Notes
to Condensed Financial Statements
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”)
has prepared the accompanying 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 balance sheets,
statements of operations, and cash flows for the periods presented. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for 2016 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 financial statements should be read in conjunction
with the audited financial statements and accompanying notes in Item 8, “Financial Statements and Supplementary Data,”
of our Annual Report on Form 10-K, filed with the SEC.
Nature
of Operations
The
Company is engaged in the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua
in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately
1.4 million acres. The Company sold its wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned
subsidiary, Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
The
Company has been pursuing exploration and development of the Nicaraguan Concessions, which represents its principal asset and
only exploration and development project. On March 5, 2009 Infinity signed the contracts relating to its Nicaraguan Concessions.
Infinity has conducted activities to develop geological information from the processing and evaluation of newly acquired and existing
2-D seismic data that was acquired for the Nicaraguan Concessions. Infinity has conducted activities to develop geological information
from the processing and evaluation of 2-D seismic data that was acquired for the Nicaraguan Concessions. The Company has identified
multiple sites for exploratory drilling and is planning the initial exploratory well on the Perlas Block in order to determine
the existence of commercial hydrocarbon reserves, subject to receipt from the Nicaraguan government of authorizations for the
drilling of up to five wells, financing and satisfaction of other conditions. In order to meet its obligations under the Perlas
Block of the Nicaraguan Concession, the Company has to drill its initial exploratory well during 2016 or risk being in default
and losing its rights under the Nicaraguan Concessions. The work plan on the Tyra block now requires the Company to shoot additional
seismic prior to the commencement of exploratory drilling. The Company is seeking a waiver of the additional seismic mapping on
the Tyra Block and extension of time to complete its initial well from the Nicaraguan government. There can be no assurance whether
it will be able to obtain such waiver of the requirements. The current environment for oil and gas development projects, especially
discoveries in otherwise undeveloped regions of the world, is very challenging given the depressed commodity prices for oil and
gas products and the resulting industry-wide reduction in capital expenditure budgets for exploration and development projects.
There can be no assurance whether the Company will be able to obtain adequate financing to fund the exploration and development
of its Nicaraguan projects.
On
May 7, 2015 the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal
amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the
Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing,
the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount
of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the Company under the Investor Note are paid,
the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement agent fees and other expenses associated
with the transaction, subject to the satisfaction of certain conditions. The Company will receive the remaining cash proceeds
upon each voluntary or mandatory prepayment of the Investor Note. The Investor may, at its option and at any time, voluntarily
prepay the Investor Note, in whole or in part. As of June 30, 2016 an additional $60,000 was funded under the Investor Note for
a total of $510,000 advanced to the Company.
The
Investor must prepay the Investor Note, in whole or in part, upon the occurrence of one or more mandatory prepayment events. These
include (i) the Investor’s conversion of the Note into shares of common stock upon which the Investor will be required to
prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Note and (ii) the Company’s
delivering a mandatory prepayment notice to the Investor after it has received governmental authorizations from the Nicaraguan
authorities necessary to commence drilling on at least five sites within the Concessions and the receipt of forbearance or similar
agreements relative to its general creditors, among other conditions.
The
Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at any time at
the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”).
As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to
an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable
commencing six months from the date of issuance for a period of seven years from the date of issuance. The Note ranks senior to
the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding the Concessions.
In
addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in
the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint
venture arrangement.
Going
Concern
As
reflected in the accompanying statements of operations, the Company has had a history of losses. In addition, the Company has
a significant working capital deficit and is currently experiencing substantial liquidity issues.
The
Company has relied on raising debt and equity capital in recent years in order to fund its ongoing maintenance/expenditure obligations
under the Nicaraguan Concession, for its day-to-day operations and its corporate overhead since it has generated no operating
revenues or cash flows in recent history. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently
in technical default. The Company is seeking an extension of the maturity date; however there can be no assurance that it will
be able to obtain such extension or what the final terms will be if the lender agrees to such extension.
The
Company is in Sub-Period 3 of the exploration phase of the 30-year Concession for both Perlas and Tyra as of June 30, 2016. Sub-Period
3 of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016 and the
shooting of additional seismic on the Tyra Block. The Company is in process of identifying at least one potential drilling site
on the Perlas Block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving
the permit to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot
additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The
Company is seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to complete its initial
well from the Nicaraguan government. There can be no assurance whether it will be able to obtain a waiver of the requirements.
In
accordance with the Nicaraguan Concession agreements, the Company has previously provided the Ministry of Energy with the required
letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The
Company has also made all required expenditures related to the Nicaraguan Concessions for training programs and as “area
fees,” for each respective year for 2010 through 2015. In accordance with the Nicaraguan Concession agreements, the Company
must provide the Ministry of Energy with the required letters of credit in the amounts which total $1,356,227 for the Perlas block
and $278,450 for the Tyra block for exploration requirements on the leases as required by the Nicaraguan Concessions, to replace
the expired letters of credit. The minimum cash requirements to maintain and comply with the minimum work program as defined in
the Nicaraguan Concessions for the next twelve-month period will be approximately $5,500,000 for the Perlas Block, which includes
all costs to prepare for and drill the initial exploratory well, and $280,000 for the Tyra Block, assuming the waiver is granted
regarding the seismic mapping. If such waiver is not granted, the Company estimates it will require approximately $2,500,000 for
the seismic mapping. Finally, the Company estimates it will need approximately $300,000 to prepare and submit an environmental
supplement to the Nicaraguan government to identify and receive authorization to drill up to five wells in the Concessions.
If
the Company does not receive the funding anticipated under its May 2015 Private Placement, it must raise substantial amounts of
debt and equity capital from other sources in the immediate future in order to fund: (1) the required letters of credit to the
Nicaraguan Government; (2) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan Concessions during
2016; (3) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions should it be unable to negotiate
a waiver of such requirement from the Nicaraguan government; (4) the payment of normal day-to-day operations and corporate overhead;
and (5) the payment of outstanding debt and other financial obligations as they become due including the $1.0 million December
2013 Note which currently is in technical default. These are substantial operational and financial issues that must be successfully
addressed during 2016 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions
will be in significant doubt. The Company is actively seeking new outside sources of debt and equity capital in addition to the
May 2015 Private Placement in order to fund the substantial needs enumerated above; however, there can be no assurance that it
will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary to cure the technical defaults
existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to drilling the exploratory wells. The current
environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very
challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital
expenditure budgets for exploration and development projects. These may provide substantial impediments for the Company and its
ability to obtain adequate financing to fund the exploration and development of its Nicaraguan projects.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue
as a going concern.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include
the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note
payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
Oil
and Gas Properties
Unproved
properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose
costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding
period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net
cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated
with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount
of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing
impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when
the impairment is recognized. All unproved property costs as of June 30, 2016 and December 31, 2015 relate to the Nicaraguan Concessions.
In assessing the unproved property costs for impairment, the Company takes into consideration various information including: i)
the terms of the Concessions, ii) the status of the Company’s compliance with the Nicaraguan Concessions’ requirements,
iii) the ongoing evaluation of the seismic data, iv) the commodity prices for oil and gas products, v) the overall environment
related to oil and gas exploration and development projects for unproven targets in unproven regions of the world, vi) the availability
of financing for financial and strategic partners, and vii) other factors that would impact the viability of a significant long-term
oil and gas exploration and development project.
The
current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world,
is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in
capital expenditure budgets for exploration and development projects. These may provide substantial impediments for the Company
and its ability to obtain adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has
performed its impairment tests as of December 31, 2015 and has concluded that a full impairment reserve should be provided on
the costs capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from
December 31, 2015 through June 30, 2016 have been charged to operating expenses as incurred.
Concentrations
The
Company’s business plan consists of developing the Nicaraguan Concessions and it expects to be active in Nicaragua for the
foreseeable future, given sufficient capital. The political climate in Nicaragua could become unstable and subject to radical
change over a short period of time. In the event of a significant negative change in political and economic stability in the vicinity
of the Nicaraguan Concessions or of the inability of the Company to obtain sufficient financing, the Company might be forced to
abandon or suspend its efforts and its rights under its Nicaraguan Concessions.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815
Derivatives and Hedging
.
ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings. Changes in
the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The
purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and
gas prices and to manage the exposure to commodity price risk. As of June 30, 2016 and December 31, 2015 and during the periods
then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes
2, 3 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value
recognized in operations.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and
tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset
to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses
the realizability of the Company’s deferred income tax assets, and a valuation allowance is recognized if it is determined
that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making
such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such
factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not
to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can
project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the
Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can
be no assurance that facts and circumstances will not materially change and require the Company to adjust its deferred income
tax asset valuation allowance in a future period. The Company recognized a deferred tax asset, net of valuation allowance, of
$-0- at June 30, 2016 and December 31, 2015.
The
Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves
dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes
certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that
the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability
for unrecognized tax benefit was recorded as of June 30, 2016 and December 31, 2015.
Asset
Retirement Obligations
The
Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities
to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability
is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging
of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted
as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic
oil properties that contain operating and abandoned wells as of June 30, 2016, the Company may have obligations related to the
divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations
to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation
related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in
Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas
producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and
its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned
wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related
to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized
an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included in asset
retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not perform
its obligations to reclaim abandoned wells in a timely manner.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts receivable, accounts payable and accrued liabilities and short term notes represent
the estimated fair value due to the short-term nature of the accounts.
The
carrying value of the Company’s debt under its line-of-credit with related party represents its estimated fair value due
to its short-term nature, its rate of interest, associated fees and expenses and initially recorded discount.
In
accordance with ASC Topic 820 —
Fair Value Measurements and Disclosures
(“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
●
|
Level
1 — Quoted prices in active markets for identical assets and liabilities.
|
|
|
|
|
●
|
Level
2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
|
|
|
|
|
●
|
Level
3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value.
|
The
estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants
issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest
rates, the probability of both the downward adjustment of the exercise price and the upward adjustment to the number of warrants
as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant
derivatives as of and June 30, 2016 and December 31, 2015 were classified under the fair value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of June 30, 2016 and December 31, 2015:
June
30, 2016
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145,673
|
|
|
$
|
145,673
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
93,446
|
|
|
|
93,446
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
239,119
|
|
|
$
|
239,119
|
|
December
31, 2015
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
265,929
|
|
|
$
|
265,929
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
210,383
|
|
|
|
210,383
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
476,312
|
|
|
$
|
476,312
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods
ended June 30, 2016 and December 31, 2015.
