UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| 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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| — | — | — |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller
reporting company | |||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 13, 2023, the registrant had shares of common stock, $0.0001 par value per share outstanding.
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
AMERICAN NOBLE GAS, INC.
Condensed Balance Sheets
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accrued receivable | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Oil and gas properties and equipment: | ||||||||
| Oil and gas properties and equipment | ||||||||
| Accumulated depreciation, depletion and impairment | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Investment in unconsolidated subsidiary – GMDOC, LLC | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Accrued interest - $ | ||||||||
| Accrued dividends | ||||||||
| Warrant derivative liability | ||||||||
| Convertible notes payable, net of unamortized discount | ||||||||
| Total current liabilities | ||||||||
| Asset retirement obligations | ||||||||
| Convertible promissory notes, net of unamortized discount - related parties | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock; par value $ per share, shares authorized; | ||||||||
| - Series A Convertible Preferred stock; – shares authorized with stated/liquidation value of $ | ||||||||
| - Series B Convertible Preferred stock; – shares authorized with stated/liquidation value of $ | ||||||||
| Common Stock, par value $ per share, shares authorized, shares issued and outstanding at September 30, 2023 and shares issued and outstanding at December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 3 |
AMERICAN NOBLE GAS, INC.
Condensed Statements of Operations
(Unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Oil and gas lease operating expense | ||||||||||||||||
| Depreciation, depletion and amortization | ||||||||||||||||
| Accretion of asset retirement obligation | ||||||||||||||||
| Oil and gas production related taxes | ||||||||||||||||
| Other general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Equity in earnings of unconsolidated subsidiary – GMDOC, LLC | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on exchange and extinguishment of liabilities | ||||||||||||||||
| Change in warrant derivative fair value | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (expense) benefit | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Convertible preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted net loss per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 4 |
AMERICAN NOBLE GAS, INC.
Condensed Statements of Changes in Stockholders’ Deficit
(unaudited)
| Series
A Preferred Stock | Series
B Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to conversion of convertible preferred stock | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||
| Accrual of preferred stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock in association with the issuance of convertible bridge notes payable | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of restricted common stock as compensation | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of detachable warrants to purchase common stock in association with issuance of convertible bridge note payable | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series A preferred stock with detachable common stock purchase warrants | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock pursuant to conversion of preferred stock | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||
| Accrual of preferred stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock pursuant to conversion of Series A Convertible Stock | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||
| Series A Convertible Preferred Stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance
of common stock upon conversion convertible notes payable and accrued interest | — | — | ||||||||||||||||||||||||||||||||||
| Accrual of preferred stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance of Series B Convertible Preferred stock with detachable common stock purchase warrants for cash | — | |||||||||||||||||||||||||||||||||||
| Issuance
of common stock upon conversion Series A Convertible Preferred Stock | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||
| Accrual of preferred stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | |||||||||||||||||||||||||||||||||
| Issuance
of common stock upon conversion of Convertible Notes Payable | — | — | ||||||||||||||||||||||||||||||||||
| Series A and B preferred stock dividends | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 5 |
AMERICAN NOBLE GAS, INC.
Condensed Statements of Cash Flows
(unaudited)
For the nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Equity in earnings of unconsolidated subsidiary – GMDOC, LLC | ( | ) | ||||||
| Change in warrant derivative fair value | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Gain on extinguishment of convertible notes payable | ( | ) | ||||||
| Depreciation, depletion and amortization | ||||||||
| Accretion of asset retirement obligations | ||||||||
| Amortization of discount on convertible notes payable | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | ( | ) | ||||||
| Increase in prepaid expenses | ( | ) | ( | ) | ||||
| (Decrease) increase in accounts payable | ( | ) | ||||||
| Increase in accrued liabilities | ||||||||
| Increase in accrued interest | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Investment in unconsolidated subsidiary – GMDOC, LLC | ( | ) | ||||||
| Investment in Hugoton Gas Field participation agreement | ( | ) | ||||||
| Investment in oil and gas properties and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from issuance of convertible notes payable | ||||||||
| Repayment of convertible note payable | ( | ) | ||||||
| Net proceeds from issuance of convertible preferred stock with detachable common stock purchase warrants | ||||||||
| Cash dividends paid on preferred stock | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents: | ||||||||
| Beginning | ||||||||
| Ending | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Accrual of dividends on Series A and Series B Convertible Preferred Stock | $ | $ | ||||||
| Issuance of common stock upon conversion of convertible notes payable and accrued interest | $ | $ | ||||||
| Conversion of Series A Convertible Preferred Stock to Common Stock | $ | $ | ||||||
| Modification of warrant exercise price pursuant to dilutive issuance of Series B Preferred Stock | $ | $ | ||||||
| Issuance of restricted common stock attributable to issuance of notes payable | $ | $ | ||||||
| Issuance of detachable common stock purchase warrants attributable to issuance of convertible notes payable | $ | $ | ||||||
| Issuance of restricted common stock as compensation | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 6 |
AMERICAN NOBLE GAS, INC.
Notes to Unaudited Condensed Financial Statements
September 30, 2023
Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
American Noble Gas, Inc. has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion, include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed balance sheets, statements of operations, statements of stockholders’ deficit and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the remainder of 2023 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 for the year ended December 31, 2022, filed with the SEC.
Nature of Operations
The Company has assessed various opportunities and strategic alternatives involving the acquisition, exploration and development of oil and gas oil producing properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
As a result, we are now involved with the following oil and gas producing properties:
Central
Kansas Uplift - On April 1, 2021, we completed the acquisition of the Central Kansas Uplift Properties, for a purchase price
of $
We commenced rework of the existing production wells after completion of the acquisition of the Properties and have performed testing and evaluation of the existence of noble gas reserves on the Properties including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the Properties’ existing oil and gas reserves while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.
During
the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash
flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022
compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The
Company has shut down the horizontal production wells due to excessive operating costs as of September 30, 2023 and December 31, 2022
and has concentrated on reworking the conventional wells on the property to emphasize crude oil production as well as helium and natural
gas liquids that were present behind casing pipe in the deeper producing zones. Accordingly, the Company has recorded an impairment charge
of $
The conventional well rework program has yielded encouraging results thus far and the Company during the quarter ended September 30, 2023. The Company and its advisors are continuing to evaluate the results of the rework and its positive impact on the production of crude oil production as well as helium and natural gas liquids that were present behind casing pipe in the deeper producing zones.
| 7 |
Hugoton
Gas Field Farm-Out - On April 4, 2022, the Company acquired a
The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 2022. The Hugoton JV will utilize Scout’s existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices.
The
Hugoton JV also acquired the right to all brine minerals subject to a ten percent (
The Hugoton JV believes that its unconventional theory has not previously been targeted for exploration by historical operations in the field. The initial exploratory well was spud on May 7, 2022 near Garden City, Kansas, with production casing set after testing and completion logs identified at least two potential zones with substantial gas and helium reserves. The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production and sales of natural gas, natural gas liquids and helium on August 17, 2022.
The
Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project.
The ceiling test indicated an impairment charge of $
The Company has decided to divest of its participation in the Hugoton Gas Field and the Peyton 21-1 well drilled near Garden City, Kansas. The Company determined that it should focus its strategy and resources on the conventional wells in the Central Kansas Uplift which have provided positive initial results from the rework programs and the potential for new reserves of crude oil, helium and natural gas liquids. In addition, the participation agreement required the drilling of four new wells prior to March 2024 which management decided would be too significant of an obligation for capital expenditures.
Woodson County Kansas Field – On July 7, 2023, the Company acquired an oil and gas lease to explore and develop approximately 240 acres located in Woodson County, Kansas (the “Woodson Property”). An exploratory well was drilled and cased during August 2023. An evaluation of drill tests indicated commercial oil reserves in at least one zone. The Company is in process of final completion of the well as of September 30, 2023 and expects the well to commence production in November 2023.
The Company continues to assess the initial well drilled on the Woodson Property in order to determine the location and number of offset wells that can be drilled to enhance the crude oil reserves that the Properties may hold.
Investment
in GMDOC, LLC - On May 3, 2022, the Company entered into an operating agreement (the “Operating Agreement”) pursuant
to which the Company acquired 17 (or
The
Company paid the cash contribution for the membership interests of $
| 8 |
GMDOC
had previously acquired
GMDOC is managed by two members: Darrah Oil Company, LLC, and Grand Mesa Operating Company, (collectively the “Managing Members”), which also serve as the operating companies under the GMDOC Leases.
Going Concern
The Company has incurred losses from operations, has a stockholders’ deficit, incurred net cash used in operating activities and has a significant working capital deficit as of and for the three and nine months ended September 30, 2023 and as of and for the year ended December 31, 2022. The Company must raise substantial amounts of debt and equity capital from other sources in the future in order to fund (i) the development of the Properties acquired on April 1, 2021; (ii) our obligations for exploration and development under the Hugoton Farmout Agreement; (iii) normal day-to-day operations and corporate overhead; and (iv) outstanding debt and other financial obligations as they become due, as described below. Most of the Company’s outstanding debt and other financial obligations are currently past due and the Company must negotiate forbearance and/or restructuring agreements with the holders of such debt. These are substantial operational and financial issues that must be successfully addressed during 2023 and beyond.
The Company has made substantial progress in resolving many of its existing financial obligations and acquiring oil and gas producing properties to deploy its new operational strategy during the period through September 30, 2023.
The Company will have significant financial commitments executing its planned exploration and development of the Properties. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development activities and may seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. There can be no assurance that it will be able to obtain such new funding or be able to reach agreements with industry operators and other third parties or on what terms.
Due to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The unaudited condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and the series of related accounting standard updates that followed, using the modified retrospective method of adoption. Adoption of the ASU did not require an adjustment to the opening balance of equity and did not change the Company’s amount and timing of revenues.
The Company’s revenues are primarily derived from its interests in the sale of oil and natural gas production. To date, such revenues have only included the sale of oil and natural gas however the Company expects to begin generating more substantial revenues from the sale of noble gases in the future. The Company recognizes revenue from its interests in the sales of oil and gas in the period that its performance obligations are satisfied. Performance obligations are satisfied when the customer obtains control of product, when the Company has no further obligations to perform related to the sale, when the transaction price has been determined and when collectability is probable. The sales of oil and gas are made under contracts which the third-party operators of the wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company receives payment from the sale of oil and gas production from one to three months after delivery. At the end of each month when the performance obligation is satisfied, the variable consideration can be reasonably estimated and amounts due from customers are accrued in trade receivables, net in the balance sheets. Variances between the Company’s estimated revenue and actual payments are recorded in the month the payment is received, however, differences have been and are insignificant. The Company’s oil is typically sold at delivery points under contracts terms that are common in our industry.
| 9 |
Cash and Cash Equivalents
For purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. The Company’s policy is that all highly liquid investments with an original maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash and equivalents.
The
Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (FDIC) in accounts that
at times may be in excess of the federally insured limit of $
Convertible Instruments
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)” which is intended to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in Accounting Standards Codification (“ASC”) 470-20, Debt: Debt with Conversion and Other Options that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
The Company early adopted ASU 2020-06 effective January 1, 2021 and applied ASU 2020-06 to all outstanding financial instruments as of January 1, 2021.
Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.
Derivative Instruments
The Company accounts for derivative instruments or hedging activities under the provisions of ASC 815 Derivatives and Hedging. ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings (loss) and are recognized in the statement of earnings when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. As of September 30, 2023 and December 31, 2022 and during the periods then ended, the Company had no oil and natural gas derivative arrangements outstanding.
| 10 |
As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes 4 and 11), those warrants were required to be accounted for as derivatives at estimated fair value, with changes in fair value recognized in operations.
Fair Value of Financial Instruments
The carrying values of the Company’s accounts payable, accrued liabilities and short-term notes represent the estimated fair value due to the short-term nature of the accounts.
