UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
Or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission file number: 0-17204
Infinity Energy Resources, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3126427 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 11900 College Blvd., Suite 310 | ||
| Overland Park, KS | 66210 | |
| (Address of principal executive offices) | (Zip Code) |
(913) 948-9512
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| Common Stock, $0.0001 par value | IFNY | Over-the-Counter QB Tier Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 30, 2019, the aggregate market value of the Registrant’s common equity held by non-affiliates, computed by reference to the closing price on June 30, 2019 ($0.09 per share) was $744,560.
The number of shares of our common stock outstanding as of May 13, 2020 is 12,310,733.
Documents incorporated by reference: None
Table of Contents
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Note Regarding Forward Looking Statements
This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included in this report.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this annual report on Form 10-K to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law.
As used in this annual report, “Infinity,” the “Company,” “we,” “us” and “our” refer collectively to Infinity Energy Resources, Inc., its predecessors and subsidiaries or one or more of them as the context may require.
DESCRIPTION OF BUSINESS
COVID – 19 Pandemic
The financial statements contained in this Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of December 31, 2019. Since that date, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures and the reluctance of individuals to leave their homes as a result of the outbreak of the coronavirus (Covid-19) and this may limit access to our management, support staff and professional advisors. In particular, the oil and gas market has been severely impacted by the negative effects of the coronavirus because of the substantial and abrupt decrease in the demand for oil and gas globally. In addition, the capital markets have been disrupted and our efforts to raise necessary capital will likely be adversely impacted by the outbreak of the virus and we cannot forecast with any certainty when the disruptions caused by it will cease to impact our business and the results of our operations. In reading this report on Form 10-K, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the outbreak of Covid-19. These factors may not only impact our operations, financial condition and our ability to raise capital to support our operations but our overall ability to react timely to mitigate the impact of this event. Furthermore, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
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Because the Company did not file an 8-K in order to rely on the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder dated March 4, 2020 (Release No. 34-88318) (the “Order”) to extend its due date for 45 days, without further modification of that Order or an appeal directly to the Commission, the Company’s Report may not be considered timely. The Company is and will use all available resources to file its Report as expeditiously as it is able under the circumstances.
Overview
Since 2009 we had planned to pursue the exploration of potential oil and gas resources in the United States and 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 have abandoned our efforts relating to the Concessions, as explained below.
We also began assessing various opportunities and 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. As a result, on July 31, 2019 we acquired an option (the “Option”) from Core Energy, LLC, a closely held company (“Core”), to purchase the production and mineral rights/leasehold for oil & gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”). We paid a nonrefundable deposit of $50,000 to bind the purchase option, which provided us the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the Option prior to December 31, 2019 and the parties are negotiating an extension of such option and a lower purchase price. There can be no assurance that the parties will be able to do so, especially in light of recent events relating to the coronavirus pandemic and its impact on the oil and gas industry.
If completed, the purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand zone with an approximate depth of 3,600 feet.
We intend to complete the acquisition of the Properties prior to the end of 2020, subject to a renegotiation of terms, obtaining adequate financing and the continuing impact of Covid-19. The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such a sale occurs, we would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide us a first right of refusal to acquire such asset.
We must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying our 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 exercise the Option.
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.
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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.
We relied on raising debt and equity capital to fund our ongoing maintenance/expenditure obligations under the Nicaraguan Concession, our day-to-day operations and corporate overhead because we have 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 three other notes payable with principal balances of $104,125 as of December 31, 2019 are now either due on demand or currently in default. We had been seeking resolutions to these defaults, including extensions of the maturity date for these notes payable; however, there can be no assurance that we 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 December 31, 2019. The Company had been 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; however, the political climate and domestic issues, as well other factors, caused the Company to abandon such efforts and the Concessions in 2020.
The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the (i) acquisition of the Properties under the Option; (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 2020.
The Company is seeking new sources of debt and equity capital to fund the needs enumerated above. The Company is attempting to obtain extensions of the maturity dates for its debt or compromises of the debt. In addition, the Company will seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. The Company has restructured certain obligations that were in default during 2019; however, there can be no assurance that it will be able to obtain such funding, extensions or additional restructurings or on what terms.
Business Strategy
Corporate Activities
During the year ended December 31, 2019, the Company has raised $142,500 in cash through a private placement of 1,425,000 shares of common stock. It used the proceeds to pay the $50,000 nonrefundable deposit Option to acquire the Properties and for general working capital purposes. The Company plans to continue to raise debt and equity capital in order to meet its contractual obligations, in particular to acquire the Properties and to resolve the December 2013 Note.
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The Company focused on resolving its outstanding obligations that are in default in 2019 and in that regard has entered into exchange agreements with several holders of such obligations. The Company completed exchange agreements with the holders of the: (i) Senior Secured Convertible Note with a principal balance of $2,197,231 and related warrant to purchase 1,800,000 shares of common stock; (ii) notes payable with a principal balance of $240,000; and (iii) the warrants to purchase 240,000 shares of common stock issued to the placement agent of the Senior Secured Convertible Note. These obligations were extinguished and exchanged for the issuance of common stock and new warrants to purchase common stock. These were important developments which resolved obligations that were in default without involving the payment of cash. In addition, the Company recorded a gain of $2,445,700 during the year ended December 31, 2019 as a result of the exchange transactions.
In addition, the Company entered into term sheets with two entities that further the Company’s 2019 objectives to resolve obligations in default and to acquire the Properties.
On July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies regarding the December 2013 Note through an exchange agreement.
On July 31, 2019 the Company acquired the Option from Core to purchase the production and mineral rights/leasehold for the Properties, as noted above.
The Company has not resolved the contingencies regarding its various notes payable with an outstanding principal balance of $1,104,125 as of December 31, 2019 related to their default status. 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.
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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.
Costs incurred during the year ended December 31, 2019 in connection with the Company’s oil and gas acquisition, exploration and development activities are shown below.
Year ended December 31, 2019 | ||||
| Property acquisition costs: | ||||
| Proved | $ | — | ||
| Unproved | ||||
| Total property acquisition costs | — | |||
| Development costs | — | |||
| Exploration costs | 77,784 | |||
| Total costs | $ | 77,784 | ||
Exploration costs during the year ended December 31, 2019 primarily related to area Concession and training fees which are accrued to be paid to the Nicaraguan Government for 2019. All costs related to the Nicaraguan Concessions have been expensed as incurred during the year ended December 31, 2019 as the Concessions were in default status and the Nicaraguan Concession assets were considered to be impaired and fully reserved as of December 31, 2019 and 2018. In addition to the above described expenditures, during 2019 the Company acquired an option to purchase a domestic oil producing property for $50,000 and also funded mineral lease extensions of $26,415 for the underlying properties. Such deposit and payments made for lease extensions have been expensed as of December 31, 2019 as the option expired.
Aggregate capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion, impairment and amortization are as follows (excluding the deposit and other expenditures for the domestic oil producing property):
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Proved oil and gas properties | $ | — | $ | — | ||||
| Unproved oil and gas properties | 11,254,557 | 11,176,773 | ||||||
| Total | 11,254,557 | 11,176,773 | ||||||
| Less amounts allocated to revenue sharing interest granted to Note holder for extension of maturity date (See Note 3) | (964,738 | ) | (964,738 | ) | ||||
| Less accumulated impairment charge on oil and gas properties as of December 31, 2015 | (9,720,666 | ) | (9,720,666 | ) | ||||
| Less amounts charged directly to operations since January 1, 2016 | (569,153 | ) | (491,369 | ) | ||||
| Less accumulated depreciation, depletion and amortization | — | — | ||||||
| Net capitalized costs | $ | — | $ | — | ||||
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Management has performed its impairment tests on its oil and gas properties as of December 31, 2019 and 2018, has concluded that a full impairment reserve should be provided on the costs capitalized for its unproved oil and gas properties consisting solely of the Nicaraguan Concessions. Therefore, an impairment charge of $9,720,666 was charged to operations during the year ended December 31, 2015 which reduced the carrying amount of oil and gas properties to zero. The Nicaraguan Concessions remained fully impaired as of December 31, 2019 and 2018. The Company has abandoned the development of the Nicaraguan Concessions.
Competition
We compete in virtually all facets of our businesses with numerous other companies in the oil and gas industry, including many that have significantly greater financial and other resources. Such competitors will be able to pay more for desirable oil and gas leases and to evaluate, bid for, and purchase a greater number of properties than our financial or personnel resources permit.
Our business strategy includes highly competitive oil and natural gas exploration, development and production. We face intense competition from a large number of independent exploration and development companies as well as major oil and gas companies in a number of areas such as obtaining the capital necessary to pursue our Nicaraguan Concessions and seeking to acquire the services, equipment, labor and materials necessary to explore, operate and develop those properties. Most of our competitors have financial and technological resources substantially exceeding those available to us. We cannot be sure that we will be successful in developing and operating profitable the Concessions in the face of this competition.
Government Regulation of the Oil and Gas Industry
General
Our business is affected by numerous laws and regulations, including, among others, laws and regulations relating to energy, environment, conservation and tax. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and/or criminal penalties, the imposition of injunctive relief or both. Moreover, changes in any of these laws and regulations could have a material adverse effect on our business. In view of the many uncertainties with respect to current and future laws and regulations, including their applicability to us, we cannot predict the overall effect of such laws and regulations on our future operations.
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The following discussion contains summaries of certain laws and regulations and is qualified as mentioned above.
Environmental and Land Use Regulation
Various federal, state and local laws and regulations relating to the protection of the environment affect our operations and costs. The areas affected include:
| ● | unit production expenses primarily related to the control and limitation of air emissions, spill prevention and the disposal of produced water; |
| ● | capital costs to drill development wells resulting from expenses primarily related to the management and disposal of drilling fluids and other oil and natural gas exploration wastes; |
| ● | capital costs to construct, maintain and upgrade equipment and facilities; |
| ● | operational costs associated with ongoing compliance and monitoring activities; and |
| ● | exit costs for operations that we are responsible for closing, including costs for dismantling and abandoning wells and remediating environmental impacts. |
The environmental and land use laws and regulations affecting oil and natural gas operations have been changed frequently in the past, and in general, these changes have imposed more stringent requirements that increase operating costs and/or require capital expenditures to remain in compliance. Failure to comply with these requirements can result in civil and/or criminal fines and liability for non-compliance, clean-up costs and other environmental damages. It is also possible that unanticipated developments or changes in law could cause us to make environmental expenditures significantly greater than those we currently expect.
The following is a summary discussion of the framework of key environmental and land use regulations and requirements affecting oil and natural gas exploration, development, production and transportation operations.
Operating Hazards and Insurance
The oil and natural gas business involves a variety of operating risks. We were unable to maintain insurance against such potential risks and losses.
In addition, pollution and environmental risks are not insured. If a significant accident or other event occurs not covered by insurance, it could adversely affect us.
Employees
We have three employees, our CEO, COO and CFO, whose salaries have been deferred. We also use outside contractors to perform services.
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Not applicable.
Item 1B. Unresolved Staff Comments.
None.
This section contains an explanation and detail of some of the relevant project groupings from our overall inventory of projects and prospects. Our sole focus in previous years has been our Nicaraguan Concessions, which are located in the Caribbean Sea, offshore Nicaragua, which project we have abandoned. During 2019 we began implementing our strategy to acquire and develop oil producing properties in the continental United States. In that regard, we acquired an option to acquire oil and gas leases in central Kansas on approximately 11,000 acres (the “Properties”).
Kansas Properties
On July 31, 2019 the Company acquired the Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gives it the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are currently negotiating an extension and repricing of the purchase price under such Option. There can be no assurance that the parties will negotiate an extension particularly in light of recent events including the coronavirus pandemic and its impact on the oil and gas industry.
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The Company intends to complete the acquisition of the Properties prior to the end of 2020, subject to successfully renegotiating of the terms, obtaining adequate financing and the continuing impact of Covid-19. The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to its exercise of the Option. If such a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide the Company a first right of refusal to acquire such asset.
Proved Reserves Reporting
We had no proved reserves as of December 31, 2019 and 2018.
Production, Prices and Production Costs
We had no production during the years ended December 31, 2019 or 2018.
Development, Exploration and Acquisition Capital Expenditures
The following table sets forth certain information regarding the costs we incurred in the purchase of proved and unproved properties and in development and exploration activities in Nicaragua:
| 2019 | 2018 | |||||||
| Property acquisition costs: | ||||||||
| Proved | $ | — | $ | — | ||||
| Unproved | — | |||||||
| Total property acquisition costs | — | — | ||||||
| Development costs | — | — | ||||||
| Exploration costs | 77,784 | 155,584 | ||||||
| Total costs | $ | 77,784 | $ | 155,584 | ||||
Exploration costs during the year ended December 31, 2019 primarily related to area concession and training fees to be paid to the Nicaraguan Government for 2019. In addition to the $77,784 expenses described above, the Company expensed all of the costs related to the option to purchase the Kansas oil and gas properties totaling $76,415 which expired on December 31, 2019. The Company expensed all costs related to the Kansas Oil and Gas option upon its expiration although the Company continues to negotiate an extension and revision of the option to acquire the Kansas oil and gas. All costs related to the Nicaraguan Concessions have been expensed as incurred during the year ended December 31, 2019 as the Concessions were in default status and the Nicaraguan Concession assets were considered to be impaired and fully reserved as of December 31, 2019 and 2018.
There were no development, exploration or acquisition costs incurred during 2019 and 2018 on our domestic properties.
Drilling Activity
We had no drilling activity during the years ended December 31, 2019 or 2018.
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Acreage Data
The following table sets forth the gross and net acres of developed and undeveloped oil and gas leases we held as of December 31, 2019.
| Developed Acreage | Undeveloped Acreage | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Onshore U.S. | — | — | — | — | ||||||||||||
| Offshore Nicaragua | — | — | 1,386,000 | 1,386,000 | ||||||||||||
| Total | — | — | 1,386,000 | 1,386,000 | ||||||||||||
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 occur, these liabilities are the obligations of the Company. Management estimates that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included in the asset retirement obligation on the accompanying balance sheets. | |
| ● | Cambrian Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719, on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources to do so. |
| ● | Torrey Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000 per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000 and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of December 31, 2019 and 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Principal Market and Price Range of Common Stock
Infinity’s common stock trades on the Over-the-Counter QB Tier Market (OTCQB) under the symbol “IFNY” The following table sets forth the high and low closing bid prices for Infinity’s common stock as reported by the OTCQB. The closing price of the common stock on May 13, 2020 was $0.0286 per share. The quotations reflect interdealer bid prices without retail markup, markdown or commission and may not represent actual transactions.
| Year Ended December 31, 2019 | High | Low | ||||||
| 1st Quarter | $ | 0.19 | $ | 0.08 | ||||
| 2nd Quarter | $ | 0.19 | $ | 0.05 | ||||
| 3rd Quarter | $ | 0.20 | $ | 0.07 | ||||
| 4th Quarter | $ | 0.08 | $ | 0.04 | ||||
| Year Ended December 31, 2018 | High | Low | ||||||
| 1st Quarter | $ | 0.10 | $ | 0.06 | ||||
| 2nd Quarter | $ | 0.08 | $ | 0.05 | ||||
| 3rd Quarter | $ | 0.15 | $ | 0.05 | ||||
| 4th Quarter | $ | 0.10 | $ | 0.04 | ||||
Reverse Stock Split
In November 2015, the Company filed an amendment to its Certificate of Incorporation to effect a one-for-ten reverse stock split of its issued and outstanding shares of common stock. Its authorized shares and par value per share remain unchanged. All common stock share and per share information in this Annual Report, including the above table reflecting the range of closing prices for the Company’s common stock, have been adjusted to reflect retroactive application of the reverse split, unless otherwise indicated.
