We began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round held by INE in January 2003.
On March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, its day-to-day operations and corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of December 3, 2018 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the requirements noted above plus finance (i) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate a waiver of such requirement from the Nicaraguan government; (ii) normal day-to-day operations and corporate overhead; and (iii) outstanding debt and other financial obligations as they become due, as described below. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt.
The Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting to obtain extensions of the maturity dates for its debt or compromises of the debt. There can be no assurance that it will be able to obtain such funding or extensions or what terms.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
On May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
On May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver a new convertible note (the “Replacement Note”) representing the remaining principal balance of $2,197,231 to replace the Convertible Note. The Replacement Note provides for a one-year maturity from May 7, 2017, a conversion price of $0.50 per share and is currently in technical default. The Company is continuing to negotiate with the Investor a resolution of this matter regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this regard.
The Note was to mature on the three-year anniversary of its issuance, bore interest at 8% per annum, and was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”). The Note is now in default and the Company has had discussions with the Holder regarding a resolution to the default, but there has been no progress at present. As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable commencing nine months from the date of issuance for a period of seven years from the date of issuance. The Note ranked senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding the Concessions. The proposed Replacement Note would have the same security interest as the Convertible Note.
In addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. |
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| Going Concern |
Going Concern
As reflected in the accompanying condensed statements of operations, the Company has had a history of losses. The Company has a significant working capital deficit, has notes payable that are in default and is experiencing substantial liquidity issues. In addition, the Company’s most significant asset and its primary business plan is the exploration and development of the Nicaraguan Concessions which are now in default and in risk of being terminated.
The Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead because it has generated no operating revenues or cash flows in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes payable with principal balances of $338,125 as of March 31, 2019 are now either due on demand or currently in default. The Company is seeking resolutions to these defaults including extensions of the maturity date for these notes payable; however, there can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, as noted above. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The Company is seeking sources of debt and equity capital to fund the substantial needs enumerated above. The Company is also attempting to obtain extensions of the maturity date for its debt. There can be no assurance that it will be successful in these regards.
Due to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. |
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| Management Estimates |
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets. |
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| Concentrations |
Concentrations
The Company’s business plan consists of developing the Nicaraguan Concessions and it plans to be active in Nicaragua in the future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations. The political climate in Nicaragua is unstable and is subject to radical change over a short period of time. In the event of a significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability of the Company to obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under its Nicaraguan Concessions. |
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| Foreign Currency |
Foreign Currency
The United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign currencies. |
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| Cash and Cash Equivalents |
Cash and Cash Equivalents
For purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the Company had minimal cash as of March 31, 2019 and December 31, 2018, it is the Company’s policy that all highly liquid investments with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents. |
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| Oil and Gas Properties |
Oil and Gas Properties
The Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized. Overhead related to development activities is also capitalized during the acquisition phase.
Depletion of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties, including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when the impairment is recognized. All unproved property costs as of March 31, 2019 and December 31, 2018 relate to the Nicaraguan Concessions. In assessing the unproved property costs for impairment, the Company takes into consideration various information including: (i) the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements, (iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall environment related to oil and gas exploration and development projects for unproven targets in unproven regions of the world, (vi) the availability of financing for financial and strategic partners, and (vii) other factors that would impact the viability of a significant long-term oil and gas exploration and development project.
The current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has performed its impairment tests as of March 31, 2019 and December 31, 2018 and has concluded that a full impairment reserve should be provided on the costs capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from January 1, 2016 through March 31, 2019 have been charged to operating expenses as incurred.
Pursuant to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the condensed balance sheet, and a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of March 31, 2019 and December 31, 2018, the Company did not have any proved oil and gas properties, and all unproved property costs relate to its Nicaraguan Concessions.
Proceeds from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss. |
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| Asset Retirement Obligations |
Asset Retirement Obligations
The Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. |
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| Derivative Instruments |
Derivative Instruments
The Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging. ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the condensed statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. As of March 31, 2019 and December 31, 2018 and during the periods then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes 2, 3, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in operations. |
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| Fair Value of Financial Instruments |
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:
The estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant derivatives as of March 31, 2019 and December 31, 2018 were classified under the fair value hierarchy as Level 3.