In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| ● | Level 1 — | Quoted prices in active markets for identical assets and liabilities. | |
| ● | Level 2 — | Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities). | |
| ● | Level 3 — | Significant unobservable inputs (including the Company’s own assumptions in determining the fair value. |
The
estimated fair value of warrant derivative liabilities, which are related to detachable warrants issued in connection with the Series
A Convertible Preferred Stock, par value $ per share (the “Series A Convertible Preferred Stock”) were estimated using
a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of
the price of the Company’s common stock, par value $
The following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant derivative liabilities | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
There
were
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, oil and gas reserves; depreciation, depletion and amortization of proved oil and gas properties; future cash flows from oil and gas properties; impairment of long-lived assets; fair value of derivatives; asset retirement obligations, our control over equity method investments, fair value of equity compensation; warrants issued in connection with convertible debt; the realization of deferred tax assets; fair values of assets acquired and liabilities assumed in business combinations.
| 11 |
Oil and gas properties
Central
Kansas Uplift Properties - On April 1, 2021, we completed the acquisition of the Properties, under the terms of the Asset Purchase
Agreement, for a purchase price of $
The Company has performed workovers of the wells subsequent to the Properties purchase which was necessary to put the lease back into production status. Therefore, these tangible and intangible workover costs were expensed as lease operating expenses rather than capitalized in the full cost pool through December 31, 2022. In addition, the Company is currently evaluating the Properties for oil and gas reserves and specifically the potential for noble gas reserves such as helium, argon and krypton. Based on these evaluations, the Company may redirect its efforts to the production of noble gases rather than crude oil on the Properties. These noble gas evaluation costs have also been expensed as lease operating costs through September 30, 2023.
Hugoton
Gas Field Farm-Out -The first exploratory well commenced on May 7, 2022 near Garden City, Kansas with a goal to evaluate its unconventional
theory of where substantial oil, natural gas and noble gases may be present in the Hugoton Gas Field. The initial well in which the Company
has acquired a
The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production on August 17, 2022.
Woodson
County Kansas Field – On July 7, 2023, the Company acquired an oil and gas lease to explore and develop approximately
The Company continues to assess the initial well drilled on the Woodson Property in order to determine the location and number of offset wells that can be drilled to enhance the crude oil reserves that the Properties may hold.
Full Cost Accounting
The accounting for, and disclosure of, oil and gas producing activities require that we choose between two GAAP alternatives: the full cost method or the successful efforts method. We adopted and use the full cost method of accounting, which involves capitalizing all exploration, exploitation, development and acquisition costs. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. Our unproved property costs, which include unproved oil and gas properties, properties under development, and major development projects, were zero as of September 30, 2023 and December 31, 2022, and are not subject to depletion. We review our unproved oil and gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost pool during that time. The full cost pool is comprised of intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved leaseholds.
When we acquire significant amounts of undeveloped acreage, we capitalize interest on the acquisition costs in accordance with FASB ASC Subtopic 835-20 for Capitalization of Interest. When the unproved property costs are moved to proved developed and undeveloped oil and gas properties, or the properties are sold, we cease capitalizing interest.
| 12 |
Capitalized costs to acquire oil and natural gas properties are depreciated and depleted on a units-of-production basis based on estimated proved reserves. Capitalized costs of exploratory wells and development costs are depreciated and depleted on a units-of-production basis based on estimated proved developed reserves. Under this method, the sum of the full cost pool, excluding the book value of unproved properties, and all estimated future development costs are divided by the total estimated quantities of proved reserves. This rate is applied to our total production for the quarter, and the appropriate expense is recorded. Support equipment and other property, plant and equipment related to oil and gas producing activities, as well as property, plant and equipment unrelated to oil and gas producing activities, are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets.
Sales, dispositions and other oil and gas property retirements are accounted for as adjustments to the full cost pool, with no recognition of gain or loss, unless the disposition would significantly alter the amortization rate and/or the relationship between capitalized costs and Proved Reserves.
Pursuant
to Rule 4-10(c)(4) of Regulation S-X, at the end of each quarterly period, companies that use the full cost method of accounting for
their oil and gas properties must compute a limitation on capitalized costs, or ceiling test. The ceiling test involves comparing the
net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling
is less than the full cost pool, we must record a ceiling test write-down of our oil and gas properties to the value of the full cost
ceiling. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from our proved
reserves by applying average prices as prescribed by the SEC Release No. 33-8995, less estimated future expenditures (based on current
costs) to develop and produce the proved reserves, discounted at
The
ceiling test is computed using the simple average spot price for the trailing twelve-month period using the first day of each month.
The trailing twelve-month reference price was $ per barrel for the West Texas Intermediate oil at Cushing, Oklahoma through December
31, 2022. This reference price for oil is further adjusted for quality factors and regional differentials to derive estimated future
net revenues. Under full cost accounting rules, any ceiling test write-downs of oil and gas properties may not be reversed in subsequent
periods. We recognized an impairment charge of $
The ceiling test calculation is based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered.
Equity Method Investments
The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of these investees is included in our Statements of Operations. Judgment regarding the level of influence over each equity method investment includes considering key factors such as the Company’s ownership interest, legal form of the investee, representation on the board of directors, participation in policy-making decisions and material intra-entity transactions.
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time and the extent to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than temporary is recognized in the period identified.
The Company accounts for distributions received from equity method investees under the “nature of the distribution” approach. Under this approach, distributions received from equity method investees are classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities).
| 13 |
Issuance of Debt Instruments With Detachable Stock Purchase Warrants
Proceeds from the issuance of a debt instrument with stock purchase warrants (detachable call options) are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds allocated to the warrants are recorded as additional paid-in capital. The remainder of the proceeds are allocated to the debt instrument portion of the transaction. Such issuances generally result in a discount (or, occasionally, a reduced premium) relative to the debt instrument, which is amortized to interest expense using the effective interest rate method.
Asset Retirement Obligations
The Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. Subsequent to its initial measurement, the asset retirement liability is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.
During April 2021, the Company acquired the Properties and assumed the related asset retirement obligation existing at the date of acquisition. The asset retirement obligation assumed for the Properties relates to the plug and abandonment costs when the wells acquired are no longer useful. The Company determined the value of the liability by obtaining quotes for this service and estimated the increased costs that the Company will face in the future. We then discounted the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future; however, we monitor the costs of the abandoned wells and we will adjust this liability if necessary.
As
of December 31, 2012, the Company had divested all of its domestic oil properties that contained operating and abandoned wells in Texas,
Colorado and Wyoming. The Company may have obligations related to the divestiture of certain abandoned non-producing domestic leasehold
properties should the new owner not perform its obligations to reclaim abandoned wells in a timely manner. Management believes the Company
has been relieved from asset retirement obligation related to Infinity-Texas because of the sale of its Texas oil and gas properties
in 2011 and its sale of
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 $-
| 14 |
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.
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted and is estimated in accordance with the provisions of ASC 718.
Related Party Transactions
The Company’s financial statements include disclosures of material related party transactions, other than compensation arrangements, expense allowances and similar items in the ordinary course of business. Disclosure of related party transactions include: 1) the nature of the relationships involved, 2) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements, 3) the dollar amounts of the transactions for each periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period, and 4) amounts due from or to related parties as of the date of each balance sheet presented and if not otherwise apparent,5) the terms of settlement.
Net income (loss) per share is calculated in accordance with FASB ASC 260, Earnings Per Share, for the periods presented. Basic net loss per share is based upon the weighted average number of shares of Common Stock outstanding. Diluted net earnings (loss) per share is based on the assumption that all dilutive convertible shares, warrants and stock options were converted or exercised or excluded from the calculations if their inclusion would be antidilutive. Dilution is computed by applying the if-converted/treasury stock method. Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase shares of Common Stock at the average market price during the period. The Company has outstanding convertible notes payable, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock all of which are potentially dilutive. Such potential dilutive effect is included in diluted earnings (loss) per share at the beginning of the period (or at the time of issuance, if later) if they have a dilutive effect or such potentially dilutive securities are excluded from the calculations if their inclusion would be antidilutive.
The adoption of ASU 2020-06 requires the Company to assume share settlement when an instrument can be settled in cash or shares at the entity’s option. This applies both to convertible instruments and freestanding arrangements that could result in cash or share settlement. ASU 2020-06 also stipulates that an average market price for the period should be used in the computation of the diluted earnings (loss) per share denominator in cases when the exercise price of an instrument may change based on an entity’s share price or changes in the entity’s share price may affect the number of shares that would be used to settle a financial instrument. Lastly, an entity should use the weighted-average share count from each quarter when calculating the year-to-date weighted average share count for all potentially dilutive securities.
During the three and nine months ended September 30, 2023 and 2022, the Company had outstanding the following securities that were potentially dilutive: i) Series A and Series B Convertible Preferred Stock, ii) various convertible notes payable, iii) warrants to purchase Common Stock and iv) options to purchase Common Stock. All potentially dilutive securities were considered for inclusion or exclusion from the calculation of diluted income (loss) per share for the three and nine months ended September 30, 2023 and 2022. Any potentially dilutive security that were considered anti-dilutive were excluded from the net income (loss) per share reported for the three and nine months ended September 30, 2023 and 2022.
| 15 |
Debt – Modifications and Extinguishments / Troubled Debt Restructuring:
In accordance with ASC 470, the Company assesses restructuring of debt as troubled debt restructuring if the creditor for economic or legal reasons related to the debtor’s financial difficulties grant a concession to the debtor that it would not otherwise consider. The Company records a gain on restructuring of payables when it transfers its assets to a creditor to fully settle a payable. The gain is measured by the excess of the carrying amount of the payable over the fair value of the assets transferred or fair value of equity interest granted.
The Company follows ASC 470-50 Debt – Modifications and Extinguishments (“ASC 470-50”), which requires the Company to assess whether the modified terms had resulted in a change that was substantial from the original agreement. ASC 470-50 requires the Company to assess if an exchange of debt instruments between or a modification of a debt instrument by a debtor and a creditor in a nontroubled debt situation is deemed to have been accomplished with debt instruments that are substantially different based on an analysis of the present value of the future cash flows under the terms of the new debt instrument compared to the present value of the remaining cash flows under the terms of the original instrument. The accounting treatment is different depending on whether such difference in the present value of future cash flows is greater than or less than 10 percent as follows:
| ● | Difference
is less than 10% - If the modification results in a difference in present value of future cash flows for the new and old debt
instruments is less than | |
| ● | Difference
is more than 10% - If the modification results
in a difference in present value of future cash flows for the new and old debt instruments is more than |
Recent Accounting Pronouncements
Business Combinations - In October 2021, FASB issued ASU 2021-08 Business Combinations (“Topic 805”): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities were recognized by the acquirer at fair value on the acquisition date. The Company adopted this ASU on January 1, 2023 and its adoption did not have a material impact on our financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
| 16 |
Note 2 – Oil and Gas Properties and Equipment
Oil and gas properties and equipment is comprised of the following at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Central Kansas Uplift – Oil and gas production equipment | $ | $ | ||||||
| Hugoton Gas Field – Oil and gas production equipment | ||||||||
| Woodson County Property – Oil and gas production equipment | ||||||||
| Woodson County Property – Leasehold costs | ||||||||
| Central Kansas Uplift – Leasehold costs | ||||||||
| Hugoton Gas Field – Leasehold costs | ||||||||
| Subtotal | ||||||||
| Less: Accumulated impairment | ( | ) | ( | ) | ||||
| Less: Accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||
| Oil and gas properties and equipment, net | $ | $ | ||||||
Note 3 – Investment in unconsolidated subsidiary – GMDOC
A summary of the Company’s investment in unconsolidated subsidiary-GMDOC during the three and nine months ended September 30, 2023 and 2022 follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Investment in unconsolidated subsidiary-GMDOC, at beginning of period | $ | $ | $ | $ | ||||||||||||
| Purchase of membership units in GMDOC, LLC | ||||||||||||||||
| Equity in earnings (loss) of GMDOC | ( | ) | ( | ) | ||||||||||||
| Distributions during period | ||||||||||||||||
| Investment in unconsolidated subsidiary-GMDOC at end of period | $ | $ | $ | $ | ||||||||||||
The following table presents summarized balance sheet financial information of the Company’s unconsolidated subsidiary – GMDOC as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accrued revenue & prepaid expenses | ||||||||
| Oil and gas properties and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| General managing members advances | ||||||||
| Mortgage note payable, net | ||||||||
| Asset Retirement Obligations | ||||||||
| Member’s equity | ||||||||
| Total liabilities and member’s equity | $ | $ | ||||||
| 17 |
The following table presents summarized income statement financial information of the Company’s unconsolidated subsidiary – GMDOC for the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Oil and gas revenues | $ | $ | $ | $ | ||||||||||||
| Lease operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Production related taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ad valorem taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Accretion of asset retirement obligation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| AMGAS member’s percentage | % | % | % | |||||||||||||
| Equity in earnings (loss) of unconsolidated subsidiary – GMDOC | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
Note 4 – Debt Obligations
Debt obligations were comprised of the following at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Notes payable: | ||||||||
| $ | $ | |||||||
| Total notes payable | ||||||||
| Less: Long-term portion | ||||||||
| Notes payable, short-term | $ | $ | ||||||
Debt obligations become due and payable as follows:
| Years ended | Principal balance due | |||
| 2023 (October 1, 2023 through December 31, 2023) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
| 18 |
3% Convertible Notes Payable due March 30, 2026
On
March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished
accounts payable and accrued liabilities totaling $
8% Convertible Notes Payable due September 30, 2023 (in default)
On
October 29, 2021, the Company issued to two accredited investors (the “October 8% Note Investors”) unsecured convertible
notes payable due October 29, 2022 (the “October 8% Notes”), with an aggregate principal face amount of approximately $
The
Company did not pay the principal balance due on the October 8% Notes upon their original maturity on October 29, 2022 and the remaining
balance remained due and payable and was therefore in technical default as of December 31, 2022. The Company reached an agreement with
the two October 8% Note Investors on January 10, 2023. On January 10, 2023, the Company and the October 8% Note Holders amended each
of the notes by entering into a Letter Agreement between the October 8% Note Investors and the Company. The Letter Agreement modifies
the terms of the October 8% Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for
the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $
| 19 |
The
Company evaluated the terms of the January 10, 2023 Letter Agreement which amended the October 8% Notes. This evaluation included analyzing
whether there are significant and consequential changes to the economic substance of the October 8% Notes based on an analysis of the
amended future cash flows. If the change was deemed insignificant (generally less than 10% difference in estimated net present value
of future cash flows between the amended notes and the original notes) then the change is considered a debt modification in the financial
statements, whereas if the change is considered substantial (generally over 10% difference in estimated net present value of future cash
flows between the amended notes and the original notes) then the change is reflected as a debt extinguishment in the financial statements.