Holders of Common Stock
At December 31, 2019, there were approximately 153 stockholders of record of our common stock.
Dividend Policy
Holders of common stock are entitled to receive such dividends as may be declared by our Board of Directors. We have not declared or paid and do not anticipate declaring or paying any dividends on our common stock in the near future. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and such other factors as the board deems relevant.
Securities Authorized for Issuance under Equity Compensation Plans
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 2005 and 2006 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.
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At the Annual Meeting of Stockholders held on September 25, 2015 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. No stock options or restricted stock has been issued under the 2015 Plan as of December 31, 2019.
As of December 31, 2019, 500,000 shares were available for future grants under the 2015 Plan as all other Plans have now expired.
The following table sets forth certain information regarding our stock option plans as of December 31, 2019:
| Number
of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
||||||||
| Plan category | (a) | (b) | (c) | |||||||
| Equity compensation plans approved by stockholders | — | $ | — | 500,000 | ||||||
| Option grants not issued under a plan approved by stockholders | 332,000 | 41.86 | n/a | |||||||
| Total | 332,000 | $ | 41.86 | 500,000 | ||||||
Recent Issuances of Unregistered Securities
During the year ended December 31, 2019, the Company conducted the following unregistered sales of securities:
| ● | From August 20, 2019 through November 6, 2019 the Company issued 1,425,000 shares of common stock in private placement transactions. The shares were issued at $0.10 per share and raised $142,500 in funds which was used to acquire the deposit on the Properties and for other general corporate purposes. The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder in issuing the shares of Common Stock in the private placement. It paid no commission or other similar compensation in connection with the transactions. | |
| ● | On May 23, 2019, the Company and the Investor agreed to an omnibus resolution to outstanding obligations, as described in to the Financial Statements and entered into the Exchange Agreement and Side-Letter Agreement providing for the issuance of 770,485 fully paid and nonassessable shares of Common Stock and Rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional shares of Common Stock. See Note 2, “Secured Convertible Note Payable,” to the Financial Statements. |
On May 30, 2019, the Company and the Investor entered into Amendment No. 1 to Exchange Agreement (the “Amendment”). Following execution of the Exchange Agreement on May 23, 2019, the Company and the Investor became aware of an inadvertent error regarding the number of shares of Common Stock to be issued to the Investor pursuant to the Exchange Agreement. The Company and the Investor agreed to amend the Exchange Agreement so it reflects the correct number of shares of Common Stock to be issued and to ensure that the Investor does not beneficially own in excess of 9.99% of the shares of Common Stock outstanding immediately following the effective date of the Exchange Agreement. Pursuant to the Amendment, the Company and the Investor agreed that the number of shares of Common Stock to be issued to the Investor would be an aggregate of 605,816 shares, instead of the 770,485 shares stated in the Exchange Agreement.
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Consistent with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
In addition, the Company issued a warrant in May 2015 to purchase 240,000 shares issued as part of the placement fee in connection with the Note. The warrant contained an expiration date of May 7, 2022 and an exercise price of $5.00 per share and is subject to certain price protection and dilution provisions. Such warrant was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions.
On June 4, 2019, the Company entered into an exchange agreement with the warrant holder to extinguish the original warrant including its certain price protection and dilution provisions, for a new warrant to purchase up to 50,000 common shares with a termination date of June 4, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions.
The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder in issuing the shares of Common Stock, the Rights and the warrants. It paid no commission or other similar compensation in connection with the transactions.
| ● | In November 2016, the Company issued a $200,000 convertible promissory note which requires no principal or interest payments until its November 2017 maturity date and bears 8% interest. The proceeds of this note were used to retire the Company’s line-of-credit upon its maturity in November 2016 and for general working capital purposes. This note was not retired at its maturity and was therefore is in default. |
In April 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April 19, 2018 and bears interest at 8% per annum. This note was not retired at its maturity and therefore was in default.
On June 19, 2019, the Company and the holders of these two convertible notes entered into an exchange agreement whereby the two convertible notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. The exchange agreement required the Company to issue the individual a new warrant to purchase up to 570,000 shares of common stock with a termination date of June 19, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions in exchange for the extinguishment of the two convertible notes and related accrued interest. The Black-Scholes valuation of the warrant issued to the holder on June 19, 2019 totaled $62,564.
The Company relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder in issuing the shares of Common Stock, the Rights and the warrants. It paid no commission or other similar compensation in connection with the transactions.
| ● | On April 12, 2019 through August 15, 2019 the Company borrowed $56,000 under an unsecured promissory note with a private third-party lender, which note is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum. Principal of $50,000 was repaid in October 2019. The Company relied on the exemption from registration set forth in Section 4(a)(2) of the Securities Act for issuance of the credit facility. No compensation was paid in connection with the issuance of the note. |
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During the year ended December 31, 2018, the Company conducted the following unregistered sales of securities:
| ● | On May 21, 2018, it borrowed $13,125 under an unsecured promissory note with a private third party lender, which note is convertible at a rate of $0.50 per share. The note is due on demand and bears interest at 8% per annum. The Company relied on the exemption from registration set forth in Section 4(a)(2) of the Securities Act for issuance of the credit facility. No compensation was paid in connection with the issuance of the note. |
Item 6. Selected Financial Data.
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “intends,” and other variations of these words or comparable words. In addition, any statements that refer to expectations, projections or other characterizations of events, circumstances or trends and that do not relate to historical matters are forward-looking statements. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished. The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the risk factors described below.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this report to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law.
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Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) we have a history of losses and are experiencing substantial liquidity problems; (ii) we have substantial obligations to a number of third parties, including but not limited to, our December 2013 promissory note in the original principal amount of $1,050,000 due in April 2016, which is in default, and there can be no assurance that we will be able to meet them; (iii) we require working capital for our operations and obligations for the next 12 months and capital to purchase the Properties, and there can be no assurances we will be able to obtain it or do so on terms favorable to us; (iv) we and our independent registered public accounting firm have concluded that there exists substantial doubt about our ability to continue as a going concern; (v) the purchase and development of the Properties will require large amounts of capital or a commercial relationship with an industry operator that we may not be able to obtain; (vi) the oil and gas market has been severely impacted by the negative effects of the coronavirus because of the substantial and abrupt decrease in the demand for oil and gas globally; (vii) the oil and gas exploration business involves a high degree of business and financial risk; (viii) we are continuing to negotiate with our creditors and may face additional claims in the future; (viii)) any future production will be contingent on successful exploration, development and acquisitions to establish reserves and revenue in the future; (ix) the oil and gas industry is highly competitive; (x) drilling is an uncertain process with many risks; (xi) oil and gas prices are volatile, and declines in prices would hurt our revenues and ability to achieve profitable operations; (xii) our common stock is traded on the OTCQB, which may not have the visibility or liquidity that we seek for our common stock; (xiii) we depend on key personnel; (xiv) sufficient voting power by coalitions of a few of our larger stockholders to make corporate governance decisions that could have a significant effect on us and the other stockholders, including Hudson Bay Master Fund LP and Amegy Bank, NA; (xv) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xvi) possible issuance of common stock subject to options and warrants may dilute the interest of stockholders; (xvii) our nonpayment of dividends and lack of plans to pay dividends in the future; (xviii) future sale or issuance of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xix) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xx) our stock price is likely to be highly volatile due to a number of factors, including a relatively limited public float; (xxi) indemnification of our officers and directors; (xxii) whether we will be able to renegotiate or extend the terms of the Option, and on terms favorable to us, or otherwise maintain our interest in the Option; (xxiii) whether we will obtain an industry or other financial partner to enable us to explore and develop our the Properties if we do obtain extensions or renegotiation of the terms of the Concessions and (xxiv) the ultimate impact of the coronavirus to our business and our ability to raise necessary capital to fund operations and our business plan.
The following information should be read in conjunction with the Financial Statements and Notes presented elsewhere in this annual report on Form 10-K. See Note 1 – “Summary of Significant Accounting Policies,” to the Financial Statements for the Years Ended December 31, 2019 and 2018.
2020 Operational and Financial Objectives
Corporate Activities
During the year ended December 31, 2019, the Company raised $142,500 in cash through a private placement of 1,425,000 shares of common stock. It used the proceeds to pay the $50,000 nonrefundable deposit Option to acquire the Properties and for general working capital purposes. The Company plans to continue to raise debt and equity capital in order to meet its contractual obligations, in particular to acquire the Properties and to resolve the December 2013 Note.
The Company has focused on resolving its outstanding obligations that are in default in 2019 and in that regard has entered into exchange agreements with several holders of such obligations. The Company completed exchange agreements with the holders of the: (i) Senior Secured Convertible Note with a principal balance of $2,197,231 and related warrant to purchase 1,800,000 shares of common stock; (ii) notes payable with a principal balance of $240,000; and (iii) the warrants to purchase 240,000 shares of common stock issued to the placement agent of the Senior Secured Convertible Note. These obligations were extinguished and exchanged for the issuance of common stock and new warrants to purchase common stock. These were important developments which resolved obligations that were in default without involving the payment of cash. In addition, the Company recorded a gain of $2,445,700 during the year ended December 31, 2019 as a result of the exchange transactions.
In addition, the Company entered into term sheets with two entities that further the Company’s 2019 objectives to resolve obligations in default and to acquire the Properties.
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On July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies regarding the December 2013 Note through an exchange agreement.
On July 31, 2019 the Company acquired the Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gives it the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the Option prior to December 31, 2019 and the parties are negotiating an extension and repricing of the purchase price under such Option. There can be no assurance that the parties will negotiate an extension particularly in light of recent events including the coronavirus pandemic and its impact on the oil and gas industry.
The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to its exercise of the Option. If such a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide the Company a first right of refusal to acquire such asset.
The Company has not resolved the contingencies regarding its various notes payable with an outstanding principal balance of $1,104,125 as of December 31, 2019 related to their default status. 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.
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.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
For the Years Ended December 31, 2019 and 2018
Results of Operations
Revenue
The Company had no revenues in either 2019 or 2018 because it focused on the acquisition of domestic oil and gas properties, resulting in its Option for the Properties on July 31, 2019.
Production and Other Operating Expenses (income)
The Company had no production related operating expenses in either 2019 or 2018. The Company sold its investment in Infinity-Texas in July 2012 and held no developed or undeveloped oil and gas properties in the United States in 2019 and 2018.
The Company has no current domestic exploration and development activities.
General and Administrative Expenses
General and administrative expenses of $418,759 for the year ended December 31, 2019 increased $209,818, or 100%, from $208,941 in the same period in 2018. The increase in general and administrative expenses is primarily attributable to stock based compensation expense totaling $186,274 related to the restricted stock granted to our newly appointed COO in 2019, $76,415 in expenses associated with the December 31, 2019 expiration of the Option to acquire the Properties and an increase in audit and legal fees associated with the Company’s regulatory filings with the Securities and Exchange Commission and the exchange agreements finalized in 2019 offset by a $77,798 decrease in Nicaragua Concession related expenses. The restricted stock granted to our new COO will continue be amortized through October 2020.
Interest expense
Interest expense decreased $24,292, or 20.8%, from $116,744 for the year ended December 31, 2018 to $92,452 for the year ended December 31, 2019. The decrease is attributable to the exchange transactions which extinguished the Senior Secured Convertible Note with an approximate principal balance of $2.2 million and short-term notes payable with a principal balance totaling $240,000 during the year ended December 31, 2019. Remaining interest expense is related to various short-term notes outstanding in both periods which have matured and for which the Company was seeking extensions as of December 31, 2019.
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The Company’s current financial condition has made traditional bank loans and customary financing terms unattainable; therefore, the Company will need to continue with these types of short-term borrowings with high effective interest rates.
Gain on exchange and extinguishment of debt and warrant obligations
The gain on exchange and extinguishment of debt and warrant obligations is attributable to exchange transactions which extinguished the Senior Secured Convertible Note with an approximate principal balance of $2.2 million, short term notes payable with a principal balance totaling $240,000 and the warrant to purchase 240,000 shares of common stock issued to a placement agent during the year ended December 31, 2019.
The Company and the holders of these obligations agreed to extinguish the existing obligations (which were in default) in exchange for the issuance of shares of common stock or new warrants to purchase common stock with no price or dilution protection. Upon exchange of the securities the existing obligations were cancelled and both holders signed agreements which released the Company of all obligations related to the old securities. As a result, the Company extinguished such original securities/obligations and recorded the issuance of the new obligations at their fair value on the date of exchange resulting in a total gain of $2,445,700 during the year ended December 31, 2019.
In addition, on July 25, 2019 the Company entered into a non-binding term sheet to enter into an exchange agreement with respect to a note payable with a principal balance of $1.0 million, accrued interest approximating $481,000, a warrant to purchase 100,000 shares of common stock and a revenue sharing agreement for 1% of hydrocarbons produced on the Nicaraguan Concession. If the parties agree to the term sheet, these obligations will be exchanged for the issuance of 740,500 shares of common stock and a cash payment of $100,000. See Note 3, “Debt.”
Change in Fair Value of Secured Convertible Note
The Company issued the Secured Convertible Note in the May 2015 Private Placement and elected to account for and record such Note on a fair value basis. On May 4, 2017, the Investor notified the Company that it elected to affect an Investor Optional Offset under Section 7(a) of the Investor Note of the full $9,490,000 principal amount outstanding under the Investor Note against $9,490,000 in aggregate principal outstanding under the Convertible Note. It did so by surrendering and concurrently cancelling $9,490,000 in aggregate principal of the Convertible Note in exchange for the satisfaction in full and cancellation of the Investor Note. The Convertible Note had an aggregate outstanding principal balance of $11,687,231 as of the date of the exchange. The Investor requested the Company to deliver the Replacement Note representing the remaining principal balance of $2,197,231 to replace the Convertible Note. The Company has recorded the fair value of the Convertible Note assuming that the remaining par value is $2,197,231 as asserted by the Investor at its maturity date in May 2018. The resulting change in the estimated fair value was $150,794 during the year ended December 31, 2018. There was no change in fair value during the year ended December 31, 2019 as the Convertible Note matured in May 2018.