Net
Income (Loss) per Share
Pursuant
to FASB ASC Topic 260,
Earnings per Share,
basic net income (loss) per share is computed by dividing the net income (loss)
by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in
which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations,
as the inclusion of common share equivalents would have an anti-dilutive effect.
Reclassifications
Certain
amounts in the prior period were reclassified to conform to the current period’s financial statement presentation. These
reclassifications had no effect on previously reported net loss or accumulated deficit.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
Secured
convertible note payable, at fair value
|
|
$
|
145,673
|
|
|
$
|
265,929
|
|
Less:
Current maturities
|
|
|
(67,805
|
)
|
|
|
(130,345
|
)
|
|
|
|
|
|
|
|
|
|
Secured
convertible note payable, long-term
|
|
$
|
77,868
|
|
|
$
|
135,584
|
|
Following
is an analysis of the activity in the secured convertible note during the six months ended June 30, 2016:
|
|
Amount
|
|
Balance
at December 31, 2015
|
|
$
|
265,929
|
|
Funding
under the Investor Note during the period
|
|
|
35,000
|
|
Principal
repaid during the period by issuance of common stock
|
|
|
(220,040
|
)
|
Change
in fair value of secured convertible note during the period
|
|
|
64,784
|
|
|
|
|
|
|
Balance
at June 30, 2016
|
|
$
|
145,673
|
|
The
funded and unfunded portion of the Investor Note consists of the following at June 30, 2016:
|
|
June
30, 2016
|
|
Investor
notes - Available funding (subject to limitations)
|
|
$
|
10,000,000
|
|
Unfunded
amount of investor notes
|
|
|
(9,490,000
|
)
|
|
|
|
|
|
Investor
notes - funded (prior to any repayments)
|
|
$
|
510,000
|
|
On
May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note
(the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The
placement agent for the Company in the transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company
receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted
a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the
Investor. The May 2015 Private Placement was made pursuant to an exemption from registration under such Act. At the closing, the
Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash,
with an aggregate initial principal amount of $9,550,000 (the “Investor Note”). Assuming all amounts payable to the
Company under the Investor Note are paid without any offset or default, the May 2015 Private Placement will result in gross proceeds
of $10.0 million before placement agent fees and other expenses associated with the transaction, subject to the satisfaction of
certain conditions. The Company used the proceeds from this offering to retire certain outstanding obligations, including the
2015 area and training fees relating to its Nicaraguan Concessions, and to provide working capital. As of June 30, 2016, an additional
$60,000 was funded under the Investor Note for a total of $510,000 advanced to the Company prior to any repayments.
The
Company is to receive the remaining cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. An Investor
may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject
to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1)
Mandatory Prepayment upon Conversion
– At any time the Investor has converted more than $2.0 million principal amount
of the Note, representing the original issue discount of the Note, the Investor will be required to prepay the Investor Note,
on a dollar-for-dollar basis, for each subsequent conversion of the Note.
(2)
Mandatory Prepayment upon Mandatory Prepayment Notices
– The Company may require the Investor to prepay the Investor
Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions,
(ii) the Company’s receipt of all Governmental Authorizations, as defined in the Purchase Agreement, necessary to commence
drilling on at least five Properties, also as defined in the Purchase Agreement, within the Nicaraguan Concessions, and (iii)
the Company obtaining forbearance agreements from certain third parties to whom the Company owes obligations. Notwithstanding
the foregoing, the Company may not request a mandatory prepayment if after giving effect to such proposed mandatory prepayment,
the Company would hold more than $4.0 million in cash or if prepayment under the Investor Note for the preceding sixty calendar
day period would exceed $2.0 million.
The
Investor Note also contains certain offset rights, which if executed, would reduce the amount outstanding under the Note and the
Investor Note and the cash proceeds received by the Company.
Description
of the Secured Convertible Note
The
Note is secured to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The
Note is convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share
(the “Conversion Price”). The Note matures on the three-year anniversary of the issuance date thereof. If the Company
issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares
of its common stock for a price per share that is less than the Conversion Price then in effect, the then current Conversion Price
will be decreased to equal such lower price. The foregoing adjustments to the Conversion Price for future stock issues will not
apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion
Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
On
the first business day of each month beginning on the earlier of the (i) effectiveness of a registration statement the Company
files to register the shares of common stock issuable upon conversion of the Note or exercise of the Warrant, as defined below,
or (ii) sixth month following the date of the Note through and including the maturity date (the “Installment Dates”),
the Company will pay to the Note holder an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the
Note (or the principal outstanding on the Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to
such principal plus (iii) the accrued and unpaid late charges (if any) with respect to such principal and interest. The Investor
has the ability to defer or accelerate such monthly payments in its sole discretion.
Prior
to the maturity date, the Note will bear interest at 8% per annum (or 18% per annum during an event of default) with interest
payable in cash or in shares of Common Stock monthly in arrears on the first business day of each calendar month following the
issuance date.
Each
monthly payment may be made in cash, in shares of the Company’s common stock, or in a combination of cash and shares of
its common stock. The Company’s ability to make such payments with shares of its common stock will be subject to various
equity conditions, including the existence of an effective registration statement covering the resale of the shares issued in
payment (or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant, as defined below,
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations)
and certain minimum trading price and trading volume. Such shares will be valued, as of the date on which notice is given by the
Company that payment will be made in shares, at the lower of (1) the then applicable Conversion Price and (2) a price that is
80.0% of the arithmetic average of the three lowest weighted average prices of the Company’s common stock during the twenty-trading
day period ending two trading days before the applicable determination date (the “Measurement Period”). If the Company
elects to pay such monthly payment in shares of the Company’s stock it is required to pre-deliver shares of the Company’s
common stock and is required to deliver additional shares, if any, to a true-up such number of shares to the number of shares
required to be delivered on the applicable Installment Date pursuant to the calculation above.
At
any time after the issuance date, the Company will have the right to redeem all or any portion of the outstanding principal balance
of the Note plus all accrued but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i)
the arithmetic average of the closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds
200% of the Conversion Price and (ii) among other conditions, there is an effective registration statement covering the resale
of the shares issued in payment or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations.
The Investor has the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
Upon
the occurrence of an event of default under the Note, the Investor may, so long as the event of default is continuing, require
the Company to redeem all or a portion of its Note. Each portion of the Note subject to such redemption must be redeemed by the
Company, in cash, at a price equal to the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid
interest, and accrued and unpaid late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined
by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately
preceding the event of default and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest
Conversion Price in effect during such period.
Subject
to certain conditions, the Investor may also require the Company to redeem all or a portion of its Note in connection with a transaction
that results in a Change of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such
redemption in cash at a price equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and
unpaid interest, and accrued and unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient
determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date
immediately preceding the earlier to occur of (i) the consummation of the Change of Control and (ii) the public announcement of
such Change of Control and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion
Price in effect during such period.
Description
of the Warrant
.
As
a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an
aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable
commencing six months from the date of issuance and the exercise prices for the Warrant is subject to adjustment for certain events,
such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase shares
of its common stock, or securities convertible into shares of its common stock for a price per share that is less than the exercise
price then in effect, the exercise price of the Warrant will be decreased to equal such lesser price. Upon each such adjustment,
the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately.
The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including
issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits,
reverse stock splits, and similar capital changes. The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99%
Restriction on Conversion of Note and Exercise of Warrant
The
Investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result
in the Investor being the beneficial owner in excess of 9.99% of the Company’s common stock. The Company was required to
hold a meeting of its shareholders to approve increase the number of its authorized shares to meet its obligations under the Purchase
Agreement to have reserved 200% of the shares issuable upon conversion of the Note and exercise of the Warrant. The Company held
its Annual Meeting of Shareholders on September 25, 2015 and the shareholders approved the reverse split of the Company’s
common stock issued and outstanding shares, which satisfied this requirement.
Registration
Rights Agreement
In
connection with the May 2015 Private Placement, the Company and the Investor entered into a Registration Rights Agreement under
which the Company is required, on or before 45 days after the closing of the May 2015 Private Placement, to file a registration
statement with the Securities and Exchange Commission (the “SEC”) covering the resale of 130% of the shares of the
Company’s common stock issuable pursuant to the Note and Warrant and to use its best efforts to have the registration declared
effective as soon as practicable. The Company will be subject to certain monetary penalties, as set forth in the Registration
Rights Agreement, if the registration statement is not filed or does not remain available for the resale (subject to certain allowable
grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement. The Company filed
the required registration statement on Form S-1 on June 19, 2015 and the Securities and Exchange Commission declared the Form
S-1 effective on October 9, 2015 and has thereby satisfied this requirement.
Participation
Rights
If,
during the period beginning on the closing date and ending on the four (4) year anniversary of the closing date, the Company offers,
sells, grants any option to purchase, or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent
securities (a “Subsequent Placement”), the Investor will have the right to participate for 50% of any such future
Subsequent Placement.
Description
of the Financial Accounting and Reporting
The
Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including its embedded
conversion feature, were estimated together utilizing a binomial lattice model on its origination date and the Black-Sholes model
at June 30, 2016. Such assumptions included the following:
|
|
Upon
Issuance
|
|
|
As
of
June 30, 2016
|
|
|
|
|
|
|
|
|
Volatility
– range
|
|
|
102.6
|
%
|
|
|
190.2
|
%
|
Risk-free
rate
|
|
|
1.00
|
%
|
|
|
0.71
|
%
|
Contractual
term
|
|
|
3.0
years
|
|
|
|
1.8
years
|
|
Conversion
price
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
Par
value of note
|
|
$
|
540,000
|
|
|
$
|
155,952
|
|
The
Company received $450,000 of proceeds at the date of issuance and after repayments and additional funding the net principal balance
was $129,960 as of June 30, 2016. The fair market value of the Note was estimated to be $682,400 as of the issuance date, $265,929
at December 31, 2015 and $145,673 as of June 30, 2016. The net $67,784 change in fair market value of the Note is included in
change in fair value of secured notes payable in the accompanying statement of operations for the six months ended June 30, 2016.
