Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.00pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
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Net-tone change vs last year's 10-K.
MD&A
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Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Risk Factors (Item 1A)
12,714 words
Item 1A. Risk Factors.
In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following risks and uncertainties, some of which have occurred and any of which may occur in the future, could have a material adverse effect on our business, financial condition, results of operations, cash flows, and prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, financial condition, results of operations, cash flows, and prospects. Our actual results and performance may differ materially from any future results and performance expressed or implied by such forward-looking statements as a result of various factors, including, but not limited to, those discussed in the sections of this report titled “Cautionary Statement Concerning Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related to Our Business and Operations
We Are an Early-Stage Company with Limited Proved Reserves, and We Have a Number of Important Milestones That We Must
MD&A (Item 7)
5,546 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for helium and CO 2 , production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed in this Annual Report on Form 10-K, particularly in “Item 1A. Risk Factors” and above in “Cautionary Statement Concerning Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur.
Our business plan is to engage in acquisition, exploration, development and production of helium and beverage grade carbon dioxide (CO 2 ), along with the capabilities for carbon capture and storage. The Company’s assets are concentrated in the St. Johns Field located in Apache County, Arizona (the “St. Johns Field”). The Company commenced production at its phase I helium extraction plant in July 2023 and had its first sale of helium produced from the St. Johns Field in August 2023. The Company’s expansion plans for helium extraction and CO 2 processing require financing from external sources to complete the work. In view of our extremely limited history in the helium and CO 2 exploration and carbon capture business, an investor may have difficulty in evaluating us and our business, both current and future activities. An investor must consider our business and prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. For our business plan to succeed, we must successfully undertake most of the following activities:
complete a financing or similar transaction that will provide us with sufficient funds;
develop the St. Johns Field to a stage at which helium and beverage grade CO 2 are being produced in commercially viable quantities;
contract with offtakers of our commercial production of helium and CO 2 upon the commencement of such production;
develop distribution channels to sell and transport our products; and
identify and enter into binding agreements with suitable third parties (such as joint venture partners and contractors) to construct and/or operate our processing facilities.
There can be no assurance that we will be successful in raising sufficient funds and undertaking the activities listed above. Our failure to undertake successfully most of the activities described above could materially and adversely affect our business, prospects, financial condition and results of operations.
We Have a History of Operating Losses, and We May Not Generate Sufficient Revenues to Support Our Operations or to Become Profitable
We have incurred operating losses since our inception. For the years ended December 31, 2023 and 2022, we incurred net operating losses of $5,835,871 and $8,054,770, respectively. As of December 31, 2023, we had an accumulated deficit of $44,262,874. We expect our net operating losses to continue until we are able to raise sufficient capital to expand our producing and processing capabilities. If our revenues do not increase substantially or if our expenses exceed our expectations, we may never become profitable. There can be no assurance that our exploration and production activities at the St. Johns Field will produce helium and CO 2 in commercially viable quantities. Moreover, even if we succeed in producing helium and CO 2 at the St. Johns Field, we expect to incur net operating losses until such time, if ever, that we produce and sell a sufficient volume of our helium and CO 2 to cover direct production costs as well as corporate overhead. There can be no assurance that sales of our helium and CO 2 production will ever generate significant revenues, that we will ever generate positive cash flow from our operations or that, if ever attained, we will be able to sustain profitability in any future period. If we cannot operate profitably, you could lose your entire investment. We may not generate revenues in the next twelve months sufficient to support our operations and therefore may rely solely on the cash we raise from investments.
Because We Have a Limited Operating History, We May Not Be Able to Successfully Operate Our Business or Execute Our Business Plan
Given our limited operating history, it is hard to evaluate our proposed business and prospects. Our proposed business operations will be subject to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks include, but are not limited to, the following:
expected continuing losses for the foreseeable future;
insufficient capital to fully realize our operating plan;
our ability to anticipate and adapt to developing markets;
limited marketing experience;
a competitive environment characterized by well-established and well-capitalized competitors;
the ability to identify, attract and retain qualified personnel; and
operating in an environment that is highly regulated.
Because we are subject to these risks, evaluating our business may be difficult, our business strategy may be unsuccessful and we may be unable to address such risks in a cost-effective manner, if at all. If we are unable to successfully address these risks our business, prospects, financial condition and results of operations could be materially and adversely affected.
The United States Government is Selling its Helium Reserves and the Effects of This Action are Unknown at This Time
In January 2024, the United States government accepted a bid at an auction it conducted to sell off its federal helium reserves, which are near Amarillo, Texas, to a private company. The United States government has 130 days to accept or reject the bids, and there will be some period of time after these 130 days before the sale actually is consummated. Nonetheless, the effects of this action are unknown at this time. On the one hand, concerns have been raised about an interruption in the supply of helium due to this transaction, and in particular a supply chain crisis. Another potential outcome of this transaction is that the buyer of the United States government’s helium reserves will attempt to put those helium reserves into the market shortly after the transaction closes, increasing the supply of helium and, therefore, likely putting downward pressure on the market price of helium. There could also potentially be effects from this transaction on the demand for helium. In short, at the current time, it is impossible to accurately predict what the effects of this action will be on our company, although it is possible that this action will materially and adversely impact our business, prospects, financial condition and results of operations.
We Are Significantly Leveraged
On November 21, 2023, we entered into a securities purchase agreement (the “SPA”) with Kips Bay Select LP (“Kips Bay”) and Cyber One LTD (“Cyber One”). Pursuant to the SPA, we have issued and sold to Kips Bay and Cyber One notes for an aggregate principal amount of $16,000,000, which resulted in cash proceeds to us in the aggregate amount of $8,000,000 (the “Notes”), and issued to each of Kips Bay and Cyber One 3,846,154 common stock warrants (the “Warrants”). The Notes bore interest at 5% per annum before an event of default, computed on the basis of a 360-day year and twelve 30-day months, not compounded, and payable on a monthly basis in cash. The Notes are in default and the interest increased to 18% per annum. The Notes are secured by all of our assets owned directly or indirectly. The use of secured indebtedness to finance our business is referred to as leveraging. Leveraging increases the risk of loss to us if and to the extent we have insufficient revenue to pay our debt obligations. Cash from other sources are required to cure the event of default. Unless we generate or raise such cash, we will not have sufficient funds to cure the event of default. Additionally, we are seeking an amendment to the Notes that would cure the event of default. If we are not successful in raising cash from other sources or amending the Notes, we might be required to sell our assets and properties to meet our obligations.
The Exercise of Secured Creditor Rights Could Result in a Significant or Complete Loss
We are in default on the Notes and the remedies available to our noteholders are (among other things) to institute proceedings against our assets and properties to sell them to satisfy the amounts owed pursuant to the Notes. This could result in the partial or total loss of our assets and properties. We have no assurance that, upon the exercise of our noteholders’ secured creditor rights, we would receive a return of anything on our assets and properties.
The loss of our assets and properties by the exercise of our noteholders secured creditor rights would most likely materially and adversely affect our business, financial condition or assets, and could result in a total loss to our stockholders.
Our Notes Feature Certain Operating Covenants That Could Adversely Affect the Company
The Notes contain operating covenants that prohibit us from certain actions (“negative operating covenants”) and that require us to continually undertake other actions (“affirmative operating covenants”). The negative operating covenants could preclude us from taking actions that we believe to be in the best interests of the Company and our stockholders. The affirmative operating covenants will require us to incur continuing costs and expenses and could require us to take actions that we believe are not in our best interests. Moreover, our failure to comply with either negative operating covenants or affirmative operating covenants would most likely be a default under the Notes, giving to our noteholders the rights described above.
We Need Additional Capital to Develop the St. Johns Field, Pay Debt Obligations and Fund Corporate Overhead; We May Not Be Able to Raise Such Capital or Such Capital May be Available to Us Only on Unfavorable Terms
We need additional capital to develop the St. Johns Field, pay debt obligations and fund corporate overhead and we are actively engaged in efforts to complete a capital raising transaction for these purposes. In the past, we have used the services of firms that specialize in capital procurement, but we are currently pursuing our own capital raising initiatives. If funds are not procured pursuant to this arrangement, we will be constrained to seek alternative financing. We have no assurance that we will be successful in completing a transaction that will provide us with required funds. Failure to procure funds needed to develop operations sufficient to generate enough cash to retire the Notes as they become due could result in noteholders’ eventual exercise of the rights of a secured creditor and the possible loss of all or a large part of our assets. If either of the preceding events were to occur, we could be forced to cease our current business plan, which could result in a complete loss to our stockholders. Our future liquidity will depend upon numerous factors, including the success of our business efforts and our capital-raising activities. If we obtain funds through the issuance of equity securities, the following results will or may occur:
the percentage ownership of our existing stockholders will be reduced;
the new equity securities could have rights, preferences or privileges senior to those of the holders of our common shares.
We cannot assure you of our ability to raise funds for any purpose or on commercially reasonable terms.
There is Substantial Doubt as to Whether We Will Continue Operations Without Additional Financing
There is substantial doubt about our ability to continue to operate as a going concern for the twelve months following the date of this Annual Report on Form 10-K. Key to this determination is our lack of any significant revenues historically and our ability to settle our debt obligations due under the SPA entered into on November 21, 2023. We continue to finance our business through private sales of our Common Stock. Pursuant to the terms of the SPA and the transaction documents, we are unable to raise any indebtedness until after the Notes have been converted into shares of Common Stock or have been repaid in full and we are unable to issue or sell, without the prior consent of the lead investor, among other things, any debt, equity or equity-linked securities (including options or warrants) that are convertible into, exchangeable or exercisable for, or include the right to receive shares of Common Stock. Notwithstanding the preceding, we still need additional funds. There can be no assurance that we will be successful in securing funding, becoming profitable, or continuing our business without either a temporary interruption or a permanent cessation.