On May 23, 2019 and as amended on May 30, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange Agreement and Side-Letter Agreement as described below:
Exchange Agreement: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued in the May 2015 Private Placement, including: (i) the Convertible Note, subject to the Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231; (ii) the related accrued interest under the Convertible Note, with a balance of $28,643; (iii) the Warrant; (iv) the Security and Pledge Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in connection with the May 2015 Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement, for 605,816 fully paid and nonassessable shares of Common Stock and certain rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional shares of Common Stock.
Upon consummation of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including any rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s ownership of the Original Securities.
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Side-letter Agreement: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement, dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an increase in the Number of Fully-Diluted Shares Outstanding of the Company from the execution date of the Exchange Agreement to the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up Shares, if any, shall provide the Investor with Rights to acquire additional Right Shares to adjust their ownership to 9.99% of the common shares and common share equivalents then outstanding. Any common share equivalents then outstanding and to be issued in conjunction with the Side-Letter Agreement will be issued in like tenor.
Consistent with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
Change in Derivative Fair Value
The conversion feature in certain outstanding promissory notes and common stock purchase warrants issued in connection with short-term notes and the Secured Convertible Note outstanding during 2019 and 2018 are treated as derivative instruments because the promissory notes and warrants contain ratchet and anti-dilution provisions. In addition, the Side-Letter Agreement with Hudson Bay as a result of the Exchange Agreement was considered a derivative and accordingly was marked-to-market until its finalization on November 23, 2019. The mark-to-market process resulted in a loss of $89,714 during the year ended December 31, 2019 and a gain of $38,681 during the year ended December 31, 2018. The loss recognized in the 2019 period is primarily the result of the Side-Letter Agreement derivative issued pursuant to the Hudson Bay exchange agreement. Such side-letter provides anti-dilution protection to Hudson Bay which will likely require the Company to issue common stock and warrants to purchase common stock on its expiration date of November 23, 2019.
Income Tax
The Company recorded no income tax benefit (expense) in the year ended December 31, 2019. The Company has been in a cumulative tax loss position and has substantial net operating loss carryforwards available to it at December 31, 2019. The Company has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense on its income before income taxes during the year ended December 31, 2019.
The Company recorded a tax benefit of $150,000 during the year ended December 31, 2018. The income tax benefit recorded in 2018 is primarily due to the Tax Cuts and Jobs Act (the “Act”) that became law on December 22, 2017. The Act significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in January 2018.
Under the Act, corporations are no longer subject to the AMT, effective for taxable years beginning after December 31, 2017. However, where a corporation has an AMT Credit from a prior taxable year, the corporation still carries it forward and may use a portion of it as a refundable credit in any taxable year beginning after 2017 but before 2022. Generally, 50% of the corporation’s AMT Credit carried forward to one of these years will be claimable and refundable for that year. In tax years beginning in 2021, however, the entire remaining carryforward generally will be refundable. The Company has generated an AMT credit carryforward during prior years totaling $150,000, which previously was reported as income taxes payable on the Company’s balance sheet and the corresponding deferred tax asset was fully reserved based on all available evidence, because the Company considered it more likely than not that all the AMT tax credit carryforward would not be realized. Based on the provisions of the new Act, the Company now considers it more likely than not that all of the AMT tax credit carryforward will be realized. Accordingly, the Company has recognized an income benefit of $150,000 during the year ended December 31, 2018 as it reduced the corresponding income taxes payable to zero as of December 31, 2018.
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For income tax purposes, the Company has net operating loss carry-forwards of approximately $66,950,000 as of December 31, 2019, which expire from 2025 through 2038. The Company has provided a 100% valuation allowance against the resulting deferred tax asset due to the uncertainty of realizing the tax benefits from its net operating loss carry-forwards.
Net income (loss)
As a result of the above, the Company reported net income of $1,844,775 for the year ended December 31, 2019 compared to a net loss of $287,798 for the same period in 2018. This represents an improvement of $2,132,573.
Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing the net 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) 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. In addition, in periods in which there is net income and the effect of including common share equivalents in the diluted per share calculations would be anti-dilutive (such as when the conversion or exercise price of the common share equivalents are higher than the average closing market price per share) such anti-dilutive common share equivalents would also be excluded from the calculation of basic and diluted weighted average shares outstanding.
During the year ended December 31, 2019 all of the common stock equivalents outstanding were anti-dilutive as their respective conversion or exercise prices were higher than the average closing market price per share during the period. Therefore, all of the common stock equivalents outstanding during the year ended December 31, 2019 were excluded from the diluted weighted average shares outstanding and diluted income per share calculations. The basic and diluted net income per share was $0.20 for the year ended December 31, 2019 the basic and diluted loss per share was $0.04 for the year ended December 31, 2018 for the reasons previously noted. Potential shares of common stock as of December 31, 2019 that have been excluded from the computation of diluted net income (loss) per share amounted to 1,278,943 shares, which included 946,943 outstanding warrants and 332,000 outstanding stock options.
Liquidity and Capital Resources; Going Concern
We have had a history of losses and have generated little or no operating revenues for a number of years as we concentrated on development of our Nicaraguan Concessions, which is a long-term, high-risk/reward exploration project in an otherwise unproven part of the world. Historically, we financed our operations through the issuance of equity and various short and long-term debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation.
Private Placement of Common Stock
During the year December 31, 2019, the Company has raised $142,500 in cash through a private placement of 1,425,000 shares of common stock. It used the proceeds to pay the $50,000 nonrefundable deposit for the Option relating to the Properties and for general working capital purposes.
Senior Secured Convertible Note
On May 7, 2015, the Company completed the private placement (the “May 2015 Private Placement”) of a $12.0 million principal amount Secured Convertible Note (the “Note”) and a common stock purchase warrant to purchase 1,800,000 shares of the Company’s common stock (the “Warrant”) with an institutional investor (the “Investor”). At the closing, the Investor acquired the Note by paying $450,000 in cash and issuing a promissory note, secured by cash, with a principal amount of $9,550,000 (the “Investor Note”).
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On May 23, 2019 and as amended on May 30, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange Agreement and Side-Letter Agreement as described in Note 3, “Debt.”
Short-Term Notes Extinguished
In November 2016, the Company issued a $200,000 convertible promissory note which requires no principal or interest payments until its November 2017 maturity date and bears 8% interest. The proceeds of this note were used to retire the Company’s line-of-credit upon its maturity in November 2016 and for general working capital purposes. This note was not retired at its maturity and was therefore in default.
In April 2017, the Company borrowed $40,000 under an unsecured credit facility with a private, third-party lender which is convertible at a rate of $5.00 per share. The note required no principal or interest payments until its maturity date of April 19, 2018 and bears interest at 8% per annum. This note was not retired at its maturity and therefore was in default.
On June 19, 2019, the Company and the holders of these two convertible notes entered into an exchange agreement whereby the two convertible notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. The exchange agreement required the Company to issue the individual a new warrant to purchase up to 570,000 shares of common stock with a termination date of June 19, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions in exchange for the extinguishment of the two convertible notes and related accrued interest.
Short-Term Notes Outstanding
On July 7, 2015 and July 15, 2015, the Company borrowed a total of $85,000 from two individuals under convertible notes payable with the conversion rate of $5.60 per share. The original terms of the notes were for a period of 90 days and the notes bore interest at 8% per annum. In connection with the notes, the Company issued warrants for the purchase of a total of 34,000 shares of common stock at $5.60 per share for a period of five years from the date of their issuance. The notes were not paid at maturity and now are in default. The Company is attempting to negotiate a resolution to the default, but there can be no assurance that it will be successful in that regard.
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. During 2019 the Company borrowed an additional $56,000 from this same third-party lender under the same terms. In addition, during October 2019 we repaid $50,000 of principal on this note. The note is due on demand and bears interest at 8% per annum.
In summary, as of December 31, 2019, the following debt was outstanding: (i) the two promissory notes in the total principal amount of $85,000, which matured in October 2016 and are in default; (ii) the December 2013 Note in the principal amount of $1,000,000, which was due in April 2016 and is in default for which the Company has entered into a term sheet to resolve the default and extinguish the obligation; and (iii) $19,125 convertible promissory note, which is due on demand.
Capital Expenditures
On July 31, 2019 the Company acquired the Option to purchase the Properties. The Company paid the required nonrefundable $50,000 deposit which was required to bind the Option to acquire the Properties for $2.5 million by December 31, 2019 to complete the transaction. In addition, the Company funded lease extensions underlying the Option which totaled $26,415. We were unable to close on the Option prior to December 31, 2019 and the parties are negotiating an extension and repricing. There can be no assurance that it will be able to do so or obtain the required financing or obtain it on terms favorable to the Company or its shareholders to acquire the Properties. Accordingly, all costs associated with the option to acquire the Properties was expensed upon expiration of the option on December 31, 2019.
| 23 |
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. The Company has been successful in restructuring certain obligations that were in default during 2019. However, there can be no assurance that it will be able to obtain additional funding, extensions or restructurings or on 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.
Inflation and Seasonality
Inflation has not materially affected us during the past fiscal year. We do not believe that our business is seasonal in nature.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
| 24 |
Infinity Energy Resources, Inc.
Financial Statements and Accompanying Notes
December 31, 2019 and 2018
Table of Contents
| 25 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors ad Stockholders of
Infinity Energy Resources, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Infinity Energy Resources, Inc. (the “Company”) as of December 31, 2019 and 2018, and the related statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Substantial doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the accompanying financial statements, the Company has suffered recurring losses, has no on-going operations, is in default of its obligations under the Nicaraguan oil and gas concessions and has a significant working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
New York, New York
May 14, 2020
| F-1 |
INFINITY ENERGY RESOURCES, INC.
Balance Sheets
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,785 | $ | 1,367 | ||||
| Total current assets | 1,785 | 1,367 | ||||||
| Total assets | $ | 1,785 | $ | 1,367 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,091,453 | $ | 6,040,948 | ||||
| Accrued liabilities (including $788,520 due to related party at December 31, 2019 and 2018) | 3,777,580 | 3,699,747 | ||||||
| Accrued interest | 528,684 | 509,894 | ||||||
| Asset retirement obligations | 1,716,003 | 1,716,003 | ||||||
| Secured convertible note payable-current | — | 2,197,231 | ||||||
| Convertible notes payable-short term | 1,104,125 | 1,338,125 | ||||||
| Total current liabilities | 13,217,845 | 15,501,948 | ||||||
| Derivative liabilities | 1,116 | 65,502 | ||||||
| Total liabilities | 13,218,961 | 15,567,450 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock; par value $.0001 per share, 10,000,000 shares authorized; no shares issued or outstanding as of December 31, 2019 and 2018 | — | — | ||||||
| Common stock, par value $.0001 per share, 75,000,000 shares authorized, 12,310,733 and 7,712,569 shares issued and outstanding at December 31, 2019 and 2018, respectively | 1,231 | 771 | ||||||
| Additional paid-in capital | 109,583,945 | 109,080,273 | ||||||
| Accumulated deficit | (122,802,352 | ) | (124,647,127 | ) | ||||
| Total stockholders’ deficit | (13,217,176 | ) | (15,566,083 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 1,785 | $ | 1,367 | ||||
The accompanying notes are an integral part of these financial statements.
| F-2 |
INFINITY ENERGY RESOURCES, INC.
Statements
of Operations
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating expenses: | ||||||||
| General and administrative expenses | $ | 418,759 | $ | 208,941 | ||||
| Total operating expenses | 418,759 | 208,941 | ||||||
| Operating loss | (418,759 | ) | (208,941 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (92,452 | ) | (116,744 | ) | ||||
| Gain on exchange and extinguishment of debt and warrant obligations | 2,445,700 | — | ||||||
| Change in fair value of secured convertible note payable | — | (150,794 | ) | |||||
| Change in derivative fair value | (89,714 | ) | 38,681 | |||||
| Total other income (expense) | 2,263,534 | (228,857 | ) | |||||
| Income (loss) before income taxes | 1,844,775 | (437,798 | ) | |||||
| Income tax (expense) benefit | — | 150,000 | ||||||
| Net income (loss) | $ | 1,844,775 | $ | (287,798 | ) | |||
| Basic and diluted net income (loss) per share: | ||||||||
| Basic | $ | 0.20 | $ | (0.04 | ) | |||
| Diluted | $ | 0.20 | $ | (0.04 | ) | |||
| Weighted average shares outstanding – basic and diluted | 9,086,265 | 7,712,569 | ||||||
The accompanying notes are an integral part of these financial statements.
| F-3 |
INFINITY ENERGY RESOURCES, INC.
Statements of Stockholders’ Deficit
| Common Stock | Additional Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2017 | 7,712,569 | $ | 771 | $ | 109,080,273 | $ | (124,359,329 | ) | $ | (15,278,285 | ) | |||||||||
| Net loss | — | — | — | (287,798 | ) | (287,798 | ) | |||||||||||||
| Balance, December 31, 2018 | 7,712,569 | 771 | 109,080,273 | (124,647,127 | ) | (15,566,083 | ) | |||||||||||||
| Stock-based compensation | — | — | 186,274 | — | 186,274 | |||||||||||||||
| Issuance of restricted stock | 2,000,000 | 200 | (200 | ) | — | — | ||||||||||||||
| Issuance of common shares pursuant to exchange agreements | 605,816 | 61 | 29,308 | — | 29,369 | |||||||||||||||
| Issuance of common stock purchase warrants pursuant to exchange agreements | — | — | 70,549 | — | 70,549 | |||||||||||||||
| Issuance of common shares pursuant to side-letter agreement | 567,348 | 57 | 68,025 | — | 68,082 | |||||||||||||||
| Issuance of warrants pursuant to side-letter agreement | — | — | 7,358 | — | 7,358 | |||||||||||||||
| Issuance of common stock pursuant Private Placement | 1,425,000 | 142 | 142,358 | — | 142,500 | |||||||||||||||
| Net income | — | — | — | 1,844,775 | 1,844,775 | |||||||||||||||
| Balance, December 31, 2019 | 12,310,733 | $ | 1,231 | $ | 109,583,945 | $ | (122,802,352 | ) | $ | (13,217,176 | ) | |||||||||
See accompanying notes are an integral part of these financial statements.
| F-4 |
INFINITY ENERGY RESOURCES, INC.