The
Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting
purposes due to its ratchet and anti-dilution provisions. Accordingly, the Company has estimated the fair value of the warrant
derivative as of the issuance date of the Note was issued at $8,034,007, which has been charged to non-operating expense during
the year ended December 31, 2015. The estimated fair value of the warrant derivative as of June 30, 2016 was $79,898, representing
a change of $102,619 from December 31, 2015 which is included in changes in derivative fair value in the accompanying statement
of operations for the six months ended June 30, 2016. See Note 6.
The
warrant issued to purchase 240,000 shares issued as part of the placement fee in connection with the Note was treated as a derivative
liability for accounting purposes due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative
liability totaled $13,683 (reduction in the derivative liability) through June 30, 2016, which is included in changes in derivative
fair value in the accompanying statement of operations for the six months ended June 30, 2016. The warrant derivative liability
balance related to such warrants was $10,653 and $24,336 as of June 30, 2016 and December 31, 2015, respectively. See Note 6.
The
Company is required to make monthly installment payments in the form of cash, common stock or a combination of both. The Company
elected to make such monthly payments in the form of common stock and has delivered a total of 4,248,068 shares of common stock
representing required principal repayments ($220,040 principal balances) and 174,262 representing interest payments ($9,146 interest
payments) during the six months ended June 30, 2016. A total of 317,154 common shares were issued to “true-up” previous
installments which were included in the shares delivered during the six months ended June 30, 2016.
Note
3 – Debt
Debt
consists of the following at June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
Line-of-credit
with related party
|
|
$
|
68,303
|
|
|
$
|
68,303
|
|
Notes
payable, short term:
|
|
|
|
|
|
|
|
|
Note
payable, net of unamortized discount of $-0- and $50,527, of June 30, 2016 and December 31, 2015, respectively
|
|
$
|
1,000,000
|
|
|
$
|
949,473
|
|
Note
payable, net of unamortized discount of $85 and $262, as of June 30, 2016 and December 31, 2015, respectively
|
|
|
49,915
|
|
|
|
49,738
|
|
Note
payable, net of unamortized discount of $52 and $238, as of June 30, 2016 and December 31, 2015, respectively
|
|
|
34,948
|
|
|
|
34,762
|
|
Total
notes payable, short-term
|
|
$
|
1,084,863
|
|
|
$
|
1,033,973
|
|
Line-of-Credit
with Related Party
The
Company entered into a line-of-credit facility on September 23, 2013 that provides it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit is convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility is unsecured, bears interest at 8% per annum, and was renewed at its maturity several times with its
current maturity date as May 28, 2016. In consideration for the origination of the line of credit facility and the various renewals,
the Company granted the lender common stock purchase warrants. On February 28, 2016 the Company extended the line-of-credit expiration
date to May 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share, which warrants
were immediately exercisable and expire on February 28, 2021. The Company estimated the fair value of the warrants at $774 as
of the grant date, which amount was recorded as debt issuance costs and will be amortized to interest expense over the extended
term of the line-of-credit. On May 28, 2016 the Company extended the line-of-credit expiration date to August 28, 2016 and issued
a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share, which warrants were immediately exercisable
and expire on May 28, 2021. The Company estimated the fair value of the warrants at $130 as of the grant date, which amount was
recorded as debt issuance costs and will be amortized to interest expense over the extended term of the line-of-credit.
During
the six months ended June 30, 2016 and 2015, respectively, $1,240 and $243,787 of debt issuance costs amortized (including amounts
immediately expensed) to interest expense, respectively and the remaining unamortized balance was $84 as of June 30, 2016, which
is included in prepaid expenses.
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company fails to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remain the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company fails to pay the December 2013 Note on or before
its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops to
$0.75 per share. All other terms of the warrant remain the same. The December 2013 Note may be prepaid without penalty at any
time. The Note is subordinated to all existing and future senior indebtedness, as such terms are defined in the Note. The December
2013 Note is in technical default and the Company is seeking an extension of the maturity date of this Note (See Note 11) from
the holder. however there can be no assurances such efforts will be successful.
The
Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The discount
is amortized ratably through the original maturity date and each of the extended maturity dates. The Company recognized the value
of the 20,000 shares of common stock issued ($104,000) and the increased value of the outstanding warrants due to the decrease
in their exercise price ($68,716) as an additional discount on the note payable to be amortized ratably over the extended term
of the underlying note.
The
discount recorded as of the December 27, 2013 origination date of the note and as a result of the amendments to the Note terms
and extensions of the maturity date has been amortized ratably over the term and extended terms of the note. Discount amortization
expense aggregated $50,526 and $68,336 for the six months ended June 30, 2016 and 2015, respectively, and the remaining unamortized
discount was $-0- as of June 30, 2016. The related warrant derivative liability balance was $1,694 at fair value as of June 30,
2016. See Note 6.
Other
than the Note described above, during the six months ended June 30, 2016 the Company had short-term notes outstanding with entities
or individuals as follows:
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. In
consideration, the Company granted the lender common stock purchase warrants exercisable to purchase 5,000 shares of common
stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire
in five years. The value of the 5,000 newly issued warrants issued on January 7, 2016 totaled $379, and $131 on May 7, 2016
both of which are being amortized over the extension period (through October 7, 2016). Discount amortization totaled $687
for the six months ended June 30, 2016 and the remaining unamortized discount was $85 as of June 30, 2016. The related warrant
derivative liability balance was $718 at fair value as of June 30, 2016. See Note 6.
|
|
●
|
On
July 15, 2015 the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to May 15, 2016. In consideration, the Company
granted the lender common stock purchase warrants exercisable to purchase an aggregate of 3,500 shares of common stock on
each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable and expire in five
years. The value of the 3,500 newly issued warrants on January 15, 2016 totaled $267 and $74 on May 15, 2016, both of which
are being amortized over the extension period (through October 15, 2016). Discount amortization totaled $527 for the six months
ended June 30, 2016 and the remaining unamortized discount was $52 as of June 30, 2016. The related warrant derivative liability
balance was $503 at fair value as of June 30, 2016. See Note 6.
|
Note
4 – Common Stock
The
Company has delivered a total of 4,248,068 shares of common stock representing required principal repayments ($220,040 principal
balances) and 174,262 representing interest payments ($9,146 interest payments) during the six months ended June 30, 2016. A total
of 317,154 common shares were issued to “true-up” previous installments which were included in the shares delivered
during the six months ended June 30, 2016. See Note 2
– Secured Convertible Note Payable
.
Note
5 – Stock Options
The
Company applies ASC 718,
Stock Compensation
, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted, and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 Plan however such 2005 Plan has now
expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase of common
stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately or as directed
by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also has issued
other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The
Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of June 30, 2016, 515,650 shares were available for future grants under all plans.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the six months ended June 30, 2016.
The
following table summarizes stock option activity for the six months ended June 30, 2016:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price Per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December 31, 2015
|
|
|
411,450
|
|
|
$
|
38.04
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2016
|
|
|
411,450
|
|
|
$
|
38.04
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
Outstanding
and exercisable at June 30, 2016
|
|
|
411,450
|
|
|
$
|
38.04
|
|
|
|
4.8
years
|
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $7,598 and $100,972
during the six months ended June 30, 2016 and 2015, respectively.
The
unrecognized compensation cost as of June 30, 2016 related to the unvested stock options as of that date was $-0-.
Note
6 – Derivative Instruments
Derivatives
– Warrants Issued Relative to Note Payables
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued
in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing
model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s
common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment
to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk
factors, among other items (ASC 820,
Fair Value Measurements
(“ASC 820”) fair value hierarchy Level 3). The
detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and
the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during
the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note
payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative
liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity
as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note
payable will remain effect until such time as the underlying warrant is exercised or terminated and the resulting derivative liability
will be transitioned from a liability to equity as of such date.
The
Company has issued warrants to purchase an aggregate of 2,174,000 common shares in connection with various outstanding debt instruments
which require derivative accounting treatment as of June 30, 2016. A comparison of the assumptions used in calculating estimated
fair value of such derivative liabilities as of June 30, 2016 is as follows:
|
|
As
of
June 30, 2016
|
|
|
|
|
|
Volatility
– range
|
|
|
148.7%
- 190.2 %
|
|
Risk-free
rate
|
|
|
0.71%
- 1.29 %
|
|
Contractual
term
|
|
|
1.83
- 5.83 years
|
|
Exercise
price
|
|
|
$5.00
- $5.60
|
|
Number
of warrants in aggregate
|
|
|
2,174,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance
at December 31, 2015
|
|
$
|
210,383
|
|
Warrants
issued to originate or extend notes payable (recorded as discount on note payable) -Note 3
|
|
|
851
|
|
Unrealized
derivative gains included in other expense for the period
|
|
|
(117,768
|
)
|
Transition
of derivative liability to equity
|
|
|
—
|
|
|
|
|
|
|
Balance
at June 30, 2016
|
|
$
|
93,466
|
|
The
warrant derivative liability consists of the following at June 30, 2016 and December 31, 2015:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
Warrant
issued to holder of Secured convertible note
|
|
$
|
79,898
|
|
|
$
|
182,517
|
|
Warrant
issued to placement agent
|
|
|
10,653
|
|
|
|
24,336
|
|
Warrant
issued to holder of December 2013 Note
|
|
|
1,694
|
|
|
|
2,540
|
|
Warrants
issued to holders of notes payable - short term
|
|
|
1,221
|
|
|
|
990
|
|
Total
warrant derivative liability
|
|
$
|
93,466
|
|
|
$
|
210,383
|
|
Note
7 – Warrants
The
following table summarizes warrant activity for the six months ended June 30, 2016:
|
|
Number
of
Warrants
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
Outstanding
and exercisable at December 31, 2015
|
|
|
2,475,771
|
|
|
$
|
5.34
|
|
Issued
for origination or extension of notes payable (Note 3)
|
|
|
17,000
|
|
|
|
5.60
|
|
Issued
for extension of line-of-credit (Note 3)
|
|
|
20,000
|
|
|
|
5.00
|
|
Exercised/forfeited
|
|
|
(5,000
|
)
|
|
|
(15.00
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at June 30, 2016
|
|
|
2,507,771
|
|
|
$
|
5.35
|
|
The
weighted average term of all outstanding common stock purchase warrants was 5.4 years as of June 30, 2016. The intrinsic value
of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero
as of June 30, 2016.