If We Fail to Manage Our Growth Effectively, We May Be Unable to Execute Our Business Plan
If we are successful in growing our business as we plan, our operations may expand rapidly and significantly. Any rapid growth could place a significant strain on our management, operational and financial resources. In order to manage the growth of our operations, we will be required to improve and expand existing operations; to implement new operational, financial and inventory systems, procedures and controls, including improvement of our financial and other internal management systems; and to train, manage and expand our staffing. If we are unable to manage growth effectively, our business, results of operations and financial condition will be materially and adversely affected.
Our Outstanding Obligations and Ability to Issue Additional Shares of Common Stock Could Result in Significant Dilution to Stockholders
The Notes and unpaid interest outstanding as of the date of the filing of this Annual Report on Form 10-K are convertible into approximately 5.4 million shares of our Common Stock, and the number of shares of Common Stock into which these Notes and unpaid interest may be converted may increase in the future. An aggregate of approximately 7.7 million shares of our Common Stock can be acquired upon the exercise of the outstanding Warrants. The conversion price of the Notes and the exercise price of the Warrants may be less than the then current market price of the shares of Common Stock at the time of conversion and exercise. Moreover, we may register additional shares of Common Stock for issuance pursuant to an equity incentive plan to employees, officers, directors, and outside consultants to compensate them for services provided or to provide incentives to them for issuance in the future. Future issuance of additional shares pursuant to the Notes, Warrants or the equity incentive plan, or otherwise, could cause immediate and substantial dilution to the net tangible book value of shares of Common Stock issued and outstanding immediately before such transactions. Any future decrease in the net tangible book value of such issued and outstanding shares could materially and adversely affect the market value of the common shares. Moreover, any shares of Common Stock issued as described above would further dilute the percentage ownership of existing stockholders. The terms on which we could obtain additional capital while the Notes or the Warrants are outstanding may be adversely affected because of the potential dilution described in this risk factor.
Our Competitors Include Larger, Better-Financed and More Experienced Companies
The helium and CO 2 business is highly competitive in the exploration for and acquisition of reserves, the acquisition of mineral leases, equipment and personnel required to find and produce reserves, in the gathering and marketing of helium and CO 2 , as well as the distribution of these products. As an early-stage company, we must compete against the independent exploration and production companies as well as larger industrial gas and integrated oil and natural gas companies that may have greater financial and technical resources than we have and substantially more experience in our industry. These competitive advantages may betterenable our competitors to sustain the impact of higher exploration and production costs, any helium and CO 2 price volatility, productivity variances among properties, overall industry cycles, transportation and supply chain issues, and other factors related to our industry. The advantages of our competitors may also negatively impact our ability to acquire prospective properties, develop reserves, attract and retain quality personnel and raise capital.
Continuing or Worsening Inflation Could Adversely Affect Our Business
Global markets have recently experienced high rates of inflation. Inflationary pressures have increased, and are likely to continue to increase, our operating and capital costs and the costs of our planned exploration and development activities. Expectations of lingering or increasing inflationary pressures in our industry are becoming widespread. In addition to price increases by third-party service companies, it may become more costly for us to recruit and retain key employees, particularly specialized/technical personnel, in the face of increased competition for specialized and experienced field and corporate employees. In addition, governmental responses to inflation, such as any increase in interest rates or the effects of previous interest rate increases, may have a significant negative impact on the economy generally, which could have a material adverse effect on our business. In the current environment, assumptions about future commodity prices, exchange rates, interest rates, costs of inputs and customer credit performance are subject to greater variability than normal, which could, in the future, significantly affect the valuation of our assets, both financial and non-financial, and may have a material adverse effect on our business, results of operations and financial condition.
Our Focus on Developing and Operating in the St. Johns Field That Has Limited Infrastructure and Producing Wells Exposes Us to Greater Risks Than Are Generally Encountered in Businesses Focused on Operating in Well Developed Fields
Our initial activity involves drilling and/or developing wells and installing helium and CO 2 processing facilities in the St. Johns Field. Test wells have been drilled in the St. Johns Field; however, there is limited history of commercial scale production of helium and CO 2 in the St. Johns Field. Furthermore, we do not have a history of helium and CO 2 processing facilities processing gas with the gas composition from our wells. The helium and CO 2 processing facilities may take longer than expected, if ever, to reach nameplate production capacity.
Additionally, because the St. Johns Field is undeveloped and in a remote location, it has limited resources of manpower and lease and well service providers. Such limited resources may slow down the process of getting shut-in wells and damaged equipment back online and may limit our ability to hire qualified field personnel. All of these factors may impact whether a drilling program will generate cash flows sufficient to provide a suitable return on investment. If we experience a series of failed drilling projects, our business, results of operations and financial condition could be materially and adversely affected. Additionally, electricity to the site is not provided by Proton Green and thus we are reliant on third parties to power our equipment.
There Are Risks Associated With the Exploration, Development and Production of Natural Resources Such As Helium and Beverage Grade CO 2
Exploring and developing natural resource projects bears a high potential for all manner of risks. Many exploration projects do not successfullyachieve development due to factors that cannot be predicted or foreseen. Moreover, even one such factor may result in the economic viability of a project being detrimentally impacted, such that it is neither feasible nor practical to proceed. Natural resource exploration involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Operations in which we have a direct or indirect interest will be subject to all the hazards and risks normally incidental to exploration, development and production of natural resources, any of which could result in work stoppages, damages to property, and possible environmental damage. If any of our exploration programs are successful, there is a degree of uncertainty attributable to the calculation of resources and corresponding grades and in the analysis of the economic viability of future development and mineral extraction. Until actually extracted and processed, the quantity of helium and beverage grade CO 2 reserves and resources must be considered as estimates only. In addition, the quantity of reserves and resources may vary depending on helium and CO 2 prices and various technical and economic assumptions. Any material change in quantity of resources, reserves, grade or recovery ratio, may affect the economic viability of our properties. In addition, there can be no assurance that results obtained in pilot projects will be duplicated in larger scale tests under on-site conditions or during production. We closely monitor our activities and those factors which could impact them, and employ experienced consulting, engineering, and legal advisors to assist us in our risk management reviews where it is deemed necessary.
Our operations are subject to all of the risks normally incident and inherent to the operation and development of natural resource properties and the drilling of wells, including, without limitation, equipment failures; fires; formations with abnormal pressures; uncontrollable flows of gases or well fluids; release of contaminants into the environment and other environmental hazards and risks; and well control events. In addition, our operations are sometimes near residential areas, which adds additional risks. The nature of these risks is such that some liabilities could exceed our insurance policy limits or otherwise be excluded from, or limited by, our insurance coverage, as in the case of environmental fines and penalties, for example, which are excluded from coverage as they cannot be insured.
We could incur significant costs related to these risks that could have a material adverse effect on our results of operations, financial condition and cash flows or could have an adverse effect upon the profitability of our operations. Additionally, a portion of our production activities may involve CO 2 injections into fields with wells plugged and abandoned by prior operators. It is often difficult (or impracticable) to determine whether a well has been properly plugged prior to commencing injections and pressuring the CO 2 reservoirs.
We may incur significant costs related to these risks that could have a material adverse effect on our results of operations, financial condition and cash flows or could have an adverse effect upon the profitability of our operations. We may incur significant costs in connection with remedial plugging operations to prevent environmental contamination and to otherwise comply with federal, state and local regulations relative to the plugging and abandoning of our helium and CO 2 wells. In addition to the increased costs, if wells have not been properly plugged, modification to those wells may delay our operations and reduce our production.
Development activities are subject to many risks, including the risk that we will not recover all or any portion of our investment in such wells and helium and CO 2 processing facilities.
The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project. Further, our drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including:
unexpected drilling conditions;
pressure or irregularities in the composition of fluids or quality of encountered formations;
equipment failures or accidents;
adverse weather conditions that can disrupt, delay or impede operations and damage processing facilities and delivery systems;
compliance with environmental and other governmental requirements;
the cost of, or shortages or delays in the availability of, drilling rigs, equipment, pipelines and services; and
title problems.
Our helium and CO 2 gas processing operations are subject to all the risks and operational hazards inherent in gathering, compressing, processing, fractionating, storing, loading and transporting helium and CO 2 , including:
damages to pipelines, terminals and facilities, related equipment and surrounding properties caused by fires, severe weather, and other natural disasters, the frequency and severity of which may be impacted by climate change, and acts of terrorism;
maintenance, repairs, mechanical or structural failures at our helium and CO 2 processing facilities on which our operations are dependent, including electrical shortages, power disruptions and power grid failures;
loss of or no availability of railroads, trucks, terminals and other means of delivering processed helium and CO 2 ;
rail car derailments, fires, explosions and spills;
disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack;
curtailments of operations due to severe seasonal weather;
protests, strikes, lockouts or other industrial disturbances;
availability and reliability of electric power; and
other hazards.
These risks could result in substantial losses due to personal injury and/or loss of life, severedamage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our helium and CO 2 gas processing facilities. Any such event or unplannedshutdown could have a material adverse effect on our business, financial condition and results of operations.