Statements of Cash Flows
For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 1,844,775 | $ | (287,798 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in fair value of derivative liability | 89,714 | (38,681 | ) | |||||
| Change in fair value of senior convertible note | — | 150,794 | ||||||
| Gain on exchange of debt and warrant obligations | (2,445,700 | ) | — | |||||
| Stock based compensation | 186,274 | — | ||||||
| Write-off of oil and gas property purchase option costs | 76,415 | — | ||||||
| Change in operations assets and liabilities: | ||||||||
| Decrease in income taxes payable | — | (150,000 | ) | |||||
| Increase in accounts payable | 6,569 | 35,543 | ||||||
| Increase in accrued liabilities | 77,833 | 155,386 | ||||||
| Increase in accrued interest | 92,453 | 116,743 | ||||||
| Net cash used in operating activities | (71,667 | ) | (18,013 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Deposit on purchase of oil and gas properties | (76,415 | ) | — | |||||
| Net cash used in investing activities | (76,415 | ) | — | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from private placement of common stock | 142,500 | — | ||||||
| Proceeds from issuance of convertible note payable | 56,000 | 13,125 | ||||||
| Repayment of convertible note payable | (50,000 | ) | — | |||||
| Net cash provided by financing activities | 148,500 | 13,125 | ||||||
| Net increase (decrease) in cash and cash equivalents | 418 | (4,888 | ) | |||||
| Cash and cash equivalents: | ||||||||
| Beginning | 1,367 | 6,255 | ||||||
| Ending | $ | 1,785 | $ | 1,367 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | — | $ | — | ||||
| Cash paid for taxes | $ | — | $ | — | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Exchange of secured convertible note payable | $ | 2,197,231 | $ | — | ||||
| Exchange of convertible notes payable - short term | $ | 240,000 | $ | — | ||||
| Issuance of common shares pursuant to exchange agreements | $ | 97,451 | $ | — | ||||
| Issuance of common stock purchase warrants pursuant to exchange agreements | $ | 77,907 | $ | — | ||||
| Issuance of shares of restricted common stock | $ | 200 | $ | — | ||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
INFINITY ENERGY RESOURCES, INC.
Notes to Financial Statements
December 31, 2019
(unaudited)
Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Since 2009 we had planned to pursue the exploration of potential oil and gas resources in the United States and 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 also began assessing various opportunities and 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. As a result, on July 31, 2019 we acquired an option (the “Option”) from Core Energy, LLC, a closely held company (“Core”), to purchase the production and mineral rights/leasehold for oil & gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”). We paid a nonrefundable deposit of $50,000 to bind the purchase option, which provided us the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are currently negotiating an extension of such Option and lowering the purchase price of the Properties. There can be no assurance that the parties will negotiate an extension particularly in light of recent events including the coronavirus pandemic and its impact on the oil and gas industry.
If the parties agree to extend, reprice or otherwise complete the acquisition, the purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand zone with an approximate depth of 3,600 feet.
We intend to complete the acquisition of the Properties prior to the end of 2020, subject to successful renegotiations and obtaining adequate financing. The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such a sale occurs, we would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide us a first right of refusal to acquire such asset.
We must obtain new sources of debt and/or equity capital to fund the substantial needs enumerated above, as well as satisfying our 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 exercise the Option.
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.
| F-6 |
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.
We relied on raising debt and equity capital to fund our ongoing maintenance/expenditure obligations under the Nicaraguan Concession, our day-to-day operations and corporate overhead because we have 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 three other notes payable with principal balances of $104,125 as of December 31, 2019 are now either due on demand or currently in default. In 2020 we abandoned the Concessions.
Going Concern
The Company must raise substantial amounts of debt and equity capital from other sources in the immediate future in order to fund the (i) acquisition of the Properties under the Option; (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 2020.
The Company is seeking new sources of debt and equity capital to fund the needs enumerated above. The Company is attempting to obtain extensions of the maturity dates for its debt or compromises of the debt. In addition, the Company will seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. The Company has restructured certain obligations that were in default during 2019; however, there can be no assurance that it will be able to obtain such funding, extensions or additional restructurings or on what terms.
Due to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
| F-7 |
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.
Recently issued accounting pronouncements
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for us for annual periods beginning January 1, 2019. The adoption of the standard had no impact on our financial position or results of operations for the years ended December 31, 2019 and 2018.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASC 842”). The guidance requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. ASC 842 is effective for fiscal years beginning after December 15, 2018. The adoption of the standard had no impact on our financial position or results of operations for the years ended December 31, 2019 and 2018.
The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a material effect on the Company’s financial position, results of operations or cash flows.
Concentrations
The Company’s business plan had consisted of developing the Nicaraguan Concessions in addition to potential domestic oil and gas projects and it may become active in Nicaragua in the future, given sufficient capital and curing the defaults under the Nicaraguan Concessions and its other financial obligations. In 2020 the Company decided not pursue development of the Concessions and has focused on the Option to purchase the Properties.
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 December 31, 2019 and 2018, its policy is 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 will follow 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 will be capitalized. Overhead related to development activities will also be capitalized during the acquisition phase.
| F-8 |
Depletion of proved oil and gas properties will be 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 will be 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 December 31, 2019 and 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 were substantial impediments for the Company to obtain adequate financing to fund the exploration and development of its Nicaraguan Concessions. The Company performed its impairment tests as of December 31, 2019 and 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 December 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 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 December 31, 2019 and 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.
| F-9 |
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 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 December 31, 2019 and 2018 and during the years then ended, the Company had no oil and natural gas derivative arrangements outstanding.
As a result of certain terms, conditions and features included in certain common stock purchase warrants issued by the Company (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. |
| F-10 |
| ● | 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 December 31, 2019 and 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 December 31, 2019 and 2018:
| December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Senior convertible note payable | $ | — | $ | — | $ | — | $ | — | ||||||||
| Derivative liabilities | — | — | 1,116 | 1,116 | ||||||||||||
| $ | — | $ | — | $ | 1,116 | $ | 1,116 | |||||||||
| 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 years ended December 31, 2019 and 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 December 31, 2019 and 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 December 31, 2019. During the year ended December 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.
| F-11 |
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 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 year ended December 31, 2018 as it reduced the corresponding income taxes payable to zero as of December 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 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 December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Secured convertible note payable, at fair value | $ | — | $ | 2,197,231 | ||||
| Less: Current maturities | (2,197,231 | ) | ||||||
| Secured convertible note payable, long-term | $ | — | $ | — | ||||
Following is an analysis of the activity in the Note during the year ended December 31, 2019:
| 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 | — | |||
| Exchange of secured convertible note payable for common stock | (2,197,231 | ) | ||
| Balance at December 31, 2019 | $ | — | ||
| F-12 |
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 received a fee of 6% of cash proceeds, or $600,000, if and when the Company receives the full cash proceeds. It received $27,000 of such amount at the closing. 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 an institutional investor (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 affect 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 had recorded the fair value of the Replacement Note assuming that the remaining par value was $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 was 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 was therefore in technical default. The Replacement Note was to be secured to the same extent as the Convertible Note. The Company and the Investor have negotiated a resolution of these outstanding matters regarding the default status and the issuance of the Replacement Note under the terms of the financing.
On May 23, 2019, the Company and the Investor agreed to an omnibus resolution to these outstanding matters and entered into the Exchange Agreement and Side-Letter Agreement as described below:
Exchange Agreement: Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued in the May 2015 Private Placement (the “Original Securities”), including: (i) the Convertible Note, subject to the Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231; (ii) the related accrued interest under the Convertible Note, with a balance of $28,643; (iii) the Warrant; (iv) the Security and Pledge Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in connection with the May 2015 Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement, for 770,485 fully paid and nonassessable shares of Common Stock and certain rights (the “Rights”) to acquire additional securities in the future, which may be exercised for additional shares of Common Stock.
As a result of the exchange transactions described above, the Investor no longer owns any of the Original Securities, including any rights thereunder, and the Company cancelled the certificate(s) and other physical documentation evidencing the Investor’s ownership of the Original Securities.
Side-letter Agreement: Concurrent with the Exchange Agreement, the Company and the Investor also entered into a letter agreement, dated May 23, 2019 (the “Side-Letter Agreement”). The Side-Letter Agreement provides that on November 23, 2019, the Company will, if required under the Side-letter Agreement, issue additional shares of Common Stock to the Investor based on an increase in the Number of Fully-Diluted Shares Outstanding (as defined below) of the Company from the execution date of the Exchange Agreement to the six-month anniversary of the Exchange Agreement (the “True-Up Shares”). The issuance of the True-Up Shares, if any, shall provide the Investor with Rights to acquire additional Right Shares (as defined in the Exchange Agreement) to be calculated according to the following formula:
| ● | A-B= aggregate number of Right Shares |
| F-13 |
| ● | A = 9.99% of shares of Common Stock outstanding on November 23, 2019 (calculated based on the Number of Fully-Diluted Shares Outstanding (as defined below)) | |
| ● | B = The shares of Common Stock Issued to the Investor contemporaneously with the Exchange Agreement |
For the purposes of the Side-Letter Agreement, “Number of Fully-Diluted Shares Outstanding” means, as of any time of determination, the sum of (i) the aggregate number of issued and outstanding shares of Common Stock as of such time of determination; (ii) the aggregate maximum number of shares of Common Stock issuable on an as-converted and as-exchanged basis, as applicable (excluding any exercise of warrants to purchase Common Stock), pursuant to all capital stock and all other securities of the Company or any of its subsidiaries (excluding any warrants to purchase Common Stock and all Rights issued pursuant to the Exchange Agreement) outstanding as of such time of determination (or issuable pursuant to agreements in effect as of such time) that are at any time and under any circumstances (after issuance thereof, if applicable), directly or indirectly, convertible into or exchangeable for, or which otherwise entitles the holder thereof to acquire, Common Stock (assuming, for such purpose, that each such security is convertible or exchangeable, as applicable, at the lowest price per share for which one share of Common Stock is at any time, directly or indirectly, issuable upon the conversion or exchange, as applicable, of any such security and without regards to any limitations on conversion or exchange applicable thereto); and (iii) without duplication with clause (ii) above, the aggregate maximum number of shares of Common Stock issuable pursuant to any agreement (excluding any warrants to purchase Common Stock and all Rights issued pursuant to the Exchange Agreement) of any person with the Company or any of its subsidiaries in effect as of such time of determination (assuming, for such purpose, that the shares of Common Stock, directly or indirectly, issued pursuant to such agreement is issued at the lowest price per share for which one share of Common Stock is at any time, directly or indirectly, issuable pursuant to such agreement).
Notwithstanding the foregoing, if any warrants to purchase Common Stock are outstanding (or issuable upon conversion or exchange of securities outstanding) as of such six-month anniversary (each, an “Outstanding Warrant”), on such six-month anniversary, the Company shall issue the Investor an additional Right to acquire a warrant (the “New Warrant”) exercisable for up to 9.99% of the shares of Common Stock issuable upon exercise of all Outstanding Warrants as of such six-month anniversary (the “New Warrant Shares”). The New Warrant Shares shall be of like tenor to the Outstanding Warrants.
Pursuant to the Side-Letter Agreement, the Company also agreed that from the execution date of the Exchange Agreement until twelve (12) months from such date, the Company will not raise capital at a price that is below $0.10 per share of Common Stock (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events) without the Investor’s consent.
On May 30, 2019, the Company and the Investor entered into Amendment No. 1 to Exchange Agreement (the “Amendment”). Following execution of the Exchange Agreement on May 23, 2019, the Company and the Investor became aware of an inadvertent error regarding the number of shares of Common Stock to be issued to the Investor pursuant to the Exchange Agreement. The Company and the Investor agreed to amend the Exchange Agreement so it reflects the correct number of shares of Common Stock to be issued and to ensure that the Investor does not beneficially own in excess of 9.99% of the shares of Common Stock outstanding immediately following the effective date of the Exchange Agreement. Pursuant to the Amendment, the Company and the Investor agreed that the number of shares of Common Stock to be issued to the Investor would be an aggregate of 605,816 shares, instead of the 770,485 shares stated in the Exchange Agreement.
Consistent with the developments above, effective November 23, 2019 the parties finalized the reconciliation pursuant to the Side-Letter Agreement described above and the related issuance of the True-Up Shares. Pursuant to the provisions of the Side-letter Agreement the parties agreed to the issuance of an additional 567,348 common shares, par value $0.0001 per share and the issuance of a warrant to purchase 61,380 common shares at an exercise price of $0.50 per share and an expiration date of June 19, 2026.
| F-14 |
Description of the Financial Accounting and Reporting
At inception, 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 at each periodic reporting date through May 23, 2019 which was the date the parties entered into the exchange agreement which extinguished the Note and related warrants as previously described. The Note was revalued to its estimated fair value at each periodic reporting date with any changes in the Note’s fair value being charged/credited to the statement of operations.
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 May 23, 2019, the date of the exchange agreement 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 statement of operations for the year ended December 31, 2019. See Note 5.
The Exchange Agreement was treated an extinguishment of debt on the date it was entered May 23, 2019. Under the Exchange Agreement, the Investor exchanged all of its rights under the original securities issued in the May 2015 Private Placement, including: (i) the Convertible Note, subject to the Optional Offset (as defined in the Investor Note), with a current balance of $2,197,231; (ii) the related accrued interest under the Convertible Note, with an unpaid and accrued balance of $28,643; (iii) the Warrant with an estimated fair value of $116,731; (iv) the Security and Pledge Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement; (v) the Guaranty made in favor of the Investor in connection with the May 2015 Private Placement; and (vi) the Registration Rights Agreement entered into by the Company and the Investor in connection with the May 2015 Private Placement, for 605,816 fully paid and nonassessable shares of Common Stock and certain rights granted in the Side-Letter to acquire additional securities in the future, which may be exercised for additional shares of Common Stock. The Side-Letter rights/obligations represent a derivative and accordingly, its fair value was estimated and recorded at the date of Exchange Agreement and will continue to be revalued and adjusted to its estimated fair value at each periodic reporting date until it expires and/or the underlying securities are issued to the Holder.
Following is an analysis of gain on exchange of the debt and warrant obligations pursuant to the Exchange Agreement during the year ended December 31, 2019:
| Amount | ||||
| Obligations extinguished on the date of exchange, May 23, 2019: | ||||
| Convertible Note balance at the date of exchange, May 23, 2019 | $ | 2,197,231 | ||
| Accrued interest on the Convertible Note at the date of exchange, May 23, 2019 | 28,643 | |||
| Fair value of Warrant Derivative at the date of exchange, May 23, 2019 | 116,731 | |||
| Securities issued in exchange for the obligations extinguished on the date of Exchange, May 23, 2019 and the finalization of the Side-Letter Agreement at November 23, 2019: | ||||
| 605,816 Common shares issued on the date of exchange, May 23, 2019 valued at $0.121 per share, the closing market price on May 23, 2019 | (73,304 | ) | ||
| 567,348 Common shares issued pursuant to the finalization of the Side-Letter agreement on November 23, 2019 | (68,082 | ) | ||
| Issuance of warrants to purchase 61,380 common shares issued pursuant to the finalization of the Side-Letter agreement on November 23, 2019 | (7,358 | ) | ||
| Gain on exchange of debt and warrant obligations | $ | 2,193,861 | ||
In addition, the Company issued a warrant in May 2015 to purchase 240,000 shares issued as part of the placement fee in connection with the Note. The warrant contained an expiration date of May 7, 2022 and an exercise price of $5.00 per share and is subject to certain price protection and dilution provisions. Such warrant was treated as a derivative liability for accounting purposes due to its ratchet and anti-dilution provisions.