Note
8 – Income Taxes
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $67,415,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance due to the uncertainty of realizing the tax
benefits from its net deferred tax asset.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2015. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
The
Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss
carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Current estimates
prepared by the Company on a preliminary basis indicate that no ownership changes have occurred, and are currently not subject
to an annual limitation, but may be further limited by additional ownership changes which may occur in the future.
Note
9 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s financial statements.
Nicaraguan
Concessions
In
April 2011, we filed with the Nicaraguan government an Environmental Impact Assessment (“EIA”) covering proposed seismic
activities on our Nicaraguan Concessions. The filing of the EIA was followed by a comment period during which there was interaction
between us the Ministerio del Ambiente y los Recursos Naturales de Nicaragua, an agency of the Nicaraguan government; and the
autonomous regions of Nicaragua that are nearest to the Nicaraguan Concessions. In April 2013 the EIA was formally approved by
the Nicaraguan government and we were cleared to commence 2-D and 3-D seismic mapping activities in the area. In late 2013 and
early 2014, we contracted with a fully integrated Geoscience company that provides geological, geophysical and reservoir services
to the global oil and gas industry, to conduct 2-D and 3-D seismic data covering selected areas within the boundaries of the Nicaraguan
Concessions.
The
final approval of the EIA by the Nicaraguan government of our environment impact study on April 13, 2013, began Sub-Period 2 for
both the Tyra and Perlas Blocks as defined in the Nicaraguan Concessions. The Company believes it has satisfied the acquisition,
processing and interpretation of Seismic data required in Sub-Period 2 for both the Perlas and Tyra Blocks. Therefore, it is now
in Sub-Period 3 of the exploration phase of the 30-year Concession for both Perlas and Tyra as of June 30, 2015. Sub-Period 3
of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016 and the shooting
of additional seismic on the Tyra Block. The Company is in process of identifying at least one potential drilling site on the
Perlas block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving the
permit to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot
additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The
Company is seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to complete its initial
well from the Nicaraguan government. There can be no assurance that it will be able to obtain such waiver of the requirements.
During
late December 2013, we completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan Concessions
at that point. We believe that the newly acquired 2-D seismic data, together with the previously acquired reprocessed 2-D seismic,
has helped us further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological
consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally oil) in place. In addition,
the new 2-D seismic acquired in 2013 provided our first geological information regarding the potential for oil resources in the
Cretaceous Zone, which we could not evaluate using less precise older 2-D seismic mapping. We have identified multiple promising
sites on the Perlas Block for exploratory drilling and are planning the drilling of initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves, given sufficient financing. We believe that we have performed all work necessary
as of June 30, 2015 to proceed to Sub-Period 3 for the Perlas Block as defined in the Nicaraguan Concessions, which requires the
drilling of at least one exploratory well on the Perlas Block within the following one-year period. We must first prepare and
submit a supplemental EIA to the Nicaraguan government before the drilling permit can be issued on the Perlas Block, which had
not been completed as of June 30, 2016.
The
Company has not yet submitted the EIA supplement to the Nicaraguan Government and therefore has not received a drilling permit;
however, assuming that Government does accept the supplemental EIA and grant the drilling permit, the Company will be required
to drill at least one exploratory well on the Perlas Block during 2016 or risk being in default and losing its rights under the
Nicaraguan Concessions.
The
Company is in technical default of the Nicaraguan Concession because it has not provided the required letters of credit to the
Nicaraguan Government. In accordance with the Nicaraguan Concession agreements, the Company had previously provided the Ministry
of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra
(expired September 2014). The Company had also made all required expenditures related to the Nicaraguan Concessions for training
programs and as “area fees,” for each respective year for 2010 through 2015. The Company is attempting to negotiate
the renewal and increase of the required letters of credit, which total $1,356,227 for the Perlas block and $278,450 for the Tyra
block with the Nicaraguan Government and its lenders; however, there can be no assurance that the Company will be successful in
the regard. The Company considers it is fully in compliance with the terms of the Nicaraguan Concessions agreements, except for
the renewal of the expired letters of credit.
The
Company must raise substantial amounts of debt and equity capital in the immediate future in order to fund: (1) the required letters
of credit to the Nicaraguan Government; (2) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan
Concessions during 2016; (3) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable
to negotiate a waiver of such requirement from the Nicaraguan government; (4) the payment of normal day-to-day operations and
corporate overhead; and (5) the payment of outstanding debt and financial obligations as they become due. These are substantial
operational and financial issues that must be successfully mitigated during 2016 or the Company’s ability to satisfy the
conditions necessary to maintain its Nicaragua Concessions will be in significant doubt. The Company completed the May 2015 Private
Placement in May 2015 in an effort to obtain its required capital. See Note 2 to the Financial Statements.
The
Company is also seeking offers from industry operators and other third parties for interests in the acreage in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement.
Accordingly, it intends to finance its business strategy through external financing, which may include debt and equity capital
raised in public and private offerings, joint ventures, sale of working or other interests, employment of working capital and
cash flow from operations, if any, and net proceeds from the sales of assets.
The
following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions
in order for the Company to retain them.
Minimum
Work Program – Perlas
Block
Perlas – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
2
|
|
-
Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation
of 667km of new 2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
443,100
|
|
Sub-Period
2 Optional
|
|
1
|
|
-
Acquisition, processing & interpretation of 200km
2
of 3D seismic
|
|
53km2
|
|
$
|
1,356,227
|
|
Sub-Period
3 Optional
|
|
1
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower
|
|
80km2
|
|
$
|
10,220,168
|
|
Sub-Period
4 Optional
|
|
2
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All
acreage except areas with discoveries
|
|
$
|
10,397,335
|
|
Minimum
Work Program – Tyra
Block
Tyra – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration
(Years)
|
|
Work
Commitment
|
|
Relinquishment
|
|
Irrevocable
Guarantee
|
|
Sub-Period1
|
|
1.5
|
|
-
Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new
2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
408,450
|
|
Sub-Period
2 Optional
|
|
0.5
|
|
-
Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period
|
|
40km2
|
|
$
|
278,450
|
|
Sub-Period
3 Optional
|
|
2
|
|
-
Acquisition, processing & interpretation of 250km
2
of new 3D seismic
|
|
160km2
|
|
$
|
1,818,667
|
|
Sub-Period
4 Optional
|
|
2
|
|
-
Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All
acreage except areas with discoveries
|
|
$
|
10,418,667
|
|
Contractual
and Fiscal Terms
Training
Program
|
|
US
$50,000 per year, per block
|
Area
Fee
|
|
Years
1-3
|
$0.05/hectare
|
|
|
Years
4-7
|
$0.10/hectare
|
|
|
Years
8 & forward
|
$0.15/hectare
|
Royalties
|
|
Recovery
Factor 0 – 1.5
|
Percentage
5%
|
|
|
1.5
– 3.0
|
10%
|
|
|
>3.0
|
15%
|
|
|
|
|
Natural
Gas Royalties
|
|
Market
value at production
|
5%
|
Corporate
Tax
|
|
Rate
no higher than 30%
|
Social
Contribution
|
|
3%
of the net profit (1.5% for each autonomous region)
|
Investment
Protection
|
|
ICSID
arbitration OPIC insurance
|
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Off-Shore,
an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000 and a one
percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently converted
the subordinated promissory note to common stock.
Under
the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from
the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the
point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional
costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser
of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation
for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for
Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs.
The
RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production
during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to
maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and
directors.
The
Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any
exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing
Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing
and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Letter
of Intent to enter Exploration Services Agreement
On
October 13, 2014 the Company announced that it had entered into a Letter of Intent (“LOI”) with Granada Exploration,
LLC, which has agreed to join with the Company to explore for potential hydrocarbons beneath Infinity’s 1.4 million-acre
oil and gas concessions in the Caribbean Sea offshore Nicaragua. Under the terms of the LOI, Granada Exploration will provide
its services in exchange for a working interest in the Nicaraguan Concessions. The scope of such services will be more specifically
described in a mutually acceptable Exploration Services Agreement (“ESA”), which is currently being negotiated. The
ESA is anticipated to provide that Granada will earn an assignment from Infinity of an undivided 30% working interest in the Concessions,
based on an 80% net revenue interest. Granada and Infinity are also anticipated to enter into a Joint Operating Agreement. Granada
may, at its discretion, participate in an initial exploratory well for up to an additional undivided 20% working interest, on
a prospect-by-prospect basis, with such additional interest to be based on an 80% net revenue interest.
The
LOI is subject to Granada’s normal and customary due diligence, including the evaluation of the Company’s Form 10-K
and 10-Q filings, documents showing that the Company is in good standing regarding the Nicaraguan Concessions and with the Nicaraguan
government; negotiation and approval of mutually acceptable formal agreements; and final approval by a majority of the partners
that comprise Granada Exploration, LLC. The parties continue to negotiate the terms of the ESA, but have not entered into definitive
agreements. Granada has not completed its normal and customary due diligence with progress being delayed due to the current environment
affecting oil and gas exploration projects and uncertainties involving the status of the Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic
oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures,
earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of prior to June 30, 2016; however, the Company may remain liable for certain asset retirement costs should the
new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003 as
of June 30, 2016 and December 31, 2015 are sufficient to cover any potential noncompliance liabilities relative to the to the
plugging of abandoned wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former
oil and gas properties. The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced
any oil & gas properties for a number of years.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial
statements.
The
Company is currently involved in litigation as follows:
●
|
In
October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties.
The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
|
|
|
|
Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates
that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas
operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included
in the asset retirement obligation on the accompanying balance sheets.
|
●
|
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
|
●
|
Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement, dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued amounts in accounts payable as of June 30, 2016 and December
31, 2015, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
10 – Related Party Transactions
The
Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the three and six months ended June 30, 2016
and 2015. The amount due to the CFO’s firm for services previously provided was $762,407 at June 30, 2016 and December 31,
2015, and is included in accrued liabilities at both dates.
On
June 6, 2009 the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue
received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue
Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any
rights in the Nicaraguan Concessions for officers and directors.