The Marketability of Our Production is Dependent Upon Transportation Means and Other Facilities, Which We Do Not Control; If and When These Transportation Means and Facilities Are Unavailable, Our Operations Could Be Interrupted and Our Revenues Would Be Adversely Affected
The marketability of our helium and CO 2 production depends, in part, upon the availability, proximity and capacity of transportation means, which includes trucking and railcars, owned by third parties. In general, we do not control these transportation facilities, and our access to them may be limited or denied. A significant disruption in the availability of, and access to, these transportation lines or other production facilities could adversely impact our ability to deliver to market or produce our helium and CO 2 and thereby cause a significant interruption in our operations. In some cases, we may be required to shut in wells, at least temporarily, for lack of a market because of the inadequacy or unavailability of transportation means. If that were to occur, we would be unable to timely realize revenue from those wells until arrangements were made to deliver our production to market. Moreover, our ability to produce and market helium and CO 2 could be negatively impacted by:
government regulations; and
government transportation, tax and energy policies.
We Rely on Independent Experts and Technical or Operational Service Providers Over Whom We May Have Limited Control
We are, and will continue to be, engaging independent contractors to provide us with technical assistance and services. These include the services of geologists, geophysicists, chemists, landmen, engineers and scientists. We also are and will be relying upon them to analyze the other future prospects to determine methods in which they may be developed in a cost-effective manner and to select drill sites. In addition, we intend to rely on the owners and operators of drilling equipment, and on providers of field services, to drill and develop our wells. Moreover, if our properties hold commercial quantities of helium and CO 2 , we may need to rely on third-party gathering and processing facilities and operators, trucking, and railcars to process and transport our production. Our limited control over the activities and business practices of these providers, any inability on our part to maintain satisfactory commercial relationships with them or their failure to provide quality services could materially and adversely affect our business, results of operations and financial condition.
Shortages of Rigs, Equipment, Supplies and Personnel Could Delay or Otherwise Adversely Affect Our Cost of Operations or Our Ability to Operate According to Our Business Plan
If drilling activity increases in the U.S., a general shortage of drilling and completion rigs, field equipment and qualified personnel could develop. As a result, the costs and delivery times of rigs, equipment and personnel could be substantially greater than in the past. From time to time, these costs have sharply increased and could do so again. The demand for and wage rates of qualified drilling rig crews generally rise in response to the increasing number of active rigs in service and could increase sharply in the event of a shortage. Shortages of drilling and completion rigs, field equipment or qualified personnel could delay, restrict or curtail development activities, which could in turn adversely affect our results of operations.
Our Review of Properties Cannot Assure That All Deficiencies or Environmental Risks May Be Identified or Avoided
We plan on undertaking reviews that we believe are consistent with industry practice for our drilling programs. However, these reviews will often be limited in scope, and may not reveal all existing or potential problems, or permit us to become sufficiently familiar with the related properties to assess all potential problems. Moreover, we may not perform an inspection on every platform or well, and our inspections may not reveal all structural or environmental problems. Our mineral rights with respect to the St. Johns Field contain no indemnification for environmental liabilities. Accordingly, we will pursue our drilling programs on an “as is” basis, which could require us to make substantial expenditures to remediate environmental contamination. If a property deficiency or environmental problem cannot be satisfactorily remedied to warrant commencing drilling operations on a property, we could lose our entire investment in the asset.
We May Not Be Able to Fully Insure Against All Risks Related to Our Proposed Operations, Which Could Result in Substantial Claims for Which We Are Underinsured or Uninsured
While we have insurance for our helium and CO 2 exploration and production activities, there is no assurance that such insurance will cover all the risks we confront. Losses and liabilities arising from uninsured and underinsured events, which could arise from even one catastrophic event, could materially and adversely affect our business, results of operations and financial condition. Our exploration, drilling and other activities are subject to a variety of risks, including without limitation:
fires and explosions;
abnormally pressured formations;
mechanical failures of drilling equipment;
personal injuries and death, including insufficient worker compensation coverage for third-party contractors who provide drilling services; and
natural disasters, such as adverse weather conditions, seismic activity or meteorite impact.
We Expect to Have Limited Control Over Activities of Other Operators, Which Could Reduce Our Production and Revenues
We expect that we will operate all of our wells. However, some of our future business activities could be conducted through joint operating agreements with other operators under which we would own partial interests in certain helium and CO 2 properties. In such a situation, we may not operate the related properties and in some cases we may not have the ability to remove the operator in the event of poor performance. As a result, we may have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. The failure of an operator of our wells to adequately perform operations, or an operator’s breach of the applicable agreements, could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others therefore depend upon a number of factors outside of our and the operator’s control, including:
timing and amount of capital expenditures;
expertise and financial resources; and
inclusion of other participants.
Estimating Our Reserves and Resources, Production and Future Net Cash Flows is Difficult to Do With Any Certainty
Estimating quantities of proved and contingent helium and CO 2 reserves and resources requires interpretations of available technical data and various assumptions, including future production rates, production costs, severance taxes, and capital expenditures. Forecasting the amount of recoverable helium and CO 2 reserves and resources, and the production rates anticipated therefrom, requires estimates. Actual results most likely will vary from our estimates. Also, the use of a 10% discount factor for reporting purposes, as prescribed by the SEC, may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which our business, and the oil and natural gas or other natural resource extraction and processing industries in general, are subject. Any significant inaccuracies in these interpretations or assumptions, or changes of conditions, could result in a revision of the quantities and net present value of our reserves and resources.
The proved helium reserves data and contingent helium and CO 2 resources represent estimates only. Quantities of proved reserves and contingent resources are estimated based on economic conditions, including expected price of helium and CO 2 . The Company used actual contract prices for helium. The CO 2 prices were estimated based on current negotiations with offtakers and limited market data. The representative helium and CO 2 prices used in estimating our January 1, 2024 reserves were $610 per MCF for helium and $200 per ton of CO 2 . Our reserves and resources and future cash flows may be subject to revisions based upon changes in economic conditions, including the helium and CO 2 prices, as well as due to production results, results of future development, operating and development costs, and other factors. Downward revisions of our reserves and resources could have an adverse effect on our financial condition and operating results. Actual future prices and costs may be materially higher or lower than the prices and costs used in our estimates.
Our Properties May Be Subject to Substantial Impairment of Their Recorded Value
The accounting rules for our properties require us to review periodically their carrying value for possible impairment. If helium and CO 2 prices decrease or if the recoverable reserves on a property are revised downward, we may be required to record impairment write-downs, which would result in a negative impact to our financial position. We also may be required to record impairment write-downs for properties lacking economic access to markets and must record impairment write-downs for expiring mineral leases or when we expect such mineral leases to expire without an extension, both of which could also negatively impact our financial position.
We are Increasingly Dependent on Information Technology and Disruptions, Failures or Security Breaches of Our Information Technology Infrastructure Could Have a Material Adverse Effect on Our Operations
Information technology is critically important to our business operations. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, including planning, production, financial, logistics, sales, marketing and administrative functions. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements. These information technology systems, many of which are managed by third parties or used in connection with shared service centers, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems sufferseveredamage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.
In addition, if we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we may encounter significant disruptions in our operations including our production and manufacturing processes, which can cause us to suffer financial and reputational damage, be subject to litigation or incur remediation costs or penalties. Any such disruption could materially and adversely impact our reputation, business, financial condition and results of operations.
Such breaches may also result in the unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees which could further harm our reputation or cause us to suffer financial losses or be subject to litigation or other costs or penalties. The mishandling or inappropriate disclosure of non-public sensitive or protected information could lead to the loss of intellectual property, negatively impact planned corporate transactions or damage our reputation and brand image. Misuse, leakage or falsification of legally protected information could also result in a violation of data privacy laws and regulations and have a negative impact on our reputation, business, financial condition and results of operations.
The Ongoing Impacts of the COVID-19 Pandemic and Its Variants May Negatively Affect Our Operations, Financial Condition, and Demand for Our Products
The COVID-19 pandemic and the new variants of the virus are still impacting countries, communities, supply chains and commodities markets, in addition to the global financial markets. This pandemic has resulted in social distancing, travel bans, governmental stay-at-home orders, and quarantines, and if any of these measures are reinstituted or prolonged, they may limit access to our facilities, customers, suppliers, management, support staff and professional advisors. At this time, it is not possible to fully assess the impact of the COVID-19 pandemic on the Company’s operations and capital requirements, but the aforementioned factors, among other things, may impact our operations, financial condition and demand for our products, as well as our overall ability to react timely and mitigate the impact of this event. Depending on their severity and longevity, the COVID-19 or future pandemics may have a material adverse effect on our business, financial condition and results of operations.
We Depend on Certain Key Personnel
We believe that our future success will depend in large part on our ability to retain and attract highly qualified management, sales and other personnel. Competition for these individuals is intense, and there can be no assurance that we can attract, assimilate or retain necessary personnel in the future. The loss of the services of any member of management, including the lack of sufficient time to devote to our operations, could materially and adversely affect our operations. Any member of management may discontinue providing his services to us at any time and for any reason, and even thereafter commence competition with us. Moreover, we do not currently maintain key man life insurance on any member of management.