A modification or an exchange that changes the substantive conversion option as of the conversion date would generally be considered
substantial and require extinguishment accounting. The amendment of the Fixed Conversion Price to $
Following is an analysis of estimated net present value of future cash flows of the amended notes as compared to the original notes as of January 10, 2023, the date of the amendment:
As of January 10, 2023 | ||||
| Carrying value of the original convertible notes payable | ||||
| Principal balance | $ | |||
| Accrued interest | ||||
| Total carrying value of original convertible note payable | ||||
| Less: Net present value of future cash flows on amended convertible notes payable | ( | ) | ||
| Gain on extinguishment of convertible notes payable | $ | |||
The
difference between estimated net present value of future cash flows of the amended notes as compared to the original notes as of January
10, 2023, the date of the amendment exceeded 10%. As a result, the Company recorded a gain on extinguishment of convertible notes payable
totaling $
The
conversion rate on the October 8% Notes was reduced to $
The Company did not pay the principal balance due on the October 8% Notes upon their amended maturity on September 30, 2023 and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the October 8% Noteholders have been in discussions regarding an extension, however, there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company.
8% Convertible Note Payable due September 30, 2023 (the New Note) (in default)
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $
On
July 22, 2023, the Company agreed to further reduce the conversion price on the New Note to $
Following is an analysis of estimated net present value of future cash flows of the amended notes as compared to the original notes as of July 22, 2023, the date of the amendment:
As of July 22, 2023 | ||||
| Carrying value of the original convertible note payable | ||||
| Principal balance | $ | |||
| Accrued interest | ||||
| Total carrying value of original convertible note payable | ||||
| Less: Net present value of future cash flows on amended convertible note payable | ( | ) | ||
| Gain (loss) on extinguishment of convertible notes payable | $ | |||
On
July 22, 2023, the note holder exercised its right to convert $
The Company did not pay the principal balance due on the 8% Notes upon their amended maturity on September 30, 2023 and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the 8% Noteholder have been in discussions regarding an extension, however, there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company.
8% Convertible Note Payable due September 30, 2023 (in default)
On
August 30, 2021, the Company issued to an accredited investor (the “8% Note Investor”) an unsecured convertible note due
| 20 |
The underlying notes and warrants contain customary events of default, representations, warranties, agreements of the Company and the investors and customary indemnification rights and obligations of the parties thereto, as applicable.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $
| 21 |
Following is an analysis of estimated net present value of future cash flows of the amended notes as compared to the original notes as of May 5, 2023, the date of the amendment:
As of May 5, 2023 | ||||
| Carrying value of the original convertible note payable | ||||
| Principal balance | $ | |||
| Accrued interest | ||||
| Total carrying value of original convertible note payable | ||||
| Less: Net present value of future cash flows on amended convertible note payable | ( | ) | ||
| Gain on extinguishment of convertible notes payable | $ | |||
The
difference between estimated net present value of future cash flows of the amended notes as compared to the original notes as of May
5, 2023, the date of the amendment exceeded 10%. As a result, the Company recorded a gain on extinguishment of convertible notes payable
totaling $
On
July 22, 2023, the Company agreed to further reduce the conversion price on the convertible notes payable to $
8% Convertible Notes Payable due October 29, 2022 (in default)
On
October 29, 2021, the Company issued to an accredited investor (the “Second 8% Note Investor”) an unsecured convertible note
payable due October 29, 2022 (the “Second 8% Notes”), with an aggregate principal face amount of approximately $
| 22 |
The underlying notes and warrants contain customary events of default, representations, warranties, agreements of the Company and the investors and customary indemnification rights and obligations of the parties thereto, as applicable.
The
Company has accrued default interest aggregating $
The
conversion rate on the Second
8% Convertible Notes Payable due September 30, 2023 (in default)
On
June 8, 2022, the Company issued to an accredited investor an unsecured convertible note due September 15, 2022 (the “June 2022
Note”), with an aggregate principal face amount of $
The
June 2022 Note bears interest at a rate of eight percent (
The underlying notes and warrants contain customary events of default, representations, warranties, agreements of the Company and the investors and customary indemnification rights and obligations of the parties thereto, as applicable.
On
May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face
amount of approximately $
| 23 |
Following is an analysis of estimated net present value of future cash flows of the amended notes as compared to the original notes as of May 5, 2023, the date of the amendment:
As of May 5, 2023 | ||||
| Carrying value of the original convertible note payable | ||||
| Principal balance | $ | |||
| Accrued interest | ||||
| Total carrying value of original convertible note payable | ||||
| Less: Net present value of future cash flows on amended convertible note payable | ( | ) | ||
| Difference | $ | |||
The difference between estimated net present value of future cash flows of the amended notes as compared to the original notes as of May 5, 2023, the date of the amendment was less than 10%. As a result, the Company did not record a gain on extinguishment of convertible notes payable.
On
July 22, 2023, the Company agreed to further reduce the conversion price on the convertible notes payable to $
8% Convertible Notes Payable due September 30, 2023 (the “May 22 Notes”) (in default)
The
Company entered into a securities purchase agreement with two accredited investors for the Company’s 8% convertible notes payable
due
| 24 |
The Company also entered into that certain registration rights side letter, pursuant to which, in the event the Company’s shares of Common Stock have not commenced trading on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the closing date, and, thereafter, the Company agreed to file a registration statement under the Securities Act to register the offer and sale, by the Company, of Common Stock underlying the May 2022 Notes in the event that such notes are not repaid prior to such 120-day period.
The
Company paid half of the May 2022 Notes principal balance upon its maturity on June 29, 2022 and an additional $
The
Company and the two May 2022 Note Holders reached an agreement on January 10, 2023. On January 10, 2023, the Company amended each of
those notes by entering into a Letter Agreement between the investors and the Company. The Letter Agreement modifies the terms of the
May 2022 Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the
Company amended the Fixed Conversion Price (as defined in each note) to $
The
Company evaluated the terms of the January 10, 2023 Letter Agreement which amended the May 2022 Notes. This evaluation included analyzing
whether there are significant and consequential changes to the economic substance of the May 2022 Notes based on an analysis of the amended
future cash flows. If the change was deemed insignificant (generally less than 10% difference in estimated future cash flows between
the amended notes and the original notes) then the change is considered a debt modification in the financial statements, whereas if the
change is considered substantial (generally over 10% difference in estimated net present value of future cash flows between the amended
notes and the original notes) then the change is reflected as a debt extinguishment in the financial statements. A modification or an
exchange that changes the substantive conversion option as of the conversion date would generally be considered substantial and require
extinguishment accounting. The amendment of the Fixed Conversion Price to $
| 25 |
Following is an analysis of estimated net present value of future cash flows of the amended notes as compared to the original notes as of January 10, 2023, the date of the amendment:
As of January 10, 2023 | ||||
| Carrying value of the original convertible notes payable | ||||
| Principal balance | $ | |||
| Accrued interest | ||||
| Total carrying value of original convertible note payable | ||||
| Less: Net present value of future cash flows on amended convertible notes payable | ( | ) | ||
| Gain on extinguishment of convertible notes payable | $ | |||
The
difference between estimated net present value of future cash flows of the amended notes as compared to the original notes as of January
10, 2023, the date of the amendment exceeded 10%. As a result, the Company recorded a gain on extinguishment of convertible notes payable
totaling $
On
January 13, 2023, one of the May 22 Note holders exercised its right to convert $
The Company did not pay the principal balance due on the May 22 Note upon their amended maturity on September 30, 2023, and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the May 22 Noteholders have been in discussions regarding an extension, however there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company.
Note 5 – Accrued liabilities
Accrued liabilities consisted of the following at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Accrued rent | $ | $ | ||||||
| Accrued Nicaragua Concession fees | ||||||||
| Accrued lease operating costs | ||||||||
| Total accrued liabilities | $ | $ | ||||||
The accrued rent balances relate to unpaid rent for the Company’s previous headquarters in Denver, Colorado and represents unpaid rents and related costs for the period June 2006 through November 2008. The Company has not had any correspondence with the landlord for several years and will seek to settle and/or negotiate the matter when it has the financial resources to do so.
From
2009 to 2020, the Company had pursued the exploration of potential oil and gas resources in the United States and in the Perlas and Tyra
concession blocks in offshore Nicaragua in the Caribbean Sea (the “Concessions”), which contain a total of approximately
| 26 |
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock-based compensation – stock option grants | $ | $ | $ | $ | ||||||||||||
| Stock-based compensation – restricted stock grants | ||||||||||||||||
| Stock-based compensation – warrants issued for services pursuant to USNG Letter Agreement | ||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | ||||||||||||
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted and is estimated in accordance with the provisions of ASC 718.
At the Company’s Annual Meeting of Stockholders held on September 25, 2015, the stockholders approved the 2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and the Company reserved shares for issuance under the 2015 Plan. At the Company’s Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved the 2021 Stock Option and Restricted Stock Plan (the “2021 Plan”) and the Company reserved shares for issuance under the 2021 Plan.
The 2021 Plan and the 2015 Plan provide for under which both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of shares of the Company’s Common Stock is reserved for issuance under the 2021 Plan and the 2015 Plan. Options granted under the 2021 Plan and 2015 Plan allow for the purchase of shares of Common Stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company has issued stock options and restricted stock awards that are not pursuant to a formal plan with terms similar to the 2021 and 2015 Plans.
As of September 30, 2023, shares were available for future grants under the 2021 Plan and the 2015 Plan.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral traits. Expected volatilities used in the valuation model are based on the expected volatility based on historical volatility. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could differ from these estimates.
| 27 |
Stock option grants
| Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining | Aggregate Intrinsic Value | |||||||||||
| Outstanding at December 31, 2021 | $ | years | $ | |||||||||||
| Granted | ||||||||||||||
| Exercised | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||
| Outstanding at September 30, 2022 | $ | years | $ | |||||||||||
| Outstanding and exercisable at September 30, 2022 | $ | years | $ | |||||||||||
| Outstanding at December 31, 2022 | $ | years | $ | |||||||||||
| Granted | years | |||||||||||||
| Exercised | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||
| Outstanding at September 30, 2023 | $ | years | $ | |||||||||||
| Outstanding and exercisable at September 30, 2023 | $ | years | $ | |||||||||||
| Outstanding options | Exercisable options | |||||||||||||
Exercise price per share | Number of options | Weighted average remaining contractual life | Number of options | Weighted average remaining contractual life | ||||||||||
| $ | years | 9.85 years | ||||||||||||
| $ | years | years | ||||||||||||
| $ | years | years | ||||||||||||
| Total | years | years | ||||||||||||
There were stock options granted during the three and nine months ended September 30, 2023 and there were no stock options granted during the three and nine months ended September 30, 2022. The Company recorded stock-based compensation expense in connection with the vesting of stock options granted aggregating $ and $ for the three months ended September 30, 2023 and 2022, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively.
The Company determined the grant date fair value of the stock options issued on August 2, 2023 utilizing the Black-Scholes methodology with the following assumptions:
As of August 2, 2023 grant date | ||||
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Contractual term | years | |||
| Exercise price | $ | |||
| Number of warrants in aggregate | ||||
The intrinsic value as of September 30, 2023 and December 31, 2022 related to the vested and unvested stock options as of that date was $--. There is $ of unrecognized compensation cost as of September 30, 2023 related to the unvested stock options as of that date and will be recorded over remaining vesting term of years.