In
connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan
Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing
partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate
purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes
the former managing partner of Offshore.
As
of June 30, 2016 and December 31, 2015, the Company had accrued compensation to its officers and directors of $1,541,208 and $1,423,208,
respectively.
The
Company entered into a line-of-credit facility on September 23, 2013 that provides it with borrowing capacity on a revolving basis
up to a maximum of $50,000, which was increased to $75,000 at August 28, 2015 and an initial maturity of November 28, 2013. The
line of credit is convertible to common stock at a rate of $5.00 per share. The entity providing the credit facility is owned
by an officer of another corporation for which Infinity’s president and chairman of the board serves as president and chairman
of the board. The facility is unsecured, bears interest at 8% per annum, and was renewed at its maturity several times with its
current maturity date as May 28, 2016. In consideration for the origination of the line of credit facility and the various renewals,
the Company granted the lender common stock purchase warrants. On February 28, 2016 the Company extended the line-of-credit expiration
date to May 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share, which warrants
were immediately exercisable and expire on February 28, 2021. On May 28, 2016 the Company extended the line-of-credit expiration
date to August 28, 2016 and issued a warrant to purchase 10,000 common shares at an exercise price of $5.00 per share, which warrants
were immediately exercisable and expire on May 28, 2021. The Company estimated the fair value of the warrants at $904 as of the
grant date for both extensions combined, which amount was recorded as debt issuance costs and will be amortized to interest expense
over the extended term of the line-of-credit.
Note
11
–
Subsequent Events
From
July 1, 2016 through August 15, 2016, the Company issued a total of 164,669 shares of common stock to the holder of the secured
convertible note payable in the form of interest payments aggregating $2,697. See Note 2
– Secured Convertible Note Payable.
The
Company has not resolved the contingency related to the expired letters of credit for its Nicaraguan Concessions (See Note 9).
The Company continues to negotiate the renewal of the letters of credit with the Nicaraguan Government and its lenders; however,
there can be no assurance that the Company will be successful in that regard.
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender which
facility has an outstanding principal balance of $1,000,000. The facility is represented by a promissory note (the “Note”)
that matured in April 2016, and is currently in technical default. The Company is seeking an extension of the maturity date, however,
there can be no assurance that it will be able to obtain an extension or what the final terms will be if the lender agrees to
such extension.
Note 12
–
Restatement to
previously issued interim financial statements
Subsequent to the issuance of the June
30, 2016 interim financial statements, management determined that the Company should obtain court approval before derecognizing
liabilities due to the expiration of their respective statute of limitations. The Company had previously derecognized liabilities
during the six months ended June 30, 2016 which resulted in other income totaling $1,134,082. This amount was reversed in the
fourth quarter of 2016 which only affected the interim financial statements previously issued during 2016. As a result, the interim
financial statements previously issued for the six months ended June 30, 2016, were restated.
The following tables reflect the corrections
to the affected line items in the previously issued financial statements for the six months ended June 30, 2016:
Effect on Balance Sheet items:
|
|
As of June
30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As restated
|
|
Liabilities and stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,478,209
|
|
|
$
|
519,164
|
|
|
$
|
5,997,373
|
|
Accrued liabilities
|
|
$
|
2,408,320
|
|
|
$
|
614,918
|
|
|
$
|
3,023,238
|
|
Accumulated deficit
|
|
$
|
(120,461,512
|
)
|
|
$
|
(1,134,082
|
)
|
|
$
|
(121,595,594
|
)
|
Effect on Statement of Operations:
|
|
Six
months ended June 30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As Restated
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on derecognition of liabilities
|
|
$
|
1,134,082
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
—
|
|
Net income (loss)
|
|
$
|
840,454
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
(293,628
|
)
|
Net income (loss) per share
|
|
$
|
0.16
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.06
|
)
|
Effect on Statements of Cash Flows:
|
|
Six
months ended June 30, 2016
|
|
|
|
As previously
|
|
|
Effect of
|
|
|
|
|
|
|
reported
|
|
|
Restatement
|
|
|
As Restated
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
840,454
|
|
|
$
|
(1,134,082
|
)
|
|
$
|
(293,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from derecognition of liabilities
|
|
$
|
(1,134,082
|
)
|
|
$
|
1,134,082
|
|
|
$
|
—
|
|
**********************
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered
by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” “intends,” and other variations of these
words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events,
circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there
are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition,
involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ
materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual
results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors
described below.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking
statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers
are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date
hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that
date, and we will not update that information except as required by law.
Factors
that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to
be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity
problems; (ii) we have substantial obligations to a number of third parties, including our December 2013 promissory note in the
original principal amount of $1,050,000 which matured in April 2016 and is currently in technical default and the $12.0 million
Convertible Note due May 2018, which began amortizing in October 2015, and there can be no assurance that we will be able to meet
them; (iii) we require working capital for our operations and obligations for the next 12 months and capital to continue our exploration
and development efforts on the Nicaraguan Concessions, including compliance with the letter of credit and other requirements of
the Nicaraguan Concessions to maintain our rights under the applicable agreements, and there can be no assurances we will be able
to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have concluded that
there exists substantial doubt about our ability to continue as a going concern; (v) our Nicaraguan Concessions and planned future
exploration activities are in a country with a developing economy and are subject to the risks of political and economic instability
associated with such economies; (vi) exploration and development of our Nicaraguan Concessions will require large amounts of capital
or a commercial relationship with an industry operator which we may not be able to obtain; (vii) we may not have sufficient resources
to conduct required seismic mapping on our Nicaraguan Concessions; (viii) the oil and gas exploration business involves a high
degree of business and financial risk; (ix) we will be subject to regulations affecting our activities with the Nicaraguan Concessions;
(x) our operations may be adversely affected by changes in the fiscal regime of Nicaragua; (xi) we are continuing to negotiate
with our creditors and may face additional claims in the future; (xii) oil prices may be affected by regional factors; (xiii)
any future production will be contingent on successful exploration, development and acquisitions to establish reserves and revenue
in the future; (xv) the oil and gas industry is highly competitive; (xvi) exploratory drilling is an uncertain process with many
risks; (xvii) oil and gas prices are volatile, and declines in prices would hurt our revenues and ability to achieve profitable
operations; (xviii) our common stock is traded on the Pink Sheets, which may not have the visibility or liquidity that we seek
for our common stock; (xix) we depend on key personnel; (xx) sufficient voting power by coalitions of a few of our larger stockholders
to make corporate governance decisions that could have significant effect on us and the other stockholders, including Amegy Bank,
NA; (xxi) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding
shares of our common stock, including sales of shares of common stock issued to the holder of the Convertible Note upon its conversion
of portions of the outstanding principal amount of the Convertible Note; (xxii) possible issuance of common stock subject to options
and warrants may dilute the interest of stockholders; (xxiii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404
as it may be required; (xxiv) our nonpayment of dividends and lack of plans to pay dividends in the future; (xxv) future sale
or issuance of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower
our value and make it more difficult for us to raise capital; (xxvi) our additional securities available for issuance, which,
if issued, could adversely affect the rights of the holders of our common stock; (xxvii) our stock price is likely to be highly
volatile due to a number of factors, including a relatively limited public float; (xxviii) indemnification of our officers and
directors; (xxix) whether we will be able to find an industry or other financial partner to enable us to explore and develop our
Nicaraguan Concessions; and (xxx) whether we will be able to identify, acquire and finance domestic oil and gas properties with
both proven and unproven reserves or whether such properties would provide positive cash flow.
The
following information should be read in conjunction with the Condensed Financial Statements and Notes presented elsewhere in this
quarterly report on Form 10-Q. See Note 1 –
“Nature of Operations, Basis of Presentation and Summary of Significant
Accounting Policies,”
to the Condensed Financial Statements for the Three and Six Months ended June 30, 2016 and 2015.
2016
Operational and Financial Objectives
Corporate
Activities
We
hold a 100% working interest in any hydrocarbon deposits found under the Perlas Block (560,000 acres/2,268 km) and Tyra Block
(826,000 acres/3,342 km) located in shallow waters offshore Nicaragua. The final approval of the EIA by the Nicaraguan government
of our environment impact study on April 13, 2013, began Sub-Period 2 for both the Tyra and Perlas Blocks as defined in the Nicaraguan
Concessions. We believe we have satisfied the acquisition, processing and interpretation of Seismic data required in Sub-Period
2 for both the Perlas and Tyra Blocks. Therefore, we are now in Sub-Period 3 of the exploration phase of the 30-year Concession
for both Perlas and Tyra as of December 31, 2015. Sub-Period 3 of the Nicaraguan Concessions requires the drilling of at least
one exploratory well on the Perlas Block during 2016 and the shooting of additional seismic on the Tyra Block. We are in process
of identifying at least one potential drilling site on the Perlas block as required in Sub-Period 3 and will have to perform supplemental
EIA work prior to requesting and receiving the permit to drill from the Nicaraguan government. The work plan on the Tyra block
for Sub-Period 3 requires us to shoot additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement
of exploratory drilling. The Company is seeking a waiver of the additional seismic mapping on the Tyra Block and extension of
time to complete its initial well from the Nicaraguan government. There can be no assurance whether we will be able to obtain
such waiver of the requirements.
During
late December 2013, we completed the 2-D seismic survey activities in the area as required under both of the Nicaraguan Concessions
at that point. We believe that the newly acquired 2-D seismic data, together with the previously acquired reprocessed 2-D seismic,
helped us to further evaluate the structures that were previously identified with 2-D seismic in the Eocene Zone. Our geological
consultants have estimated that these Eocene structures may contain recoverable hydrocarbons (principally oil) in place. In addition,
the new 2-D seismic acquired in 2013 provided our first geological information regarding the potential for oil resources in the
Cretaceous Zone, which we could not evaluate using less precise older 2-D seismic mapping. We have identified multiple promising
sites on the Perlas Block for exploratory drilling and are planning the drilling of initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves, given sufficient capital. We believe that we have performed all work necessary
as of December 31, 2015 to proceed to Sub-Period 3 for the Perlas Block as defined in the Nicaraguan Concessions, which requires
the drilling of at least one exploratory well on the Perlas concession within the following one-year period. We must first prepare
and submit a supplemental EIA to the Nicaraguan government before the drilling permit can be issued on the Perlas Block.
