Notes
to Condensed Financial Statements
March
31, 2019
(unaudited)
Note
1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
Infinity
Energy Resources, Inc. (collectively, “we,” “ours,” “us,” “Infinity” or the “Company”)
has prepared the accompanying condensed financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in our opinion,
include all adjustments consisting of normal recurring adjustments and accruals necessary for a fair presentation of our condensed
balance sheets, statements of operations, and cash flows for the periods presented. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for 2019 due to various factors. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed
financial statements should be read in conjunction with the audited financial statements and accompanying notes in Item 8, “Financial
Statements and Supplementary Data,” of our Annual Report on Form 10-K, filed with the SEC.
Nature
of Operations
We
plan to pursue the exploration of potential oil and gas resources in the Perlas and Tyra concession blocks offshore Nicaragua
in the Caribbean Sea (the “Nicaraguan Concessions” or “Concessions”), which contain a total of approximately
1.4 million acres. We sold our wholly-owned subsidiary Infinity Oil and Gas of Texas, Inc. in 2012 and its wholly-owned subsidiary,
Infinity Oil and Gas of Wyoming, Inc., was administratively dissolved in 2009.
We
are assessing various opportunities and strategic alternatives (the “Strategic Alternatives”) involving the acquisition,
exploration and development of natural gas and oil properties in the United States, including the possibility of acquiring businesses
or assets that provide support services for the production of oil and gas in the United States.
We
must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying its
existing debt obligations. We are attempting to obtain extensions of the maturity date for our outstanding debt; however, there
can be no assurance that we will be able to do so or what the final terms will be if the lenders agree to such extensions. Further,
we can provide no assurance that we will be able to obtain sufficient new debt/equity capital to pursue any Strategic Alternatives
we may consider.
Nicaragua
We
began pursuing an oil and gas exploration opportunity offshore Nicaragua in the Caribbean Sea in 1999. Since such time, we built
relationships with the Instituto Nicaraguense de Energia (“INE”) and undertook the geological and geophysical research
that helped us to become one of only six companies qualified to bid on offshore blocks in the first international bidding round
held by INE in January 2003.
On
March 5, 2009, we signed the contracts granting us the Perlas and Tyra concession blocks offshore Nicaragua (the “Nicaraguan
Concessions” or “Concessions”). Since our acquisition of the Nicaraguan Concessions, we have conducted an environmental
study and developed geological information from the reprocessing and additional evaluation of existing 2-D seismic data acquired
over our Perlas and Tyra concession blocks. In April 2013, the Nicaraguan government formally approved our Environmental Impact
Assessment, at which time we commenced significant activity under the initial work plan involving the acquisition of new seismic
data on the two Nicaraguan Concessions. We undertook seismic shoots during late 2013 that resulted in the acquisition of new 2-D
and 3-D seismic data and have reviewed it to select initial drilling sites for exploratory wells.
The
Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan
Concession, its day-to-day operations and corporate overhead because it has generated no operating revenues or cash flows in recent
years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other notes
payable with principal balances of $338,125 as of December 3, 2018 are now either due on demand or currently in default. The Company
is seeking resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can
be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such extensions.
The
Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, including
(1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the Tyra Block;
(3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227 for the Perlas
block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017, 2018 and 2019
area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016, 2017, 2018 and
2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking a resolution
of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions with the Nicaraguan
government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or renegotiate the Nicaraguan
Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts of debt and equity capital
from other sources in the immediate future in order to fund these requirements. These are substantial operational and financial
issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the conditions necessary to maintain
and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The
Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund
the requirements noted above plus finance (i) the shooting of additional seismic on the Tyra Block of the Nicaraguan Concessions
if it is unable to negotiate a waiver of such requirement from the Nicaraguan government; (ii) normal day-to-day operations and
corporate overhead; and (iii) outstanding debt and other financial obligations as they become due, as described below. These are
substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to
satisfy the conditions necessary to maintain its Nicaragua Concessions will be in significant doubt.
The
Company is seeking new sources of debt and equity capital to fund the substantial needs enumerated above. The Company is attempting
to obtain extensions of the maturity dates for its debt or compromises of the debt. There can be no assurance that it will be
able to obtain such funding or extensions or what terms.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
On
May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal
amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the
Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing,
the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount
of $9,550,000 (the “Investor Note”).
On
May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the
Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal
outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal
of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had
an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to
deliver a new convertible note (the “Replacement Note”) representing the remaining principal balance of $2,197,231
to replace the Convertible Note. The Replacement Note provides for a one-year maturity from May 7, 2017, a conversion price of
$0.50 per share and is currently in technical default. The Company is continuing to negotiate with the Investor a resolution of
this matter regarding the issuance of the Replacement Note under the terms of the financing and taking into consideration that
the Investor only funded $510,000 in the entire transaction, but there can be no assurance that it will be successful in this
regard.
The
Note was to mature on the three-year anniversary of its issuance, bore interest at 8% per annum, and was convertible at any time
at the option of the holder into shares of the Company’s common stock at $5.00 per share (the “Conversion Price”).
The Note is now in default and the Company has had discussions with the Holder regarding a resolution to the default, but there
has been no progress at present. As a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving
it the right to purchase up to an aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00
per share. The Warrant is exercisable commencing nine months from the date of issuance for a period of seven years from the date
of issuance. The Note ranked senior to the Company’s existing and future indebtedness and is secured by all the assets of
the Company, excluding the Concessions. The proposed Replacement Note would have the same security interest as the Convertible
Note.
In
addition, the Company continues to seek offers from industry operators and other third parties for interests in the acreage in
the Nicaraguan Concessions in exchange for cash and a carried interest in exploration and development operations or other joint
venture arrangement.
Going
Concern
As
reflected in the accompanying condensed statements of operations, the Company has had a history of losses. The Company has a significant
working capital deficit, has notes payable that are in default and is experiencing substantial liquidity issues. In addition,
the Company’s most significant asset and its primary business plan is the exploration and development of the Nicaraguan
Concessions which are now in default and in risk of being terminated.
The
Company has relied on raising debt and equity capital to fund its ongoing maintenance/expenditure obligations under the Nicaraguan
Concession, for its day-to-day operations and its corporate overhead because it has generated no operating revenues or cash flows
in recent years. The $1.0 million December 2013 Note (See Note 3) matured in April 2016 and is currently in default and five other
notes payable with principal balances of $338,125 as of March 31, 2019 are now either due on demand or currently in default. The
Company is seeking resolutions to these defaults including extensions of the maturity date for these notes payable; however, there
can be no assurance that it will be able to obtain such extensions or what the final terms will be if the lenders agree to such
extensions.
The
Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of March 31, 2019, as
noted above. These are substantial operational and financial issues that must be successfully addressed during 2019 or the Company’s
ability to satisfy the conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The
Company is seeking sources of debt and equity capital to fund the substantial needs enumerated above. The Company is also attempting
to obtain extensions of the maturity date for its debt. There can be no assurance that it will be successful in these regards.
Due
to the uncertainties related to these matters, there exists substantial doubt about the Company’s ability to continue as
a going concern within one year after the date the financials are issued. The condensed financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going concern.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates with regard to the financial statements include
the estimated carrying value of unproved properties, the estimated fair value of derivative liabilities, secured convertible note
payable, stock-based awards and overriding royalty interests, and the realization of deferred tax assets.
