Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
The following information should be read in conjunction with the Financial Statements and Notes presented elsewhere in this Annual Report on Form 10-K. See Note 1 – “Summary of Significant Accounting Policies,” to the Financial Statements for the Years Ended December 31, 2022 and 2021.
Overview
The Company has assessed various opportunities and strategic alternatives involving the acquisition, exploration and development of oil and gas oil producing properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States.
As a result, we are now involved with the following oil and gas producing properties:
Central Kansas Uplift - On April 1, 2021, we completed the acquisition of the Central Kansas Uplift Properties, for a purchase price of $900,000. The Central Kansas Uplift Properties include the production and mineral rights/leasehold for oil and gas properties, subject to overriding royalties to third parties, in the Central Kansas Uplift geological formation covering over 11,000 contiguous acres (the “Properties”). The purchase of the Properties included the existing production equipment, infrastructure and ownership of 11 square miles of existing 3-D seismic data on the acreage. The Properties include a horizontal producing well, horizontal saltwater injection well, conventional saltwater disposal well and two conventional vertical producing wells, which currently produce from the Reagan Sand Zone with an approximate depth of 3,600 feet.
We commenced rework of the existing production wells after completion of the acquisition of the Properties and have performed testing and evaluation of the existence of noble gas reserves on the Properties including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and we have yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the Properties’ existing oil and gas reserves, including the exploration for the existence of new oil and gas zones and other mineral reserves, in particular, the noble gas reserves that the Properties may hold.
During the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells as of December 31, 2022 and is considering the deepening of the conventional wells on the property to explore for helium and other noble gases that may be present in deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022.
Hugoton Gas Field Farm-Out - On April 4, 2022, the Company acquired a 40% participation in a Farmout Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Company has joined three other parties to explore for and develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement (collectively the “Hugoton JV”).
The Farmout Agreement covers drilling and completion of up to 50 wells, with the first exploratory well spudded on May 7, 2022. The Hugoton JV will utilize Scout’s existing infrastructure assets including water disposal, gas gathering and helium processing. The Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices.
The Hugoton JV also acquired the right to all brine minerals subject to a ten percent (10%) royalty to Scout, across Finney and Haskell Counties. Brine minerals are harvested from the formation water produced from active, and to be drilled, oil and gas wells and may include a variety of dissolved minerals including bromine and iodine. The Hugoton JV plans to target brine minerals with commercial quantities of bromine and iodine. The Company through the Hugoton JV is currently developing proprietary technology to recover brine minerals, particularly with respect to bromine, which is well underway and has demonstrated recovery efficiency and is expected to be available for use in existing and future development wells.
The Hugoton JV believes that its unconventional theory has not previously been targeted for exploration by historical operations in the field. The initial exploratory well was spud on May 7, 2022 near Garden City, Kansas, with production casing set after testing and completion logs identified at least two potential zones with substantial gas and helium reserves. The initial well was completed upon the successful perforation across two lower intervals of the Chase group of formations. The fracture stimulation was completed in two stages during June 2022. The well was connected to the pipeline and commenced commercial production and sales of natural gas, natural gas liquids and helium on August 17, 2022. The Company is continuing to evaluate the initial flows of both natural gas, natural gas liquids and helium to determine its plan for additional wells on the farmout.
The Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project. The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December 31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022.
Investment in GMDOC, LLC - On May 3, 2022, the Company entered into an operating agreement (the “Operating Agreement”) pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited liability membership interests (the “Interests”) in GMDOC, LLC, a Kansas limited liability company (“GMDOC”), for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.
With respect to its cash capital contribution, the Company paid a non-refundable cash deposit for the membership interests in the amount of $50,000 on May 3, 2022. The Company paid the remainder of the cash contribution for the membership interests, or $800,000, on May 16, 2022. The remainder of the Company’s capital contribution, or $3,187,500, was financed by the Bank Loan (as defined below).
GMDOC had previously acquired 70% of the working interests (the “Acquisition”) in certain oil and gas leases (the “GMDOC Leases”) from Castelli Energy, L.L.C., an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis.