We
must prepare and submit the EIA supplement to the Nicaraguan Government, assuming that it accepts the supplemental EIA and grant
the drilling permit, we will be required to drill at least one exploratory well on the Perlas Block during 2016 or risk being
in default and losing our rights under the Nicaraguan Concessions. We do not believe that we will drill a well on the Nicaraguan
Concessions during 2016 given the current state of the oil and gas commodity markets, financing the drilling, and the challenging
economics for any new exploration and development project, especially a project in an area of the world without historical proven
reserves of commercial hydrocarbons. We believe that we will be able to negotiate extensions with the Nicaraguan government of
the required date by which an exploratory well must be drilled; however, there can be no assurance in this regard.
The
Company is in technical default of the Nicaraguan Concession because it has not provided the required letters of credit to the
Nicaraguan Government. In accordance with the Nicaraguan Concession agreements, the Company had previously provided the Ministry
of Energy with the required letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra
(expired September 2014). The Company had also made all required expenditures related to the Nicaraguan Concessions for training
programs and as “area fees,” for each respective year for 2010 through 2015. The Company is currently negotiating
the renewal and increase of the required letters of credit which total $1,356,227 for the Perlas block and $278,450 for the Tyra
block with the Nicaraguan Government and its lenders; however, there can be no assurance that the Company will be successful in
the regard. The Company considers it is fully in compliance with the terms of the Nicaraguan Concessions agreements, except for
the renewal of the expired letters of credit. The foregoing items remain as substantial operational and legal issues that we must
resolve in order to maintain our rights under the Nicaraguan Concessions during 2016.
We
are also seeking offers from industry operators and other third parties for interests in the acreage in the Nicaraguan Concessions
in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. Accordingly,
we intend to finance our business strategy through external financing, which may include debt and equity capital raised in public
and private offerings, joint ventures, sale of working or other interests, employment of working capital and cash flow from operations,
if any, and net proceeds from the sales of assets.
Our
ability to complete these activities is dependent on a number of factors, including, but not limited to:
|
●
|
The
availability of the capital resources required to fund the activities;
|
|
|
|
|
●
|
The
availability of third party contractors for completion services; and
|
|
|
|
|
●
|
The
approval by regulatory agencies of applications for permits to conduct exploration activities in a timely manner.
|
The
Company is considering the acquisition of domestic oil and gas properties with both proven and unproven reserves. Management believes
that the current distressed state for oil and gas properties and the resulting decline in valuations may yield an opportunity
for the Company to accumulate undervalued oil and gas assets which will produce positive cash flows even with the decline in natural
gas and crude oil commodity prices. Management believes that there may be financing available for such cash generating oil and
gas properties at reasonable cost of capital especially when compared to the Nicaraguan Concessions which may yield higher returns
but at higher risk levels. This initiative may provide the Company with positive cash flows to address immediate working capital
needs while the environment improves for exploration projects such as the Nicaraguan Concessions. No assurances can be given regarding
the Company’s ability to identify, acquire and finance such domestic properties or whether such properties would provide
positive cash flow.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations)
or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial
conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or
significant components of revenue or expenses.
For
the Three Months Ended June 30, 2016 and 2015
Results
of Operations, As restated
Revenue
The
Company had no revenues in either 2016 or 2015 as it focused solely on the exploration, development, financing and maintenance
of the Nicaraguan Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2016 or 2015. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2016 and 2015.
The
Company has no current domestic exploration and development activities; however, it is seeking to identify and acquire domestic
properties with both proven and unproven reserves, given sufficient financing. It is not actively working on any domestic property,
focusing instead on the exploration, development and financing of the Nicaraguan Concessions.
General
and Administrative Expenses
General
and administrative expenses of $148,925 for the three months ended June 30, 2016 increased $26,615, or 22.0%, from $122,310 in
the same period in 2015. The increase in general and administrative expenses is primarily attributable to an increase of $15,000
in Nicaraguan Concession costs incurred. The Company is no longer capitalizing Nicaraguan Concession expenditures due to its decision
to fully impair the Nicaraguan Project at December 31, 2016 as a result of the difficult oil and gas economy and noncompliance
issues with the requirements of the Concessions. The increase was also attributable to an overall increase in professional fees
of $4,095 as the Company incurred increases in audit fees.
Stock-based
compensation
Stock-based
compensation expenses of $-0- for the three months ended June 30, 2016 decreased $42,612, or 100% from the same period in 2015.
The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued stock
options to compensate and motivate its officers, directors and other service providers in previous years that vest generally over
a two-year time period. The Company did not grant any stock options during 2016 and 2015. The significant decrease in stock-based
compensation expense during 2016 compared to 2015 is attributable to the full vesting of the January 2014 stock option grant in
January 2016, which reduced the related amortization during the three months ended June 30, 2016 compared to 2015. All outstanding
stock options are fully vested as of June 30, 2016.
Interest
expense
Interest
expense decreased from $124,221 for the three months ended June 30, 2015 to $29,349 for the 2016 period. This significant decrease
is attributable to the Company converting approximately $555,000 of its interest bearing debt to common stock during early 2015.
The Company received loan proceeds of $450,000 from the Secured Convertible Note issued in May 2015 and $85,000 from two other
convertible notes issued in July 2015, all of which bear interest at 8% per annum and remained outstanding at June 30, 2016. In
previous years the Company issued short-term notes payable at various dates and extended their maturities by paying additional
compensation to the lenders chiefly in the form of warrants. The fair value of the warrants issued to the note holders at the
origination and extension dates of the short-term promissory notes was recorded as a discount on the related debt. Amortization
of the value of the warrants and revenue sharing interests granted to the holders resulted in a substantial increase in the overall
effective borrowing costs during the three months ended June 30, 2015 compared to the same period in 2016. Discount amortization
represents a non-cash expense and totaled $3,928 and $77,052 of total interest expense recognized in the three months ended June
30, 2016 and 2015, respectively.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company may find it necessary to continue with these types of short-term borrowings with high effective interest rates.
Secured
Convertible Note Payable Issuance Costs
On
May 7, 2015, we completed the May 2015 Private Placement of a $12.0 million principal amount Convertible Note and a Warrant exercisable
to purchase 1,800,000 shares of our common stock, $0.0001 par value. We elected to account for and record such note on a fair
value basis. Accordingly, all related debt issuance expenses, which totaled $1,302,629 (including $1,071,201 representing the
value of the warrant to purchase 240,000 shares of common stock issued to placement agent and $231,428 of other fees and expenses),
was charged to non-operating expenses during the three months ended June 30, 2015. No similar transaction occurred during 2016.
Change
in Fair Value of Secured Convertible Note
We
issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair
value basis. We received $450,000 of proceeds at the date of issuance and the fair market value of the Secured Convertible Note
was estimated to be $265,929 as of December 31, 2015 and $145,673 at June 30, 2016. After considering principal repayments and
additional funding received the net $11,578 and $168,100 change in fair market value of such Note is included in the accompanying
statement of operations for the three months ended June 30, 2016 and 2015, respectively.
Issuance
of Warrant Derivative in Connection with Secured Convertible Note
The
Warrant issued in the May 2015 Private Placement contains various provisions that grant the holder ratchet and anti-dilution rights.
Consequently, such Warrant is required to be treated on a liability basis at its estimated fair value and classified as a derivative
liability in the accompanying financial statements. We recorded its origination date estimated fair value at $8,034,007 as a non-operating
expense in the three months ended March 31, 2015. The value of the Warrant to purchase 240,000 shares granted to the placement
agent in the May 2015 Private Placement was included in secured convertible note issuance costs in the statement of operations
as previously described.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the secured convertible note outstanding during 2016 and 2015 are treated as derivative instruments because the promissory notes
and warrants contain ratchet and anti-dilution provisions. Accordingly, we adjusted the value of the outstanding derivative liabilities
to their estimated fair value as of June 30, 2016 and 2015. The mark-to-market process resulted in a loss of $743 during the three
months ended June 30, 2016 and a gain of $2,202,839 during the three months ended June 30, 2015. The decrease in the gain recognized
is primarily the result of the lesser reduction in the closing market price of our common stock between the December 31, 2015
($0.16 per share) and June 30, 2016 ($0.07 per share) compared to the corresponding period in 2015 ($5.50 at December 31, 2014
versus $4.10 at June 30, 2015). Generally, the fair value of the derivative liability declines when the market value of the underlying
common stock decreases compared to the derivatives exercise price.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $67,415,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
For
the three months ended June 30, 2016, the Company realized net losses. The Company anticipates operating losses and additional
tax losses for the foreseeable future and does not believe that utilization of its tax loss carryforward is more likely than not.
Therefore, because of the uncertainty as to the ultimate utilization of the Company’s loss carryforwards, any deferred tax
asset at June 30, 2016 that resulted from anticipated benefit from future utilization of such carryforward has been fully offset
by a valuation allowance.
Net loss
As
a result of the above, we reported a net loss of $190,595 for the three months ended June 30, 2016 compared to a net loss of $7,587,600
for the three months ended June 30, 2015. This represents an improvement of $7,397,005.
Basic
and Diluted Loss per Share
Basic
net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders by the
weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included
in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury stock
and “if converted” method. For periods in which net losses from continuing operations are incurred, weighted average
shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents
would have an anti-dilutive effect.
The
basic and diluted loss per share was ($0.03) and ($2.83) for the three months ended June 30, 2016 and 2015, respectively,
for the reasons previously noted. All outstanding stock options and warrants to purchase common stock were considered antidilutive
and therefore excluded from the calculation of diluted loss per share for the three months ended June 30, 2016 and 2015
because of the exercise price of the warrants being substantially higher than market price in 2016 and the net loss reported for
both periods. Potential shares of common stock as of June 30, 2016 that have been excluded from the computation of diluted net
loss per share amounted to 2,919,221 shares, which included 2,507,771 outstanding warrants and 411,450 outstanding stock options.
For
the Six Months Ended June 30, 2016 and 2015
Results
of Operations
Revenue
The
Company had no revenues in either 2016 or 2015 as it focused solely on the exploration, development, financing and maintenance
of the Nicaraguan Concessions.