Concentrations
The
Company’s business plan consists of developing the Nicaraguan Concessions and it plans to be active in Nicaragua in the
future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations.
The political climate in Nicaragua is unstable and is subject to radical change over a short period of time. In the event of a
significant negative change in political and economic stability in the vicinity of the Nicaraguan Concessions or of the inability
of the Company to obtain sufficient financing, the Company might be forced to abandon or suspend its efforts and its rights under
its Nicaraguan Concessions.
Foreign
Currency
The
United States dollar is the functional currency for the Company’s operations. Although the Company’s acquisition and
exploration activities have been conducted in Nicaragua, a significant portion of the payments incurred for exploration activities
are denominated in United States dollars. The Company expects that a significant portion of its required and discretionary expenditures
in the foreseeable future will also be denominated in United States dollars. Any foreign currency gains and losses are included
in the results of operations in the period in which they occur. The Company does not have any cash accounts denominated in foreign
currencies.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash consists of cash on hand and demand deposits with financial institutions. Although the
Company had minimal cash as of March 31, 2019 and December 31, 2018, it is the Company’s policy that all highly liquid investments
with a maturity of three months or less when purchased would be cash equivalents and would be included along with cash as cash
and equivalents.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for exploration and development activities. Accordingly, all costs incurred
in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay
lease rentals, dry holes and seismic costs) and the fair value of estimated future costs of site restoration, dismantlement, and
abandonment activities are capitalized. Overhead related to development activities is also capitalized during the acquisition
phase.
Depletion
of proved oil and gas properties is computed on the units-of-production method, with oil and gas being converted to a common unit
of measure based on relative energy content, whereby capitalized costs, as adjusted for estimated future development costs and
estimated asset retirement costs, are amortized over the total estimated proved reserve quantities. Investments in unproved properties,
including capitalized interest and internal costs, are not depleted pending determination of the existence of proved reserves.
Unproved
properties are assessed periodically (at least annually) to ascertain whether impairment has occurred. Unproved properties whose
costs are individually significant are assessed individually by considering the primary lease terms of the properties, the holding
period of the properties, geographic and geologic data obtained relating to the properties, and estimated discounted future net
cash flows from the properties. Estimated discounted future net cash flows are based on discounted future net revenues associated
with probable and possible reserves, risk adjusted as appropriate. Where it is not practicable to assess individually the amount
of impairment of properties for which costs are not individually significant, such properties are grouped for purposes of assessing
impairment. The amount of impairment assessed is deducted from the costs to be amortized, and reported as a period expense when
the impairment is recognized. All unproved property costs as of March 31, 2019 and December 31, 2018 relate to the Nicaraguan
Concessions. In assessing the unproved property costs for impairment, the Company takes into consideration various information
including: (i) the terms of the Concessions, (ii) the status of the Company’s compliance with the Nicaraguan Concessions’
requirements, (iii) the ongoing evaluation of the seismic data, (iv) the commodity prices for oil and gas products, (v) the overall
environment related to oil and gas exploration and development projects for unproven targets in unproven regions of the world,
(vi) the availability of financing for financial and strategic partners, and (vii) other factors that would impact the viability
of a significant long-term oil and gas exploration and development project.
The
current environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world,
is very challenging given the depressed commodity prices for oil and gas products and the resulting industry-wide reduction in
capital expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain
adequate financing to fund the exploration and development of its Nicaraguan projects. The Company has performed its impairment
tests as of March 31, 2019 and December 31, 2018 and has concluded that a full impairment reserve should be provided on the costs
capitalized for the Nicaraguan Concessions oil and gas properties. All costs related to the Nicaraguan Concessions from January
1, 2016 through March 31, 2019 have been charged to operating expenses as incurred.
Pursuant
to full cost accounting rules, the Company must perform a “ceiling test” each quarter. The ceiling test provides that
capitalized costs less related accumulated depletion and deferred income taxes for each cost center may not exceed the sum of
(1) the present value of future net revenue from estimated production of proved oil and gas reserves using prices based on the
arithmetic mean of the previous 12 months’ first-of month prices and current costs, including the effects of derivative
instruments accounted for as cash flow hedges, but excluding the future cash outflows associated with settling asset retirement
obligations that have been accrued on the condensed balance sheet, and a discount factor of 10%; plus (2) the cost of properties
not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being
amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. If
capitalized costs exceed the ceiling, the excess must be charged to expense and may not be reversed in future periods. As of March
31, 2019 and December 31, 2018, the Company did not have any proved oil and gas properties, and all unproved property costs relate
to its Nicaraguan Concessions.
Proceeds
from the sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized,
unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas,
in which case the gain or loss would be recognized in the determination of the Company’s net earnings/loss.
Asset
Retirement Obligations
The
Company records estimated future asset retirement obligations pursuant to the provisions of ASC 410. ASC 410 requires entities
to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred with a corresponding
increase in the carrying amount of the related long-lived asset. Subsequent to initial measurement, the asset retirement liability
is required to be accreted each period. The Company’s asset retirement obligations consist of costs related to the plugging
of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. Capitalized costs are depleted
as a component of the full cost pool using the units of production method. Although the Company had divested all of its domestic
oil properties that contain operating and abandoned wells as of December 31, 2012, the Company may have obligations related to
the divestiture of certain abandoned non-producing domestic leasehold properties should the new owner not perform its obligations
to reclaim abandoned wells in a timely manner. Management believes the Company has been relieved from asset retirement obligation
related to Infinity-Texas because of the sale of its Texas oil and gas properties in 2011 and its sale of 100% of the stock in
Infinity-Texas in 2012. The Company has recognized an additional liability of $734,897 related to its former Texas oil and gas
producing properties (included in asset retirement obligations) to recognize the potential personal liability of the Company and
its officers for the Infinity-Texas oil and gas properties should the new owner not perform its obligations to reclaim abandoned
wells in a timely manner. In addition, management believes the Company has been relieved from asset retirement obligations related
to Infinity-Wyoming because of the sale of its Wyoming and Colorado oil and gas properties in 2008; however, the Company has recognized
since 2012 an additional liability of $981,106 related to its former Wyoming and Colorado oil and gas producing properties (included
in asset retirement obligations) to recognize the potential liability of the Company and its officers should the new owner not
perform its obligations to reclaim abandoned wells in a timely manner.
Derivative
Instruments
The
Company accounts for derivative instruments or hedging activities under the provisions of ASC 815
Derivatives and Hedging
.
ASC 815 requires the Company to record derivative instruments at their fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income (loss) and are recognized in the condensed statement of operations when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, are recognized in earnings.
Changes in the fair value of derivatives that do not qualify for hedge treatment are recognized in earnings.
The
purpose of hedging is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and
gas prices and to manage the exposure to commodity price risk. As of March 31, 2019 and December 31, 2018 and during the periods
then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As
a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (Notes
2, 3, 5 and 6), those warrants are required to be accounted for as derivatives at estimated fair value, with changes in fair value
recognized in operations.