On June 4, 2019, the Company entered into an exchange agreement with the warrant holder to extinguish the original warrant including its certain price protection and dilution provisions, for a new warrant to purchase up to 50,000 common shares with a termination date of June 4, 2026 at an exercise price of $0.50 per share without any price protection or dilution provisions.
| F-15 |
The estimated fair value of the original warrant derivative as of May 23, 2019, the date of the exchange agreement, was $37,368 representing a change of $29,795 from December 31, 2018, which is included in changes in derivative fair value in the accompanying statement of operations for the year ended December 31, 2019. See Note 5.
As a result of the exchange agreement, the Company extinguished the derivative liability of $37,368 attributable to the original warrant and recognized the estimated value of the new warrant of $7,985 as of June 4, 2019, the date of the exchange agreement. The resulting $29,383 difference been the estimated fair value of the old warrant extinguished and the new warrant issued to the holder has been recorded as a gain on exchange of debt and warrant obligations in the accompanying statement of operations for the year ended December 31, 2019.
Note 3 – Debt
Debt consists of the following at December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Convertible notes payable, short term: | ||||||||
| Note payable, (in default) | $ | 1,000,000 | $ | 1,000,000 | ||||
| Note payable (extinguished through exchange agreement) | — | 200,000 | ||||||
| Note payable (extinguished through exchange agreement) | — | 40,000 | ||||||
| Note payable, (in default) | 50,000 | 50,000 | ||||||
| Note payable (in default) | 35,000 | 35,000 | ||||||
| Note payable (due on demand) | 19,125 | 13,125 | ||||||
| Total notes payable, short-term | $ | 1,104,125 | $ | 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 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 December 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.
| F-16 |
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 expired as of December 31, 2019. 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 completing the extinguishment of the note balance, accrued interest and revenue sharing agreement through an exchange agreement which is further described below; however, there can be no assurances such efforts will be successful.
The Warrant was 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 was revalued to fair value at each reporting date with the corresponding income (loss) reflected in the statement of operations as change in derivative liability. The Warrant expired as of December 31, 2019. The discount was 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.
On July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which has an unpaid principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies regarding the December 2013 Note through an exchange agreement. Under the proposed terms the Company will make a cash payment of $100,000 within 60 days of the execution of an Exchange Agreement and will issue 740,500 shares of common stock to the holder in exchange for and cancellation of the following obligations:
| ● | December 2013 Note with an original principal balance of $1,050,000 and current principal balance of $1,000,000; | |
| ● | Accrued and unpaid interest of approximately $481,000 as of December 31, 2019 related to the December 2013 Note; | |
| ● | Common Stock Purchase Warrant issued December 27, 2013 to acquire 100,000 shares of common stock with an exercise price of $5.00 per share; | |
| ● | Preemptive Rights Agreement dated December 27, 2013; and | |
| ● | Revenue Sharing Agreement issued May 30, 2014 representing 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. |
The term sheet is non-binding until such time as the cash payment is made and the common stock are issued to the holder and there can be no assurance that the Company will successfully complete the Exchange Agreement. The Company did not make the required $100,000 cash payment within the contractual 60-day time period and therefore the term sheet is not binding on the parties. The parties are attempting to resolve the payment default and otherwise complete the Exchange Agreement as described above.
The following notes were extinguished on June 19, 2019:
| ● | 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 required no principal or interest payments until its maturity date of November 7, 2017 and bore interest at 8% per annum. The note was not paid on its original maturity date. | |
| ● | 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 bore interest at 8% per annum. The note was not paid on its maturity date. |
| F-17 |
On June 19, 2019, the Company and the holder of these two convertible notes entered into an exchange agreement whereby the two convertible notes with an unpaid principal balance of $240,000 and related accrued interest totaling $45,020 were extinguished. Under the exchange agreement the Company issued the individual a new warrant exercisable to purchase up to 570,000 shares of common stock at an exercise price of $0.50 per share with a termination date of June 19, 2026 without any price protection or dilution provisions in exchange for the extinguishment of the two convertible notes and related accrued interest. The Black-Scholes valuation of the warrant issued to the holder on June 19, 2019 totaled $62,564.
Following is an analysis of gain on extinguishment of the obligations pursuant to the Exchange Agreement during the year ended December 31, 2019:
| Amount | ||||
| Obligations extinguished on the date of exchange, June 19, 2019: | ||||
| Convertible Notes balance at the date of exchange, June 19, 2019 | $ | 240,000 | ||
| Accrued interest on the Convertible Notes at the date of exchange, June 19, 2019 | 45,020 | |||
| Securities issued in exchange for the obligations extinguished on the date of the exchange, June 19, 2019: | ||||
| Value of the stock purchase warrant issued on the date of exchange, June 19, 2019 | (62,564 | ) | ||
| Gain on exchange of debt and warrant obligations | $ | 222,456 | ||
Other than the December 2013 Note, at December 31, 2019 the Company had short-term notes outstanding with entities or individuals as follows:
| ● | On July 7, 2015 the Company borrowed a total of $50,000 from an individual under a convertible note payable with the conversion rate of $5.60 per share. The term of the note was for a period of 90 days and bears interest at 8% per annum. In connection with the loan, the Company issued the entity a warrant for the purchase of 5,000 shares of common stock at $5.60 per share for a period of five years from the date of the note. The terms of the note and warrant provide that should the note and interest not be paid in full by its maturity date, the number of warrants automatically increases to 10,000 shares and the exercise price remains at $5.60 per share. The ratchet provision in the stock purchase warrant requires that the warrant be accounted for as derivative liability. The Company recorded the estimated fair value of the warrant totaling $22,314 as a discount on note payable and as a derivative liability in the same amount, as of the origination date. On October 7, 2015, the note was extended for an additional 90 days or until January 7, 2016 and later to May 7, 2016 and ultimately to October 7, 2016. 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 $662 and $492 as of December 31, 2019 and 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 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 $454 and $345 as of December 31, 2019 and 2018, respectively. See Note 5. |
| F-18 |
| ● | On May 21, 2018 the Company borrowed $13,125 under an unsecured promissory note with a private third lender which is convertible into common stock at a rate of $0.50 per share. During June 2019 and August 2019 the Company borrowed an additional $50,500 and $5,500, respectively from this same third-party lender under the same terms. The note is due on demand and bears interest at 8% per annum. In October 2019 the Company repaid $50,000 in principal on this demand note. The outstanding principal on the demand notes totaled $19,125 and $13,125 as of December 31, 2019 and 2018 respectively. |
Note 4 – Stock Based Compensation
The Company applies ASC 718, Stock Compensation, which requires companies to recognize compensation expense for share-based payments based on the estimated fair value of the awards. ASC 718 also requires tax benefits relating to the deductibility of increases in the value of equity instruments issued under share-based compensation arrangements to be presented as financing cash inflows in the statement of cash flows. Compensation cost is recognized based on the grant-date fair value for all share-based payments granted and is estimated in accordance with the provisions of ASC 718.
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.
At the Annual Meeting of Stockholders 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 December 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 years ended December 31, 2019 and 2018.
| F-19 |
The following table summarizes stock option activity for the year ended December 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 | (6,200 | ) | (7.80 | ) | ||||||||||||
| Outstanding at December 31, 2019 | 332,000 | $ | 41.86 | 2.29 years | $ | — | ||||||||||
| Outstanding and exercisable at December 31, 2019 | 332,000 | $ | 41.86 | 2.29 years | $ | — | ||||||||||
The Company recorded stock-based compensation expense in connection with the vesting of options granted aggregating $-0- and $-0- during the years ended December 31, 2019 and 2018, respectively.
The intrinsic value as of December 31, 2019 related to the vested and unvested stock options as of that date was $-0-. The unrecognized compensation cost as of December 31, 2019 related to the unvested stock options as of that date was $-0-.
Restricted stock grants. During the year ended December 31, 2019 the Board of Directors granted restricted stock awards to our new Chief Operating Officer. Restricted stock awards are valued on the date of grant and have no purchase price for the recipient. Restricted stock awards typically vest over a period of time generally corresponding to yearly anniversaries of the grant date. Unvested shares of restricted stock awards may be forfeited upon the termination of service of employment with the Company, depending upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock have full stockholder’s rights, including voting rights and the right to receive cash dividends.
A summary of all restricted stock activity under the equity compensation plans for the year ended December 31, 2019 is as follows:
| Number of Restricted shares | Weighted average grant date fair value | |||||||
| Nonvested balance, January 1, 2019 | — | $ | — | |||||
| Granted | 2,000,000 | 0.13 | ||||||
| Vested | (1,250,000 | ) | (0.13 | ) | ||||
| Forfeited | — | — | ||||||
| Nonvested balance, December 31, 2019 | 750,000 | $ | 0.13 | |||||
The Company recorded stock-based compensation expense in connection with the issuance/vesting of restricted granted aggregating $186,274 and $-0- during the years ended December 31, 2019 and 2018, respectively.
The Company estimated the fair market value of these restricted stock grants based on the closing market price on the date of grant. As of December 31, 2019, there were $73,726 of total unrecognized compensation costs related to all remaining non-vested restricted stock grants, which will be amortized over the next 10 months in accordance with the respective vesting scale.
| F-20 |
The nonvested balance of restricted stock vests as follows:
| Years ended | Number of shares | |||
| 2020 | 750,000 | |||
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 issued warrants to purchase an aggregate of 34,000 shares of common stock, respectively in connection with various outstanding debt instruments which require derivative accounting treatment as of December 31, 2019 and 2018. A comparison of the assumptions used in calculating estimated fair value of such derivative liabilities as of December 31, 2019 is as follows:
As of December 31, 2019 | ||||
| Volatility – range | 316.2 | % | ||
| Risk-free rate | 1.69 | % | ||
| Contractual term | 0.5 – 1.3 years | |||
| Exercise price | $ | 5.60 | ||
| Number of warrants in aggregate | 34,000 | |||
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 | ||
| Unrealized derivative losses included in other expense for the period | 89,714 | |||
| Extinguishment of derivative liability in exchange transactions | (154,100 | ) | ||
| Balance at December 31, 2019 | $ | 1,116 | ||
| F-21 |
The warrant derivative liability consists of the following at December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Warrant issued to holder of Secured convertible note (Note 2) | $ | — | $ | 57,092 | ||||
| Warrant issued to placement agent (Note 2) | — | 7,573 | ||||||
| Warrants issued to holders of notes payable - short term (Note 3) | 1,116 | 837 | ||||||
| Total warrant derivative liability | $ | 1,116 | $ | 65,502 | ||||
Note 6 – Warrants
The following table summarizes warrant activity for the year ended December 31, 2019:
| Number of Warrants | Weighted Average Exercise Price Per Share | |||||||
| Outstanding and exercisable at December 31, 2018 | 2,365,563 | $ | 5.01 | |||||
| Issued pursuant to exchange agreements | 681,380 | 0.50 | ||||||
| Cancelled pursuant to exchange agreements | (2,040,000 | ) | (5.00 | ) | ||||
| Exercised/forfeited | (60,000 | ) | (5.00 | ) | ||||
| Outstanding and exercisable at December 31, 2019 | 946,943 | $ | 1.78 | |||||
The weighted average term of all outstanding common stock purchase warrants was 4.8 years as of December 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 December 31, 2019.
Note 7 – Supplemental Oil and Gas Information
Estimated Proved Oil and Gas Reserves (Unaudited)
As of December 31, 2019 and 2018, the Company had no proved reserves. As such, there are no estimates of proved reserves to disclose, nor standardized measure of discounted future net cash flows relating to proved reserves.
Costs Incurred in Oil and Gas Activities
Costs incurred during the year ended December 31, 2019 in connection with the Company’s oil and gas acquisition, exploration and development activities are shown below.
Year ended December 31, 2019 | ||||
| Property acquisition costs: | ||||
| Proved | $ | — | ||
| Unproved | ||||
| Total property acquisition costs | — | |||
| Development costs | — | |||
| Exploration costs | 77,784 | |||
| Total costs | $ | 77,784 | ||
| F-22 |
Exploration costs during the year ended December 31, 2019 primarily related to area concession and training fees to be paid to the Nicaraguan Government for 2019. In addition to the $77,784 expenses described above, the Company expensed all of the costs related to the option to purchase the Properties totaling $76,415 which expired on December 31, 2019. The Company expensed all costs related to the Option upon its expiration although the Company continues to negotiate an extension and revision of the Option to acquire the Properties. All costs related to the Nicaraguan Concessions have been expensed as incurred during the year ended December 31, 2019 as the Concessions were in default status and the Nicaraguan Concession assets were considered to be impaired and fully reserved as of December 31, 2019 and 2018.
Aggregate capitalized costs relating to the Company’s oil and gas producing activities, and related accumulated depreciation, depletion, impairment and amortization are as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Proved oil and gas properties | $ | — | $ | — | ||||
| Unproved oil and gas properties | 11,254,557 | 11,176,773 | ||||||
| Total | 11,254,557 | 11,176,773 | ||||||
| Less amounts allocated to revenue sharing interest granted to Note holder for extension of maturity date (See Note 3) | (964,738 | ) | (964,738 | ) | ||||
| Less accumulated impairment charge on oil and gas properties as of December 31, 2015 | (9,720,666 | ) | (9,720,666 | ) | ||||
| Less amounts charged directly to operations since January 1, 2016 | (569,153 | ) | (491,369 | ) | ||||
| Less accumulated depreciation, depletion and amortization | — | — | ||||||
| Net capitalized costs | $ | — | $ | — | ||||
Management has performed its impairment tests on its oil and gas properties as of December 31, 2019 and 2018, has concluded that a full impairment reserve should be provided on the costs capitalized for its unproved oil and gas properties consisting of the Nicaraguan Concessions and its Option to acquire the Properties which expired on December 31, 2019. Therefore, an impairment charge of $9,720,666 was charged to operations during the year ended December 31, 2015 which reduced the carrying amount of Nicaragua Concession oil and gas properties to zero. The Nicaraguan Concessions remained fully impaired as of December 31, 2019 and 2018. The Company abandoned the Concessions project in 2020.
Costs Not Being Amortized
Oil and gas property costs not being amortized at December 31, 2019, (all accumulated costs have been reserved through an impairment charge as of December 31, 2015 and through direct expense for January 1, 2016 and after) costs by year that the costs were incurred, are as follows:
| Year Ended December 31, | ||||
| 2019 (expensed directly) | $ | 77,784 | ||
| 2018 (expensed directly) | 155,584 | |||
| 2017 (expensed directly) | 170,274 | |||
| 2016 (expensed directly) | 165,511 | |||
| 2015 | 92,568 | |||
| 2014 | 115,622 | |||
| 2013 | 6,051,411 | |||
| 2012 | 581,723 | |||
| 2011 | 731,347 | |||
| Prior | 3,112,733 | |||
| Total costs not being amortized | $ | 11,254,557 | ||
| F-23 |
The above unevaluated costs relate to the Company’s approximate 1,400,000 acre Nicaraguan Concessions.