Production
and Other Operating Expenses (income)
The
Company had no production related operating expenses in either 2016 or 2015. The Company sold its investment in Infinity-Texas
in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2016 and 2015.
The
Company has no current or planned domestic exploration and development activities at this time. It is not actively working on
any domestic property, focusing instead on the exploration, development and financing of the Nicaraguan Concessions.
General
and Administrative Expenses
General
and administrative expenses of $231,496 for the six months ended June 30, 2016 increased $3,317, or 1.5%, from $228,179 in the
same period in 2015. The increase in general and administrative expenses is primarily attributable to an increase of $27,952 in
Nicaraguan Concession costs incurred. The Company is no longer capitalizing Nicaraguan Concession expenditures due to the decision
to fully impair the Nicaraguan Project at December 31, 2016 as a result of the difficult oil and gas economy and noncompliance
issues with the requirements of the Concessions. The increase in general and administrative expenses was offset by a decrease
of $19,326 in Delaware annual report and franchise taxes for 2016 compared to 2015. The Delaware tax is based on our total assets
which decreased substantially due to the impairment of our Nicaraguan oil and gas properties during 2015. The increase in general
and administrative costs was also offset by reductions in expenses relating to the Company attending fewer investor conferences
or similar forums during the three months ended June 30, 2016 compared to 2015, which decreased such expenses by $13,003. The
closing of the May 2015 Private Placement reduced the need to incur additional costs related to capital raising and investor relations
activities during the 2016 period coupled with the poor investment climate for oil and gas companies during 2016 and 2015.
Stock-based
compensation
Stock-based
compensation expenses of $7,598 for the six months ended June 30, 2016 decreased $93,374, or 92.5%, from the same period in 2015.
The Company has had minimal resources to pay employees, consultants and other service providers. Therefore, it has issued stock
options to compensate and motivate its officers, directors and other service providers in previous years that vest generally over
a two-year time period. The Company did not grant any stock options during 2016 and 2015. The significant decrease in stock-based
compensation expense during 2016 compared to 2015 is attributable to the full vesting of the January 2014 stock option grant in
January 2016, which reduced the related amortization during the six months ended June 30, 2016 compared to 2015. All outstanding
stock options are fully vested as of June 30, 2016.
Interest
expense
Interest
expense decreased from $697,304 for the six months ended June 30, 2015 to $107,518 for the 2016 period. This significant decrease
is attributable to the Company converting approximately $555,000 of its interest bearing debt to common stock during early 2015.
The Company received loan proceeds of $450,000 from the Secured Convertible Note issued in the May 2015 Private Placement and
$85,000 from two other convertible notes issued in July 2015, all of which bear interest at 8% per annum and remained outstanding
at June 30, 2016. In previous years the Company issued short-term notes payable at various dates and extended their maturities
by paying additional compensation to the lenders chiefly in the form of warrants. The fair value of the warrants issued to the
note holders at the origination and extension dates of the short-term promissory notes was recorded as a discount on the related
debt. Amortization of the value of the warrants and revenue sharing interests granted to the holders resulted in a substantial
increase in the overall effective borrowing costs during the six months ended June 30, 2015 compared to the same period in 2016.
Discount amortization represents a non-cash expense and totaled $52,981 and $600,836 of total interest expense recognized in the
six months ended June 30, 2016 and 2015, respectively.
The
Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore,
the Company may find it necessary to continue with these types of short-term borrowings with high effective interest rates.
Secured
Convertible Note Payable Issuance Costs
On
May 7, 2015, we completed the May 2015 Private Placement of a $12.0 million principal amount Secured Convertible Note and a Warrant
exercisable to purchase 1,800,000 shares of our common stock, $0.0001 par value. We elected to account for and record such note
on a fair value basis. Accordingly, all related debt issuance expenses, which totaled $1,302,629 (including $1,071,201 representing
the value of the warrant to purchase 240,000 shares of common stock issued to placement agent and $231,428 of other fees and expenses),
was charged to non-operating expenses during the six months ended June 30, 2015. No similar transaction occurred during 2016.
Change
in Fair Value of Secured Convertible Note
We
issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair
value basis. We received $450,000 of proceeds at the date of issuance and the fair market value of the Secured Convertible Note
was estimated to be $265,929 as of December 31, 2015 and $145,673 at June 30, 2016. After considering principal repayments and
additional funding received the net $64,784 and $168,100 change in fair market value of such Note is included in the accompanying
statement of operations for the six months ended June 30, 2016 and 2015, respectively.
Issuance
of Warrant Derivative in Connection with Secured Convertible Note
The
Warrant issued in the May 2015 Private Placement contains various provisions that grant the holder ratchet and anti-dilution rights.
Consequently, such Warrant is required to be treated on a liability basis at its estimated fair value and classified as a derivative
liability in the accompanying financial statements. We recorded its origination date estimated fair value at $8,034,007 as a non-operating
expense in the six months ended June 30, 2015. The value of the Warrant to purchase 240,000 shares granted to the placement agent
in the May 2015 Private Placement was included in Secured Convertible Note issuance costs in the statement of operations as previously
described.
Change
in Derivative Fair Value
The
conversion feature of the promissory notes and the common stock purchase warrants issued in connection with short-term notes and
the Secured Convertible Note outstanding during 2016 and 2015 are treated as derivative instruments because the promissory notes
and warrants contain ratchet and anti-dilution provisions. Accordingly, we adjusted the value of the outstanding derivative liabilities
to their estimated fair value as of June 30, 2016 and 2015. The mark-to-market process resulted in a gain of $117,768 during the
six months ended June 30, 2016 and a gain of $2,468,106 during the six months ended June 30, 2015. The decrease in the gain recognized
is primarily the result of the lesser reduction in the closing market price of our common stock between the December 31, 2015
($0.16 per share) and June 30, 2016 ($0.07 per share) compared to the corresponding period in 2015 ($5.50 at December 31, 2014
versus $4.10 at June 30, 2015). Generally, the fair value of the derivative liability declines when the market value of the underlying
common stock decreases compared to the derivatives exercise price.
Other income (expense)
Other income (expense) decreased from
$174,457 for the six months ended June 30, 2015 to $0 in 2016. The Company derecognized certain previously recorded
liabilities in 2015 due to the expiration of the statute of limitations on collection of such obligations for the
Company.
Income
Tax
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $67,415,000 as of December 31, 2015, which
expire from 2025 through 2030. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due
to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
For
the six months ended June 30, 2016, the Company realized net losses and the Company anticipates operating losses and additional
tax losses for the foreseeable future and does not believe that utilization of its tax loss carryforward is more likely than not.
Therefore, because of the uncertainty as to the ultimate utilization of the Company’s loss carryforwards, any deferred tax
asset at June 30, 2016 that resulted from anticipated benefit from future utilization of such carryforward has been fully offset
by a valuation allowance.
Net loss
As
a result of the above, we reported a net loss of $293,628 for the six months ended June 30, 2016 compared
to a net loss of $7,888,628 for the six months ended June 30, 2015. This represents an improvement of $7,595,000.
Basic
and Diluted Loss per Share
Basic
net loss loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net loss attributable to common shareholders
by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents
included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants using the treasury
stock and “if converted” method. For periods in which net losses from continuing operations are incurred, weighted
average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents
would have an anti-dilutive effect.
The
basic and diluted loss per share was ($0.06) and ($2.99) for the six months ended June 30, 2016 and 2015, respectively,
for the reasons previously noted. All outstanding stock options and warrants to purchase common stock were considered antidilutive
and therefore excluded from the calculation of diluted income (loss) per share for the six months ended June 30, 2016 and
2015 because of the exercise price of the warrants being substantially higher than market price in 2016 and the net loss reported
for both periods. Potential shares of common stock as of June 30, 2016 that have been excluded from the computation of
diluted net loss per share amounted to 2,919,221 shares, which included 2,507,771 outstanding warrants and 411,450 outstanding
stock options.
Liquidity
and Capital Resources; Going Concern
We
have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development
of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the
world. Historically, we financed our operations through the issuance of redeemable preferred stock and various short and long-term
debt financing that contained some level of detachable warrants to provide the holder’s with a level of equity participation
should we be successful exploring our Nicaraguan Concessions.
During
2013 we borrowed approximately $1,825,000 on a short-term basis by issuing various subordinated promissory notes with detachable
warrants to purchase common shares. The fair value of the warrants resulted in a substantial increase in the overall effective
borrowing costs. We used the proceeds of these notes to repay previously issued notes, including the foregoing related party note,
to meet obligations and conduct seismic mapping related to our Nicaraguan Concessions and to provide working capital. In addition,
we entered into an unsecured line-of-credit with a related party that supplemented its working capital needs and also provided
detachable warrants to purchase common stock that increased the overall cost of the borrowing.
In
April 2013, we conducted a private placement of units composed of common stock and warrants under which we raised $890,000 in
proceeds and exchanged $125,000 principal amount of an outstanding note plus accrued interest for units. We used part of these
proceeds to retire notes issued earlier in 2013.
We
were unable to raise long-term capital in 2014 to pay the majority of the outstanding short-term promissory notes on their respective
maturity dates. We were able to negotiate extensions of the maturity dates on these short-term promissory notes by issuing additional
warrants exercisable to purchase shares of common stock and, in one case, granting a revenue sharing interest in our Nicaraguan
Concessions.
In
the first quarter 2015, we were able to increase our line-of-credit to a maximum of $100,000, which provided us some liquidity,
but were unable to obtain other sources of capital. On February 28, 2015, the short-term note holders of maturing debt exercised
their right to convert principal balances totaling $475,000 and accrued interest totaling $28,630 into 100,726 shares of common
stock at an exchange rate of $5.00 per share. In addition, on June 30, 2015, the lender who provides the line-of-credit facility
converted a partial principal balance totaling $50,000 into 10,000 shares of common stock at a price of $5.00 per share. Such
debt to equity conversions helped to reduce our near term cash needs.
In
July 2015, the Company issued two promissory notes for total cash proceeds of $85,000. The promissory notes have maturity dates
that have been extended several times and currently mature in August 2016. In connection with the origination and extension of
the notes, the Company issued warrants exercisable to purchase shares of common stock at an exercise price of $5.60 per share.
The warrants are immediately exercisable and terminate five years from their dates of issuance.