Fair
Value of Financial Instruments
The
carrying values of the Company’s accounts payable, accrued liabilities and short term notes represent the estimated fair
value due to the short-term nature of the accounts.
In
accordance with ASC Topic 820 —
Fair Value Measurements and Disclosures
(“ASC 820”), the Company utilizes
the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets
or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:
|
●
|
Level
1 —
|
Quoted
prices in active markets for identical assets and liabilities.
|
|
|
|
|
|
●
|
Level
2 —
|
Other
significant observable inputs (including quoted prices in active markets for similar assets or liabilities).
|
|
|
|
|
|
●
|
Level
3 —
|
Significant
unobservable inputs (including the Company’s own assumptions in determining the fair value.
|
The
estimated fair value of the Company’s Note and various derivative liabilities, which are related to detachable warrants
issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions
related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock, interest
rates, the probability of both of the downward adjustment of the exercise price and the upward adjustment to the number of warrants
as provided by the warrant agreement terms and non-performance risk factors, among other items. The fair values for the warrant
derivatives as of March 31, 2019 and December 31, 2018 were classified under the fair value hierarchy as Level 3.
The
following table represents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a
recurring basis as of March 31, 2019 and December 31, 2018:
March
31, 2019
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
|
$
|
2,197,231
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
133,949
|
|
|
|
133,949
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,331,180
|
|
|
$
|
2,331,180
|
|
December
31, 2018
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible note payable
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,197,231
|
|
|
$
|
2,197,231
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
65,502
|
|
|
|
65,502
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,262,733
|
|
|
$
|
2,262,733
|
|
There
were no changes in valuation techniques or reclassifications of fair value measurements between Levels 1, 2 or 3 during the periods
ended March 31, 2019 and December 31, 2018.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and
tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset
to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses
the realizability of the Company’s deferred income tax assets, and a valuation allowance is recognized if it is determined
that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making
such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such
factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not
to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When the Company can
project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, the
Company will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can
be no assurance that facts and circumstances will not materially change and require the Company to adjust its deferred income
tax asset valuation allowance in a future period. The Company recognized a deferred tax asset, net of valuation allowance, of
$0 at March 31, 2019 and December 31, 2018.
The
Company is potentially subject to taxation in many jurisdictions, and the calculation of income tax liabilities (if any) involves
dealing with uncertainties in the application of complex income tax laws and regulations in various taxing jurisdictions. It recognizes
certain income tax positions that meet a more-likely-than not recognition threshold. If the Company ultimately determines that
the payment of these liabilities will be unnecessary, it will reverse the liability and recognize an income tax benefit. No liability
for unrecognized tax benefit was recorded as of March 31, 2019. During the three months March 31, 2018 the Company determined
that the payment of the certain liabilities related to the alternative minimum tax from prior years will be unnecessary, and therefore
it reversed the liability and recognized an income tax benefit as described in the following section.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”),which significantly changes U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance
sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more
likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the
Company now considers it more likely than not that all the AMT tax credit carryforward will be realized. Accordingly, the Company
has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income
taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward
because the Company had not previously paid the AMT tax but rather it recorded the income tax liability on the accompanying condensed
balance sheet.
Net
Income (Loss) per Share
Pursuant
to FASB ASC Topic 260,
Earnings per Share,
basic net income (loss) per share is computed by dividing the net income (loss)
by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent
shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in
which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations,
as the inclusion of common share equivalents would have an anti-dilutive effect.
Note
2 – Secured Convertible Note Payable
Secured
Convertible Note (the “Note) payable consists of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Secured
convertible note payable, at fair value
|
|
$
|
2,197,231
|
|
|
$
|
2,197,231
|
|
Less:
Current maturities
|
|
|
(2,197,231
|
)
|
|
|
(2,197,231
|
)
|
|
|
|
|
|
|
|
|
|
Secured
convertible note payable, long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
Following
is an analysis of the activity in the Note during the three months December 31, 2018:
|
|
Amount
|
|
Balance
at December 31, 2018
|
|
$
|
2,197,231
|
|
Funding
under the Investor Note during the period
|
|
|
—
|
|
Principal
repaid during the period by issuance of common stock
|
|
|
—
|
|
Change
in fair value of secured convertible note during the period
|
|
|
—
|
|
|
|
|
|
|
Balance
at March 31, 2019
|
|
$
|
2,197,231
|
|
On
May 7, 2015, the Company completed the May 2015 Private Placement of a $12.0 million principal amount secured convertible note
(the “Note”) and Warrant to purchase 1,800,000 shares of the Company’s common stock, $0.0001 par value. The
placement agent for the Company in the transaction will receive a fee of 6% of cash proceeds, or $600,000, if and when the Company
receives the full cash proceeds. It received $27,000 of such amount at the closing. In addition, the placement agent was granted
a warrant to purchase 240,000 shares of common stock at $5.00 per share, which warrant is immediately exercisable.
The
Note and Warrant were issued pursuant to a Securities Purchase Agreement, dated May 7, 2015, by and between the Company and the
Investor. The May 2015 Private Placement was made pursuant to an exemption from registration under such Act. At the closing, the
Investor acquired the secured convertible note by paying $450,000 in cash and issuing a secured promissory note, secured by cash,
with an aggregate initial principal amount of $9,550,000 (the “Investor Note”).
On
May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the
Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal
outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal
of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had
an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to
deliver a new convertible note (the “Replacement Note”) with respect to the remaining principal balance of $2,197,231
to replace the Convertible Note. The aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an
approximate $2.0 million original issue discount; however, the Investor funded only $510,000 under the Investor Note. The Company
has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor.
The Replacement Note provided for a maturity date of May 7, 2018, a conversion price of $0.50 per share and is due in monthly
installment payments through May 2018 either in cash or stock, among other terms. The Company did not repay the Replacement Note
at its maturity and it is now in technical default. The Replacement Note is to be secured to the same extent as the Convertible
Note. The Company is continuing to negotiate a resolution of this matter with the Investor regarding the current default status,
the issuance of the Replacement Note under the terms of the financing and taking into consideration the Investor’s minimal
funding in the entire transaction, but there can be no assurance that it will be successful in this regard.
Description
of the Secured Convertible Note
The
Note is senior to the Company’s existing and future indebtedness and is secured by all the assets of the Company, excluding
the Nicaraguan Concessions, and to the extent and as provided in the related security documents.
The
Note was convertible at any time at the option of the holder into shares of the Company’s common stock at $5.00 per share
(the “Conversion Price”). The Note was to mature on the three-year anniversary of its issuance date. If the Company
issues or sells shares of its common stock, rights to purchase shares of its common stock, or securities convertible into shares
of its common stock for a price per share that is less than the Conversion Price then in effect, the then current Conversion Price
will be decreased to equal such lower price. The foregoing adjustments to the Conversion Price for future stock issues will not
apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans. In addition, the Conversion
Price is subject to adjustment upon stock splits, reverse stock splits, and similar capital changes.