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
There were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods ended March 31, 2019 and December 31, 2018. |
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| Income Taxes |
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 March 31, 2019 and December 31, 2018.
The Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability for unrecognized tax benefit was recorded as of March 31, 2019. During the three months March 31, 2018 the Company determined that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore it reversed the liability and recognized an income tax benefit as described in the following section.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward because the Company had not previously paid the AMT tax but rather it recorded the income tax liability on the accompanying condensed balance sheet. |
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| Net Income (Loss) Per Share |
Net Income (Loss) per Share
Pursuant to FASB ASC Topic 260, Earnings per Share, basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect. |
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Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies (Tables) |
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Mar. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis |
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
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Secured Convertible Note Payable (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Secured Convertible Note Payable |
Secured Convertible Note (the “Note) payable consists of the following at March 31, 2019 and December 31, 2018:
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| Schedule of Activity in Secured Convertible Note |
Following is an analysis of the activity in the Note during the three months December 31, 2018:
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Debt (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Debt Outstanding |
Debt consists of the following at March 31, 2019 and December 31, 2018:
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Stock Options (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Stock Option Activity |
The following table summarizes stock option activity for the three months March 31, 2019:
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Derivative Instruments (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Estimated Fair Value of Derivative Liabilities |
A comparison of the assumptions used in calculating estimated fair value of such derivative liabilities as of March 31, 2019 is as follows:
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| Summary of Changes in Fair Value Derivative Financial Instruments |
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:
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| Schedule of Warrant Derivative Liability |
The warrant derivative liability consists of the following at March 31, 2019 and December 31, 2018:
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Warrants (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants and Rights Note Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Warrant Activity |
The following table summarizes warrant activity for the three months March 31, 2019:
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Income Taxes (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Components of Income Tax Expense (Benefit) |
The provision for income taxes consists of the following:
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Commitments and Contingencies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Minimum Exploration Work Commitment and Relinquishments by Individual Blocks |
The following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions in order for the Company to retain them unless it is successful in obtaining extensions, renewals or the renegotiation of the entire Concessions Agreements for the Perlas and Tyra blocks.
Minimum Work Program – Perlas
Block Perlas – Exploration Minimum Work Commitment and Relinquishments
Minimum Work Program – Tyra
Block Tyra – Exploration Minimum Work Commitment and Relinquishments
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| Schedule of Contractual and Fiscal Terms |
Contractual and Fiscal Terms
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Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies - Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Senior convertible note payable | $ 2,197,231 | $ 2,197,231 |
| Derivative liabilities | 133,949 | 65,502 |
| Fair Value, Measurements, Recurring [Member] | ||
| Senior convertible note payable | 2,197,231 | 2,197,231 |
| Derivative liabilities | 133,949 | 65,502 |