The Company anticipates that these unproved costs in the table above will be reclassified to proved costs within the next five years.
Note 8 – Income Taxes
The provision for income taxes consists of the following:
| For the Year Ended | ||||||||
| December 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 continuing operations varies from the statutory federal income tax rate as follows:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Federal income tax rate | 21.0 | % | (21.0 | )% | ||||
| State income tax rate | 4.7 | (4.4 | ) | |||||
| Stock-based compensation | (17.7 | ) | — | |||||
| Change in valuation allowance | (12.9 | ) | 26.4 | |||||
| AMT Credit carryforward | — | (34.3 | ) | |||||
| Other, net | (4.9 | ) | (1.0 | ) | ||||
| Effective tax rate | — | % | (34.3 | )% | ||||
The significant temporary differences and carry-forwards and their related deferred tax asset (liability) and deferred tax asset valuation allowance balances are as follows:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Accruals and other | $ | 980 | $ | 940 | ||||
| Asset retirement obligations | 435 | 435 | ||||||
| Note payable discounts and derivatives | — | (510 | ) | |||||
| Stock-based compensation | 801 | 1,190 | ||||||
| Alternative minimum tax credit carry-forward | — | — | ||||||
| Net operating loss carry-forward | 17,006 | 16,930 | ||||||
| Gross deferred tax assets | 19,222 | 18,985 | ||||||
| Less valuation allowance | (19,222 | ) | (18,985 | ) | ||||
| Deferred tax asset | $ | — | $ | — | ||||
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.
| F-24 |
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 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 year ended December 31, 2018 as it reduced the corresponding income taxes payable to zero as of December 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 balance sheet.
The Company has incurred operating losses in recent years and it continues to be in a three-year cumulative loss position at December 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 $66,950,000, which expire from 2025 through 2039.
The Company has not completed the filing of tax returns for the tax years 2012 through 2019. Therefore, all such tax returns are open to examination by the Internal Revenue Service.
The Internal Revenue Code contains provisions under Section 382 which limit a company’s ability to utilize net operating loss carry-forwards in the event that it has experienced a more than 50% change in ownership over a three-year period. Management has not completed its review of whether such ownership changes have occurred, and whether the Company currently is subject to an annual limitation or the possibility of the complete elimination of the net operating loss carry- forwards might have occurred. In addition, the Company may be further limited by additional ownership changes which may occur in the future.
As discussed in Note 1, “Summary of Significant Accounting Policies,” tax positions are evaluated in a two-step process. Management first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Management has identified no tax positions taken that would meet or exceed these thresholds and therefore there are no gross interest, penalties and unrecognized tax expense/benefits that are not expected to ultimately result in payment or receipt of cash in the financial statements.
Note 9 – Commitments and Contingencies
The Company has not maintained insurance coverage on its U.S domestic oil and gas properties for a number of years. The Company is not in compliance with Federal and State laws regarding the U.S. domestic oil and gas properties. The Company’s known compliance issues relate to the Texas Railroad Commission regarding administrative filings and renewal permits relative to its Texas oil and gas properties that were sold in 2012. The ultimate resolution of these compliance issues could have a material adverse impact on the Company’s financial statements.
| F-25 |
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, 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 $194,485; and (5) payment of the 2016, 2017, 2018 and 2019 training fees required for both the Perlas and Tyra totaling approximately $350,000. The Company had been 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; however, the political climate and domestic issues caused the Company to halt such efforts and to abandon the Concessions in 2020.
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.
| F-26 |
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 December 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 December 31, 2019 and 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.
Binding Term Sheet to Acquire Domestic Oil and Gas Properties
On July 31, 2019 the Company acquired the “Option” from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are currently negotiating an extension of such option and a reduction of the purchase price, although there can be no assurance that the parties will reach an agreement to do so. The Company has expensed all costs related to the Option to acquire the Properties as of December 31, 2019 as the Option is now expired.
| F-27 |
The purchase will include the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand zone with an approximate depth of 3,600 feet.
The Option includes a provision permitting Core to exercise a buy-out clause and sell the Properties to a third-party purchaser prior to our exercise of the Option. If such a sale occurs, the Company would be entitled to 10% of the proceeds of the sale on the closing date. In such event, Core will for a period of nine months following the buy-out find a project of like kind and provide the Company a first right of refusal to acquire such asset.
Litigation
The Company is subject to numerous claims and legal actions in which vendors are claiming breach of contract due to the Company’s failure to pay amounts due. The Company believes that it has made adequate provision for these claims in the accompanying financial statements.
The Company is currently involved in litigation as follows:
| ● | In October 2012 the State of Texas filed a lawsuit naming Infinity-Texas, the Company and the corporate officers of Infinity-Texas, seeking $30,000 of reclamation costs associated with a single well, in addition to administrative expenses and penalties. The Company engaged in negotiations with the State of Texas in late 2012 and early 2013 and reached a settlement agreement that would reduce the aggregate liability, in this action and any extension of this to other Texas wells, to $45,103, which amount has been paid. Certain performance obligations remain which must be satisfied in order to finally settle and dismiss the matter. |
| Pending satisfactory performance of the performance obligations and their acceptance by the State of Texas, the officers have potential liability regarding the above matter, and the officers are held personally harmless by indemnification provisions of the Company. Therefore, to the extent they might actually occur, these liabilities are the obligations of the Company. Management estimates that the liabilities associated with this matter will not exceed $780,000, calculated as $30,000 for each of the 26 Infinity-Texas operated wells. This related liability, less the payment made to the State of Texas in 2012 in the amount of $45,103, is included in the asset retirement obligation on the accompanying balance sheets. |
| ● | Cambrian Consultants America, Inc. (“Cambrian”) filed an action in the District Court of Harris County, Texas, number CV2014-55719, on September 26, 2014 against Infinity Energy Resources, Inc. resulting from certain professional consulting services provided for quality control and management of seismic operations during November and December 2013 on the Nicaraguan Concessions. Cambrian provided these services pursuant to a Master Consulting Agreement with Infinity, dated November 20, 2013, and has claimed breach of contract for failure to pay amounts due. On December 8, 2014, a default judgment was entered against the Company in the amount of $96,877 plus interest and attorney fees. The Company has included the impact of this litigation as a liability in its accounts payable. The Company will seek to settle the default judgment when it has the financial resources to do so. |
| ● | Torrey Hills Capital, Inc. (“Torrey”) notified the Company by letter, dated August 15, 2014, of its demand for the payment of $56,000, which it alleged was unpaid and owed under a consulting agreement dated October 18, 2013. The parties entered into a consulting agreement under which Torrey agreed to provide investor relations services in exchange for payment of $7,000 per month and the issuance of 15,000 shares of common stock. The agreement was for an initial three month-term with automatic renewals unless terminated upon 30 days’ written notice by either party. The Company made payments totaling $14,000 and issued 15,000 shares of common stock during 2013. The Company contends that Torrey breached the agreement by not performing the required services and that it had provided proper notice of termination to Torrey. Furthermore, the Company contends that the parties agreed to settle the dispute on or about June 19, 2014 under which it would issue 2,800 shares of common stock in full settlement of any balance then owed and final termination of the agreement. Torrey disputed the Company’s contentions and submitted the dispute to binding arbitration. The Company was unable to defend itself and the arbitration panel awarded Torrey a total of $79,594 in damages. The Company has accrued this amount in accounts payable as of December 31, 2019 and 2018, which management believes is sufficient to provide for the ultimate resolution of this dispute. |
| F-28 |
Note 10 – Related Party Transactions
The Company does not have any employees other than the CEO, COO 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 years ended December 31, 2019 and 2018. The amount due to the CFO’s firm for services previously provided was $762,407 at December 31, 2019 and 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.
On July 31, 2019 we acquired the Option Core to purchase the production and mineral rights/leasehold the Properties. We paid a nonrefundable deposit of $50,000 to bind the purchase option, which provided us the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are currently negotiating an extension of such Option and reduction of the purchase price. Mr. Loeffelbein, our COO is a member of Core Energy, LLC.
As of December 31, 2019 and 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 11 – Subsequent Events
Covid – 19 Pandemic
The consolidated financial statements contained in this Report as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of December 31, 2019. Since that date, economies throughout the world have been severely disrupted by the effects of the quarantines, business closures and the reluctance of individuals to leave their homes as a result of the outbreak of the coronavirus (Covid-19). In particular, the oil and gas market has been severely impacted by the negative effects of the coronavirus because of the substantial and abrupt decrease in the demand for oil and gas globally. In addition, the capital markets have been disrupted and our efforts to raise necessary capital will likely be adversely impacted by the outbreak of the virus and we cannot forecast with any certainty when the disruptions caused by it will cease to impact our business and the results of our operations. In reading this report on Form 10-K, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the outbreak of Covid-19.
| F-29 |
NICARAGUA CONCESSIONS
The Company has not resolved the various contingencies related to the default status of its Nicaraguan Concessions (See Note 8). The Company had been 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; however, the political climate and domestic issues caused the Company to halt such efforts in 2020 and abandon the project relating to the Concessions.
DEBT OBLIGATIONS
The Company has not resolved the contingencies regarding its various notes payable related to their default status as described in Notes 3 other than the December 2013 Note described above. 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.
On July 29, 2019 the Company entered into a non-binding term sheet with the holder of the December 2013 Note which had an unpaid principal balance of $1.0 million as of December 31, 2019. The term sheet, if consummated, will resolve the default contingencies regarding the December 2013 Note through an exchange agreement. See Note 3, Debt.”
OIL AND GAS PROPERTY ACQUISITION
On July 31, 2019 the Company acquired an the Option from Core to purchase the production and mineral rights/leasehold for the Properties. The Company paid a nonrefundable deposit of $50,000 to bind the purchase option which gave it the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the option prior to December 31, 2019 and the parties are negotiating an extension of such Option and a reduction of the purchase price, although there can be no assurance that the parties will reach an agreement to do so.
**********************
| F-30 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures to provide reasonable assurance of achieving the control objectives, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on their evaluation as of December 31, 2019, the end of the period covered by this annual report on Form 10-K, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective in assuring that financial statement presentation and disclosure are in conformity with those which are required to be included in our periodic SEC filings.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
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● Provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the filing of this annual report on Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our assessment using those criteria, management believes that, as of December 31, 2019, our internal control over financial reporting was not effective due to material weaknesses identified as follows:
| (a) | Lack of control processes in place that provide multiple levels of review and supervision and | |
| (b) | Lack of segregation of duties. |
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of our fiscal year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the names, positions and ages of our directors and executive officers. Our directors were elected by the majority written consent of our stockholders in lieu of a meeting. Our directors are typically elected at each annual meeting and serve for one year and until their successors are elected and qualify. Officers are elected by our board of directors and their terms of office are at the discretion of our board.
| Name | Age | Positions and Offices Held | ||
| Stanton E. Ross | 58 | Chairman, President and Chief Executive Officer | ||
| Daniel F. Hutchins | 64 | Director, Chief Financial Officer, Secretary | ||
| Leroy C. Richie | 78 | Director | ||
| John Loeffelbein | 49 | Chief Operating Officer |
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Stanton E. Ross. From March 1992 to June 2005, Mr. Ross was Infinity’s Chairman and President and served as an officer and director of each of its subsidiaries. He resigned all of these positions with Infinity in June 2005, except Chairman, but was reappointed as Infinity’s President in October 2006. Mr. Ross has served as Chairman, President and Chief Executive Officer of Digital Ally, Inc. (“Digital”) since September 2005. Digital is a publicly held company whose common stock is traded on the Nasdaq Capital Market under the symbol DGLY. From 1991 until March 1992, he founded and served as President of Midwest Financial, a financial services corporation involved in mergers, acquisitions and financing for corporations in the Midwest. From 1990 to 1991, Mr. Ross was employed by Duggan Securities, Inc., an investment banking firm in Overland Park, Kansas, where he primarily worked in corporate finance. From 1989 to 1990, he was employed by Stifel, Nicolaus & Co., a member of the New York Stock Exchange, where he was an investment executive. From 1987 to 1989, Mr. Ross was self-employed as a business consultant. From 1985 to 1987, Mr. Ross was President and founder of Kansas Microwave, Inc., which developed a radar detector product. From 1981 to 1985, he was employed by Birdview Satellite Communications, Inc., which manufactured and marketed home satellite television systems, initially as a salesman and later as National Sales Manager. Mr. Ross allocates his time between Digital and the Company as he deems necessary to discharge his fiduciary duties to each of them. Because of the Company’s reduced level of activity and the needs of Digital, he has devoted most of his time to Digital and the balance to the Company during the last year. Mr. Ross served on the board of directors of Studio One Media, Inc., a publicly held company, from January 2013 to March 2013. Mr. Ross holds no public company directorships other than with Digital and Infinity currently and has not held any others during the previous five years, except for Studio One Media, Inc. The Company believes that Mr. Ross’s broad entrepreneurial, financial and business experience and his experience with micro-cap public companies and role as Chairman, President and CEO gives him the qualifications and skills to serve as a director.
Daniel F. Hutchins. Mr. Hutchins was elected to serve as a Director of Infinity and was also appointed to serve as Chief Financial Officer of Infinity effective as of August 13, 2007. Mr. Hutchins was elected as a Director of Digital Ally, Inc. in December 2007, serves as Chairman of its Audit Committee and is its financial expert. He is also a member of Digital’s Nominating and Governance Committee. Mr. Hutchins, a Certified Public Accountant, is a Principal with the accounting firm of Hutchins & Haake, LLC. He was previously a member of the Advisory Board of Digital Ally. Mr. Hutchins has served as an instructor for the Becker CPA exam with the Keller Graduate School of Management and has over 18 years of teaching experience preparing CPA candidates for the CPA exam. He has over 30 years of public accounting experience, including five years with Deloitte & Touche, LLP. He holds no other public directorships and has not held any others during the previous five years. He has served on the boards of various non-profit groups and is a member of the American Institute of Certified Public Accountants. Mr. Hutchins earned his Bachelor of Business Administration degree in Accounting at Washburn University in Topeka, Kansas. Mr. Hutchins holds no other public company directorships currently and for the previous five years. The Company believes that Mr. Hutchins’ significant experience in finance and accounting gives him the qualifications to serve as a director.