On
the first business day of each month beginning on the earlier of the (i) effectiveness of a registration statement the Company
files to register the shares of common stock issuable upon conversion of the Note or exercise of the Warrant, as defined below,
or (ii) sixth month following the date of the Note through and including the maturity date (the “Installment Dates”),
the Company will pay to the Note holder an amount equal to (i) one-thirtieth (1/30th) of the original principal amount of the
Note (or the principal outstanding on the Installment Date, if less) plus (ii) the accrued and unpaid interest with respect to
such principal plus (iii) the accrued and unpaid late charges (if any) with respect to such principal and interest. The Investor
has the ability to defer or accelerate such monthly payments in its sole discretion.
Prior
to the maturity date, the Note bore interest at 8% per annum (or 18% per annum during an event of default) with interest payable
in cash or in shares of Common Stock monthly in arrears on the first business day of each calendar month following the issuance
date.
Each
monthly payment may be made in cash, in shares of the Company’s common stock, or in a combination of cash and shares of
its common stock. The Company’s ability to make such payments with shares of its common stock will be subject to various
equity conditions, including the existence of an effective registration statement covering the resale of the shares issued in
payment (or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant, as defined below,
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations)
and certain minimum trading price and trading volume. Such shares will be valued, as of the date on which notice is given by the
Company that payment will be made in shares, at the lower of (1) the then applicable Conversion Price and (2) a price that is
80.0% of the arithmetic average of the three lowest weighted average prices of the Company’s common stock during the twenty-trading
day period ending two trading days before the applicable determination date (the “Measurement Period”). If the Company
elects to pay such monthly payment in shares of the Company’s stock, it is required to pre-deliver shares of its common
stock and is required to deliver additional shares, if any, to true-up such number of shares to the number of shares required
to be delivered on the applicable Installment Date pursuant to the calculation above.
At
any time after the issuance date, the Company had the right to redeem all or any portion of the outstanding principal balance
of the Note plus all accrued but unpaid interest and any other charges at a price equal to 125% of such amount provided that (i)
the arithmetic average of the closing sale price of the common stock for any twenty (20) consecutive Trading Days equals or exceeds
200% of the Conversion Price and (ii) among other conditions, there is an effective registration statement covering the resale
of the shares issued in payment or, in the alternative, the eligibility of the shares issuable pursuant to the Note and the Warrant
for sale without restriction under Rule 144 and without the need for the Company to remain current with its public filing obligations.
The Investor has the right to convert any or all of the amount to be redeemed into common stock prior to redemption.
Upon
the occurrence of an event of default under the Note, the Investor may, so long as the event of default is continuing, require
the Company to redeem all or a portion of its Note. Each portion of the Note subject to such redemption must be redeemed by the
Company, in cash, at a price equal to the greater of (1) 125% of the amount being redeemed, including principal, accrued and unpaid
interest, and accrued and unpaid late charges, and (2) the product of (I) the amount being redeemed and (II) the quotient determined
by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date immediately
preceding the event of default and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest
Conversion Price in effect during such period.
Subject
to certain conditions, the Investor may also require the Company to redeem all or a portion of its Note in connection with a transaction
that results in a Change of Control, as defined in the Note. The Company must redeem each portion of the Note subject to such
redemption in cash at a price equal to the greater of (1) 125% of the amount being redeemed (including principal, accrued and
unpaid interest, and accrued and unpaid late charges), and (2) the product of (I) the amount being redeemed and (II) the quotient
determined by dividing (A) the greatest closing sale price of the shares of common stock during the period beginning on the date
immediately preceding the earlier to occur of (i) the consummation of the Change of Control and (ii) the public announcement of
such Change of Control and ending on the date the holder delivers a redemption notice to the Company, by (B) the lowest Conversion
Price in effect during such period.
Description
of the Warrant
.
As
a part of the May 2015 Private Placement, the Company issued a Warrant to the Investor giving it the right to purchase up to an
aggregate of 1,800,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Warrant is exercisable
commencing nine months from the date of issuance and the exercise prices for the Warrant is subject to adjustment for certain
events, such as stock splits and stock dividends. If the Company issues or sells shares of its common stock, rights to purchase
shares of its common stock, or securities convertible into shares of its common stock for a price per share that is less than
the exercise price then in effect, the exercise price of the Warrant will be decreased to equal such lesser price. Upon each such
adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately.
The foregoing adjustments to the exercise price for future stock issues will not apply to certain exempt issuances, including
issuances pursuant to certain employee benefit plans. In addition, the Conversion Price is subject to adjustment upon stock splits,
reverse stock splits, and similar capital changes. The Warrant will expire on the seventh (7th) anniversary of the date of issuance.
9.99%
Restriction on Conversion of Note and Exercise of Warrant
The
Investor has no right to convert the Note or exercise the Warrant to the extent that such conversion or exercise would result
in the Investor being the beneficial owner in excess of 9.99% of the Company’s common stock. The Company was required to
hold a meeting of its shareholders to approve an increase to the number of its authorized shares to meet its obligations under
the Purchase Agreement to have reserved 200% of the shares issuable upon conversion of the Note and exercise of the Warrant. The
Company held its Annual Meeting of Shareholders on September 25, 2015 and the shareholders approved the reverse split of the Company’s
common stock issued and outstanding shares, which satisfied this requirement.
Participation
Rights
If,
during the period beginning on the closing date and ending on the four (4) year anniversary of the closing date, the Company offers,
sells, grants any option to purchase, or otherwise disposes of any of its or its subsidiaries’ equity or equity equivalent
securities (a “Subsequent Placement”), the Investor will have the right to participate for 50% of any such future
Subsequent Placement.
Description
of the Financial Accounting and Reporting
The
Company elected to account for the Note on its fair value basis, therefore, the fair value of the Note, including its embedded
conversion feature, were estimated together utilizing the Black-Scholes model at March 31, 2019 and December 31, 2018.
The
Company received $450,000 of proceeds at the date of issuance and after repayments and additional funding the net principal balance
was $129,960 as of March 31, 2019 and December 31, 2018. The fair market value of the Note was estimated to be $682,400 as of
the issuance date, $2,197,231 at December 31, 2018 and at March 31, 2019. The net change in fair market value of the Note of $61,636
during the three month period ended March 31, 2018 is included in change in fair value of senior secured convertible note
payable in the accompanying condensed statement of operations for the three months ended March 31, 2018.
On
May 4, 2017, the Investor notified the Company that it elected to effect an Investor Optional Offset under Section 7(a) of the
Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal
outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal
of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had
an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to
deliver the Replacement Note with respect to the remaining principal balance of $2,197,231 to replace the Convertible Note. The
aggregate outstanding principal balance of $11,687,231 of the Convertible Note included an approximate $2.0 million original issue
discount; however, the Investor funded only $510,000 under the Investor Note. The Company has recorded the fair value of the Convertible
Note assuming that the remaining par value is $2,197,231 as asserted by the Investor. The Company is negotiating with the Investor
regarding the current default status, the issuance of the Replacement Note under the terms of the financing and taking into consideration
the Investor’s minimal funding in the entire transaction, but there can be no assurance that it will be successful in this
regard.
The
Warrant issued to purchase 1,800,000 common shares in connection with the Note was treated as a derivative liability for accounting
purposes due to its ratchet and anti-dilution provisions. The estimated fair value of the warrant derivative as of March 31, 2019
was $116,731, representing a change of $59,639 from December 31, 2018, which is included in changes in derivative fair value in
the accompanying condensed statement of operations for the three months ended March 31, 2019. See Note 5.