| Fair value on liabilities | 2,331,180 | 2,262,733 |
| Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | ||
| Senior convertible note payable | ||
| Derivative liabilities | ||
| Fair value on liabilities | ||
| Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | ||
| Senior convertible note payable | ||
| Derivative liabilities | ||
| Fair value on liabilities | ||
| Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | ||
| Senior convertible note payable | 2,197,231 | 2,197,231 |
| Derivative liabilities | 133,949 | 65,502 |
| Fair value on liabilities | $ 2,331,180 | $ 2,262,733 |
Secured Convertible Note Payable - Schedule of Secured Convertible Note Payable (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| Secured convertible note payable, at fair value | $ 2,197,231 | $ 2,197,231 |
| Less: Current maturities | (2,197,231) | (2,197,231) |
| Secured convertible note payable, long-term |
Secured Convertible Note Payable - Schedule of Activity in Secured Convertible Note (Details) |
3 Months Ended |
|---|---|
|
Mar. 31, 2019
USD ($)
| |
| Debt Disclosure [Abstract] | |
| Balance, beginning | $ 2,197,231 |
| Funding under the Investor Note during the period | |
| Principal repaid during the period by issuance of common stock | |
| Change in fair value of secured convertible note during the period | |
| Balance, ending | $ 2,197,231 |
Debt - Schedule of Debt Outstanding (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Total notes payable, short-term | $ 1,338,125 | $ 1,338,125 |
| Notes Payable (In Default) One [Member] | ||
| Total notes payable, short-term | 1,000,000 | 1,000,000 |
| Notes Payable (In Default) Two [Member] | ||
| Total notes payable, short-term | 200,000 | 200,000 |
| Notes Payable (In Default) Three [Member] | ||
| Total notes payable, short-term | 40,000 | 40,000 |
| Notes Payable (In Default) Four [Member] | ||
| Total notes payable, short-term | 50,000 | 50,000 |
| Notes Payable (In Default) Five [Member] | ||
| Total notes payable, short-term | 35,000 | 35,000 |
| Notes Payable Six (Due on Demand) [Member] | ||
| Total notes payable, short-term | $ 13,125 | $ 13,125 |
Stock Options (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
|
| Stock-based compensation expense in connection with vesting of options granted | $ 0 | $ 0 |
| Share based vested and unvested stock options, intrinsic value | 0 | |
| Unrecognized compensation cost related to unvested stock options | $ 0 | |
| 2006 Equity Incentive Plan [Member] | ||
| Issuance of reserved common stock, shares | 47,000 | |
| Stock date of granted expiration period | 10 years | |
| 2005 Equity Incentive Plan [Member] | ||
| Issuance of reserved common stock, shares | 47,500 | |
| 2015 Stock Option and Restricted Stock Plan [Member] | ||
| Issuance of reserved common stock, shares | 500,000 | |
| Shares available for future grants under all plans | 500,000 | |
Derivative Instruments (Details Narrative) - shares |
Mar. 31, 2019 |
Dec. 31, 2018 |
Jul. 15, 2015 |
|---|---|---|---|
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||
| Issued warrant to purchase shares of common stock | 2,074,000 | 2,074,000 | 3,500 |
Derivative Instruments - Summary of Changes in Fair Value Derivative Financial Instruments (Details) |
3 Months Ended |
|---|---|
|
Mar. 31, 2019
USD ($)
| |
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
| Beginning balance | $ 65,502 |
| Warrants issued to originate or extend notes payable (recorded as discount on note payable) - Note 3 | |
| Unrealized derivative gains included in other expense for the period | 68,447 |
| Transition of derivative liability to equity | |
| Ending balance | $ 133,949 |
Derivative Instruments - Schedule of Warrant Derivative Liability (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||
| Warrant issued to holder of Secured convertible note (Note 2) | $ 116,731 | $ 57,092 |
| Warrant issued to placement agent (Note 2) | 15,564 | 7,573 |
| Warrants issued to holders of notes payable - short term (Note 3) | 1,654 | 837 |
| Total warrant derivative liability | $ 133,949 | $ 65,502 |
Warrants (Details Narrative) - Warrant [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2019
USD ($)
| |
| Weighted average of purchase warrants term | 2 years 9 months 18 days |
| Common stock purchase warrants and intrinsic value | $ 0 |
Warrants - Summary of Warrant Activity (Details) - Warrant [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2019
$ / shares
shares
| |
| Number of warrants outstanding and exercisable, beginning balance | shares | 2,365,563 |
| Number of warrants, Issued | shares | |
| Number of warrants, exercised/forfeited | shares | |
| Number of warrants outstanding and exercisable, ending balance | shares | 2,365,563 |