On
December 27, 2013 the Company borrowed $1,050,000 under the December 2013 Note, which is an unsecured credit facility with a private,
third-party lender. Effective April 7, 2015 the Company and the lender agreed to extend the maturity date of the December 2013
Note from April 7, 2015 to the earlier of (i) April 7, 2016 or (ii) the payment in full of the Investor Note issued in the May
2015 Private Placement in the principal amount of $9,550,000 (the “New Maturity Date”). All other terms of the Note
remained the same and the remaining principal balance was reduced to $1,000,000 as of June 30, 2016 after the $50,000 principal
repayment required by the extension agreement.
The
December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all existing and future
senior indebtedness, as such terms are defined in the December 2013 Note. The December 2013 Note matured in April 2016 and is
currently in technical default. The Company is seeking an extension of the maturity date; however there can be no assurance that
it will be able to obtain such extension or what the final terms will be if the lender agrees to such an extension.
On
May 7, 2015 the Company completed the May 2015 Private Placement of $12.0 million Secured Convertible Note and a Warrant exercisable
to purchase 1,800,000 shares of the Company’s common stock with an institutional investor. At the closing of the May 2015
Private Placement, the investor acquired the Convertible Note by paying $450,000 in cash and issuing the Investor Note, secured
by cash, with a principal amount of $9,550,000. Assuming all amounts payable to the Company under the Investor Note are paid,
the May 2015 Private Placement will result in gross proceeds of $10.0 million before placement agent fees and other expenses associated
with the transaction, subject to the satisfaction of certain conditions. The Company used the initial proceeds from the closing
to retire certain outstanding obligations, including the 2015 area and training fees of approximately $155,000 owed to the Nicaraguan
government relating to its Nicaragua Concessions, and to provide additional working capital.
The
Company will receive the remaining cash proceeds upon each voluntary or mandatory prepayment of the Investor Note. The investor
may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part.
The
Convertible Note matures on the three-year anniversary of its issuance, bears interest at 8% per annum, and is convertible at
any time at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion
Price”). As a part of the May 2015 Private Placement, the Company issued a Warrant to the investor giving it the right to
purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The
Warrant is exercisable commencing six months from the date of issuance for a period of seven years from the date of issuance.
The
investor has no right to convert the Convertible Note or exercise the Warrant to the extent that such conversion or exercise would
result in the investor being the beneficial owner of in excess of 9.99% of the Company’s common stock. The Convertible Note
ranks senior to the Company’s existing and future indebtedness and is secured by all of the assets of the Company, excluding
the Nicaraguan Concessions.
WestPark
Capital acted as placement agent for the Company in the May 2015 Private Placement and received a fee of 6% of cash proceeds,
or $600,000, if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing plus the
reimbursement of legal fees totaling $7,500. The Company also issued WestPark a warrant exercisable to purchase 240,000 shares
of common stock at a price of $5.00 per share. The warrant was exercisable upon from the date of issuance for a period of seven
years.
In
summary, as of June 30, 2016, we owed: (i) $68,303 on our line-of-credit, which is due August 28, 2016; (ii) the two promissory
notes in the total principal amount of $85,000, which are due in August 2016; (iii) the Secured Convertible note with a fair value
of $145,673, which is due in 26 monthly installment payments either in cash or stock; and (iv) and the December 2013 Note in the
principal amount of $1,000,000, which was due in April 2016 and is currently in technical default. We are seeking to extend the
maturity date in order to cure the technical default; however there can be no assurance that it will be able to obtain such extension
or what the final terms will be if the lender agrees to such extension. We intend to seek additional funding under the secured
convertible note and other short-term debt financing to provide the funds necessary to pay-off the line-of-credit when it comes
due and to provide working capital to fund normal operations, although we can provide no assurances that we will be successful
in this regard. Our current financial condition has made traditional bank loans and normal financing terms unattainable; therefore,
we may find it necessary to continue with these types of short-term borrowings with high effective interest rates.
The
Company is in Sub-Period 3 of the exploration phase of the 30-year Concessions for both Perlas and Tyra as of June 30, 2015. Sub-Period
3 of the Nicaraguan Concessions requires the drilling of at least one exploratory well on the Perlas Block during 2016 and the
shooting of additional seismic on the Tyra Block. The Company is in process of identifying at least one potential drilling site
on the Perlas Block as required in Sub-Period 3 and will have to perform supplemental EIA work prior to requesting and receiving
the permit to drill from the Nicaraguan government. The work plan on the Tyra block for Sub-Period 3 requires the Company to shoot
additional seismic, which is estimated to cost approximately $2,500,000 prior to the commencement of exploratory drilling. The
Company is seeking a waiver of the additional seismic mapping on the Tyra Block and extension of time to complete its initial
well from the Nicaraguan government. There can be no assurance whether it will be able to obtain a waiver of the requirements.
In
accordance with the Nicaraguan Concession agreements, the Company has previously provided the Ministry of Energy with the required
letters of credit in the amounts of $443,100 for Perlas (expired March 2014) and $408,450 for Tyra (expired September 2014). The
Company has also made all required expenditures related to the Nicaraguan Concessions for training programs and as “area
fees,” for each respective year for 2010 through 2015. In accordance with the Nicaraguan Concession agreements, the Company
must provide the Ministry of Energy with the required letters of credit in the amounts which total $1,356,227 for the Perlas block
and $278,450 for the Tyra block for exploration requirements on the leases as required by the Nicaraguan Concessions, to replace
the expired letters of credit. The minimum cash requirements to maintain and comply with the minimum work program as defined in
the Nicaraguan Concessions for the next twelve-month period will be approximately $5,500,000 for the Perlas Block which includes
all costs to prepare for and drill the initial exploratory well, and $280,000 for the Tyra Block, assuming the waiver is granted
regarding the seismic mapping. If such waiver is not granted, the Company estimates it will require approximately $2,500,000 for
the seismic mapping. Finally, the Company estimates it will need approximately $300,000 to prepare and submit an environmental
supplement to the Nicaraguan government to identify and receive authorization to drill up to five wells in the Concessions.
The
Company has identified multiple sites for exploratory drilling and is planning the initial exploratory wells in order to determine
the existence of commercial hydrocarbon reserves, subject to receipt from the Nicaraguan government of authorizations for the
drilling of up to five wells. In order to meet its obligations under the Perlas Block of the Nicaraguan Concession, the Company
must drill its initial exploratory well during 2016 or risk being in default and losing its rights under the Nicaraguan Concessions.
We
are negotiating the renewal and/or adjustment of the required letters of credit with the Nicaraguan Government. Further, we are
seeking a waiver of the 3-D seismic mapping requirement because we do not believe it will be effective in providing additional
information due the supplemental water depth and other factors. We plan to prepare the necessary information to submit to the
EIA in order to obtain the necessary authorizations to drill up to five locations in the Concessions. There can be no assurance
that we will be successful in any of the foregoing regards. Except for the foregoing items, we believe we are in full compliance
with the terms of the Nicaraguan Concessions agreements.
The
Company must successfully comply with the restrictions related to the secured convertible note in order to release the remaining
$9.49 million in funding under the Investor Note or it must raise substantial amounts of debt and equity capital in the immediate
future in order to fund: (1) the required letters of credit to the Nicaraguan Government; (2) fund approximately $300,000 to prepare
and submit an environmental supplement to the Nicaraguan government to identify and receive authorization to drill up to five
wells in the Concessions; (3) the drilling of at least one exploratory well on the Perlas Block of the Nicaraguan Concessions
during 2016; (4) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions if it is unable to negotiate
a waiver of such requirement form the Nicaraguan government; (5) the payment of normal day-to-day operations and corporate overhead;
and (6) the payment of outstanding debt and financial obligations as they become due including the $1.0 December 2013 Note which
currently is in technical default. These are substantial operational and financial issues that must be successfully addressed
during 2016 or the Company’s ability to satisfy the conditions necessary to maintain its Nicaragua Concessions will be in
significant doubt. The Company is actively seeking new outside sources of debt and equity capital in order fund the substantial
needs enumerated above, however, there can be no assurance that it will be able to obtain such capital or obtain it on favorable
terms or within the timeframe necessary to cure the technical defaults existing on the Nicaraguan Concessions or to meet its ongoing
requirements to drill the exploratory wells.
In
addition to the minimum cash requirements related to the Nicaraguan Concessions, we estimate that we will require approximately
$330,000 of working capital to maintain corporate operations for the next 12 months, but not including approximately $1,000,000
principal amount of a short-term promissory note which matured in April 2016 and is in technical default, plus accrued interest,
the $85,000 principal due on the two promissory notes due in October 2016 and the $68,303 currently outstanding under a revolving
line of credit due August 2016. We owe $4,945,000 in trade payables related to seismic activities already performed (in December
2013) but not yet paid; however, we believe such party has agreed to extend the time for payment of this obligation to until such
time as we begin drilling operations on the Nicaraguan Concessions. We also owe other obligations to third parties as noted on
our balance sheet, which we intend to pay, negotiate and/or settle prior to the beginning of any drilling operations, although
there is no assurance that will be able negotiate settlements with venders or avoid collection activities.
We
plan to raise long-term capital to satisfy the foregoing needs through an offering of our equity or debt securities and/or through
a commercial relationship with other industry operators, which may involve the granting of revenue or other interests in the Nicaraguan
Concessions in exchange for cash and a carried interest in exploration and development operations or the creation of a joint venture
or other strategic partnership. There can be no assurance that we will obtain such funding or obtain it on terms acceptable to
us. Further, if we cannot meet our obligations respecting the Nicaraguan Concessions, we may lose our rights to them.
The
Company does not believe that it will be able to meet all of the Nicaraguan Concession requirements in 2016, including proceeding
to drill the required exploration well during 2016 given the current state of the oil and gas commodity markets and the challenging
economics for any new exploration and development project especially a project in an area of the world without historical proven
reserves of commercial hydrocarbons. The Company believes that it will be able to negotiate extensions with the Nicaraguan government
relative to the required date by which any exploratory wells must be drilled as well as the other requirements for maintaining
the Concessions; however, there can be no assurance in this regard. These are substantial operational and legal issues that the
Company must resolve in order to maintain its rights under the Nicaraguan Concessions during 2016.
Due
to the uncertainties related to these matters, there exists substantial doubt about our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should we be unable to continue as a going concern.