The
warrant to purchase 240,000 shares issued as part of the placement fee in connection with the Note was treated as a derivative
liability for accounting purposes due to its ratchet and anti-dilution provisions. Changes in the fair value of the warrant derivative
liability totaled $7,991 (increase in the derivative liability) through March 31, 2019, which is included in changes in derivative
fair value in the accompanying condensed statement of operations for the three months ended March 31, 2019. The warrant derivative
liability balance related to such warrants was $15,564 and $7,573 as of March 31, 2019 and December 31, 2018, respectively. See
Note 5.
The
Company is required to make monthly installment payments in the form of cash, common stock or a combination of both. The Holder
suspended such installments during the third and fourth quarters of 2016 and the suspension continued through March 31, 2019.
Note
3 – Debt
Debt
consists of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Convertible
notes payable, short term:
|
|
|
|
|
|
|
|
|
Note
payable, (in default)
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Note
payable (in default)
|
|
|
200,000
|
|
|
|
200,000
|
|
Note
payable (in default)
|
|
|
40,000
|
|
|
|
40,000
|
|
Note
payable, (in default)
|
|
|
50,000
|
|
|
|
50,000
|
|
Note
payable (in default)
|
|
|
35,000
|
|
|
|
35,000
|
|
Note
payable (due on demand)
|
|
|
13,125
|
|
|
|
13,125
|
|
Total
notes payable, short-term
|
|
$
|
1,338,125
|
|
|
$
|
1,338,125
|
|
Note
Payable – Short-term
On
December 27, 2013 the Company borrowed $1,050,000 under an unsecured credit facility with a private, third-party lender. The facility
is represented by a promissory note (the “December 2013 Note”) with an original maturity date of March 12, 2014.
In
connection with the December 2013 Note, the Company granted the lender a warrant (the “Warrant”) exercisable to purchase
100,000 shares of its common stock at an exercise price of $15.00 per share. In connection with an extension to April 2015, the
parties amended the date for exercise of the Warrant to be a period commencing April 7, 2015 and expiring on the third anniversary
of such date. The Company issued no additional warrants to the lender in connection with the extension of the Note to the New
Maturity Date. If the Company failed to pay the Note on or before its New Maturity Date, the number of shares issuable under the
Warrant increases to 1,333,333 and the exercise price drops to $0.75 per share. All other terms of the Warrant remained the same.
The Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability.
The discount is amortized ratably through the original maturity date and each of the extended maturity dates. The warrant expired
as of March 31, 2019 and is no longer exercisable.
In
connection with an extension of the December 2013 Note to April 7, 2016, the Company agreed to enter into a definitive revenue
sharing agreement with the lender to grant the lender under the revenue sharing agreement an irrevocable right to receive a monthly
payment equal to one half of one percent (1/2%) of the gross revenue derived from the share of all hydrocarbons produced at the
wellhead from the Nicaraguan Concessions and any other oil and gas concessions that the Company and its affiliates may acquire
in the future. This percent increased to one percent (1%) when the Company did not pay the December 2013 Note in full by August
7, 2014. Therefore, the revenue sharing agreement is fixed at one percent (1%). The value of the one percent (1.0%) definitive
revenue sharing agreement granted to the lender as consideration for the extension of the maturity date to December 7, 2014 was
estimated to be $964,738. Such amount was recorded as a reduction of oil and gas properties and as a discount on the renewed note
payable and amortized ratably over the extended term of the note.
In
connection with the extension of the maturity date of the December 2013 Note to April 7, 2016, the Company also (i) issued the
lender 20,000 shares of restricted common stock; (ii) decreased the exercise price of the warrant to $5.00 per share and extended
the term of the warrant to a period commencing on the New Maturity Date and expiring on the third anniversary of such date; and
(iii) paid $50,000 toward amounts due under the December 2013 Note. The Company issued no additional warrants to the lender in
connection with the extension of the Note to the New Maturity Date. If the Company failed to pay the December 2013 Note on or
before its New Maturity Date, the number of shares issuable under the Warrant increases to 1,333,333 and the exercise price drops
to $0.75 per share. All other terms of the warrant remained the same. The warrant has expired as of March 31, 2019 and is no longer
exercisable. The December 2013 Note may be prepaid without penalty at any time. The December 2013 Note is subordinated to all
existing and future senior indebtedness, as such terms are defined in the Note. The December 2013 Note is in default and the Company
is pursuing a resolution to this default including seeking an extension of the maturity date of this Note (See Note 11) from the
holder; however, there can be no assurances such efforts will be successful.
The
Warrant has been treated as a derivative liability whereby the value of Warrant is estimated at the date of grant and recorded
as a derivative liability and as a discount on the note payable. The warrant liability is revalued to fair value at each reporting
date with the corresponding income (loss) reflected in the condensed statement of operations as change in derivative liability.
The Warrant expired as of March 31, 2019 and can no longer be exercised. The discount has been amortized ratably through the original
maturity date and each of the extended maturity dates. The Company recognized the value of the 20,000 shares of common stock issued
($104,000) and the increased value of the outstanding warrants due to the decrease in their exercise price ($68,716) as an additional
discount on the note payable to be amortized ratably over the extended term of the underlying note.
Other
than the December 2013 Note described above, during the three months March 31, 2019 the Company had short-term notes outstanding
with entities or individuals as follows:
|
●
|
On
November 8, 2016 the Company borrowed a total of $200,000 from an individual under a convertible note payable with the conversion
rate of $5.00 per share. The note requires no principal or interest payments until its maturity date of November 7, 2017 and
bears interest at 8% per annum. The note was not paid on its original maturity date. The Company is pursuing a resolution
of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will
be successful in this regard.
|
|
●
|
On
April 20, 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is
convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April
19, 2018 and bears interest at 8% per annum. The note was not paid on its maturity date. The Company is pursuing a resolution
of this default including an extension or other resolution with the Holder. There can be no assurance that the Company will
be successful in this regard.
|
|
|
|
|
●
|
On
July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on
note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was
extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. The
Company and its lender are pursuing a resolution of this default. There can be no assurance that the Company will be successful
in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable to purchase 5,000
shares of common stock on each extension date at an exercise price of $5.60 per share, which warrants were immediately exercisable
and expire in five years. The value of the 5,000 newly issued warrants issued on January 7, 2016 totaled $379 and $131 on
May 7, 2016 both of which were amortized over the extension period (through October 7, 2016). The related warrant derivative
liability balance was $973 and $492 as of March 31, 2019 and December 31, 2018, respectively. See Note 5.
|
|
|
|
|
●
|
On
July 15, 2015, the Company borrowed a total of $35,000 from an individual under a convertible note payable with the conversion
rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection
with the loan, the Company issued the entity a warrant for the purchase of 3,500 shares of common stock at $5.60 per share
for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest
not be paid in full by its maturity date, the number of warrants automatically increases to 7,000 shares and the exercise
price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted
for as a derivative liability. The Company recorded the estimated fair value of the warrant totaling $11,827 as a discount
on note payable and as a derivative liability in the same amount, as of the origination date. On October 15, 2015, the note
was extended for an additional 90 days or until January 15, 2016 and later to October 15, 2016. The Company is currently pursuing
a resolution of this default including an additional extension from the Holder. There can be no assurance that the Company
will be successful in this regard. In consideration, the Company granted the lender common stock purchase warrants exercisable
to purchase an aggregate of 3,500 shares of common stock on each extension date at an exercise price of $5.60 per share, which
warrants were immediately exercisable and expire in five years. The value of the 3,500 newly issued warrants on January 15,
2016 totaled $267 and $74 on May 15, 2016, both of which were amortized over the extension period (through October 15, 2016).