We Are Required to Indemnify Our Directors and Officers
Our Articles of Incorporation and Bylaws provide that we will indemnify our officers and directors to the maximum extent permitted by Nevada law, provided that the officer or director did not act in bad faith or breach his or her duty to us or our stockholders, or that it is more likely than not that it will ultimately be determined that the officer or director has met the standards of conduct which make it permissible for under Nevada law for the Company to indemnify the officer or director. If we were called upon to indemnify an officer or director, then the portion of its assets expended for such purpose would reduce the amount otherwise available for the Company’s business.
We May Not Have Adequate Internal Controls Over Financial Reporting
While we are in the process of improving our control systems, our management has determined that our disclosure controls, procedures and controls over financial reporting are not sufficiently effective to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Board of Directors has not yet designated an Audit Committee. We have implemented a number of disbursing, accounting and financial statement preparation and review processes, and added accounting personnel and as a result the financial controls of the Company have been improved. If we do not have adequate internal accounting controls, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under applicable securities laws.
There May Be Limitations on the Effectiveness of Our Internal Controls, and a Failure of Our Control Systems to Prevent Error or Fraud May Materially Harm Us
We do not expect that internal control over financing reporting, even if timely and well established, will prevent all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could materially and adversely affect our business.
We Have Not Voluntarily Implemented Various Corporate Governance Measures, in the Absence of Which, Stockholders May Have More Limited Protections Against Interested Director Transactions, Conflicts of Interest and Similar Matters
Certain legislation, including the Sarbanes Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors’ independence, audit committee oversight, and the adoption of a code of ethics. Although we have adopted a Code of Ethics, we have not yet adopted any of these other corporate governance measures and, since our securities are not yet listed on a national securities exchange, we are not required to do so. Possibly if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Although we intend to bolster our corporate governance capabilities as funds become available for this purpose, prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
Our CEO, President and Director, is Affiliated with VVC Exploration (“VVC”), Which is Our Shareholder As Well As a Company Engaged in Business Activities Similar to Ours, and, Accordingly, May Have Conflicts of Interest in Allocating His Time and Determining to Which Entity a Particular Business Opportunity Should Be Presented
We intend to produce helium and beverage grade CO 2 . VVC engages in a similar business and may compete for the sale of helium in certain territories with us. Our CEO, President and Director, Mr. Steven Looper, has been a member of the VVC board of directors since September 2023. Mr. Looper may hold stock in VVC. As a result, Mr. Looper could have conflicts of interest, including in respect of our contractual relationships with business partners, allocation of management’s time between us and VVC, and decisions of whether to present business opportunities to us or to VVC. These conflicts may not be resolved in our favor, which may result in the terms of our contractual relationships being not as advantageous to us as they would be absent any conflicts of interest, management spending less time on our business than they would absent any conflicts of interest, or potential business opportunities being presented to VVC instead of us. We have no formal code of ethics or policy in place for vetting potential conflicts of interest, and our Board will review any potential conflicts of interest on a case-by-case basis.
Our Chairman of the Board is Affiliated with Our Co-Tenant, Pantheon Resources LLC (Pantheon); Accordingly May Have Conflicts of Interest With Respect to the Shared Space and the Related Expenses
Our independent director and the Chairman of the Board, Mr. David Hobbs, is the executive chairman of Pantheon. In October 2023, the Board approved a co-tenancy arrangement whereby we expanded the leased space in our Houston office and share the expanded space with Pantheon. Under this arrangement, we share equally the costs of the lease and office supplies with Pantheon. However, Mr. Hobbs may have conflicts of interest with respect to the shared space and the related expenses. These conflicts may not be resolved in our favor, which may result in the terms of our contractual relationships being not as advantageous to us as they would be absent any conflicts of interest. We have no formal code of ethics or policy in place for vetting potential conflicts of interest, and our Board will review any potential conflicts of interest on a case-by-case basis.
Risks Relating to Our Industry
Certain Trends and the Corresponding Laws and Regulations Could Materially Adversely Affect Us and Our Industry
Worldwide concern over the risks of climate change is growing. This has led to the following developments and could lead to further movement in the following directions:
Laws are being adopted or considered to reduce greenhouse gas including CO 2 . These laws include carbon taxes, trade tariffs, minimum renewable usage requirements, restrictive permitting, increased efficiency standards, and incentives or mandates for alternative resources. Governments and other activists are also seeking to promote their climate change agendas indirectly, such as by seeking to reduce the availability of or increase the cost for the financing and investment in our industry and taking actions intended to promote changes in business strategy for companies in this industry. In August 2023, we were selected by the U.S. Department of Energy (“DoE”) as a member of a consortium of companies to receive an approximately $11,600,000 grant for plans to develop the Southwest Regional Direct Air Capture (“DAC”) Hub (the “DoE DAC Grant”), see “ Business – U.S. Department of Energy Program ”);
Change of laws and policies with respect to carbon capture could cause the loss of DoE DAC Grant and any future government funding of this type; and
Consumer sentiment seems to be shifting against fuel sources that leave a large carbon footprint in favor of products that use alternative energy sources. As a result, some investors are increasingly sensitive to environmental, social, and governance (“ESG”) matters, opting to divest their holdings of, or not acquire investments in, companies in our industry. Organizations provide information to investors on corporate governance and related matters and have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. As participants in an industry subject to many federal, state and local laws and regulations, any changes to such laws and regulations could have negative impacts on the price of our Common Stock, and on our access to capital markets directly, as well as indirectly through impacts on companies in our industry, our distributors, vendors and business partners.
Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address such current trends and concerns may apply to production of CO 2 and impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions from, our equipment and operations could require us to incur costs to reduce emissions of CO 2 associated with our operations. Substantial limitations on CO 2 emissions could also adversely affect demand for it. Activists concerned about the potential effects of CO 2 on climate change may turn their attention at sources of funding for CO 2 producers, which may result in certain financial institutions, funds and other sources of capital restricting or eliminating their investment in CO 2 production and related activities. Ultimately, this could make it more difficult for us to secure funding for certain infrastructure projects that are crucial to our operations. Furthermore, some scientists have concluded that increasing concentrations of greenhouse gasses in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our operations or our exploration and production operations, which in turn could affect demand for our services.
Helium and CO 2 Are Industrial Gases Subject to Price Volatility Based on Multiple Factors Outside the Control of Producers, and Low Prices May Make Properties Uneconomic
Helium and CO 2 are commodities, and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. The markets for helium and CO 2 may be volatile in the future. The prices a producer may charge and the level of production depend on numerous factors beyond our control. Lower helium and CO 2 prices may not only decrease revenues on a per unit basis, but also may reduce the volume of helium and CO 2 that can be economically produced. Lower prices will also negatively impact the value of proved reserves and contingent resources. Additionally, the helium and CO 2 markets are very opaque and are not tied to an exchange. Therefore, we cannot hedge our production and sales, and are subject to fluctuations in price.
Risks Relating to Legislative or Regulatory Actions
A Change in the Jurisdictional Characterization of Some of Our Assets by Federal, State or Local Regulatory Agencies or a Change in Policy by Those Agencies May Result in Increased Regulation of Our Assets, Which May Cause Our Operating Expenses to Increase, Limit the Rates We Charge for Certain Services and Decrease Our Profitability
We believe that our helium and CO 2 gas gathering pipelines meet the traditional tests that the Federal Energy Regulatory Commission (“FERC”) uses to determine that pipelines perform primarily a gathering function and are, therefore, not subject to FERC jurisdiction. The distinction between FERC-regulated interstate transportation services and federally unregulated gathering services, however, has been the subject of substantial litigation, and FERC determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of our gathering facilities is subject to change based on future determinations by FERC, the courts or Congress. If FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the Natural Gas Act of 1938 (“NGA”), and that the facility provides interstate transportation service, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by FERC under the NGA or the Natural Gas Policy Act (“NGPA”). Such regulation could decrease revenue, increase operating costs, and depending upon the facility in question, adversely affect our results of operations and cash flow. In addition, if any of our facilities were found to have provided services or otherwise operated in violation of the NGA or NGPA, this could result in the imposition of substantial civil penalties, as well as a requirement to disgorge revenues collected for such services in excess of the maximum rates established by FERC.
Even though we consider our helium and CO 2 gathering facilities to be exempt from the jurisdiction of FERC under the NGA, FERC regulation of interstate natural gas transportation pipelines may indirectly impact gathering services. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on interstate open access transportation, ratemaking, capacity release, and market center promotion may indirectly affect intrastate markets and gathering services. In recent years, FERC has pursued pro-competitive policies in its regulation of interstate natural gas pipelines. However, we cannot assure you that the FERC will continue to pursue this approach as it considers matters such as pipeline rates and rules and policies that may indirectly affect the gas gathering services.
Gas gathering may receive greater regulatory scrutiny at the state level; therefore, our helium and CO 2 gathering operations could be adversely affected should they become subject to the application of state regulation of rates and services. Our gathering operations could also be subject to safety and operational regulations relating to the design, construction, testing, operation, replacement and maintenance of gathering facilities. We cannot predict what effect, if any, such changes might have on our operations, but we could be required to incur additional capital expenditures and increased operating costs depending on future legislative and regulatory changes.