Restricted stock grants.
During May 2022, the Board of Directors granted shares of restricted stock awards to our officers, directors and consultants. In addition, during August 2020 the Board of Directors granted shares of restricted stock awards to our officers, directors and a consultant. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over a period of time generally corresponding to yearly anniversaries of the grant date. Unvested shares of restricted stock awards may be forfeited upon the termination of service of employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.
| 28 |
Number of restricted shares | Weighted average grant date fair value | |||||||
| Nonvested balance, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Nonvested balance, September 30, 2022 | $ | |||||||
| Nonvested balance, December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Nonvested balance, September 30, 2023 | $ | |||||||
The Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted stock grants aggregating $-- and $ during the three months ended September 30, 2023 and 2022, respectively and $ and $ during the nine months ended September 30, 2023 and 2022, respectively.
The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of September 30, 2023, there were $-- of total unrecognized compensation costs related to all remaining non-vested restricted stock grants as all restricted stock granted to date have fully vested.
Note 7 – Warrants
The following table summarizes warrant activity for the nine months ended September 30, 2023 and 2022:
Number of Warrants | Weighted Average Exercise Price Per Share | |||||||
| Outstanding and exercisable at December 31, 2021 | $ | |||||||
| Issued in connection with issuance of Series A Convertible Preferred Stock (See Note 13) | ||||||||
| Issued in connection with issuance of 8% Convertible Promissory Note (See Note 4) | ||||||||
| Exercised | ||||||||
| Forfeited/expired | ||||||||
| Outstanding and exercisable at September 30, 2022 | $ | |||||||
| Outstanding and exercisable at December 31, 2022 | $ | |||||||
| Issued | ||||||||
| Exercised | ||||||||
| Forfeited/expired | ||||||||
| Outstanding and exercisable at September 30, 2023 | $ | |||||||
The
weighted average term of all outstanding Common Stock purchase warrants was
| 29 |
The
warrant exercise price on warrants to acquire
As of May 4, 2023 with original exercise price | As of May 4, 2023 with new exercise price | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Contractual term | ||||||||
| Exercise price | $ | to | $ | |||||
| Number of warrants in aggregate | ||||||||
On July 22, 2023, the Company agreed to reduce the exercise price on
The following table summarizes the range of exercise prices and weighted average remaining contractual life for outstanding and exercisable warrants to purchase common shares as of September 30, 2023:
| Outstanding and exercisable warrants | ||||||||
Exercise price per share | Number of warrants | Weighted average remaining contractual life | ||||||
| $ | years | |||||||
| $ | years | |||||||
| Total | ||||||||
Warrants issued pursuant to USNG Letter Agreement
On
November 9, 2021, the Company entered into a letter agreement (the “USNG Letter Agreement”) with U.S. Noble Gas, LLC (“USNG”),
pursuant to which USNG provides consulting services to the Company for exploration, testing, refining, production, marketing and distribution
of various potential reserves of noble gases and rare earth element/minerals on the Company’s recently acquired
The
USNG Letter Agreement also provides that USNG will supply a large vessel designed for flows up to
The USNG Letter Agreement requires the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised of various experts involved in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers and exploration and development companies from the energy industry. The financial partners may include large family offices or small institutions.
| 30 |
Pursuant
to the USNG Letter Agreement, the Company will pay USNG a monthly cash fee equal to $
The
USNG Letter Agreement has an initial term of
In
consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants
to purchase, in the aggregate, shares of its Common Stock at an exercise price of fifty cents ($
The fair value of the warrants to purchase Common Stock in consideration for services to be rendered under the USNG Letter Agreement with USNG is estimated on the date of grant using the Black-Scholes option-pricing model.
The
Company recognized $ and $ of compensation expense relative to the
The
total grant date fair value of the
Note 8 – Income Taxes
The effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily due to the net operating loss history of the Company maintaining a full reserve on all net deferred tax assets during the three and nine months ended September 30, 2023 and 2022.
The
Company has incurred operating losses in recent years, and it continues to be in a three-year cumulative loss position at September 30,
2023. 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
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $
The Company has recently completed the filing of its tax returns for the tax years 2012 through 2021. Therefore, all such tax returns are open to examination by the Internal Revenue Service.
| 31 |
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards
in the event that it has experienced a more than
Note 9 – Gain on Extinguishment of Convertible Notes Payable
During the three and nine months ended September 30, 2023 and 2022, the Company recorded gains on the extinguishment of convertible notes payable through negotiation and settlements with certain creditors as follows:
| Three Months Ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Gain on extinguishment of convertible notes payable: | ||||||||||||||||
| Gain on extinguishment of convertible notes payable – the May 22 Notes (see Note 4) | $ | $ | $ | $ | ||||||||||||
| Gain on extinguishment of convertible notes payable – the October 8% Notes (See Note 4) | ||||||||||||||||
| Gain on extinguishment of convertible notes payable – the May 22 Notes (see Note 4) | ||||||||||||||||
| Total gain on exchange and extinguishment of liabilities | $ | $ | $ | $ | ||||||||||||
Note 10 – Asset Retirement Obligations
The Company’s asset retirement obligations primarily relate to the Company’s portion of future plugging and abandonment costs for wells and related facilities. The following table presents the changes in the asset retirement obligations for the nine months ended September 30, 2023 and 2022:
| Amount | ||||
| Asset retirement obligation at December 31, 2021 | $ | |||
| Additions | ||||
| Accretion expense during the period | ||||
| Asset retirement obligation at September 30, 2022 | $ | |||
| Asset retirement obligation at December 31, 2022 | $ | |||
| Additions | ||||
| Accretion expense during the period | ||||
| Asset retirement obligation at September 30, 2023 | $ | |||
Approximately
$
| 32 |
Note 11 – Warrant Derivative Liability
The estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection with Series A Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates. The detachable warrants issued in connection with the issuance of certain Series A Convertible Preferred Stock (See Note 13 - March 2021 Issuance) contained a provision allowing the holder to require cash settlement in certain situations were fundamental transaction, as defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the Holder’s ability to utilize such provisions therefore the related derivative liability was recognized on December 31, 2022 and also at September 30, 2023.
The following is a summary of the assumptions used in calculating estimated fair value of such derivative liabilities as of the September 30, 2023 and December 31, 2022:
As of September 30, 2023 | As of December 31, 2022 | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Number of warrants in aggregate | ||||||||
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, 2021 | $ | |||
| Unrealized derivative gains included in other income/expense for the period | ||||
| Balance at September 30, 2022 | $ | |||
| Balance at December 31, 2022 | $ | |||
| Unrealized derivative gains included in other income/expense for the period | ( | ) | ||
| Balance at September 30, 2023 | $ | |||
The
warrant exercise price on warrants to acquire
As of May 4, 2023 with original exercise price | As of May 4, 2023 with new exercise price | |||||||
| Volatility – range | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Contractual term | ||||||||
| Exercise price | $ | $ | ||||||
| Number of warrants in aggregate | ||||||||
| 33 |
Note 12 – Commitments and Contingencies
Lack of Compliance with Law Regarding Domestic Properties
The
Company was not in compliance with then existing federal, state and local laws, rules and regulations for domestic oil and gas properties
owned and disposed of in 2012 and in years prior to 2012 and could have a material or significantly adverse effect upon the liquidity,
capital expenditures, earnings or competitive position of the Company. All domestic oil and gas properties held by Infinity-Wyoming and
Infinity-Texas were disposed of in 2012 and in years prior to 2012; however, the Company may remain liable for certain asset retirement
costs should the new owners not complete their obligations. Management believes the total asset retirement obligations recorded for these
prior matters of $
USNG Letter Agreement commitment
Pursuant
to the USNG Letter Agreement (see Note 7), the Company will pay USNG a monthly cash fee equal to $
The
USNG Letter Agreement has an initial term of
Litigation
The Company is subject to various claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial statements.
The Company is currently involved in litigation as follows:
| ● | In
October 2012, the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $ |
| Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the Company’s officers
have potential liability regarding the above matter, and the Company’s officers are held personally harmless by indemnification
provisions of the Company. Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company.
|
| 34 |
| ● | Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against the Company resulting from certain professional consulting services provided for quality control and
management of seismic operations during November and December 2013 on the Nicaraguan Concessions. Cambrian provided these services
pursuant to a Master Consulting Agreement with the Company, dated November 20, 2013, and has claimed breach of contract for failure
to pay amounts due. On December 8, 2014, a default judgment was entered against the Company in the amount of $ |
| ● | Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment of
$ |
Note 13 – Stockholder’s Deficit
Conversion of 8% Convertible Notes Payable to Common Stock.
On
January 13, 2023, a holder of 8% Convertible Notes Payable exercised its right to convert $
On
July 22, 2023, the June 22 Note holder exercised its right to convert $
Convertible Preferred Stock
As of September 30, 2023 and December 31, 2022, the Company is authorized to issue up to shares of preferred stock, par value $ per share.
Series
A Convertible Preferred Stock Authorization - On March 16, 2021, the Company approved and filed a Certificate of Designation of Preferences,
Rights and Limitations of the Series A Convertible Preferred Stock (“COD”) with the Secretary of State of the State of Delaware.
The COD provides for the issuance of up to shares of Series A Convertible Preferred Stock with a stated/liquidation value of $
| 35 |
Series
B Convertible Preferred Stock Authorization - On May 3, 2023, the Company approved and filed a COD of the Series B Convertible Preferred
Stock with the Secretary of State of the State of Delaware. The COD provides for the issuance of up to shares of Series B Convertible
Preferred Stock with a stated/liquidation value of $
The following summarizes the activity in the Series A and Series B Convertible Preferred Stock for the three months ended September 30, 2023 and 2022:
| Nine months ended September 30, 2023 | Nine months ended September 30, 2022 | |||||||||||||||
| Series A | Series B | Series A | Series B | |||||||||||||
| Outstanding at beginning of period: | ||||||||||||||||
| Issued | ||||||||||||||||
| Converted to common stock | ( | ) | ( | ) | ||||||||||||
| Redeemed | ||||||||||||||||
| Outstanding at end of period | ||||||||||||||||
Series
A - March 2021 Issuance - On March 26, 2021, the Company entered into a securities purchase agreement with five (5) accredited investors
providing for an aggregate investment of $
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the acquisition of the Properties, which occurred on April 1, 2021, to register the shares of Common Stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90th) calendar day following the closing of the acquisition of the Properties, which occurred on April 1, 2021. The Company completed the required registration of these shares on Form S-1, which the Securities and Exchange Commission declared effective on August 4, 2021.
| 36 |
The holders of March 2021 Series A Convertible Preferred Stock exercised their right to convert shares of the March 2021 Series A Convertible Preferred Stock into shares of Common Stock during the nine months ended September 30, 2023. The holders exercised their rights to convert a total of shares of March 2021 Series A Convertible Preferred Stock into shares of Common Stock during the nine months ended September 30, 2022.
On
March 26, 2021, Ozark Capital, LLC (“Ozark”) acquired shares of March 2021 Series A Convertible Preferred Stock (convertible
into shares of Common Stock), together with warrants to acquire
Series
A - June 2022 Issuance - On June 15, 2022, the Company entered into a securities purchase agreement with an accredited investor providing
for an aggregate investment of $
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the of the June 2022 Series A Preferred Stock, which occurred on June 15, 2022, to register the shares of Common Stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90th) calendar day following the closing of the offering, which occurred on June 15, 2022.
Series
A - August/September 2022 Issuances – During August and September 2022, the Company entered into a securities purchase agreement
with three accredited investors providing for an aggregate investment of $
| 37 |
Series
B - May 2023 Issuance - On May 4, 2023, the Company entered into a securities purchase agreement with three (3) accredited investors
providing for an aggregate investment of $
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the acquisition of the Properties, to register the shares of Common Stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof.
The holders of May 2023 Series B Convertible Preferred Stock did not exercise their rights to convert any of the May 2023 Series B Convertible Preferred Stock into shares of Common Stock during the three and nine months ended September 30, 2023 and 2022.
On
April 27, 2023 and May 4, 2023, Ozark Capital, LLC (“Ozark”) acquired shares of May 2023 Series B Convertible Preferred
Stock (convertible into shares of Common Stock), together with warrants to acquire
The estimated fair value of the detachable warrants issued in connection with Series B Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates.