The related warrant derivative liability balance was $681 and $345 as of March 31, 2019 and December 31, 2018, respectively.
See Note 5.
|
|
|
|
|
●
|
On
May 21, 2018, the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible
at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum.
|
Note
4 – Stock Options
The
Company applies ASC 718,
Stock Compensation
, which requires companies to recognize compensation expense for share-based
payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of
increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash
inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based
payments granted, and is estimated in accordance with the provisions of ASC 718.
In
May 2006, the Company’s stockholders approved the 2006 Equity Incentive Plan (the “2006 Plan”), under which
both incentive and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants.
An aggregate of 47,000 shares of the Company’s common stock are reserved for issuance under the 2006 Plan. In June 2005,
the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), under which both incentive
and non-statutory stock options may be granted to employees, officers, non-employee directors and consultants. An aggregate of
47,500 shares of the Company’s common stock were reserved for issuance under the 2005 and 2006 Plans; however, such Plans
have now expired and no further issuances can be made. Options granted under the 2005 Plan and 2006 Plan allow for the purchase
of common stock at prices not less than the fair market value of such stock at the date of grant, become exercisable immediately
or as directed by the Company’s Board of Directors and generally expire ten years after the date of grant. The Company also
has issued other stock options not pursuant to a formal plan with terms similar to the 2005 and 2006 Plans.
The
Annual Meeting of Stockholders was held on September 25, 2015 and the stockholders approved the Infinity Energy Resources, Inc.
2015 Stock Option and Restricted Stock Plan (the “2015 Plan”) and reserved 500,000 shares for issuance under the Plan.
As
of March 31, 2019, 500,000 shares were available for future grants under the 2015 Plan. All other Plans have now expired.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires
the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected
dividends. These estimates involve inherent uncertainties and the application of management judgment. For purposes of estimating
the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral
traits. Expected volatilities used in the valuation model are based on the expected volatility that would be used by an independent
market participant in the valuation of certain of the Company’s warrants. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company’s forfeiture rate assumption
used in determining its stock-based compensation expense is estimated based on historical data. The actual forfeiture rate could
differ from these estimates. There were no stock options granted during the periods ended March 31, 2019 and December 31, 2018.
The
following table summarizes stock option activity for the three months March 31, 2019:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise
Price Per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2018
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
3.1
years
|
|
$
|
—
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2019
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
3.0
years
|
|
$
|
—
|
|
Outstanding
and exercisable at March 31, 2019
|
|
|
338,200
|
|
|
$
|
41.24
|
|
|
3.0
years
|
|
$
|
—
|
|
The
Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0-
during the three months ended March 31, 2019 and 2018, respectively.
The
intrinsic value as of March 31, 2019 related to the vested and unvested stock options as of that date was $-0. The unrecognized
compensation cost as of March 31, 2019 related to the unvested stock options as of that date was $-0-.
Note
5 – Derivative Instruments
Derivatives
– Warrants Issued Relative to Notes Payable
The
estimated fair value of the Company’s derivative liabilities, all of which are related to the detachable warrants issued
in connection with various notes payable and the secured convertible note, were estimated using a closed-ended option pricing
model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s
common stock, interest rates, the probability of both the downward adjustment of the exercise price and the upward adjustment
to the number of warrants as provided by the note payable and warrant agreement terms (Note 2 and 3) and non-performance risk
factors, among other items (ASC 820,
Fair Value Measurements
(“ASC 820”) fair value hierarchy Level 3). The
detachable warrants issued in connection with the secured convertible note (See Note 2), the December 2013 Note (See Note 3) and
the two other short-term notes payable (See Note 3) contain ratchet and anti-dilution provisions that remain in effect during
the term of the warrant while the ratchet and anti-dilution provisions of the other notes payable cease when the related note
payable is extinguished. When the note payable containing such ratchet and anti-dilution provisions is extinguished, the derivative
liability will be adjusted to fair value and the resulting derivative liability will be transitioned from a liability to equity
as of such date. The derivative liability associated with the warrants issued in connection with the secured convertible note
payable will remain in effect until such time as the underlying warrant is exercised or terminated and the resulting derivative
liability will be transitioned from a liability to equity as of such date.
The
Company has issued warrants to purchase an aggregate of 2,074,000 shares of common stock in connection with various outstanding
debt instruments which require derivative accounting treatment as of March 31, 2019 and December 31, 2018. A comparison of the
assumptions used in calculating estimated fair value of such derivative liabilities as of March 31, 2019 is as follows:
|
|
As
of
March
31, 2019
|
|
|
|
|
|
Volatility
– range
|
|
|
239.8%
- 275.7
|
%
|
Risk-free
rate
|
|
|
2.23%
- 2.31
|
%
|
Contractual
term
|
|
|
1.25
- 3.1 years
|
|
Exercise
price
|
|
|
$5.00
- $5.60
|
|
Number
of warrants in aggregate
|
|
|
2,074,000
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial
instruments, measured at fair value on a recurring basis using significant unobservable inputs for both open and closed derivatives:
|
|
Amount
|
|
Balance
at December 31, 2018
|
|
$
|
65,502
|
|
Warrants
issued to originate or extend notes payable (recorded as discount on note payable) -Note 3
|
|
|
—
|
|
Unrealized
derivative gains included in other expense for the period
|
|
|
68,447
|
|
Transition
of derivative liability to equity
|
|
|
—
|
|
|
|
|
|
|
Balance
at March 31, 2019
|
|
$
|
133,949
|
|
The
warrant derivative liability consists of the following at March 31, 2019 and December 31, 2018:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Warrant
issued to holder of Secured convertible note (Note 2)
|
|
$
|
116,731
|
|
|
$
|
57,092
|
|
Warrant
issued to placement agent (Note 2)
|
|
|
15,564
|
|
|
|
7,573
|
|
Warrants
issued to holders of notes payable - short term (Note 3)
|
|
|
1,654
|
|
|
|
837
|
|
Total
warrant derivative liability
|
|
$
|
133,949
|
|
|
$
|
65,502
|
|
Note
6 – Warrants
The
following table summarizes warrant activity for the three months March 31, 2019:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Outstanding
and exercisable at December 31, 2018
|
|
|
2,365,563
|
|
|
$
|
5.01
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised/forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at March 31, 2019
|
|
|
2,365,563
|
|
|
$
|
5.01
|
|
The
weighted average term of all outstanding common stock purchase warrants was 2.8 years as of March 31, 2019. The intrinsic value
of all outstanding common stock purchase warrants and the intrinsic value of all vested common stock purchase warrants was zero
as of March 31, 2019.