Leroy C. Richie. Mr. Richie has been a director of Infinity since June 1, 1999. Since 2005, Mr. Richie has served as the lead outside director of Digital Ally, Inc. and currently serves as a member of Digital’s Audit Committee and is the Chairman of its Nominating and Governance and Compensation Committees. Additionally, until 2017, Mr. Richie served as a member of the boards of directors of Columbia Mutual Funds, (or mutual fund companies acquired by or merged with Columbia Mutual Funds), a family of investment companies managed by Ameriprise Financial, Inc. From 2004 to 2015, he was of counsel to the Detroit law firm of Lewis & Munday, P.C. He holds no other public directorships and has not held any others during the previous five years, except for OGE Energy Corp. (2007-2014) and Kerr-McGee Corporation (1998-2005). Mr. Richie serves as Vice-Chairman of the Board of Trustees and Chairman of the Compensation Committee for the Henry Ford Health System, in Detroit. Mr. Richie was formerly Vice President of Chrysler Corporation and General Counsel for automotive legal affairs, where he directed all legal affairs for its automotive operations from 1986 until his retirement in 1997. Before joining Chrysler, he was an associate with the New York law firm of White & Case (1973-1978), and served as director of the New York office of the Federal Trade Commission (1978-1983). Mr. Richie received a B.A. from City College of New York, where he was valedictorian, and a J.D. from the New York University School of Law, where he was awarded an Arthur Garfield Hays Civil Liberties Fellowship. The Company believes that Mr. Richie’s extensive experience as a lawyer and as an officer or director of public companies gives him the qualifications and skills to serve as a Director.
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John Loeffelbein. Mr. Loeffelbein was appointed Chief Operating Officer of Infinity on September 30, 2019. Mr. Loeffelbein began his oil & gas career in 1998 working for Orion Oil and Gas, Inc., a land, mineral and title company, located in Amarillo, Texas. During his tenure, he was actively involved in title, acquisition of leases and purchase of right-of-way for major companies such as Anadarko Petroleum, K&N Energy and other major oil and gas companies. Since 1998, Loeffelbein has actively purchased and sold millions of dollars’ worth of oil and gas projects and owns interests in wells or mineral rights in most of the major oil and gas basins in the United States. In 2004 Mr. Loeffelbein formed Coal Creek Energy, LLC which leased acreage and acquired existing oil & gas production primarily in Kansas focusing on leases which could be developed and enhanced at a very low risk/high reward. He has been involved in over 1,000 wells in the state. In 2014 Coal Creek Energy provided a variety of services to Viking Energy Group, Inc. in connection with its acquisition of numerous Kansas oil and gas properties. In 2017, Mr. Loeffelbein helped found Vulcan Labs, LLC, which specializes in coating pipe for the oil and gas industry. The coated pipe it supplies reduces corrosion, friction and wear on production equipment thereby reducing maintenance costs and down-time. Vulcan Labs supplies coated pipe to a number of the top 50 oil and gas companies. Mr. Loeffelbein has not served as a director of any other public companies within the last five years. The Company believes that Mr. Loeffelbein’s broad entrepreneurial, financial and business experience gives him the qualifications and skills to serve as the Company’s COO.
Family Relationships
There is no family relationship between any of our directors, director nominees and executive officers.
Board of Directors and Committee Meetings
Our Board of Directors held two meetings during the fiscal year ended December 31, 2019. In addition, our Board of Directors acted by unanimous written consent two times during fiscal year ended December 31, 2019. Our directors attended all the meetings of the Board of Directors. Our directors are expected, absent exceptional circumstances, to attend all Board meetings.
Committees of the Board of Directors
We do not have Audit, Compensation or Nominating and Governance Committees. Our full Board of Directors discharges the duties that such committees would normally have. We do not have such committees because of our stage of operations and because our Board of Directors consists of only three members.
Our full Board is comprised of three Directors, one of whom is independent, as defined by the rules and regulations of the Securities and Exchange Commission. The members of our Board of Directors are Stanton E. Ross, Leroy C. Richie and Daniel F. Hutchins. The Board of Directors determined that Mr. Richie qualifies as an “audit committee financial expert,” as defined under the rules and regulations of the Securities and Exchange Commission, and is independent as noted above.
Stanton E. Ross, Leroy C. Richie and Daniel F. Hutchins are the directors of the Company. Messrs. Ross and Hutchins are not considered “independent” in accordance with Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The Board of Directors has determined that Mr. Richie is independent in accordance with the NASDAQ and SEC rules. We are currently traded on the OTC QB, which does not require that a majority of the board be independent. If we ever become an issuer whose securities are listed on a national securities exchange or on an automated inter-dealer quotation system of a national securities association, which has independent director requirements, we intend to comply with all applicable requirements relating to director independence.
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the Company’s independent accountants must be approved in advance by the Board to assure that such services do not impair the accountants’ independence from the Company. Our full board of directors performs the equivalent functions of an audit committee, therefore, no policies or procedures other than those required by SEC rules on auditor independence, have been implemented.
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Report of the Board of Directors Serving the Equivalent Functions of an Audit Committee
Review and Discussion with Management
Our Board has reviewed and discussed with management our audited financial statements for the fiscal year ended December 31, 2019, the process designed to achieve compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and our assessment of internal control over financial reporting.
Review and Discussions with Independent Registered Public Accounting Firm
Our Board has discussed with RBSM, LLP, our independent registered public accounting firm for fiscal year 2019 and 2018, the matters the Board, serving the equivalent functions of an audit committee, is required to discuss pursuant Specifically, the Board has discussed with the independent registered public accounting firm the matters required to be discussed by the Public Company Accounting Oversight Board’s Auditing AS 1301 (Communications With Audit Committees), as modified or supplemented. The discussions occurred with management and the independent public accountants about the quality (and not merely the acceptability) of the Company’s accounting principles, the reasonableness of significant estimates, judgments and the transparency of disclosures in the Company’s financial statements.
The Board of Directors has also received written disclosures in a letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s independence, and has discussed with the independent registered public accounting firm their independence from the Company and its management. This review also includes discussions of audit and non-audit fees as well as evaluation of the Company’s significant financial policies and accounting systems and controls.
The Board of Directors has also reviewed the independence of the independent registered public accounting firm considering the compatibility of non-audit services with maintaining their independence from the Company. Based on the preceding review and discussions contained in this paragraph, the Board of Directors recommended that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for filing with the Securities and Exchange Commission.
Conclusion
Based on the review and discussions referred to above, the Board, serving the equivalent functions of the audit committee, approved our audited financial statements for the fiscal year ended December 31, 2019 be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for filing with the Securities and Exchange Commission.
Board of Directors’ Role in the Oversight of Risk Management
We face a variety of risks, including credit, liquidity and operational risks. In fulfilling its risk oversight role, our Board of Directors focuses on the adequacy of our risk management process and overall risk management system. Our Board of Directors believes that an effective risk management system will (i) adequately identify the material risks that we face in a timely manner; (ii) implement appropriate risk management strategies that are responsive to our risk profile and specific material risk exposures; (iii) integrate consideration of risk and risk management into our business decision-making; and (iv) include policies and procedures that adequately transmit necessary information regarding material risks to senior executives and, as appropriate, to the Board or relevant committee.
Our Board of Directors oversees risk management for us. Accordingly, the Board schedules time for periodic review of risk management, in addition to its other duties. In this role, the Board receives reports from management, certified public accountants, outside legal counsel, and to the extent necessary, from other advisors, and strives to generate serious and thoughtful attention to our risk management process and system, the nature of the material risks we face, and the adequacy of our policies and procedures designed to respond to and mitigate these risks.
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Board Leadership Structure
Our Board of Directors has a Chairman of the Board. Our Board of Directors does not have a policy on whether or not the roles of Chief Executive Officer and Chairman of the Board of Directors should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee. Our Board of Directors believes that it should be free to make a choice from time to time in any manner that is in the best interests of us and our shareholders. The Board of Directors believes that Mr. Ross’s service as both Chief Executive Officer and Chairman of the Board is in the best interests of us and our stockholders. Mr. Ross possesses detailed and in-depth knowledge of the issues, opportunities and challenges we face and is thus best positioned to develop agendas, with the input of the other directors that ensure that the Board’s time and attention are focused on the most critical matters. His combined role enables decisive leadership, ensures clear accountability, and enhances our ability to communicate our message and strategy clearly and consistently to our stockholders, employees, customers and suppliers, particularly given the issues and other challenges the Company has faced in recent years. Our Board has determined that our Board leadership structure is appropriate given the size of our Board and the nature of our business.
Stockholder Communications with the Board of Directors
Stockholders may communicate with the Board of Directors by writing to us as follows: Infinity Energy Resources, Inc., attention: Corporate Secretary, 11900 College Blvd., Suite 310, Overland Park, KS 66210. Stockholders who would like their submission directed to a particular member of the Board of Directors may so specify and the communication will be forwarded as appropriate.
Process and Policy for Director Nominations
Our full Board will consider candidates for Board membership suggested by Board members, management and our stockholders. In evaluating the suitability of potential nominees for membership on the Board, the Board members will consider the Board’s current composition, including expertise, diversity, and balance of inside, outside and independent directors. The Board considers the general qualifications of the potential nominees, including integrity and honesty; recognized leadership in business or professional activity; a background and experience that will complement the talents of the other board members; the willingness and capability to take the time to actively participate in board and committee meetings and related activities; the extent to which the candidate possesses pertinent technological, political, business, financial or social/cultural expertise and experience; the absence of realistic possibilities of conflict of interest or legal prohibition; the ability to work well with the other directors; and the extent of the candidate’s familiarity with issues affecting our business.
While the Board considers diversity and variety of experiences and viewpoints to be important factors, it does not believe that a director nominee should be chosen solely or mainly because of race, color, gender, national origin or sexual identity or orientation. Thus, although diversity may be a consideration in the Board’s process, it does not have a formal policy regarding the consideration of diversity in identifying director nominees.
Stockholder Recommendations for Director Nominations. Our Board of Directors does not have a formal policy with respect to consideration of any director candidate recommendation by stockholders. While the Board of Directors may consider candidates recommended by stockholders, it has no requirement to do so. To date, no stockholder has recommended a candidate for nomination to the Board. Given that we have not received director nominations from stockholders in the past and that we do not canvass stockholders for such nominations, we believe it is appropriate not to have a formal policy in that regard. We do not pay a fee to any third party to identify or evaluate or assist in identifying or evaluating potential nominees.
Stockholder recommendations for director nominations may be submitted to the Company at the following address: Infinity Energy Resources, Inc., attention: Corporate Secretary, 11900 College Blvd., Suite 310, Overland Park, KS 66210. Such recommendations will be forwarded to the Board for consideration, provided that they are accompanied by sufficient information to permit the Board to evaluate the qualifications and experience of the nominees, and provided that they are in time for the Board to do an adequate evaluation of the candidate before the annual meeting of stockholders. The submission must be accomplished by a written consent of the individual to stand for election if nominated by the Board of Directors and to serve if elected and to cooperate with a background check.
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Stockholder Nominations of Directors. The bylaws of the Company provide that in order for a stockholder to nominate a director at an annual meeting, the stockholder must give timely, written notice to the Secretary of the Company and such notice must be received at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the date of the meeting. Such stockholder’s notice shall include, with respect to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person, including such person’s written consent to being named in the proxy statement as a nominee, serving as a director, that is required under the Securities Exchange Act of 1934, as amended, and cooperating with a background investigation. In addition, the stockholder must include in such notice his name and address, as they appear on the Company’s records, of the stockholder proposing the nomination of such person, and the name and address of the beneficial owner, if any, on whose behalf the nomination is made, the class or series and number of shares of capital stock of the Company that are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the nomination is made, and any material interest, relationship, arrangement or understanding that such stockholder of record and/or the beneficial owner, if any, on whose behalf the nomination is made may respectively have in such business or with such nominee. At the request of the Board of Directors, any person nominated for election as a director shall furnish to the Secretary of the Company the information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee.
If public disclosure of the date of the meeting is made less than 100 days prior to the date of the meeting, a stockholder’s notice must be received not later than the close of business on the tenth day following the day on which such public disclosure of the date of the meeting was made. With respect to a special meeting called at the written request of stockholders, any notice submitted by a stockholder making the request must be provided simultaneously with such request.
Code of Ethics and Conduct
Our Board of Directors has adopted a Code of Ethics and Conduct that is applicable to all our employees, officers and directors. Our Code of Ethics and Conduct is intended to ensure that our employees act in accordance with the highest ethical standards. A copy of our Code of Ethics and Conduct may be obtained by sending a written request to us at 11900 College Blvd., Suite 310, Overland Park, KS 66210; Attn: President and the Code of Ethics and Conduct is filed as an exhibit to this Annual Report on Form 10-K.
Section 16(a) Beneficial Ownership Reporting
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who own more than ten percent (10%) of our common stock, to file with the Securities and Exchange Commission reports of ownership of, and transactions in, our securities and to provide us with copies of those filings. To our knowledge, based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2019, all filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with during fiscal year 2019.
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Item 11. Executive Compensation.
The following table shows compensation paid, accrued or awarded with respect to our named executive officers during the years indicated, a significant portion of all compensation after 2008 is accrued but not paid:
2019 - Summary Compensation Table
| Name
and Principal Position |
Year | Salary ($) |
Bonus ($) |
Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation |
Change
in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All
Other Compensation ($) |
Total ($) |
|||||||||||||||||||||||||||
| Stanton Ross (1) | 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| CEO | 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| Daniel F. Hutchins(2) | 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| COO | 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
| James Loeffelbein(3) | 2019 | $ | — | $ | — | $ | 260,000 | $ | — | $ | — | $ | — | $ | — | $ | 260,000 | |||||||||||||||||||
| COO | 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
(1) The Company’s Board of Directors discontinued compensation for the Company’s officers and directors effective January 1, 2018. In addition, due to the financial condition of the Company, Mr. Ross has deferred the receipt of a portion of his salary since January 2009. Mr. Ross received $-0- of his salary in cash during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, a total of $565,708 of his salary has been accrued but was unpaid.
(2) The Company’s Board of Directors discontinued compensation for the Company’s officers and directors effective January 1, 2018. Mr. Hutchins began serving the Company as Chief Financial Officer in August 2007. Since January 2009 he has deferred his compensation and a total of $900,000 of direct compensation was accrued but unpaid as of December 31, 2019. Previously, Mr. Hutchins received other indirect compensation consisting of services billed at the CFO firm’s normal standard billing rate plus out-of-pocket expenses for general corporate and bookkeeping purposes. For the years ended December 31, 2019 and 2018 the Company was billed $-0- for such services. Total amounts accrued for his indirect compensation was $762,407 as of December 31, 2019 and 2018.
(3) The Company’s Board of Directors appointed John Loeffelbein, as Chief Operating Officer of Infinity Energy Resources, Inc. effective September 30, 2019. In connection with his appointment as Chief Operating Officer the Board of Directors approved the grant of 2,000,000 restricted shares of common stock effective October 2, 2019. Of the 2,000,000 total restricted shares, 1,250,000 vested immediately and the remaining 750,000 will vest one year after the date of grant, assuming that he remains as an employee of the Company at that point in time. Mr. Loeffelbein will receive no cash compensation for his services for the remainder of 2019 and calendar year 2020. The value of the restricted stock awards was determined based on the total number of restricted shares at the closing price on the date of award or October 2, 2019.