Such
warrants are equity-classified with an estimated fair value of $
As of May 4, 2023 | ||||
| Volatility – range | % | |||
| Risk-free rate | % | |||
| Contractual term | ||||
| Exercise price | $ | |||
| Number of warrants in aggregate | ||||
| 38 |
Series
A Convertible Preferred Stock Dividends – The Company has accrued preferred dividends totaling $
Accrued
dividends on Series A Convertible Preferred Stock attributable to Ozark were $
Series
B Convertible Preferred Stock Dividends - The Company has accrued preferred dividends totaling $
Accrued
dividends on Series B Convertible Preferred Stock attributable to Ozark were $
Note 14 – Related Party Transactions
The
Company does not have any employees other than its Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. In previous
years, certain general and administrative services (for which payment is deferred) had been provided by the Company’s Chief Financial
Officer’s accounting firm at its standard billing rates plus out-of-pocket expenses consisting primarily of accounting, tax and
other administrative fees. The Company no longer utilizes its Chief Financial Officer’s accounting firm for such support services
and was not billed for any such services during the years ended December 31, 2022 and 2021. On March 31, 2021, the parties entered into
a Debt Settlement Agreement whereby all amounts due to such firm for services totaling $
The
Company had accrued compensation to its officers and directors in years prior to 2018. The Board of Directors authorized the Company
to cease the accrual of compensation for its officers and directors, effective January 1, 2018. On March 31, 2021, the parties entered
into Debt Settlement Agreements whereby all accrued amounts due for such services totaling $
Offshore
Finance, LLC was owed financing costs in connection with a subordinated loan to the Company which was converted to common shares in 2014.
The managing partner of Offshore and the Company’s Chief Financial Officer are partners in the accounting firm which the Company
used for general corporate purposes in the past. On March 31, 2021, the parties entered into a Debt Settlement Agreement whereby all
amounts due for such services totaling $
In
connection with the Hugoton Gas Field Farmout Agreement, John Loeffelbein, the Company’s previous Chief Operating Officer, was
granted a
Note 15 – Subsequent Events
On October 17, 2023, the Company and M3 Helium Corp. (“M3”) entered into a letter of understanding (the “Letter Agreement”) and a related Assignment of Certain Rights and Interests that included the following provisions:
| ● | The
Company assigned all of its rights, title and interest in and to the |
| ● | The assignment included all of its rights, title and interest in and to the Peyton 21-1 well which was drilled and completed in June 2022 pursuant to the participation agreement. In addition, M3 has agreed to assume all obligations and receivables for the sale of oil and gas as of October 17, 2023. |
| ● | The parties agreed that the USNG Agreement dated November 9, 2021 is terminated effective October 17, 2023. |
| ● | M3
has agreed to pay a total of $ |
**********************
| 39 |
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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. These statements include statements relating to trends in or expectations relating to the effects of our existing and any future initiatives, strategies, investments, outlooks and plans.
Actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included in this report. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others: our ability to successfully develop and operate our properties; changes in the competitive environment in our industry and the markets we serve, and our ability to compete effectively; our cash needs and the adequacy of our cash flows and earnings; our ability to service our debt obligations; our ability to attract and retain qualified personnel; changes in applicable laws or regulations; litigation; public health epidemics or outbreaks (such as the novel strain of COVID-19 and related variants); accidents, equipment failures or mechanical problems; and other risks.
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.
As used in this quarterly report, “AMGAS,” the “Company,” “we,” “us” and “our” refer collectively to American Noble Gas Inc., its predecessors and subsidiaries or one or more of them as the context may require.
Overview
The Company has assessed various opportunities and strategic alternatives involving the acquisition, exploration and development of oil and gas oil producing properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
As a result, we are now involved with the following oil and gas producing properties:
Central Kansas Uplift - On April 1, 2021, we completed the acquisition of the Central Kansas Uplift Properties, for a purchase price of $900,000. The Central Kansas Uplift Properties include the production and mineral rights/leasehold for oil and gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”). The purchase of the Properties included the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand Zone with an approximate depth of 3,600 feet.
We commenced rework of the existing production wells after completion of the acquisition of the Properties and have performed testing and evaluation of the existence of noble gas reserves on the Properties including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the Properties’ existing oil and gas reserves while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.
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During the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells due to excessive operating costs as of September 30, 2023 and December 31, 2022 and has concentrated on reworking the conventional wells on the property to emphasize crude oil production as well as helium and natural gas liquids that were present behind casing pipe in the deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of September 30, 2023 and December 31, 2022.
The conventional well rework program has yielded encouraging results thus far and the Company during the quarter ended September 30, 2023. The Company and its advisors are continuing to evaluate the results of the rework and its positive impact on the production of crude oil production as well as helium and natural gas liquids that were present behind casing pipe in the deeper producing zones.
Hugoton Gas Field Farm-Out - On April 4, 2022, the Company acquired a 40% participation in a Farmout Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor (“Scout”) with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Company has joined three other parties to explore for and develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement (collectively the “Hugoton JV”).
The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 2022. The Hugoton JV will utilize Scout’s existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices.
The Hugoton JV also acquired the right to all brine minerals subject to a ten percent (10%) royalty to Scout, across Finney and Haskell Counties. Brine minerals are harvested from the formation water produced from active, and to be drilled, oil and gas wells and may include a variety of dissolved minerals including bromine and iodine. The Hugoton JV plans to target brine minerals with commercial quantities of bromine and iodine. The Company through the Hugoton JV is currently developing proprietary technology to recover brine minerals, particularly with respect to bromine, which is well underway and has demonstrated recovery efficiency and is expected to be available for use in existing and future development wells.
The Hugoton JV believes that its unconventional theory has not previously been targeted for exploration by historical operations in the field. The initial exploratory well was spud on May 7, 2022 near Garden City, Kansas, with production casing set after testing and completion logs identified at least two potential zones with substantial gas and helium reserves. The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production and sales of natural gas, natural gas liquids and helium on August 17, 2022.
The Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project. The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December 31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022. The Company recorded an addition to depreciation and amortization expense of $3,411 during the three months ended September 30, 2023.
The Company has decided to divest of its participation in the Hugoton Gas Field and the Peyton 21-1 well drilled near Garden City, Kansas. The Company determined that it should focus its strategy and resources on the conventional wells in the Central Kansas Uplift which have provided positive initial results from the rework programs and the potential for new reserves of crude oil, helium and natural gas liquids. In addition, the participation agreement required the drilling of four new wells prior to March 2024 which management decided would be too significant of an obligation for capital expenditures.
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Woodson County Kansas Field – On July 7, 2023, the Company acquired an oil and gas lease to explore and develop approximately 240 acres located in Woodson County, Kansas (the “Woodson Property”). An exploratory well was drilled and cased during August 2023. An evaluation of drill tests indicated commercial oil reserves in at least one zone. The Company is in process of final completion of the well as of September 30, 2023 and expects the well to commence production in November 2023.
The Company continues to assess the initial well drilled on the Woodson Property in order to determine the location and number of offset wells that can be drilled to enhance the crude oil reserves that the Properties may hold.
Investment in GMDOC, LLC - On May 3, 2022, the Company entered into an operating agreement (the “Operating Agreement”) pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited liability membership interests (the “Interests”) in GMDOC, LLC, a Kansas limited liability company (“GMDOC”), for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.
The Company paid the cash contribution for the membership interests of $850,000, during May 2022. The remainder of the Company’s capital contribution, or $3,187,500, was financed by the Bank Loan (as defined below).
GMDOC had previously acquired 70% of the working interests (the “Acquisition”) in certain oil and gas leases (the “GMDOC Leases”) from Castelli Energy, L.L.C., an Oklahoma limited liability company (“Castelli”). The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis.
GMDOC is managed by two members: Darrah Oil Company, LLC, and Grand Mesa Operating Company, (collectively the “Managing Members”), which also serve as the operating companies under the GMDOC Leases.
Recent developments – On October 17, 2023, the Company and M3 Helium Corp. (“M3”) entered into a letter of understandiong (the “Letter Agreement”) and the related Assignment of Certain Rights and Interests that included the following provisions:
| ● | The Company assigned all of its rights, title and interest in and to the 40% participation it had acquired on April 4, 2022 in a Farmout Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor (“Scout”) with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Company assigned such participation rights to M3 effective October 7, 2023. |
| ● | The assignment included all of its rights, title and interest in and to the Peyton 21-1 well which was drilled and completed in June 2022 pursuant to the participation agreement. In addition, M3 has agreed to assume all obligations and receivables for the sale of oil and gas as of October 17, 2023. |
| ● | The parties agreed that the USNG Agreement dated November 9, 2021 is terminated effective October 17, 2023. |
M3 has agreed to pay a total of $75,000 cash to the Company as consideration for the Letter Agreement including the assignments thereunder.
2023 Operational and Financial Objectives
Corporate Activities
The Company’s 2023 operating objectives are focused on: 1) raising the necessary funds to finance exploration and development of the Hugoton Gas Field through the Hugoton JV, 2) raising the necessary funds for repayment of obligations that become due, or are in default and/or past due, 3) raising the funds necessary to explore and develop the Central Kansas Uplift Properties, including testing and evaluation of noble gas reserves in additional to the oil and gas producing zones, 4) raising the funds necessary to allow the Company to compete for new oil and gas properties that become available for acquisition purposes, and 5) funding our daily operations and the repayment of other obligations that become due, or are in default and/or past due.
Recent financings –
Issuance of Series B Convertible Preferred Stock
May 2023 Issuance - On May 4, 2023, the Company entered into a securities purchase agreement with three (3) accredited investors providing for an aggregate investment of $750,000 by the investors for the issuance by the Company to them of (i) 7,500 shares of Series B Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “May 2023 Series B Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 15,000,000 shares of Common Stock at an exercise price of five ($0.05) cents per share, subject to customary adjustments thereunder. The 7,500 shares of May 2023 Series B Convertible Preferred Stock are convertible into an aggregate of up to 15,000,000 shares of Common Stock. Holders of the warrants may exercise the warrants by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrants. The Company intends to use the proceeds of the May 2023 Series B Convertible Preferred Stock offering for development of Hugoton Gas Field and Central Kansas Uplift Properties and for general working capital purposes.
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the May 2023 Series B Convertible Preferred Stock transaction, to register the shares of Common Stock issuable upon the conversion of the May 2023 Series B Convertible Preferred Stock and the common stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90th) calendar day following the closing of the issuance of the May 2023 Series B Convertible Preferred Stock.
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Refinancing and extensions of Convertible Notes Payable
8% Convertible Notes Payable due September 30, 2023 - The Company did not pay the $500,000 principal balances due on the October 8% Notes upon their original maturity on October 29, 2022 and the remaining balance remained due and payable and was therefore in technical default as of December 31, 2022. The Company reached an agreement with the two October 8% Note Investors on January 10, 2023. On January 10, 2023, the Company and the October 8% Note Holders amended each of the notes by entering into a Letter Agreement between the October 8% Note Investors and the Company. The Letter Agreement modifies the terms of the October 8% Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes. The conversion price of the October 8% Note and the related warrant exercise price were further adjusted to $0.05 per share due to the dilutive issuance of the Series B Convertible Preferred Stock on May 4, 2023.
The Company did not pay the principal balance due on the October 8% Notes upon their amended maturity on September 30, 2023 and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the October 8% Noteholders have been in discussions regarding an extension, however, there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company
8% Convertible Notes Payable due September 30, 2023 - On May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000, which the Company did not pay by their respective maturity dates. The Company and the holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable.
On July 22, 2023, the Company agreed to further reduce the conversion price on the convertible notes payable to $0.05 per share as an accommodation to the Holder. The interest rate and other significant terms of the convertible note remained the same. On July 22, 2023, the note holder exercised its right to convert $57,250 of principal into 1,145,000 shares of common stock. The remaining outstanding principal balance on the New Note totaled $392,750 and $350,000 as of September 30, 2023 and December 31, 2022, respectively.
The Company did not pay the principal balance due on the amended 8% Notes upon their amended maturity on September 30, 2023 and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the noteholder have been in discussions regarding an extension, however, there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company
8% Convertible Notes Payable due September 30, 2023 (the “May 22 Notes”) - The Company and the two May 2022 Note Holders reached an agreement on January 10, 2023. On January 10, 2023, the Company amended each of those notes by entering into a Letter Agreement between the investors and the Company. The Letter Agreement modifies the terms of the May 2022 Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes. The conversion rate on the May 22 Notes were further reduced to $0.05 per share as a result of the dilutive issuance of the Series B Convertible Preferred Stock that occurred on May 4, 2023.