Note
7 – Income Taxes
The
provision for income taxes consists of the following:
|
|
For
the Three months Ended
|
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Current
income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
Deferred
income tax benefit
|
|
|
—
|
|
|
|
—
|
|
Total
income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
(150,000
|
)
|
The
effective income tax rate on income (loss) before income tax benefit varies from the statutory federal income tax rate primarily
due to the Tax Cuts and Jobs Act (the “Act”) enacted on December 22, 2017. The Act significantly changed U.S. corporate
income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018.
Under
the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However,
where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion
of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s
AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021,
however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward
during prior years totaling $150,000 which previously was reported as income taxes payable on the Company’s condensed balance
sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, the Company considered it more
likely than not that all of the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the
Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company
has recognized an income benefit of $150,000 during the three months ended March 31, 2018 as it reduced the corresponding income
taxes payable to zero as of March 31, 2018. The Company will receive no cash from the elimination of this AMT tax credit carryforward
as the Company had not previously paid the AMT tax rather it recorded the income tax liability on the accompanying condensed balance
sheet.
The
Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at March
31, 2019. Accordingly, the Company determined there was not sufficient positive evidence regarding its potential for future profits
to outweigh the negative evidence of our three-year cumulative loss position under the guidance provided in ASC 740. Therefore,
it determined to continue to provide a 100% valuation allowance on its net deferred tax assets. The Company expects to continue
to maintain a full valuation allowance until it determines that it can sustain a level of profitability that demonstrates its
ability to realize these assets. To the extent the Company determines that the realization of some or all of these benefits is
more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed.
For
income tax purposes, the Company has net operating loss carry-forwards of approximately $66,845,000, which expire from 2025 through
2038.
The
Company has not completed the filing of tax returns for the tax years 2012 through 2018. Therefore, all such tax returns are open
to examination by the Internal Revenue Service.
Note
8 – Commitments and Contingencies
The
Company has not maintained insurance coverage on its U.S domestic oil and gas properties for several years. The Company is not
in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance
issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil
and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact
on the Company’s condensed financial statements.
Nicaraguan
Concessions
The
Company was in default of various provisions of the 30-year Concession for both Perlas and Tyra blocks as of December 31, 2018,
including (1) the drilling of at least one exploratory well on the Perlas Block; (2) the shooting of additional seismic on the
Tyra Block; (3) the provision of the Ministry of Energy with the required letters of credit in the amounts totaling $1,356,227
for the Perlas block and $278,450 for the Tyra block for exploration requirements on the leases; (4) payment of the 2016, 2017,
2018 and 2019 area fees required for both the Perlas and Tyra which total approximately $180,000; and (5) payment of the 2016,
2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $325,000. The Company is seeking
a resolution of these defaults including the ability to extend, renew and/or renegotiate the terms of the Nicaraguan Concessions
with the Nicaraguan government to cure the defaults. There can be no assurance whether it will be able to extend, renew and/or
renegotiate the Nicaraguan Concessions and whether any new terms will be favorable to the Company. It must raise substantial amounts
of debt and equity capital from other sources in the immediate future in order to fund these requirements. These are substantial
operational and financial issues that must be successfully addressed during 2019 or the Company’s ability to satisfy the
conditions necessary to maintain and/or renegotiate its Nicaragua Concessions will be in significant doubt.
The
Company is seeking debt and equity capital in order to fund the substantial needs enumerated above; however, there can be no assurance
that it will be able to obtain such capital or obtain it on favorable terms or within the timeframe necessary to cure the defaults
existing on the Nicaraguan Concessions or to meet its ongoing requirements relative to drilling the exploratory wells. The current
environment for oil and gas development projects, especially discoveries in otherwise undeveloped regions of the world, is very
challenging given the depressed commodity prices for oil and gas products, and the resulting industry-wide reduction in capital
expenditure budgets for exploration and development projects. These are substantial impediments for the Company to obtain adequate
financing to fund the exploration and development of its Nicaraguan projects.
The
following charts set forth the minimum work programs required under for the Perlas and Tyra blocks comprising the Concessions
in order for the Company to retain them unless it is successful in obtaining extensions, renewals or the renegotiation of the
entire Concessions Agreements for the Perlas and Tyra blocks.
Minimum
Work Program – Perlas
Block
Perlas – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration (Years)
|
|
Work Commitment
|
|
Relinquishment
|
|
Irrevocable Guarantee
|
|
Sub-Period1
|
|
2
|
|
- Environmental Impact Study - Acquisition & interpretation of 333km of new 2D seismic - Acquisition, processing & interpretation of 667km of new 2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
443,100
|
|
Sub-Period 2 Optional
|
|
1
|
|
- Acquisition, processing & interpretation of 200km2 of 3D seismic
|
|
53km2
|
|
$
|
1,356,227
|
|
Sub-Period 3 Optional
|
|
1
|
|
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is Shallower
|
|
80km2
|
|
$
|
10,220,168
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except areas with discoveries
|
|
$
|
10,397,335
|
|
Minimum
Work Program – Tyra
Block
Tyra – Exploration Minimum Work Commitment and Relinquishments
Exploration
Period (6 Years)
|
|
Duration (Years)
|
|
Work Commitment
|
|
Relinquishment
|
|
Irrevocable Guarantee
|
|
Sub-Period1
|
|
1.5
|
|
- Environmental Impact Study - Acquisition & interpretation of 667km of existing 2D seismic - Acquisition of 667km of new 2D seismic (or equivalent in 3D)
|
|
26km2
|
|
$
|
408,450
|
|
Sub-Period 2 Optional
|
|
0.5
|
|
- Processing & interpretation of the 667km 2D seismic (or equivalent in 3D) acquired in the previous sub-period
|
|
40km2
|
|
$
|
278,450
|
|
Sub-Period 3 Optional
|
|
2
|
|
- Acquisition, processing & interpretation of 250km2 of new 3D seismic
|
|
160km2
|
|
$
|
1,818,667
|
|
Sub-Period 4 Optional
|
|
2
|
|
- Drilling of one exploration well to the Cretaceous or 3,500m, whichever is shallower - Geochemical analysis
|
|
All acreage except areas with discoveries
|
|
$
|
10,418,667
|
|
Contractual
and Fiscal Terms
Training
Program
|
|
US
$50,000 per year, per block
|
|
|
|
Area
Fee
|
|
Years
1-3
|
|
$
|
0.05/hectare
|
|
|
|
Years
4-7
|
|
$
|
0.10/hectare
|
|
|
|
Years
8 & forward
|
|
$
|
0.15/hectare
|
|
Royalties
|
|
Recovery
Factor 0 – 1.5
|
|
|
Percentage
5
|
%
|
|
|
1.5
– 3.0
|
|
|
10
|
%
|
|
|
>3.0
|
|
|
15
|
%
|
|
|
|
|
|
|
|
Natural
Gas Royalties
|
|
Market
value at production
|
|
|
5
|
%
|
Corporate
Tax
|
|
Rate
no higher than 30%
|
|
|
|
|
Social
Contribution
|
|
3%
of the net profit (1.5% for each
autonomous region)
|
|
|
|
|
Investment
Protection
|
|
ICSID
arbitration OPIC insurance
|
|
|
|
|
Revenue
Sharing Commitments
On
March 23, 2009, the Company entered into a Securities Purchase Agreement, dated effective as of March 23, 2009, with Offshore
Finance, LLC, an accredited investor, to issue a subordinated promissory note in the aggregate principal amount of up to $1,275,000
and a one percent (1%) revenue sharing interest in the Nicaraguan Concessions. Off-Shore funded a total of $1,275,000 and subsequently
converted the subordinated promissory note to common stock.