| Weighted Average Exercise Price Per Share, Outstanding and exercisable | $ / shares | $ 5.01 |
| Weighted Average Exercise Price Per Share, issued | $ / shares | |
| Weighted average exercise price per share, exercised/forfeited | $ / shares | |
| Weighted Average Exercise Price Per Share, Outstanding and exercisable | $ / shares | $ 5.01 |
Income Taxes (Details Narrative) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
Dec. 31, 2018 |
|
| Net operating loss carry-forward | $ 66,845,000 | $ 66,845,000 | |
| Income tax expense (benefit) | $ (150,000) | ||
| Corresponding income tax payable | $ 0 | ||
| Percentage on valuation allowance | 100.00% | ||
| Net operating loss carry-forward balance expires | Expire from 2025 through 2038 | ||
| AMT Credit [Member] | |||
| Corporate tax rate | 21.00% | ||
| Income tax description | However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation's AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. | ||
| Effective income tax percentage | 50.00% | ||
| Net operating loss carry-forward | $ 150,000 | ||
Income Taxes - Schedule of Components of Income Tax Expense (Benefit) (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2019 |
Mar. 31, 2018 |
|
| Income Tax Disclosure [Abstract] | ||
| Current income tax expense (benefit) | $ (150,000) | |
| Deferred income tax benefit | ||
| Total income tax expense (benefit) | $ (150,000) | |
Commitments and Contingencies - Schedule of Minimum Exploration Work Commitment and Relinquishments by Individual Blocks (Details) |
3 Months Ended |
|---|---|
|
Mar. 31, 2019
USD ($)
| |
| Sub-Period 1 [Member] | Perlas Block [Member] | |
| Duration | 2 years |
| Minimum Work Commitment | Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D) |
| Relinquishment | 26km2 |
| Irrevocable Guarantee | $ 443,100 |
| Sub-Period 1 [Member] | Tyra Block [Member] | |
| Duration | 1 year 6 months |
| Minimum Work Commitment | Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new 2D seismic (or equivalent in 3D) |
| Relinquishment | 26km2 |
| Irrevocable Guarantee | $ 408,450 |
| Sub-Period 2 Optional [Member] | Perlas Block [Member] | |
| Duration | 1 year |
| Minimum Work Commitment | Acquisition, processing & interpretation of 200km2 of 3D seismic |
| Relinquishment | 53km2 |
| Irrevocable Guarantee | $ 1,356,227 |
| Sub-Period 2 Optional [Member] | Tyra Block [Member] | |
| Duration | 6 months |
| Minimum Work Commitment | Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period |
| Relinquishment | 40km2 |
| Irrevocable Guarantee | $ 278,450 |
| Sub-Period 3 Optional [Member] | Perlas Block [Member] | |
| Duration | 1 year |
| Minimum Work Commitment | Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower |
| Relinquishment | 80km2 |
| Irrevocable Guarantee | $ 10,220,168 |
| Sub-Period 3 Optional [Member] | Tyra Block [Member] | |
| Duration | 2 years |
| Minimum Work Commitment | Acquisition, processing & interpretation of 250km2 of new 3D seismic |
| Relinquishment | 160km2 |
| Irrevocable Guarantee | $ 1,818,667 |
| Sub-Period 4 Optional [Member] | Perlas Block [Member] | |
| Duration | 2 years |
| Minimum Work Commitment | Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis |
| Relinquishment | All acreage except areas with discoveries |
| Irrevocable Guarantee | $ 10,397,335 |
| Sub-Period 4 Optional [Member] | Tyra Block [Member] | |
| Duration | 2 years |
| Minimum Work Commitment | Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis |
| Relinquishment | All acreage except areas with discoveries |
| Irrevocable Guarantee | $ 10,418,667 |
Related Party Transactions (Details Narrative) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Jun. 06, 2009 |
Mar. 31, 2019 |
Dec. 31, 2018 |
|
| Officers and Directors [Member] | |||
| Percentage of revenue | 1.00% | ||
| Accrued compensation | $ 1,829,208 | $ 1,829,208 | |
| Offshore Finance, LLC [Member] | |||
| Percentage of revenue | 1.00% | ||
| CFO's Firm [Member] | |||
| Due to related party for consideration of services | $ 762,407 | $ 762,407 |
Subsequent Events (Details Narrative) - USD ($) |
May 03, 2019 |
Apr. 30, 2019 |
Mar. 31, 2019 |
Apr. 20, 2017 |
Nov. 08, 2016 |
Jul. 15, 2015 |
Jul. 07, 2015 |
|---|---|---|---|---|---|---|---|
| Conversion price | $ 5.00 | $ 5.00 | $ 5.60 | $ 5.60 | |||
| Bears interest percentage | 8.00% | 8.00% | 8.00% | 8.00% | 8.00% | ||
| Subsequent Event [Member] | Unsecured Promissory Note [Member] | |||||||
| Unsecured promissory note | $ 13,125 | ||||||
| Conversion price | $ 0.50 | ||||||
| Bears interest percentage | 8.00% | ||||||
| Subsequent Event [Member] | Private Third Party Lender [Member] | Unsecured Promissory Note [Member] | |||||||
| Unsecured promissory note | $ 50,500 | $ 50,500 |
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