Federal and State Legislative and Regulatory Initiatives Relating to Pipeline Safety That Require the Use of New or More Stringent Safety Controls or Result in More Stringent Enforcement of Applicable Legal Requirements Could Subject Us to Increased Capital Costs, Operational Delays and Costs of Operation
The U.S. Department of Transportation (“DOT”), through its Pipeline and Hazardous Materials Safety Administration agency (“PHMSA”) and state agencies, enforces safety regulations with respect to the design, construction, operation, maintenance, inspection and management of certain of the pipeline facilities. The PHMSA requires pipeline operators to implement integrity management programs, including more frequent inspections and other measures to ensure pipeline safety in high-consequence areas (“HCAs”), defined as those areas that are unusually sensitive to environmental damage, that cross a navigable waterway, or that have a high population density. The regulations require operators to (i) perform ongoing assessments of pipeline integrity, (ii) identify and characterize applicable threats to pipeline segments that could impact a HCA, (iii) improve data collection, integration and analysis, (iv) repair and remediate pipelines as necessary and (v) implement preventive and mitigating actions. These regulations contain requirements for the development and implementation of pipeline integrity management programs, which include the inspection and testing of pipelines and the correction of anomalies. The PHMSA’s regulations also require that pipeline operation and maintenance personnel meet certain qualifications and that pipeline operators develop comprehensive spill response plans, including extensive spill response training for pipeline personnel.
The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, also known as the Pipeline Safety and Job Creation Act, and the Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016, also known as the PIPES Act, are the most recent enactments of federal legislation to amend the Natural Gas Pipeline Safety Act of 1968, or NGPSA, and the Hazardous Liquids Pipeline Safety Act of 1979, or HLPSA, which are pipeline safety laws requiring increased safety measures for natural gas and hazardous liquids pipelines. Among other things, the Pipeline Safety and Job Creation Act directs the Secretary of Transportation to promulgate regulations relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, material strength testing and verification of the maximum allowable pressure of certain pipelines. The Pipeline Safety and Job Creation Act also increases the maximum penalty for violation of pipeline safety regulations from $100,000 to $200,000 per violation per day of violation and from $1.0 million to $2.0 million for a related series of violations. To account for inflation, those maximum civil penalties have increased to $213,268 per violation per day, with a maximum of $2,132,679 for a related series of violations. The PIPES Act ensures that the Pipeline and Hazardous Materials Safety Administration, or PHMSA, completes the Pipeline Safety and Job Creation Act requirements; reforms PHMSA to be a more dynamic, data-driven regulator; and closes gaps in federal standards.
Traditionally not applicable to our scope of operations, PHMSA recently issued another final rule, entitled “Safety of Gas Gathering Pipelines,” that establishes new safety standards and reporting requirements for certain historically unregulated onshore gas gathering lines, effective as of May 16, 2022. The final rule creates a new Type C category of regulated onshore gas gathering lines in Class 1 locations that are subject to PHMSA’s safety standards and reporting requirements. The final rule also creates a new Type R category of reporting-only onshore gas gathering that are subject to PHMSA’s incident and annual reporting requirements. We are revising our operating and inspection procedures to address these requirements and are in the process of implementing these changes. We may incur expenses related to compliance activities but do not expect our operations to be affected any differently than similarly situated midstream companies.
PHMSA is in the process of developing other regulations to address congressional mandates and for other purposes. The adoption of these new PHMSA rules and implementation of new mandates on the federal and state levels could impact our gas gathering pipeline assets and operations by requiring the installation of new or modified safety controls and the implementation of new capital projects or accelerated maintenance programs, all of which could require us to incur increased operational costs that could be significant. We may also be affected by lost cash flows resulting from shutting down our pipelines during the pendency of any repairs and any testing, maintenance, and repair of pipeline facilities downstream from our own facilities. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and regulatory changes could materially adversely affect our business, financial condition and results of operations.
Environmental Laws and Regulations Applicable to Our Industry Are Costly and Stringent
Our operations are subject to complex and stringent federal, state, and local laws and regulations governing, among other things, the discharge of substances into the environment or otherwise relating to the protection of human health and the protection of endangered species. These laws and regulations and related public policy considerations affect the costs, manner, and feasibility of our operations and require us to make significant expenditures in order to comply. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminalpenalties, the imposition of investigatory and remedial obligations, and the issuance of injunctions that could limit or prohibit our operations. Some of these laws and regulations may impose joint and several, strict liability for contamination resulting from spills, discharges, and releases of substances, including helium and CO 2 and other wastes, without regard to fault or the legality of the original conduct. Under such laws and regulations, we could be required to remove or remediate previously disposed substances and property contamination, including wastes disposed or released by prior owners or operators.
Conducting Operations in the Helium and CO 2 Industry Subjects Us to Complex Laws and Regulations other than the Environmental Regulations That Can Have a Material Adverse Effect on the Cost, Manner or Feasibility of Doing Business
In addition to any applicable environmental laws and regulations, companies that explore for and develop, produce and sell helium and CO 2 are subject to extensive government laws and regulations, including complex tax laws, and are required to obtain various permits and approvals from government agencies. If these permits are not issued or unfavorable restrictions or conditions are imposed on our drilling activities, we may not be able to conduct our operations as planned. Alternatively, failure to comply with these laws and regulations, including the requirements to obtain any permits, may result in the suspension or termination of our operations and subject us to administrative, civil and criminalpenalties. Compliance costs can be significant. Further, these laws and regulations could change in ways that substantially increase our costs and associated liabilities. We cannot be certain that existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations will not harm our business, results of operations and financial condition. For example, matters subject to regulation and the types of permits required include:
drilling permits;
reclamation;
spacing of wells;
occupational safety and health;
air quality, noise levels and related permits;
rights-of-way and easements;
calculation and payment of royalties; and
taxation;
Under these laws and regulations, we could be liable for:
personal injuries;
property damage;
discharge of hazardous materials;
remediation and clean-up costs;
fines and penalties; and
natural resource damages.
Any Future Climate Change Initiatives by the Executive Branch of the United States Government, by Congress or by State Regulatory or Legislative Bodies Could Negatively Affect Our Business and Operations
In addition to the environmental laws and regulations currently applicable to us, there is a possibility of a future change in initiatives, laws and regulations applicable to us based on the change of scope of the current laws and regulations or reclassification of certain relevant aspects of our business. The United States government periodically evaluates and re-evaluates the U.S. position with respect to global initiatives, laws and regulations with respect to climate change and specifically the Paris Climate Agreement and its target reduction of greenhouse gas emissions. A number of governmental bodies have introduced or are contemplating regulatory changes in response to various proposals to combat climate change and how it should be dealt with, including heightened CO 2 regulation. Legislation and increased regulation regarding climate change or CO 2 standards or procedures could have a direct or indirect impact on us and impose significant costs on us and possibly affect our financial condition and operating performance.
Risks Related to Ownership of Our Securities
The Price of Our Common Stock May Be Subject to Substantial Volatility, and Stockholders May Lose All or a Substantial Part of Their Investment
Our Common Stock currently trades on the OTC Pink Open Market operated by OTC Markets Group, Inc. (the “OTC Pink”). There is very limited public float, and trading volume historically has been low and sporadic. As a result, the market price for our Common Stock may not necessarily be a reliable indicator of our fair market value. The price at which our Common Stock trades may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results, actual or anticipated announcements of new releases by us or competitors, the gain or loss of significant customers, changes in the estimates of our operating performance, market conditions in our industry and the economy as a whole.
A More Active, Liquid Trading Market for our Common Stock May Not Develop, and the Price of Our Common Stock May Fluctuate Significantly, Which Could Lead to CostlyLitigation For Us
Historically, the market price of our Common Stock has fluctuated over a wide range. During the less than 12-month period prior to the date of this Annual Report on Form 10-K, our Common Stock traded as high as $1.03 per share and as low as $1.01 per share on the OTC Pink. In addition, the Company sold shares in private offerings through Subscription Agreements. There has been very limited trading volume in the market for our Common Stock, and a more active, liquid public trading market may not develop or may not be sustained. Limited liquidity in the trading market for our Common Stock may adversely affect a stockholder’s ability to sell its shares of Common Stock at the time it wishes to sell them or at a price that it considers acceptable. If a more active, liquid public trading market does not develop we may be limited in our ability to raise capital by selling shares of Common Stock and our ability to acquire other companies or assets by using shares of our Common Stock as consideration. In addition, if there is a thin trading market or “float” for our stock, the market price for our Common Stock may fluctuate significantly more than the stock market as a whole. Without a large float, our Common Stock would be less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our Common Stock may be more volatile and it would be harder for a stockholder to liquidate any investment in our Common Stock. Furthermore, the stock market is subject to significant price and volume fluctuations, and the price of our Common Stock could fluctuate widely in response to several factors, including:
our quarterly or annual operating results;
changes in our earnings estimates;
investment recommendations by securities analysts following our business or our industry;
additions or departures of key personnel;
changes in the business, earnings estimates or market perceptions of our competitors;
our failure to achieve operating results consistent with securities analysts’ projections;
changes in industry, general market or economic conditions; and
announcements of legislative or regulatory changes.
The stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in the technological and healthcare industry. The changes often appear to occur without regard to specific operating performance. The price of our Common Stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations could materially reduce our stock price.
In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, regardless of the outcome of such litigation.
We Need to Raise Additional Capital to Meet Our Future Business Requirements and Such Capital Raising May Be Costly or Difficult to Obtain and Could Dilute the Ownership Interest of Current Stockholders
We have relied upon cash from financing activities and, in the future, we expect to rely on the proceeds from future debt and/or equity financings, and we hope to rely on revenues generated from operations to fund all of the cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cash from our operating activities in the future. Future financing may not be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the Common Stock will likely include financial and other covenants that will restrict our flexibility.
Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations because we could lose our existing sources of funding and impair our ability to secure new sources of funding. However, there can be no assurance that the Company will be able to generate any investor interest in its securities. If we do not obtain additional financing, we may not be able to fully develop our assets, in which case you would likely lose the entirety of your investment in us.
At this time, we have not secured or identified any additional financing. We do not have any firm commitments or other identified sources of additional capital from third parties or from our officers and directors or from other stockholders. There can be no assurance that additional capital will be available to us, or that, if available, it will be on terms satisfactory to us. Any additional financing will involve dilution to our existing stockholders. If we do not obtain additional capital on terms satisfactory to us, or at all, it may cause us to delay, curtail, scale back or forgo some or all of our product development and/or business operations, which could have a material adverse effect on our business and financial results. In such a scenario, investors would be at risk of losing all or a part of any investment in our Company.
If Shares of Our Common Stock Become Subject to the Penny Stock Rules, It Would Become More Difficult to Trade Our Shares
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain a listing on certain national securities exchanges or are not authorized for quotation on certain automated quotation systems and if the price of our Common Stock is less than $5.00, our Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock, and therefore stockholders may have difficulty selling their shares.
Our Three Largest Stockholders Collectively Own Approximately 55% of our Common Stock and Will Be Able to Exert a Controlling Influence Over Our Business Affairs and Matters Submitted to Our Stockholders For Approval
Our three largest stockholders, who include one member of our senior management team, collectively own approximately 55% of our Common Stock. As a result, if they were to act collectively, they would have control over all matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, the approval of any business combination, and any other significant corporate transaction. These actions may be taken even if they are opposed by other stockholders, including public stockholders like you.
We Do Not Expect to Pay Dividends in the Foreseeable Future
We have never declared or paid any cash dividends. We anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our operations, and to finance the growth and development of our business. Any determination to declare or pay dividends in the future will be at the discretion of our board of directors, subject to applicable laws, and dependent upon a number of factors, including our earnings, capital requirements, and overall financial conditions. In addition, our ability to pay dividends on our Common Stock may be restricted by the terms of any future debt or preferred securities issuances. Accordingly, your only opportunity to achieve a return on your investment in our Company may be if the market price of our Common Stock appreciates and you sell your shares at a profit. The market price for our Common Stock may never exceed, and may fall below, the price that you pay for such Common Stock. We cannot assure you of a positive return on your investment or that you will not lose the entire amount of your investment.
Sales of a Significant Number of Shares of Our Common Stock in the Public Markets, or the Perception That Such Sales Could Occur, Could Depress the Market Price of Our Common Stock
Sales of a substantial number of shares of our Common Stock in the public markets could depress the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our Common Stock would have on the market price of our Common Stock.
Upon Dissolution of Our Company, You May Not Recoup All or Any Portion of Your Investment
In the event of a liquidation, dissolution or winding-up of our Company, whether voluntary or involuntary, our assets would be used to pay all of our debts and liabilities, and only thereafter would any remaining assets be distributed to our stockholders, subject to rights of the holders of our preferred stock, if any, on a pro rata basis. There can be no assurance that we will have assets available from which to pay any amounts to our stockholders upon such a liquidation, dissolution or winding-up. In such an event, you would lose all of your investment.
If Securities or Industry Analysts Do Not Publish Research or Publish Inaccurate or Unfavorable Research About Our Business, Our Stock Price and Trading Volume Could Decline
The trading market for our Common Stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Several analysts may cover our stock. If one or more of those analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
We Are an “Emerging Growth Company” and the Reduced Disclosure Requirements Applicable to Emerging Growth Companies May Make Our Common Stock Less Attractive to Investors
We are an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted by SEC rules and plan to rely on exemptions from certain disclosure requirements that are applicable to other SEC-registered public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. In this prospectus, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our Common Stock less attractive if we rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Our Management Team is Required to Devote Substantial Time to Public Company Compliance Initiatives
As a publicly reporting company, we incur significant legal, accounting, and other expenses. Our management and other personnel devote a substantial amount of time to comply with our reporting obligations. Moreover, these reporting obligations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
Overview
Cyber App Solutions Corp. (the “Company,” “CYRB” “we,” “us,” or “our”) is a corporation established under the corporation laws in the State of Nevada on February 19, 2021.
On July 17, 2023, we completed a reverse asset acquisition with Proton Green, LLC (“Proton Green”), a Wyoming limited liability company (the “Acquisition”). Effective July 17, 2023, we entered into that certain Share Exchange Agreement (the “Share Exchange Agreement”) by and among us, Proton Green, and the members of Proton Green (the “Proton Green Members”). Pursuant to the Share Exchange Agreement, we agreed to exchange the outstanding membership interests of Proton Green held by the Proton Green Members for shares of our Common Stock. At the Closing Date, we issued 68,000,000 new shares of Common Stock to the Proton Green Members, representing approximately 94.4% of the issued and outstanding shares of our Common Stock following such issuance. In connection with the closing of the transaction, Proton Green became a wholly owned subsidiary of ours.
As a result of the Acquisition, the Proton Green Members were collectively able to unilaterally control the election of our board of directors, all matters upon which shareholder approval is required and, ultimately, the direction of us. The Managing Member of Proton Green assumed the role of President, Chief Executive Officer and Director immediately following the Acquisition. We are in the process of changing our name from “Cyber App Solutions Corp.” to “Proton Green Corporation”.
Our shares of Common Stock are quoted on the OTC Pink under the symbol “CYRB”.
Subsequent to the Share Exchange Agreement, we have no other operations other than the operations acquired from Proton Green. We are focused on the acquisition, exploration, development and production of helium and beverage grade carbon dioxide (CO 2 ) and we have the capabilities for carbon capture and storage. Our assets are concentrated in the St. Johns Field located in Apache County, Arizona of the United States (the “St. Johns Field”).
We completed the installation of our first helium processing plant in the St. Johns Field and commenced production and generated our first helium revenues during the third quarter of 2023. The first helium plant has a current processing capacity of approximately 4 million cubic feet per day of inlet gas during this initial long term process testing phase. However, we are analyzing the production and processing performance and plans to expand the capacity of this first helium processing plant to 20 million cubic feet per day of inlet gas.
We are also focused on the commercialization of our CO 2 reserves. Front-end engineering design (“FEED”) studies are underway for beverage grade CO 2 plants with a plan to install multiple modular CO 2 plants at the St. Johns Field, each capable of processing up to 500 tons per day each of liquid CO 2 . The pace of installation will initially rely upon availability of external financing. However, as internally generated cash flow builds, we will continue to add CO 2 plants that are capable of processing up to 500 tons per day of liquid CO 2 on a routine basis. We have engaged with multiple plant equipment providers to determine the most economical and productive construction partner following the completion of the FEED studies.
Our principal executive offices are located at 2000 Bering Drive, Suite 875, Houston, Texas, 77057. Our main telephone number is (713) 400-2987. Our website is www.protongreen.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into, and is not a part of this Annual Report on Form 10-K.
U.S. Department of Energy Program
In August 2023, we received notice regarding a potential financial award from the U.S. Department of Energy (“DoE”) that we, as a member of a consortium of companies, which includes us, Black & Veatch, Carbon Collect, CarbonCapture, Carbon Solutions, Arizona State University, University of New Mexico, University of Utah, Tallgrass, and the Arizona Geological Survey, had been selected to receive an approximately $11,600,000 grant for plans to develop the Southwest Regional Direct Air Capture (“DAC”) Hub to advance the design of a regional DAC hub. The program aims to expedite the deployment of a nationwide network of large-scale DAC CO 2 removal sites to address legacy CO 2 pollution and complement rapid emission reduction in the region. We will work alongside our consortium partners to develop a storage field development plan to securely sequester CO 2 captured from the atmosphere into our St. Johns Field basin. Under the program, we expect that we will receive reimbursement for certain overhead fees incurred. The negotiations of the DoE award are ongoing and we anticipate completing negotiations during the first half of 2024.
Market Conditions
Helium
The global helium market size in 2023 was estimated at $3.6 billion and is expected to grow 1 at a compound annual growth rate of 6.7% from 2024 to 2030. 2 Helium is a unique element in that it is the second most abundant in the universe, the most stable, yet rare and difficult to capture and store on the Earth, found in only a few locations spanning about twenty production fields globally. Its unique qualities make it a non-renewable and limited natural resource, highly demanded in many growing industries such as medical technology, high-tech, space exploration and national defense. Specific uses for helium include: semiconductor and fiber-optics manufacturing, cooling superconducting magnets in MRI machines, leak detection, as a purge gas and pressurizing agent in spacecraft, leak detection, airbags, deep sea diving oxygen tanks, and more. Production of helium goes back to 1900s. Since that time, the industry has experienced four notable periods of shortage between year 2006 and today, with the helium production currently experiencing a Helium shortage 4.0 started in 2022 and driven by the increased demand from growing industries and technologies and decreased production. The demand for helium is currently estimated at 5.9 billion cubic feet (Bcf) and expected to increase to about 8 Bcf by 2030 3 . The United States has been a leading producer of helium 4 and currently holds roughly 40% of the global production market share, which is expected to decrease to about 30% by year 2030.