Under
the Revenue Sharing Agreement (the “Revenue Agreement”), Infinity assigned to Off-Shore a monthly payment (the “RSP”)
equal to the revenue derived from one percent (1%) of Infinity’s share of the hydrocarbons produced at the wellhead from
the Nicaraguan Concessions. The RSP will bear its proportionate share of all costs incurred to deliver the hydrocarbons to the
point of sale to an unaffiliated purchaser, including its share of production, severance and similar taxes, and certain additional
costs. The RSP will be paid to Off-Shore by the last day of each month based on the revenue received by Infinity from the purchaser
of the production during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation
for Infinity to maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for
Off-Shore. In connection with its dissolution Off-Shore assigned its RSP to its individual members.
On
June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs.
The
RSP shall be paid by the last day of each month based on the revenue received by Infinity from the purchaser of the production
during the previous month from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to
maintain or develop the Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for officers and
directors.
The
Company intends to seek joint venture or working interest partners (the “Farmout”) prior to the commencement of any
exploratory drilling operations on the Nicaraguan Concessions. On September 8, 2009 the Company entered into a Revenue Sharing
Agreement with Jeff Roberts to assist the Company with its technical studies of gas and oil holdings in Nicaragua and managing
and assisting in the Farmout. Infinity assigned to Jeff Roberts a monthly payment equal to the revenue derived from one percent
(1%) of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear
its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including
its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid to Jeff Roberts by the
last day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month
from the Nicaraguan Concessions. The Revenue Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions, and does not create any rights in the Nicaraguan Concessions for Jeff Roberts.
In
connection with the extension of the December 2013 Note with a $1,050,000 principal balance issued in December 2013, the Company
entered into a Revenue Sharing Agreement in May 2014. Infinity assigned to the note holder a monthly payment equal to the revenue
derived from one percent (1%) of 8/8ths of Infinity’s share of the hydrocarbons produced at the wellhead from the Nicaraguan
Concessions and any other oil and gas concessions that the Company and its affiliates may acquire in the future. The RSP will
bear its proportionate share of all costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser,
including its share of production, severance and similar taxes, and certain additional costs. The RSP shall be paid by the last
day of each month based on the revenue received by Infinity from the purchaser of the production during the previous month from
the Nicaraguan Concessions. The Revenue Sharing Agreement does not create any obligation for Infinity to maintain or develop the
Nicaraguan Concessions.
Lack
of Compliance with Law Regarding Domestic Properties
Infinity
has not been in compliance with existing federal, state and local laws, rules and regulations for its previously owned domestic
oil and gas properties and this could have a material or significantly adverse effect upon the liquidity, capital expenditures,
earnings or competitive position of Infinity. All domestic oil and gas properties held by Infinity – Wyoming and Infinity-Texas
were disposed of well prior to March 31, 2019; however, the Company may remain liable for certain asset retirement costs should
the new owners not complete their obligations. Management believes the total asset retirement obligations recorded of $1,716,003
as of March 31, 2019 and December 31, 2018 are sufficient to cover any potential noncompliance liabilities relative to the plugging
of abandoned wells, the removal of facilities and equipment, and site restoration on oil and gas properties for its former oil
and gas properties. The Company has not maintained insurance on the domestic properties for a number of years nor has it owned/produced
any oil & gas properties for a number of years.
Litigation
The
Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s
failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying condensed
financial statements.
The
Company is currently involved in litigation as follows:
●
|
In
October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas,
seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties.
The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement
that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which
amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss
the matter.
|
|
|
|
Pending
satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential
liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company.
Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates
that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas
operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included
in the asset retirement obligation on the accompanying condensed balance sheets.
|
|
|
●
|
Cambrian
Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719,
on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided
for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions.
Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has
claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the
Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as
a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources
to do so.
|
|
|
●
|
Torrey
Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment
of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered
into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000
per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic
renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000
and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing
the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that
the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock
in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions
and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded
Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of March 31, 2019 and December
31, 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute.
|
Note
9 – Related Party Transactions
The
Company does not have any employees other than the CEO and CFO. In previous years, certain general and administrative services
(for which payment is deferred) had been provided by the CFO’s accounting firm at its standard billing rates plus out-of-pocket
expenses consisting primarily of accounting, tax and other administrative fees. The Company no longer utilizes the CFO’s
accounting for such support services and was not billed for any such services during the three months ended March 31, 2019 and
2018. The amount due to the CFO’s firm for services previously provided was $762,407 at March 31, 2019 and December 31,
2018, and is included in accrued liabilities at both dates.
On
June 6, 2009, the Company entered into a Revenue Sharing Agreement with the officers and directors for services provided. Infinity
assigned to officers and directors a monthly payment equal to the revenue derived from one percent (1%) of Infinity’s share
of the hydrocarbons produced at the wellhead from the Nicaraguan Concessions. The RSP will bear its proportionate share of all
costs incurred to deliver the hydrocarbons to the point of sale to an unaffiliated purchaser, including its share of production,
severance and similar taxes, and certain additional costs. The RSP shall be paid by the last day of each month based on the revenue
received by Infinity from the purchaser of the production during the previous month from the Nicaraguan Concessions. The Revenue
Agreement does not create any obligation for Infinity to maintain or develop the Nicaraguan Concessions and does not create any
rights in the Nicaraguan Concessions for officers and directors.
In
connection with its subordinated loan, Offshore Finance, LLC was granted a one percent (1%) revenue sharing interest in the Nicaraguan
Concessions in connection with a subordinated loan provided previously which was subsequently converted to common stock. The managing
partner of Offshore and the Company’s CFO are partners in the accounting firm which the Company used for general corporate
purposes in the past. In connection with its dissolution, Offshore assigned its RSP to its individual members, which includes
the former managing partner of Offshore.
As
of March 31, 2019 and December 31, 2018, the Company had accrued compensation to its officers and directors of $1,829,208. The
Board of Directors authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Note
10
–
Subsequent Events
The
Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The
Company continues to attempt to negotiate extensions, waivers or a new Concession agreement with the Nicaraguan Government; however,
there can be no assurance that the Company will be successful in that regard. The Company is pursuing meetings with Nicaraguan
Government officials to address the pending defaults; however, the political situation in Nicaragua has complicated this task.
The
Company has not resolved the contingencies regarding its various notes payable related to their default status as described in
Notes 2 and 3. The Company continues to pursue resolutions of these defaults including to negotiate extensions, waivers or new
note agreements; however, there can be no assurance that the Company will be successful in that regard.
During
April and May 2019, the Company borrowed an additional $50,500 from the same private third party lender who
previously loaned the Company $13,125 under an unsecured promissory note which is convertible at a rate of $0.50 per share.
The note is due on demand and bears interest at 8% per annum.
**********************