Compensation Policies and Objectives
We structure compensation for executive officers, including the named executive officers, to drive performance, to accomplish both our short-term and long-term objectives, and to enable us to attract, retain and motivate well qualified executives by offering competitive compensation and by rewarding superior performance. We also seek to link our executives’ total compensation to the interests of our shareholders. To accomplish this, our board of directors relies on the following elements of compensation, each of which is discussed in more detail below:
| ● | salary; | |
| ● | annual performance-based cash awards; | |
| ● | equity incentives in the form of stock and/or stock options; and | |
| ● | other benefits. |
Our board of directors believes that our executive compensation package, consisting of these components, is comparable to the compensation provided in the market in which we compete for executive talent and is critical to accomplishing our recruitment and retention aims.
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In setting the amounts of each component of an executive’s compensation and considering the overall compensation package, the Committee generally considers the following factors:
Benchmarking—For executive officers, the board of directors considers the level of compensation paid to individuals in comparable executive positions of other oil and gas exploration and production companies of a similar size. The board of directors believes that these companies are the most appropriate for review because they are representative of the types of companies with which we compete to recruit and retain executive talent. The information reviewed by the board of directors includes data on salary, annual and long-term cash incentive bonuses and equity compensation, as well as total compensation.
Internal Equity—The board of directors considers the salary level for each executive officer and each position in overall management to reflect their relative value to us.
Individual Performance—The board of directors considers the individual responsibilities and performance of each named executive officer, which is based in part on the board of directors’ assessment of that individual’s performance as well as the evaluation of the individual by the Chief Executive Officer.
All executive officers are eligible for annual cash bonuses and equity incentive awards that reinforce the relationship between pay and performance by conditioning compensation on the achievement of the Company’s short- and long-term financial and operating goals, including operating profits, reserve finding costs, and growth in the Company’s daily oil and gas production and estimated proved, probable and possible recoverable oil and gas reserves.
Components of Executive Compensation
The following provides an analysis of each element of compensation, what each element is designed to reward and why the board of directors chose to include it as an element of our executive compensation.
Salaries
Salaries for executive officers are intended to incentivize the officers to focus on executing the Company’s day-to-day business and are reviewed annually. Changes are typically effective in April of each year and are based on the factors discussed above. Compensation arrangements with Mr. Hutchins were determined through arms-length negotiations. The Company’s Board of Directors discontinued compensation for the Company’s officers and directors effective January 1, 2018.
Annual Bonuses
The awarding of annual bonuses to executives is at the Committee’s discretion. The objective of the annual bonus element of compensation is to align the interest of executive officers with the achievement of superior Company performance for the year and also to encourage and reward extraordinary individual performance. In light of the Company’s operating results for 2019 and 2018, the Committee determined that it was appropriate not to grant annual bonuses to the executive officers for 2019 and 2018.
Stock Options
Including an equity component in executive compensation closely aligns the interests of the executives and our shareholders and rewards executives consistent with shareholder gains. Stock options produce value for executives only if our stock price increases over the exercise price, which is set at the market price on the date of grant. Also, through vesting and forfeiture provisions, stock options serve to encourage executive officers to remain with the Company. Awards made other than pursuant to the annual equity grants are typically made to newly hired or recently promoted employees.
In determining the stock option grants for Messrs. Ross and Hutchins, the Board considered the number of options previously granted that remained outstanding, the number and value of shares underlying the options being granted and the related effect on dilution. The Board also took into account the number of shares that remained available for grant under our stock incentive plans. Messrs. Ross and Hutchins were not granted stock options during the year ended December 31, 2019 and 2018. Information regarding all outstanding equity awards as of December 31, 2019 for the named executive officers is set forth below in the “Outstanding Equity Awards at Fiscal Year End” table.
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Other Elements of Executive Compensation
We have not provided cash perquisites to our executive officers given our limited funds.
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 (the “RSP”) 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. The RSP shall 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.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
(As of December 31, 2019)
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||||
| Ross | 20,000 | — | — | $ | 52.50 | 2/10/2021 | — | — | — | — | ||||||||||||||||||||||||||
| 20,000 | — | — | $ | 75.00 | 8/2/2021 | — | — | — | — | |||||||||||||||||||||||||||
| 50,000 | — | — | $ | 30.00 | 11/6/2021 | — | — | — | — | |||||||||||||||||||||||||||
| 60,000 | — | — | $ | 30.00 | 1/17/2024 | — | — | — | — | |||||||||||||||||||||||||||
| Hutchins | 17,500 | — | — | $ | 52.50 | 2/10/2021 | — | — | — | — | ||||||||||||||||||||||||||
| 17,500 | — | — | $ | 75.00 | 8/2/2021 | — | — | — | — | |||||||||||||||||||||||||||
| 25,000 | — | — | $ | 30.00 | 11/6/2021 | — | — | — | — | |||||||||||||||||||||||||||
| 15,000 | — | — | $ | 30.00 | 1/17/2024 | — | — | — | — | |||||||||||||||||||||||||||
| Loeffelbein | — | — | — | — | — | 750,000 | $ | 60,000 | — | — | ||||||||||||||||||||||||||
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DIRECTOR COMPENSATION
The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as the case may be, to each of the Company’s directors during the fiscal years ended December 31, 2019 and 2018.
| Name (2) | Year | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Leroy C. Richie (1) | 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| 2018 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
(1) The Company’s Board of Directors discontinued compensation for the Company’s officers and directors effective January 1, 2018. Mr. Richie received no cash compensation in 2019 and 2018 and has accrued an aggregate of $363,500 for his services on the Board since January 1, 2008.
(2) Mr. Ross’ and Mr. Hutchins’ compensation and option awards are noted in the Executive Compensation table because neither of them received compensation or stock options for their services as a director.
Compensation Committee Interlocks and Insider Participation
Leroy C. Richie was the sole member of the Compensation Committee in 2019 and 2018. Mr. Richie is not currently and has not ever been an officer or employee of Infinity or its subsidiaries.
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
We have no employment agreements or similar contracts with Stanton E. Ross, Daniel F. Hutchins or John Loeffelbein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of May 13, 2020, the number and percentage of outstanding shares of common stock beneficially owned by each person known by us to beneficially own more than five percent of such stock. We have no other class of capital stock outstanding.
Security Ownership of Certain Beneficial Owners
| Name and address of beneficial owner | Amount and nature of beneficial ownership | Percent
of class |
||||||
| 5% Stockholders (excluding executive officers and directors): | ||||||||
| % | ||||||||
| None | ||||||||
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The following table sets forth, as of May 13, 2020, the number and percentage of outstanding shares of common stock beneficially owned by each director of the Company, each named officer of the Company, and all our directors and executive officers as a group. We have no other class of capital stock outstanding.
Security Ownership of Management
| Name and address of beneficial owner | Amount and nature of beneficial ownership | Percent
of class |
||||||
| Executive Officers & Directors: (1) | ||||||||
| Stanton E. Ross (2) | 177,500 | 1.41 | % | |||||
| Leroy C. Richie (3) | 65,000 | 0.51 | % | |||||
| John Loeffelbein (4) | 2,000,000 | 15.87 | % | |||||
| Daniel F. Hutchins (4) | 93,000 | 0.74 | % | |||||
| All officers and directors as a group (3 individuals) | 2,335,500 | 18.53 | % | |||||
(1) The address of these persons is c/o 11900 College Blvd., Suite 310, Overland Park, KS 66210.
(2) Mr. Ross’s shares include vested options exercisable to purchase 150,000 shares of common stock. Mr. Ross has pledged 27,500 shares of common stock and all of his outstanding options to purchase common stock to third parties as collateral for personal loans.
(3) Mr. Richie’s total shares include vested options exercisable to purchase 65,000 shares of common stock.
(3) Mr. Loeffelbein’s total shares include 750,000 restricted shares of common stock subject to forfeiture.
(4) Mr. Hutchins’ total shares include vested options exercisable to purchase 75,000 shares of common stock.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The charter for the Company’s Audit Committee includes a requirement for the Audit Committee to review and approve any transaction involving the Company and a related party at least once a year or upon any significant change in the transaction or relationship. For these purposes, a “related party transaction” includes any transaction required to be disclosed pursuant to Item 404 of Regulation S-K.
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 year ended December 31, 2019 and 2018. The amount due to the CFO’s firm for services previously provided was $762,407 at December 31, 2019 and 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.
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On July 31, 2019 we acquired an Option from Core, to purchase the production and mineral rights/leasehold for the Properties. We paid a nonrefundable deposit of $50,000 to bind the Option, which provided us the right to acquire the Properties for $2.5 million prior to December 31, 2019. The Company was not able to exercise the Option prior to December 31, 2019 and the parties are currently negotiating an extension of such Option and reduction of the purchase price. Mr. Loeffelbein, our COO is a member of Core.
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 December 31, 2019 and 2018, the Company had accrued compensation to its officers and directors of $1,829,208 and $1,829,208, respectively. The Board of Directors has authorized the Company to cease compensation for its officers and directors effective January 1, 2018.
Stanton E. Ross, Leroy C. Richie and Daniel F. Hutchins are the directors of the Company. Messrs. Ross and Hutchins are not considered “independent” in accordance with Rule 5605(a)(2) of the NASDAQ Marketplace Rules. The Board of Directors has determined that Mr. Richie is independent in accordance with the NASDAQ and SEC rules. We are currently traded on the OTC QB, which does not require that a majority of the board be independent. If we ever become an issuer whose securities are listed on a national securities exchange or on an automated inter-dealer quotation system of a national securities association, which has independent director requirements, we intend to comply with all applicable requirements relating to director independence.
Item 14. Principal Accounting Fees and Services.
Audit and Related Fees
The Audit Committee of the Company has appointed RBSM, LLP as the Company’s independent registered public accounting firm for the year ended December 31, 2019 and 2018.
The following table is a summary of the fees rendered to us by RBSM, LLP for the years ended December 31, 2019 and 2018:
| Fee Category: | 2019 | 2018 | ||||||
| Audit Fees | $ | 56,500 | $ | 53,000 | ||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total Fees | $ | 56,500 | $ | 53,000 | ||||
Audit Fees. Such amount consists of fees billed for professional services rendered in connection with the audit of our annual financial statements and review of the interim financial statements included in our quarterly reports. It also includes services that are normally provided by our independent registered public accounting firms in connection with statutory and regulatory filings or engagements.
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Audit-Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include employee benefit plan audits, accounting consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax Fees. Tax fees consist of fees billed for professional services related to tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, customs and duties, mergers and acquisitions, and international tax planning.
All Other Fees. Consists of fees for products and services other than the services reported above. In fiscal 2019 and 2018, there were no fees related to this category.
The Audit Committee’s practice is to consider and approve in advance all proposed audit and non-audit services to be provided by our independent registered public accounting firm. All of the fees shown above were pre-approved by the Audit Committee.
The audit report of RBSM, LLP on the financial statements of the Company for the years ended December 31, 2019 and 2018 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. The opinion did emphasize a matter regarding the Company’s ability to continue as a going concern.
During our fiscal year ended December 31, 2019 and 2018 there were no disagreements with RBSM, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to RBSM, LLP’s satisfaction would have caused it to make reference to the subject matter of such disagreements in connection with its report on the financial statements for such period.
During our fiscal years ended December 31, 2019 and 2018, there were no reportable events (as described in Item 304(a)(1)(v) of Regulation S-K).
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this annual report on Form 10-K:
| 1. | Financial Statements: |
All financial statements set forth under Part II, Item 8 of this annual report.
| 2. | Financial Statement Schedules: |
All schedules are omitted because they are not applicable or are not required, or because the required information is included in the financial statements or notes in this annual report.
| 3. | Exhibits: |
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EXHIBITS
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(1) Filed as an exhibit to Form 10 by the Company on May 13, 2011.
(2) Filed as an exhibit to Amendment No. 1 to Form 10 by the Company on July 1, 2011.
(3) Filed as an exhibit to Amendment No. 2 to Form 10 by the Company on April 5, 2012.
(4) Filed as an exhibit to Form 10-K by the Company on April 16, 2012.
(5) Filed as an exhibit to Form 8-K by the Company on April 19, 2012.
(6) Filed as an exhibit to Form 8-K by the Company on February 19, 2013.
(7) Filed as an Exhibit to Form 8-K by the Company on March 1, 2013.
(8) Filed as an Exhibit to Form 8-K by the Company on April 29, 2013
(9) Filed as an Exhibit to Form 8-K by the Company on January 3, 2014
(10) Filed as an Exhibit to Form 8-K by the Company on November 20, 2014
(11) Filed as an Exhibit to Form 8-K by the Company on May 8, 2015
(12) Filed as an Exhibit to Form 8-K by the Company on May 11, 2015
(13) Filed as an Exhibit to Form 8-K by the Company on August 12, 2015
(14) Filed as an Exhibit to Definitive Schedule 14A filed by the Company on August 12, 2015
(15) Filed as an Exhibit to Form 10-K by the Company on April 17, 2017
(16) Filed as an Exhibit to Form 8-K by the Company on May 24, 2019
(17) Filed as an Exhibit to Form 8-K by the Company on June 3, 2019
(18) Filed as an Exhibit to Form 8-K by the Company on June 6, 2019
(19) Filed as an Exhibit to Form 8-K by the Company on June 20, 2019
*XBRL related information in Exhibit 101 to this annual report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 14, 2020
| INFINITY ENERGY RESOURCES, INC., | ||
| a Delaware corporation | ||
| By: | /s/ Stanton E. Ross | |
| Stanton E. Ross | ||
| Chief Executive Officer | ||
| By: | /s/ Daniel F. Hutchins | |
| Daniel F. Hutchins | ||
| Chief Financial Officer | ||
| By: | /s/ John Loeffelbein | |
| John Loeffelbein | ||
| Chief Operating Officer | ||
Each person whose signature appears below authorizes Stanton E. Ross to execute in the name of each such person who is then an officer or director of the registrant, and to file, any amendments to this annual report on Form 10-K necessary or advisable to enable the registrant to comply with the Securities Exchange Act of 1934 and any rules, regulations and requirements of the Securities and Exchange Commission in respect thereof, which amendments may make such changes in such annual report as such attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature and Title | Date | |
| /s/ Stanton E. Ross | May 14, 2020 | |
| Stanton E. Ross, Director and Chief Executive Officer | ||
| /s/ Leroy C. Richie | May 14, 2020 | |
| Leroy C. Richie, Director and Audit Committee Chairman | ||
| /s/ Daniel F. Hutchins | May 14, 2020 | |
| Daniel F. Hutchins, Director and Chief Financial Officer |
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