The Company did not pay the principal balance due on the May 22 Notes upon their amended maturity of September 30, 2023, and the remaining balance remained due and payable and was therefore in technical default as of September 30, 2023. The Company and the May 22 Noteholders have been in discussions regarding an extension, however there can be no assurance that these negotiations will result in an extension of the due date or that the terms of any extension will be on terms acceptable to the Company.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on our financial conditions, changes in our financial conditions, or our results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses except as follows:
Investment in Unconsolidated Subsidiary – GMDOC - On May 3, 2022, the Company entered into the Operating Agreement pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited liability membership Interests in GMDOC, for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.
The Company paid the cash contribution for the membership interests of $850,000, in May 2022. The remainder of the Company’s capital contribution, or $3,187,500, was financed by the Bank Loan (as defined below).
GMDOC had previously acquired 70% of the working interests in the GMDOC Leases from Castelli Energy, L.L.C, an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis.
Pursuant to the terms of the Operating Agreement, each member agreed to pay GMDOC, as its capital contribution, $50,000 in cash per Interest, with the remainder to be financed, in part, by a loan to GMDOC from a commercial bank, secured by GMDOC’s property, in the aggregate amount of $6,045,000 (the “Bank Loan”). The principal of the Bank Loan is to be repaid in 84 varying monthly installments, ranging from $170,000 at the beginning to $40,500 at the end of the loan term, with the first installment on July 1, 2022. The Bank Loan bears a variable interest beginning at an initial rate of 6% per annum with one rate adjustment after 36 months subject to a 6% minimum interest rate.
For the Three Months Ended September 30, 2023 and 2022
Results of Operations
Revenue
Revenues totaled $22,004 and $43,034 for the three months ended September 30, 2023 and 2022, respectively. The $21,030 or 49% decrease in revenues during the three months ended September 30, 2023 as compared to the same period in 2022 reflects the reduction in oil and gas sales from our Central Kansas Uplift properties due to the wells being down awaiting necessary rework/maintenance.
During the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells due to excessive operating costs as of September 30, 2023 and December 31, 2022 and has concentrated on reworking the conventional wells on the property to emphasize crude oil production as well as helium and natural gas liquids that were present behind casing pipe in the deeper producing zones.
The conventional well rework program has yielded encouraging results thus far and the Company during the quarter ended September 30, 2023. The Company and its advisors are continuing to evaluate the results of the rework and its positive impact on the production of crude oil production as well as helium and natural gas liquids that were present behind casing pipe in the deeper producing zones.
Accordingly, revenues during the three months ended September 30, 2023 was substantially less than the comparable period in 2022.
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Oil and Gas Lease Operating Expenses
Total oil and gas lease operating expenses totaled $93,204 and $55,288 for the three months ended September 30, 2023 and 2022, respectively. The increase in oil and gas lease operating expenses during the three months ended September 30, 2023 as compared to the same period in 2022 is attributable to significant repairs and rework performed in the three months ended September 30, 2023 that did not occur during the three months ended September 30, 2023. The Company has shut down the horizontal production wells as of September 30, 2023 and December 31, 2022 and has reworked two of the conventional wells on the property to produce crude oil, helium and natural gas liquids from a deeper producing zone. Accordingly, oil and gas lease operating expenses during the three months ended September 30, 2023 were substantially higher than the comparable period in 2022.
Depreciation, Depletion and Impairment
Depreciation, depletion and amortization expense totaled $3,411 and $34,292 during the three months ended September 30, 2023 and 2022, respectively.
During late 2022, the Company changed its strategy regarding the Central Kansas Uplift properties considering its reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells as of September 30, 2023 and December 31, 2022 and has deepened one of the conventional wells on the property to produce crude oil known to be present in deeper producing zones. Accordingly, the Company recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022 which remains in place at September 30, 2023. Depreciation, depletion and impairment expense was reduced substantially during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 as a result of the impairment recognized at December 31, 2022.
Accretion of Asset Retirement Obligation
Total expense for the accretion of asset retirement obligations was $1,218 and $424 for the three months ended September 30, 2023 and 2022, respectively. The Company recognized additional expenses for its asset retirement obligations relative to both the Central Kansas Uplift and Hugoton Gas Field properties. The Company commenced production from the Hugoton Gas Field well in late 2022 which began the accretion of its related asset retirement obligations. The obligation relates to legal requirements associated with the retirement of long-lived assets that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.
Oil and Gas Production Related Taxes
Oil and gas production related taxes totaled $28 and $55 for the three months ended September 30, 2023 and 2022, respectively. Such taxes are deducted from gross oil and gas revenue by the crude oil purchaser upon payment to the Company and include primarily severance taxes imposed by the State of Kansas, and Kansas conservation assessment fees. Revenues totaled $22,004 for the three months ended September 30, 2023, which resulted in the deduction of $28 in production related taxes due to the shut-down of crude oil production from the Central Kansas Uplift properties in late 2022.
Other General and Administrative Expenses
Other general and administrative expenses were $145,068 for the three months ended September 30, 2023, a decrease of $138,244, or 49%, from other general and administrative expenses of $283,312 for the three months ended September 30, 2022. The decrease in other general and administrative expenses is primarily attributable to a decrease of $124,375 in stock-based compensation due to the noncash compensation awarded to the Company’s executives, members of the Board of Directors became fully vested in 2023 and therefore no related compensation expense was recorded during the three months ended September 30, 2023 as compared to $246,091 of stock based compensation expense recorded during the three months ended September 30, 2022.
Equity in earnings of unconsolidated subsidiary – GMDOC
The Company reported equity in earnings (loss) of unconsolidated subsidiary of $(65,846) for the three months ended September 30, 2023, compared to earnings of $209,297 for the three months ended September 30, 2022. Such income (loss) resulted from the Company acquiring a 60.7143% membership interest in GMDOC in May 2022. The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
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GMDOC had previously acquired 70% of the working interests in the GMDOC Leases from Castelli Energy, L.L.C., an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis. GMDOC, LLC generated $65,575 of net income on $446,910 of oil and gas revenues during the three months ended September 30, 2023. The Company owns a 60.7143% membership interest in such net (loss) income or $65,846 which it has reported as equity in earnings of unconsolidated subsidiary – GMDOC during the three months ended September 30, 2023.
Interest Expense
Interest expense increased to $25,156 for the three months ended September 30, 2023, compared to $217,872 for the three months ended September 30, 2022. The decrease in interest expense during the three months ended September 30, 2023 compared to the same period in 2022 was attributable to $189,611 of amortization of discount on convertible notes payable recorded during the three months ended September 30, 2022. There was no similar amortization of discount on convertible notes payable recorded during the three months ended September 30, 2023.
Change in Warrant Derivative Fair Value
The change in warrant derivative liability was a gain of $52,828 during the three months ended September 30, 2023, as compared to a gain of $-0- during the three months ended September 30, 2022. The estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection with the issuance of Series A Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates. The detachable warrants issued in connection with the issuance of certain Series A Convertible Preferred Stock contained a provision allowing the holder to require cash settlement in certain situations were fundamental transaction, as defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the Holder’s ability to utilize such provisions, therefore the derivative liability was recognized on December 31, 2022 and September 30, 2023. Management estimated the fair value of the underlying derivative utilizing the Black-Scholes methodology as of September 30, 2023 and June 30, 2023 with the change in fair value being recognized as the change in warrant derivative fair value for the three months ended September 30, 2023.
Income Tax
The Company recorded no income tax benefit (expense) in the three months ended September 30, 2023 and 2022. The Company has been in a cumulative tax loss position and has substantial net operating loss carryforwards available for its utilization at September 30, 2023. The Company has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense or benefit on its income (loss) before income taxes during the three months ended September 30, 2023 and 2022.
Net Income (Loss)
The Company reported a net loss of $259,099 for the three months ended September 30, 2023, compared to a net loss of $338,912 for the three months ended September 30, 2022. This represents an improvement of $79,813 for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Convertible Preferred Stock Dividends
The Company recorded $77,976 and $65,406 in Series A and Series B Convertible Preferred Stock dividends in the three months ended September 30, 2023 and 2022, respectively. On March 26, 2021, the Company issued and classified its Series A Convertible Preferred Stock as equity securities on its balance sheet. During 2022, the Company issued additional shares of Series A Convertible Preferred Stock, therefore, there were more shares of Series A Convertible Preferred Stock outstanding during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. On March 4, 2023, the Company issued and classified its Series B Convertible Preferred Stock as equity securities on its balance sheet.
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Series A Convertible Preferred Stock bear a cumulative dividend at a 10% rate based on its stated/liquidation value. Series B Convertible Preferred Stock bear a cumulative dividend at a 8% rate based on its stated/liquidation value.
Net Income (Loss) Applicable to Common Stockholders
The Series A and Series B Convertible Preferred Stock issued have dividend and/or distribution preferences over our Common Stock and, therefore, such accrued dividend amounts have been deducted from net income (loss) to report net income (loss) applicable to common stockholders of $(337,075) and $(404,318) for the three months ended September 30, 2023 and 2022, respectively.
Basic and Diluted Net Income (Loss) Attributable to Common Stockholders per Share
Basic net income (loss) attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of Common Stock and dilutive Common Stock Equivalents outstanding during the period. Common Stock Equivalents included in the diluted net income (loss) attributable to common stockholders per share computation represent shares of Common Stock issuable upon the assumed conversion of convertible notes payable, Series A Convertible Preferred Stock and the assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses attributable to common stockholders are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of Common Stock Equivalents would have an anti-dilutive effect.
The Company incurred a net loss attributable to common stockholders during the three months ended September 30, 2023, and therefore all Common Stock Equivalents were considered antidilutive for fully diluted net loss per share purposes. All of the outstanding convertible notes payable, all of the Series A Convertible Preferred Stock, and all of the outstanding stock options and common stock purchase warrants were determined to be antidilutive and therefore were also excluded from the diluted loss per share calculation. The basic and diluted net income (loss) attributable to common stockholders per share was $(0.01) for the three months ended September 30, 2023.
The Company incurred a net loss attributable to common stockholders during the three months ended September 30, 2022, therefore all Common Stock Equivalents were considered anti-dilutive and excluded from diluted net loss attributable to common stockholders per share computations. The basic and diluted net loss attributable to common stockholders per share were $(0.02) for the three months ended September 30, 2022, respectively.
Potential Common Stock Equivalents as of September 30, 2023 totaled 136,659,187 shares of Common Stock, which included 24,236,404 shares of Common Stock underlying the convertible notes payable, 65,552,000 shares of Common Stock underlying the conversion of Series A and Series B Convertible Preferred Stock, 35,430,783 shares of Common Stock underlying outstanding warrants and 11,440,000 shares of Common Stock underlying outstanding stock options.
For the Nine months ended September 30, 2023 and 2022
Results of Operations
Revenue
Revenues totaled $34,968 and $111,903 for the nine months ended September 30, 2023 and 2022, respectively. The $76,935 or 69% decrease in revenues during the nine months ended September 30, 2023 as compared to the same period in 2022 reflects the reduction in oil and gas sales from our Central Kansas Uplift properties due to the wells being down awaiting necessary rework/maintenance.
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During late 2022, the Company changed its strategy regarding the Central Kansas Uplift properties considering its reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells as of September 30, 2023 and December 31, 2022 and has reworked two of the conventional wells on the property to produce crude oil, helium and natural gas liquids from a deeper producing zone. Accordingly, revenues during the nine months ended September 30, 2023 was substantially less than the comparable period in 2022.
Oil and Gas Lease Operating Expenses
Total oil and gas lease operating expenses totaled $256,496 and $198,003 for the nine months ended September 30, 2023 and 2022, respectively. The increase in oil and gas lease operating expenses during the nine months ended September 30, 2023 as compared to the same period in 2022 is attributable to significant repairs and rework performed in the nine months ended September 30, 2023 that did not occur during the nine months ended September 30, 2022. The Company has shut down the horizontal production wells on the Central Kansas Uplift Properties as of September 30, 2023 and December 31, 2022 and has reworked two of the conventional wells on the property to produce crude oil, helium and natural gas liquids from a deeper producing zone. In addition, the Company incurred a $40,000 extension fee relative to the Hugoton Participation Agreement to extend the time period to drill additional wells. Accordingly, oil and gas lease operating expenses during the nine months ended September 30, 2023 were substantially higher than the comparable period in 2022.
Depreciation, Depletion and Impairment
Depreciation, depletion and amortization expense totaled $10,233 and $95,961 during the nine months ended September 30, 2023 and 2022, respectively.
During late 2022, the Company changed its strategy regarding the Central Kansas Uplift properties considering its reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells as of September 30, 2023 and December 31, 2022 and has deepened one of the conventional wells and fracked another conventional well on the property to produce crude oil, helium and natural gas liquids known to be present in deeper producing zones. Accordingly, the Company recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022 which remains in place at September 30, 2023. Depreciation, depletion and impairment expense was reduced substantially during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of the impairment recognized at December 31, 2022.