Carbon Dioxide (CO 2 )
The U.S. carbon dioxide market size was valued at $3.2 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 8.4% from 2022 to 2030. The food & beverages segment led with a revenue share of 34.52% in the year 2021. 5 In the U.S. beverage industry, CO 2 is commonly utilized for carbonating soft drinks and beer. Additional uses for CO 2 are enhanced oil recovery, dry ice production, wastewater treatment, welding, fire suppression, plant growth, food preservation, food refrigeration and freezing, and more. Characteristics of its use include creating carbonation for desired fizziness, diverse sources (industrial processes, fermentation), adherence to food-grade standards, reliance on a stable supply chain, and transportation/storage in liquid or compressed gas forms. Industry-specific details are recommended for the latest information.
CO 2 for beverages can come from various sources: fermentation processes (alcoholic beverage production), industrial processes (chemical manufacturing), natural sources (natural springs), dry ice production, biogas production (anaerobic digestion), and upstream oil and gas operations (natural gas processing). Regardless of the source, CO 2 must meet strict quality standards to ensure safety and taste in the final beverage product, often involving purification processes by manufacturers.
The Company manages its business globally within one reportable segment, which is consistent with how our management reviews the business, prioritizes investment and resource allocation decisions and assesses operating performance.
Results of Operations
Fiscal Year Ended December 31, 2023 Compared to the Fiscal Year Ended December 31, 2022
For the Year Ended
December 31,
Change
Helium revenue
Operating expenses
Depreciation, depletion, amortization and accretion
Lease and well operating expenses
Shut-in expenses
Gathering and processing expenses
Production taxes
General and administrative expenses
General and administrative expenses - related parties
Deposit on terminated purchase and sale agreement
Total operating expenses
Net loss from operations
Other income (expense)
Gain on extinguishment of debt
Interest expense
Event of default fees
Interest income - related parties
Other income (expense), net
Unrealized gain (loss) on derivatives mark-to-market
Total other expense
Net loss
Revenue
Helium revenue.
For the years ended December 31, 2023 and 2022, the helium revenue was $313,198 and $0, respectively. The 100% increase in helium revenues was due to the completion and startup of our first helium plant in the St. Johns Field. We sold approximately 677 MCF during the period.
Operating Expenses
Depreciation, depletion, amortization and accretion.
For the years ended December 31, 2023 and 2022, the depreciation, depletion, amortization and accretion was $157,653 and $51,800, respectively. The 204% increase primarily relates to depreciation on the gas processing plant costs in the amount of $37,195 that began production during the third quarter of 2023 and depletion expense in the amount of 65,978, which began in the third quarter of 2023 with the startup of production at our first well. The remaining increase is due to an additional $2,559 of accretion expense.
Lease and well operating expenses .
For the years ended December 31, 2023 and 2022, the lease and well operating expenses were $149,210 and $22,481, respectively. The 564% increase is primarily due to compression costs to feed gas into the plant in the St. Johns Field. Compression costs for the year ended December 31, 2023 was $111,918 compared to $0 for the year ended December 31, 2022. Additionally, for the year ended December 31, 2023, we incurred $15,000 of operator fees to maintenance the wellhead equipment and compressor compared to $0 for the year ended December 31, 2022.
Shut-in expenses
For the years ended December 31, 2023 and 2022, the shut-in expenses were $197,187 and $390,224, respectively. The 49% decrease in shut-in expenses for the year ended December 31, 2023 compared to the same period in 2022 was due to a significant lease owner not requiring us to make a shut-in royalty payment in 2023 and the payment was made in 2022.
Gathering and processing expenses
For the years ended December 31, 2023 and 2022, the gathering and processing expenses were $701,983 and $0, respectively. The 100% increase is due to the startup of our first helium plant in the St. Johns Field. Gathering and processing expenses are the cost incurred to operate the helium plant. Gathering and processing expenses for the year ended December 31, 2023 consisted of $209,182 for electricity to power the equipment at the plant, $270,000 related to the amortization of leased equipment recorded in right-of-use assets, and $222,800 related to operator fees and maintenance costs at the helium plant.
Production taxes
For the years ended December 31, 2023 and 2022, the production taxes were $13,456 and $0, respectively. The 100% increase is due to us having sales during the year ended December 31, 2023. Production taxes relates to the Arizona transaction privilege tax. Arizona’s stated transaction privilege tax for our industry is 3.437% of gross helium revenues.
General and administrative expenses
For the years ended December 31, 2023 and 2022, the general and administrative expenses were $4,762,080 and $6,952,765, respectively. The 32% decrease is primarily driven by a decrease in stock compensation expense of $1,590,282. Stock compensation expense during the year ended December 31, 2023 of $909,218 relates to equity granted to our executive officer for joining the company compared to $2,499,500 during the year ended December 31, 2022 related to equity paid for consulting services. The remaining decrease of approximately $1,346,794 primarily relates to a reduction in professional fees. Professional fees during the year ended December 31, 2022 primarily related to accounting professionals assisting with design and implementation of accounting policies and procedures, general ledger accounting, and preparation for being a public company and engineering professionals assisting with development plans of the St. Johns Field, reserve studies, and permitting studies; such costs were not incurred to the same magnitude during the year ended December 31, 2023. Above decreases were partially offset by an increase of $303,160 to payroll and payroll related costs and $244,4000 in audit fees.
General and administrative expenses - related parties
For the years ended December 31, 2023 and 2022, the general and administrative expenses - related parties were $167,500 and $137,500. The 22% increase is due to $95,000 paid for Front-end engineering design studies for our initial beverage grade CO 2 plant to an entity that is affiliated with one of our Board members .The increase was partially offset by a decrease of $65,000 for advisory and human resource consulting services provided by principal owners of greater than 10% of our common stock and an immediate family member of one of our name executive officers.
Deposit on terminated purchase and sale agreement
During the year ended December 31, 2022, we paid an earnest deposit towards a purchase and sale agreement that was terminated. A similar event did not occur during the year ended December 31, 2023.
Other income (expense)
Gain on Extinguishment of debt
For the years ended December 31, 2023 and 2022, the gain on extinguishment of debt was $3,033,634 and $0, respectively. We issued convertible notes in November 2023 and used a portion of the proceeds to settle the outstanding convertible notes we had outstanding with Alpha Carta, Ltd. The settlement was accounted for as an extinguishment of debt and resulted in a gain of $17,671,812. The gain was partially offset by the fair value of the convertible notes and warrants issued in November 2023. We elected the fair value option to account for the convertible notes issued in November 2023. The initial fair value of the convertible notes and warrants issued in November 2023 resulted in an unrealized loss of $14,638,178.
Interest expense
For the years ended December 31, 2023 and 2022, the interest expense was $2,818,478 and $8,439,687, respectively. The 67% decrease is primarily related to the amortization of debt discounts on the Amended and Restated Notes of $0 and $6,635,147 during the years ended December 31, 2023 and 2022, respectively. There was also a decrease of $177,587 in monthly interest expense accruing on the Amended and Restated Notes during the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was partially offset by an increase of $560,400 related to interest expense incurred on short-term notes issued and settled during 2023, $480,000 of commitment fees on the convertible notes entered into in November 2023 that we elected the fair value option on, and $146,667 related to interest expense incurred on the convertible notes entered into in November 2023 for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Event of default fees
For the years ended December 31, 2023 and 2022, the event of default fees related to the Amended and Restated Notes were $5,875,111 and $11,013,572, respectively. The 47% decrease was due to us recording $2,416,829 to increase the principal balance to its redemption value and a $2,250,000 liquidateddamage fee during the year ended December 31, 2022, which was a nonrecurring charge. The remaining decrease of $748,200 was due to fewer days of incurring the daily financing, administrative, packaging, and extension fees during the year ended December 31, 2023 compared to 2022. The total decrease was partially offset by an increase of $276,567 in the 1% of the Event of Default Redemption Price due to the increasing principal balance used to calculate the fee during the year ended December 31, 2023 compared to 2022.
Other income (expense), net
For the years ended December 31, 2023 and 2022, other income (expense) was an expense of $53,691 and an income of $7, respectively. The decrease in other income (expense), net was due to the write-off of certain assets and liabilities acquired in the reverse acquisition among Cyber App Solutions Corp and Proton Green, LLC in the amount of $24,755 and the change in unrealized loss on the fair value of the convertible notes issued in November 2023 in the amount of $28,944 from initial recognition through December 31, 2023.
Unrealized loss on change in fair value of notes payable
For the years ended December 31, 2023 and 2022, unrealized loss on change in fair value of notes payable was $12,082,880 and $0, respectively. The primary reason for the increase was due to the Company electing the fair value option on the convertible notes issued in November 2023, which resulted in an initial unrealized loss of $12,053,936. The change in unrealized loss on the fair value of the convertible notes issued in November 2023 increased by $28,944 from initial recognition through December 31, 2023.
Unrealized Gain (Loss) on derivatives mark-to-market
For the years ended December 31, 2023 and 2022, unrealized gain (loss) on derivatives mark-to-market was a loss of $197,886 and a gain of $142,698, respectively. Unrealized gain (loss) on derivatives mark-to-market relates to warrants and conversion features on the Company’s notes payable.
Liquidity and Capital Resources
Since inception, we have generated significant losses. As of December 31, 2023, we had an accumulated deficit of $44,262,874. We did not begin to produce or generate any revenue from sales of our helium at the St. Johns Field until August 2023 and have only generated limited revenue to date. Our primary sources of capital have been through proceeds from the issuance of debt and equity. The primary uses of capital to date has been for the acquisition of our mineral leases in the St. Johns Field, which gave us operating control over approximately 170,000 acres in Apache County, Arizona, development of the St. Johns Field, paying debt service costs, production start-up costs, helium plant installation and funding corporate overhead.