Accretion of Asset Retirement Obligation
Total expense for the accretion of asset retirement obligations was $3,654 and $1,004 for the nine months ended September 30, 2023 and 2022, respectively. The Company recognized additional expenses for its asset retirement obligations relative to both the Central Kansas Uplift and Hugoton Gas Field properties during the nine months ended September 30, 2023 as compared to the same period in 2022. The Company commenced production from the Hugoton Gas Field well in late 2022 which began the accretion of its related asset retirement obligations. The obligation relates to legal requirements associated with the retirement of long-lived assets that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.
Oil and Gas Production Related Taxes
Oil and gas production related taxes totaled $28 and $164 for the nine months ended September 30, 2023 and 2022, respectively. Such taxes are deducted from gross oil and gas revenue by the crude oil purchaser upon payment to the Company and include primarily severance taxes imposed by the State of Kansas, and Kansas conservation assessment fees. Revenues totaled $22,004 for the nine months ended September 30, 2023, which resulted in the deduction of $28 in production related taxes due to the shut-down of crude oil production from the Central Kansas Uplift properties in late 2022.
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Other General and Administrative Expenses
Other general and administrative expenses were $676,559 for the nine months ended September 30, 2023, a decrease of $456,897, or 40%, from other general and administrative expenses of $1,131,456 for the nine months ended September 30, 2022. The decrease in other general and administrative expenses is primarily attributable to a decrease of $414,815 in stock-based compensation due to the noncash compensation awarded to the Company’s executives, members of the Board of Directors became fully vested in 2023 and therefore a lesser amount of related compensation expense was recorded during the nine months ended September 30, 2023 as compared to $608,247 of stock based compensation expense recorded during the nine months ended September 30, 2022.
Equity in earnings of unconsolidated subsidiary – GMDOC
The Company reported equity in (loss) earnings of unconsolidated subsidiary of $(36,379) for the nine months ended September 30, 2023, compared to $323,633 for the nine months ended September 30, 2022. Such income resulted from the Company acquiring a 60.7143% membership interest in GMDOC in May 2022. The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
GMDOC had previously acquired 70% of the working interests in the GMDOC Leases from Castelli Energy, L.L.C., an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis. GMDOC, LLC generated a loss of $59,919 on $1,510,723 of oil and gas revenues during the nine months ended September 30, 2023. The Company owns a 60.7143% membership interest in such net loss or $36,279 which it has reported as equity in loss of unconsolidated subsidiary – GMDOC during the nine months ended September 30, 2023.
Interest Expense
Interest expense increased to $85,495 for the nine months ended September 30, 2023, compared to $643,662 for the nine months ended September 30, 2022. The decrease in interest expense during the nine months ended September 30, 2023 compared to the same period in 2022 was attributable to $579,263 of amortization of discount on convertible notes payable recorded during the nine months ended September 30, 2022. There was no similar amortization of discount on convertible notes payable recorded during the nine months ended September 30, 2023.
Gain on Extinguishment of Liabilities
The Company reported a gain on extinguishment of convertible notes payable of $193,152 and $-0- during the nine months ended September 30, 2023 and 2022, respectively.
On May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000 (including $100,000 outstanding principal balance of the 8% Note), which the Company did not pay by their maturity dates. The Company and the holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable was cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable. The Company treated the refinancing of the $100,000 8% Note Payable as an extinguishment of the old note which resulted in a gain on extinguishment of $24,190 during the nine months ended September 30, 2023.
On January 10, 2023, the Company and the holders of the October 8% Notes reached an agreement with respect to the modification/extension of the $500,000 of aggregate outstanding principal balance on its convertible notes payable. On January 10, 2023, the Company and the October 8% Note Holders amended each of the notes by entering into a Letter Agreement between the October 8% Note Investors and the Company. The Letter Agreement modifies the terms of the October 8% Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes. The Company treated the refinancing as an extinguishment of the old notes which resulted in a gain on extinguishment of $103,977 during the nine months ended September 30, 2023.
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On January 10, 2023, the Company and the two May 2022 Note Holders reached an agreement with respect to the modification/extension of the $312,500 of aggregate outstanding principal balance on its convertible notes payable. On January 10, 2023, the Company amended each of those notes by entering into a Letter Agreement between the investors and the Company. The Letter Agreement modifies the terms of the May 2022 Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes. The Company treated the refinancing as an extinguishment of the old notes which resulted in a gain on extinguishment of $64,985 during the nine months ended September 30, 2023.
Change in Warrant Derivative Fair Value
The change in warrant derivative liability was a gain of $420,003 during the nine months ended September 30, 2023, as compared to a gain of $-0- during the nine months ended September 30, 2022. The estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection with the issuance of Series A Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates. The detachable warrants issued in connection with the issuance of certain Series A Convertible Preferred Stock contained a provision allowing the holder to require cash settlement in certain situations were fundamental transaction, as defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the Holder’s ability to utilize such provisions, therefore the derivative liability was recognized on December 31, 2022 and September 30, 2023. Management estimated the fair value of the underlying derivative utilizing the Black-Scholes methodology as of September 30, 2023 and December 31, 2023 with the change in fair value being recognized as the change in warrant derivative fair value for the nine months ended September 30, 2023.
Income Tax
The Company recorded no income tax benefit (expense) in the nine months ended September 30, 2023 and 2022. The Company has been in a cumulative tax loss position and has substantial net operating loss carryforwards available for its utilization at September 30, 2023. The Company has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense or benefit on its income (loss) before income taxes during the nine months ended September 30, 2023 and 2022.
Net Income (Loss)
The Company reported net loss of $420,721 for the nine months ended September 30, 2023, compared to a net loss of $1,634,714 for the nine months ended September 30, 2022. This represents an improvement of $1,213,993 for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Convertible Preferred Stock Dividends
The Company recorded $214,032 and $170,556 in Series A and Series B Convertible Preferred Stock dividends in the nine months ended September 30, 2023 and 2022, respectively. On March 26, 2021, the Company issued and classified its Series A Convertible Preferred Stock as equity securities on its balance sheet. During 2022, the Company issued additional shares of Series A Convertible Preferred Stock, therefore, there were more shares of Series A Convertible Preferred Stock outstanding during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. On March 4, 2023, the Company issued and classified its Series B Convertible Preferred Stock as equity securities on its balance sheet.
Series A Convertible Preferred Stock bear a cumulative dividend at a 10% rate based on its stated/liquidation value. Series B Convertible Preferred Stock bear a cumulative dividend at a 8% rate based on its stated/liquidation value.
Net Income (Loss) Applicable to Common Stockholders
The Series A and Series B Convertible Preferred Stock issued have dividend and/or distribution preferences over our Common Stock and, therefore, such accrued dividend amounts have been deducted from net income (loss) to report net income (loss) applicable to common stockholders of $(634,753) and $(1,805,270) for the nine months ended September 30, 2023 and 2022, respectively.
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Basic and Diluted Net Income (Loss) Attributable to Common Stockholders per Share
Basic net income (loss) attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of Common Stock and dilutive Common Stock Equivalents outstanding during the period. Common Stock Equivalents included in the diluted net income (loss) attributable to common stockholders per share computation represent shares of Common Stock issuable upon the assumed conversion of convertible notes payable, Series A Convertible Preferred Stock and the assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses attributable to common stockholders are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of Common Stock Equivalents would have an anti-dilutive effect.
The Company incurred a net loss attributable to common stockholders during the nine months ended September 30, 2023, and therefore all Common Stock Equivalents were considered antidilutive for fully diluted net loss per share purposes. All of the outstanding convertible notes payable, all of the Series A Convertible Preferred Stock, and all of the outstanding stock options and common stock purchase warrants were determined to be antidilutive and therefore were also excluded from the diluted loss per share calculation. The basic and diluted net income (loss) attributable to common stockholders per share was $(0.03) for the nine months ended September 30, 2023.
The Company incurred a net loss attributable to common stockholders during the nine months ended September 30, 2022, therefore all Common Stock Equivalents were considered anti-dilutive and excluded from diluted net loss attributable to common stockholders per share computations. The basic and diluted net loss attributable to common stockholders per share were $(0.09) for the nine months ended September 30, 2022, respectively.
Potential Common Stock Equivalents as of September 30, 2023 totaled 136,659,187 shares of Common Stock, which included 24,236,404 shares of Common Stock underlying the convertible notes payable, 65,552,000 shares of Common Stock underlying the conversion of Series A and Series B Convertible Preferred Stock, 35,430,783 shares of Common Stock underlying outstanding warrants and 11,440,000 shares of Common Stock underlying outstanding stock options.
Liquidity and Capital Resources; Going Concern–
We have had a history of losses and have generated little or no operating revenues for a number of years. In 2020, we began assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States. As a result, we: 1) acquired the Properties, 2) entered into the Hugoton JV 3) leased and drilled the Woodson County Kansas Properties and 4) entered into the GMDOC venture.
The planned development of the development projects previously identified will require us to raise additional capital to accomplish our operating plan, which cannot be assured. Historically, we financed our operations through the issuance of equity and various short and long-term debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation.
At the present time, we do not have arrangements to raise additional capital, and we may need to identify potential investors and negotiate appropriate arrangements with them. We may not be able to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations. Additional equity financing, if available, may be dilutive to the holders of our capital stock. Debt financing may involve significant cash payment obligations, covenants and financial ratios that may restrict our ability to operate and grow our business.
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Capital Raised
Historically, we have raised funds through various equity and debt instruments through private transactions. The Company was able to raise liquidity during 2022 through the issuance of debt and equity in private transactions with accredited investors. These financial instruments generally require the Company to register the Common Stock underlying the conversion of the Series A Convertible Preferred Stock, the Common Stock purchase warrants and the convertible notes payable. These issuances generally provide the holders with a right to participate in future capital raises and require their approval for the future issuance of securities at rates less than their purchase price. The holders have also agreed that the conversion of the Series A Convertible Preferred Stock, the convertible notes payable and the exercise of the underlying warrants are generally subject to beneficial ownership limitations such that each holder of the financial instruments individually may not convert the underlying Series A Convertible Preferred Stock, convertible notes payable or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the holders individually being the beneficial owner in excess of 4.99% (or, upon election of the holders, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.
Designation of Series B Convertible Preferred Stock
On May 3, 2023, the Company filed the Certificate of Designation (the “Certificate of Designation”) with the Secretary of State of the State of Nevada (the “Nevada Secretary of State”), establishing the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Convertible Preferred Stock”). The Certificate of Designation became effective upon filing with the Nevada Secretary of State.
Pursuant to the provisions of the Certificate of Designation of Preferences, Rights and Limitations of the Series B Preferred Stock (the “Certificate of Designation”) the Company is authorized to issue up to 50,000 shares of Series B Preferred from time to time with a Stated Value/Liquidation Value of $100 per share. Each share of Series B Preferred Stock is convertible, at the option of the holders thereof, at any time, subject to certain beneficial ownership limitations, into shares of Common Stock determined on a per share basis by dividing the Stated Value of such share of Preferred Stock (as such term is defined in the Certificate of Designation) by the Conversion Price (as such term is defined in the Certificate of Designation), which Conversion Price is subject to certain adjustments. In addition, the Certificate of Designation also provides for the payment of dividends, in (I) cash, or (ii) shares of Common Stock, to the holders of the Series B Preferred Stock, of 8% per annum, based on the Stated Value, until the earlier of (i) the date on which the shares of Series B Preferred Stock are converted to Common Stock or (ii) date the Company’s obligations under the Certificate of Designation have been satisfied in full. The shares of Series B Preferred Stock also (i) vote on an as-converted to Common Stock basis, subject to certain beneficial ownership limitations, (ii) are redeemable at the option of the Company at any time, (iii) rank senior to the Common Stock and any class or series of capital stock created after the Series B Preferred Stock and (iv) have a special preference upon the liquidation of the Company.
Issuance of Series B Convertible Preferred Stock
May 2023 Issuance - On May 4, 2023, the Company entered into a securities purchase agreement with three (3) accredited investors providing for an aggregate investment of $750,000 by the investors for the issuance by the Company to them of (i) 7,500 shares of Series B Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “May 2023 Series B Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 15,000,000 shares of Common Stock at an exercise price of five ($0.05) cents per share, subject to customary adjustments thereunder. The 7,500 shares of May 2023 Series B Convertible Preferred Stock are convertible into an aggregate of up to 15,000,000 shares of Common Stock. Holders of the warrants may exercise the warrants by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrants. The Company used the proceeds of the May 2023 Series B Convertible Preferred Stock offering for general working capital purposes.
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the May 2023 Series B Convertible Preferred Stock transaction, to register the shares of Common Stock issuable upon the conversion of the May 2023 Series B Convertible Preferred Stock and the common stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90th) calendar day following the issuance of the May 2023 Series B Convertible Preferred Stock.
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The holders of the May 2023 Series B Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its May 2023 Series B Convertible Preferred Stock and/or exercise its Common Stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days advance notice to the Company.
The Securities Purchase Agreement also contains customary representations, warranties and agreements of the Company and the Investors and customary indemnification rights and obligations of the parties thereto.
We will likely continue to issue such convertible preferred stock and convertible notes payable with detachable warrants to acquire Common Stock to fund our operational and capital expenditure plans for the remainder of 2023.
Capital Expenditures
As of September 30, 2023, we had: 1) acquired the Properties, 2) entered into the Hugoton JV, 3) leased and drilled the Woodson County Kansas Properties and 4) entered into the GMDOC venture as more fully described elsewhere in this Quarterly Report on Form 10-Q.
Going Concern
The Company has incurred losses from operations, has a stockholders’ deficit, incurred net cash used in operating activities and has a significant working capital deficit as of and for the three and nine months ended September 30, 2023 and as of and for the year ended December 31, 2022. The Company must raise substantial amounts of debt and equity capital from other sources in the future in order to fund (i) the development of the Properties acquired on April 1, 2021; (ii) our obligations for exploration and development under the Hugoton Farmout Agreement; (iii) normal day-to-day operations and corporate overhead; and (iv) outstanding debt and other financial obligations as they become due, as described below. Most of the Company’s outstanding debt and other financial obligations are currently past due and the Company must negotiate forbearance and/or restructuring agreements with the holders of such debt. These are substantial operational and financial issues that must be successfully addressed during 2023 and beyond.
The Company has made substantial progress in resolving many of its existing financial obligations and acquiring oil and gas producing properties to deploy its new operational strategy during the period through September 30, 2023.
The Company will have significant financial commitments executing its planned exploration and development of the Properties. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development activities and may seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. There can be no assurance that it will be able to obtain such new funding or be able to reach agreements with industry operators and other third parties or on what terms.
Due to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The unaudited condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Cash and cash equivalents balances-
As of September 30, 2023, we had cash and cash equivalents with an aggregate balance of $106,349, an increase from a balance of $10,163 as of December 31, 2022. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $96,186 net increase in cash during the nine months ended September 30, 2023:
| ● | Operating activities: | $490,247 of net cash used in operating activities. Net cash used in operating activities was $490,247 and $216,522 for the nine months ended September 30, 2023 and 2022, respectively, a deterioration in net cash used in operating activities of $273,725. The deterioration in net cash used in operating activities was primarily the result of increases in non-cash income including, the reduction in non-cash stock compensation expense, the increase in warrant derivative liability and the gain on extinguishment of convertible notes payable offset by the improvement in net loss as reflected in our cash flows from operating activities for the nine months ended September 30, 2023 compared to the same period in 2022. |
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| ● | Investing activities: | $47,566 of net cash used in investing activities. Cash used in investing activities was $47,566 for the nine months ended September 30, 2023 compared to $1,179,977 for the nine months ended September 30, 2022. We utilized funds during 2023 to acquire and drill the Woodson County Kansas properties. We utilized funds during 2022 to acquire our $850,000 investment in unconsolidated subsidiary – GMDOC, LLC, our $314,753 investment in the Hugoton Gas Field participation agreement and our purchase of equipment for our Central Kansas Uplift properties. | |
| ● | Financing activities: | $633,999 of net cash provided by financing activities. Cash provided by financing activities for the nine months ended September 30, 2023 was $633,999 compared to cash provided by financing activities of $1,153,005 for the nine months ended September 30, 2022. We raised $750,000 through the issuance of Series B Convertible Preferred Stock in 2023 and $645,000 through the issuance of Series A Convertible Preferred Stock in 2022. We raised $1,200,000 through the issuance of convertible notes in 2022 and also paid-off $537,500 in convertible notes in 2022. We paid cash dividends of $116,001 and $154,495 on our Series A and Series B Convertible Preferred Stock during the nine months ended September 30, 2023 and 2022, respectively. |
The net result of these activities was a $98,186 increase in cash and cash equivalents from $10,163 as of December 31, 2022 to $106,349 as of September 30, 2023.
Commitments:
Capital Expenditures. We had no material commitments for capital expenditures at September 30, 2023. However, we are required by the Hugoton Gas Field Farmout Agreement to drill at least three additional gas production wells in 2023 and 2024 in order to maintain the Hugoton JV. We drilled and completed the first Hugoton Gas Field production well in May 2022, which was connected to the pipeline and commenced production on August 17, 2022. We estimate that the expenses related to the drilling program to be approximately $350,000 for drilling and completion of each additional exploratory well. The Company is considering paying $40,000 to extend the time period under which it is required to drill the additional three exploratory wells pursuant to the Hugoton Gas Field Participation Agreement.
Repayment of Debt. Debt obligations are comprised of the following at September 30, 2023:
| September 30, 2023 | ||||
| Notes payable: | ||||
| 3% convertible notes payable due March 30, 2026 (the 3% Notes) | $ | 28,665 | ||
| 8% convertible notes payable due September 30, 2023 - (the October 8% Notes) (in default) | 500,000 | |||
| 8% convertible note payable due September 30, 2023 - (the New Note) (in default) | 392,750 | |||
| 8% convertible note payable due October 29, 2022 (the Second 8% Note) (in default) | 50,000 | |||
| 8% Convertible promissory notes payable due September 30, 2023 (the May 2022 Notes) (in default) | 266,204 | |||
| Total notes payable | 1,237,619 | |||
| Less: Long-term portion | 28,665 | |||
| Notes payable, short-term | $ | 1,208,954 | ||
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Debt obligations become due and payable as follows:
| Years ended | Principal balance due | |||
| 2023 (October 1, 2023 through December 31, 2023) | $ | 1,208,954 | ||
| 2024 | — | |||
| 2025 | — | |||
| 2026 | 28,665 | |||
| 2027 | — | |||
| 2028 | — | |||
| Total | $ | 1,237,619 | ||
With respect to the convertible note payable that are currently in default, the parties are negotiating a forbearance/resolution to such technical defaults which include several alternatives. Such negotiations include i) a reduction in the conversion price of the underlying convertible notes, ii) an extension and a roll-over of the principal into other Company securities, and iii) a combination of the alternatives. The Company can provide no assurance that the parties will reach a mutually agreeable resolution.
Open Litigation.
The nature of the Company’s business exposes its properties, the Company, the Hugoton JV and its interest in GMDOC to the risk of claims and litigation in the normal course of business. Other than as noted elsewhere in this Quarterly Report on Form 10-Q, in our Notes to the Unaudited condensed Financial Statements or routine litigation arising out of the ordinary course of business, the Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company.
Contractual Obligations
USNG Letter Agreement - Pursuant to the USNG Letter Agreement, the Company is required to pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that the Company receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore, there has been no payment or accrual liability relative to this cash fee provision through September 30, 2023.
Farmout Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field - On April 4, 2022, the Company acquired a 40% interest in a Farm-Out Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Farmout Agreement covers drilling and completion of up to 50 wells and the Company has joined three other entities in the Hugoton JV to explore for and develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement Farm-Out Agreement.
The Hugoton JV will utilize Scout Energy Partner’s existing infrastructure assets, including water disposal, gas gathering and helium processing. In addition, the Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, located in Grant County, Kansas, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices. The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production on August 17, 2022. The Company is continuing to evaluate the initial flows of both natural gas and helium to determine its plan for additional wells on the farmout and whether it should attempt to extend the time period before it has to drill additional wells in Hugoton Gas Field per the farm-out agreement.
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Inflation and Seasonality
Inflation in general has had a material effect on us during the nine months ended September 30, 2023 and we do believe that inflation will continue to significantly impact our business during the remainder of 2023 and perhaps beyond. We do not believe that our business is seasonal in nature.
In addition, our oil and gas lease operating expenses have been substantially impacted by the COVID-19 pandemic and the Russian war in Ukraine, which has restricted the supply of production pipe and other materials used in the drilling and rework of oil and gas wells. In addition, experienced oil and gas service professionals have been in high demand in the oil and gas service sector and thereby increasing the cost of oil and gas well services. We expect this trend to continue during 2023 and perhaps beyond.
Critical Accounting Policies
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective, or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:
Note 1 – Going Concern Analysis - In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements- Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financials are issued. When management identifies conditions or events that raise substantial doubt about their ability to continue as a going concern it should consider whether its plans to mitigate those relevant conditions or events will alleviate the substantial doubt. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of management’s plans, the entity should disclose information that enables user of financial statements to understand the principal events that raised the substantial doubt, management’s evaluation of the significance of those conditions or events, and management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
We performed the analysis and our overall assessment was there were conditions or events, considered in the aggregate, which raised substantial doubt about our ability to continue as a going concern within the next year, but such doubt was not adequately mitigated by our plans to address the substantial doubt as disclosed in Note 1 of the Notes to the Financial Statements.
Note 2 – Oil and Gas Properties and Equipment – The Company was required to perform an allocation of the purchase price for the acquisition of the Properties and to provide the estimated useful lives assigned to the related equipment purchased.
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In addition, the accounting for, and disclosure of, oil and gas producing activities require that we choose between two alternatives under accounting principles generally accepted in the United States (“GAAP”): the full cost method or the successful efforts method. We adopted and use the full cost method of accounting, which involves capitalizing all exploration, exploitation, development and acquisition costs. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. Our unproved property costs, which include unproved oil and gas properties, properties under development, and major development projects, were zero through September 30, 2023 and December 31, 2022, and are not subject to depletion. We review our unproved oil and gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost pool during that time. The full cost pool is comprised of intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved leaseholds.
Note 3 – Investment in unconsolidated subsidiary – GMDOC - The Company’s investment in its unconsolidated subsidiary - GMDOC requires that the Company assess its control over the operations of GMDOC.
The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
Note 4 – Debt Obligations – The Company has issued various debt and equity securities that require the Company to estimate the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities issued. Management must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt securities between its debt and equity components.
Note 6 – Stock Options - The Company follows the fair value recognition provisions of Accounting Standards Codification (“ASC”) 718. Stock-based compensation expense is recognized in the financial statements for granted, modified, or settled stock options based on estimated fair values. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment.
Note 7 – Warrants - The Company has issued various debt and equity securities (including detachable warrants) that require the Company to estimate the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities issued. Management must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt securities between its debt and equity components.
Note 8 – Income Taxes - Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.
Note 11 – Warrant Derivative Liabilities - Accounting for warrant derivative liabilities requires significant estimates and judgments on the part of management. The estimated fair value of the Company’s warrant derivative liabilities, all of which were related to the detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on their evaluation as of September 30, 2023, 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.
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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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information regarding certain legal proceedings in which the Company is involved is set forth in Note 12, Commitments and Contingencies – Litigation of the Notes to the Unaudited condensed Financial Statements (Part I, Item 1 of this Quarterly Report on Form 10-Q), and such information is incorporated by reference into this Item 1.
In addition to such legal proceedings, we may become involved in various other claims and threatened legal proceedings arising in the normal course of our businesses. At this time, we do not believe any material losses under such other claims and threatened proceedings to be probable. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, it is in the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered securities during the quarter that were not previously reported on a Current Report on Form 8-K except as set forth below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Convertible Notes Payable - The Company did not pay the principal balance due on various Convertible Notes with an outstanding principal balance of $1,208,954 upon their respective maturity dates and the remaining balance remains due and payable and is therefore in technical default. The parties are negotiating a resolution to such technical default including an extension and a roll-over of the principal into other Company securities, although there can be no assurance that the parties will reach a mutually agreeable resolution.
Series A Convertible Preferred Stock Dividends –The Company has outstanding accrued and unpaid preferred dividends totaling $160,197 relative to the Series A Convertible Preferred Stock as of September 30, 2023, respectively.
Series B Convertible Preferred Stock Dividends - The Company has outstanding accrued and unpaid preferred dividends totaling $14,959 relative to the Series B Convertible Preferred Stock as of September 30, 2023.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(c) Exhibits.
| Exhibit Number | Description | |
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
| 32.1* | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. (Filed herewith.) | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2023
| AMERICAN NOBLE GAS INC, | ||
| a Nevada corporation | ||
| By: | /s/ Thomas J. Heckman | |
| Thomas J. Heckman | ||
| Chief Executive Officer and Chief Financial Officer | ||
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