We define working capital as current assets less current liabilities. At December 31, 2023 and 2022, we had a working capital deficit of $23,739,229 and $22,343,766, respectively. The deficits were primarily due to the amounts outstanding under our notes, as they are classified as current liabilities.
As of March 27, 2024, we had cash on hand of $136,200. Our material liquidity needs over the next twelve months consist of the following:
On November 21, 2023, the Company issued convertible promissory notes to each of two investors, with an aggregate principal amount of $16,000,000, with interest at a rate of 5% per annum due monthly and monthly repayments of $1,500,000 starting from January 21, 2024 and remaining outstanding balance due on July 21, 2024. See Note 8 – Debt , for more details. We have not made interest and principal payments and are in default on the convertible promissory notes.
Outstanding accounts payable balances, corporate overhead, and helium operations until, if ever, we are able to generate sufficient cash flows from operations.
We need to expand the capacity of our first helium plant in the St. Johns Field, which we estimate will require capital expenditures ranging from $1,500,000 to $2,000,000. We expect with this expansion, that we will generate sufficient cash flows to cover operating costs at the helium plant, fund corporate overhead, and make payments required for convertible promissory notes issued in 2023.
We have no committed capital to address our material liquidity needs over the next twelve months from the date of these financial statements being issued. These matters raise substantial doubt about our ability to continue as a going concern for a period of one year after the date that these consolidated financial statements are issued. The consolidated financial statements included in this report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include adjustments that might result from the outcome of these uncertainties.
Over the next twelve to eighteen months, in addition to continuing to develop our helium reserves, we plan to focus on the development of our CO 2 reserves. We have front-end engineering design studies underway for our CO 2 plants. Our current plans are to install two CO 2 plants at the St. Johns Field that are capable of producing a combined 1,000 tons per day of liquid CO 2 . Our estimate of the cost for each CO 2 plant ranges from $11,000,000 to $13,000,000. In addition, we expect that we’ll need additional capital ranging from $3,000,000 to $6,000,000 to drill new wells to keep our helium and CO 2 plants at capacity.
We are currently evaluating debt and equity financing strategies that we believe will provide sufficient capital to fund the CO 2 plants and begin drilling new wells as needed. We believe the cash flows generated from the addition of the CO 2 plants will be more than sufficient to address any debt service costs we would incur from debt financing strategies and fund any additional capital needed to drill new wells. Helium and CO 2 production levels that we believe we are capable of achieving as a result of these capital expenditures will position us as a top tier producer of helium and liquid CO 2 , thereby giving us considerable bargaining power when negotiating off-take and transportation agreements. If we are unable to execute any of our debt and financing strategies or one on acceptable terms, we may not be able to finance the capital expenditures necessary to develop our helium and CO 2 resources. Because we are the operator of all of our acreage, the timing and level of our capital spending is largely discretionary and within our control.
Off-Balance Sheet Arrangements
As of December 31, 2023, we had no off-balance arrangements or other such unrecorded obligations and we have not guaranteed any debt of any unrelated party.
Cash Flows from Operating, Investing and Financing Activities
The following table summarizes our cash flows for the period indicated:
For the Year Ended
December 31,
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating activities . There was an increase in cash used in operating activities of $869,924 for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a decrease in change in working capital of $828,911, which increases cash used in operating activities.
Investing activities . There was an increase in cash used in investing activities of $762,855 for the year ended December 31, 2023 compared to the year ended December 31, 2022. Net cash used in investing activities for the year ended December 31, 2023 included $1,785,243 primarily related to capital expenditures paid for the helium plant at the St. Johns Field, partially offset by $23,837 related to cash acquired in the reverse acquisition. Net cash used in investing activities for the year ended December 31, 2022 included approximately $1,073,551 related to capital expenditures paid as final settlement for the acquisition of the mineral leases at the St. Johns Field, acquire equipment for the gas processing facility, install electrical infrastructure to the St. Johns Field, and acquire surface land to construct the helium plant upon and a net receipt of $75,000 from related-party lending activity.
Financing activities . There was an increase in cash provided by financing activities of $4,153,320 for the year ended December 31, 2023 compared to the year ended December 31, 2022. Net cash provided by financing activities for the year ended December 31, 2023 consisted of cash proceeds, net of issuance costs, of $11,226,725 from the issuance of equity, $8,000,000 from the issuance of those certain convertible promissory notes on November 21, 2023, and $634,600, net of issuance costs, from short-term notes issued by the company. This increase was partially offset by the paydown on debt of $11,435,000 and payment of $88,305 for direct costs incurred in the reverse asset acquisition. Net cash provided by financing activities for the year ended December 31, 2023 consisted of cash proceeds of $3,550,700 from the issuance of equity and net cash proceeds of $2,800,000 from the issuance of the Alpha Carta Note 3 partially offset by the paydown on debt of $2,000,000 and payment of $166,000 for equity issuance costs.
Contractual Obligations and Commitments
Helium Recovery Unit . On January 3, 2022, we entered into a Master Services Agreement (the “MSA”) with a contractor for the contractor to provide certain helium removal and purification services at the plant in the St. Johns Field. The service consist of processing our feed gas using the contractor’s pressure swing absorption process and equipment to be operated by the contractor. It is a five-year lease that commenced on April 1, 2023. The fee is $50,000 per month for the service and increases to $70,000 per month if or when we have the contractors add more equipment to increase the capacity of gas the plant can process. We attributed $30,000 per month to the rental of equipment and accounted for it as an operating lease under ASC 842 and recorded it to the balance sheet.
Houston Office Lease . On September 30, 2022, we amended the lease for our corporate office in Houston, Texas. The commencement date of the amendment was October 15, 2022 and the lease expiration date was October 31, 2025. On October 25, 2023, we entered into a second amendment on the lease for our corporate office in Houston, Texas to expand the amount of square feet leased. The commencement date for the expansion is January 1, 2024 and the expiration date will be extended to January 31, 2027. We accounted for this lease under ASC 842 as an operating lease that’s been recorded to the balance sheet. The lease payments escalate annually. We have co-tenants with the expansion. This amended lease will result in a straight-line amortization of approximately $3,762 per month in “General and administrative expenses” over the life of the contract.
Please see Note 16 – Commitments and Contingencies , to the financial statements.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, and expenses. Changes in these assumptions, judgments, and estimates will occur as a result of the passage of time and the occurrence of future events and, accordingly, actual results could differ significantly from amounts previously reported. The more significant areas requiring the use of assumptions, judgments and estimates in these financials include helium reserves, cash flow inputs for impairment analysis, asset retirement obligations, fair value of derivative liabilities, and accrued expenses.
Helium and CO 2 Properties
We use the full cost method of accounting for costs related to the acquisition, exploration, and development of helium and CO 2 properties. Under this method, all such costs (productive and nonproductive), including salaries, benefits and other internal costs directly attributable to these activities, are capitalized into a full cost pool and amortized over the estimated lives of the properties using the units-of-production method. These capitalized costs are subject to a ceiling test that limits such pooled costs, net of applicable deferred taxes, to the aggregate of the present value of future net revenues attributable to proved helium resources, discounted at 10% (standardized measure). Any costs in excess of the ceiling are written off as a non-cash expense. The expense may not be reversed in future periods. The ceiling limitation calculation is prepared using fixed contract prices we receive for the sale of our helium and CO 2 production. The future cash outflows associated with future development or abandonment of wells will be included in the computation of the discounted present value of future net revenues for purposes of the ceiling limitation calculation. The net book value of our helium and CO 2 properties that were subject to the full cost ceiling limitation did not exceed the ceiling amount at December 31, 2023.
Costs associated with unproved helium and CO 2 properties, which may include leasehold, seismic, drilling and capitalized interest costs, are excluded from the amortization base until the properties are evaluated or an impairment is indicated. The Company’s decision to withhold costs from amortization and the timing of the transfer of those costs into the amortization base involves judgment and may be subject to changes over time based on several factors, including drilling plans, availability of capital, project economics and drilling results from adjacent acreage. We did not record any impairment to our unproved helium and CO 2 properties at December 31, 2023.
Asset Retirement Obligations (“ARO”)
Helium and CO 2 properties require expenditures to plug and abandon the wells and reclaim the associated pads and other supporting infrastructure when the wells are no longer producing. An ARO associated with the retirement of a tangible long-lived asset such as helium properties is recognized as a liability in the period incurred or when it becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. These asset retirement costs are depleted on a unit-of-production basis within the full cost pool. The ARO is recorded at its estimated fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value.
Derivative Financial Instruments
The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company recognize its derivative instruments as either assets or liabilities at fair value with changes in fair value recognized in earnings. The related cash flow impact of the Company’s derivative activities is reflected as cash flows from operating activities unless the derivative contract contains a significant financing element, in which case, they are classified within financing activities. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous changes in fair value recorded to earnings are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not settlement of the derivative instrument could be required within twelve months of the balance sheet date. See Note 9 – Derivatives for more derivatives disclosures.
Fair Value Option
The fair value option election allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are recorded in other, net in the Consolidated Statements of Operations. The decision to elect the fair value option is determined on an instrument by instrument basis, which must be applied to an entire instrument and is irrevocable once elected. See Note 7 – Fair Value Measurements for more details on inputs used to fair value our debt.
For a summary of our additional accounting policies see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies , to the financial statements.