GMDOC is managed by two members: Darrah Oil Company, LLC, and Grand Mesa Operating Company, (collectively the “Managing Members”), which also serve as the operating companies under the GMDOC Leases.
Name Change and Reincorporation Matters
At the Company’s Annual Meeting of Stockholders held on October 13, 2021, the stockholders approved an amendment to the Company’s Certificate of Incorporation, changing the Company’s name to American Noble Gas Inc. The stockholders also approved an amendment to the Company’s Certificate of Incorporation, removing the provision providing that any action taken by the stockholders by written consent in lieu of a meeting requires that all of the Company’s stockholders entitled to vote on such action consent in writing thereto. Finally, t he stockholders approved the 2021 Plan and we reserved 5,000,000 shares of the Company’s Common Stock, par value $0.0001 per share (the “Common Stock”) for issuance under the 2021 Plan.
Reincorporation in Nevada
On December 7, 2021, pursuant to the Agreement and Plan of Merger, American Noble Gas, Inc., a Delaware corporation, merged with and into its wholly owned subsidiary, American Noble Gas Inc., a Nevada corporation (“AMGAS-Nevada” and/or the “Company”) with AMGAS-Nevada continuing as the surviving corporation. In conjunction with the merger, AMGAS-Nevada succeeded to the assets, continued the business and assumed the rights and obligations of the predecessor Delaware corporation existing immediately prior to the merger. The merger was consummated by the filing of a Certificate of Merger on December 7, 2021 with the Secretary of State of the State of Delaware and Articles of Merger with the Secretary of State of the State of Nevada. The Agreement and Plan of Merger and transactions contemplated thereby were adopted by the holders of a majority of the outstanding shares of the predecessor’s common stock, par value $0.0001 per share, and/or Series A Convertible Preferred Stock, par value $0.0001 per share, on an as-converted common stock basis, by written consent in lieu of a special meeting of stockholders, in accordance with the Delaware General Corporation Law.
Pursuant to the Agreement and Plan of Merger, (i) each outstanding share of the Predecessor’s common stock automatically converted into one share of Common Stock of AMGAS-Nevada, (ii) each outstanding share of the predecessor’s Series A Convertible Preferred Stock automatically converted into one share of Series A Convertible Preferred Stock, par value $0.0001 per share, of AMGAS-Nevada (the “Series A Convertible Preferred Stock”), and (iii) each outstanding option, right or warrant to acquire shares of predecessor common stock converted into an option, right or warrant to acquire an equal number of shares of AMGAS-Nevada Common Stock under the same terms and conditions as the original options, rights or warrants.
Similar to the shares of common stock of the Predecessor prior to the merger, the shares of Common Stock were quoted on the OTCQB tier operated by the OTC Markets Group Inc. under the symbol “IFNY”. In accordance with the Agreement and Plan of Merger, each outstanding certificate previously representing shares of the predecessor’s common stock or Series A Convertible Preferred Stock automatically represents, without any action of the predecessor’s stockholders, the same number of shares of Common Stock or Series A Convertible Preferred Stock, as applicable.
Pursuant to the Agreement and Plan of Merger, the directors and officers of the predecessor immediately prior to the merger became the directors and officers of AMGAS-Nevada and continued their respective directorship or services with the Company on the same terms as their respective directorship or services with the predecessor immediately prior to the merger.
As a result of the merger, the internal affairs of the Company ceased to be subject to the Delaware General Corporation Law or governed by the predecessor’s Certificate of Incorporation, as amended, and its bylaws. As of December 7, 2021, effective date of the merger, the Company is now subject to the Nevada Revised Statutes and is governed by the Company’s Articles of Incorporation as filed in the State of Nevada and the Company’s Bylaws.
All references to the Company in this Annual Report on Form 10-K refer to the predecessor prior to the merger, and AMGAS-Nevada subsequent to the merger.
2023 Operational and Financial Objectives
COVID–19 PANDEMIC
The financial statements contained in this Annual Report on Form 10-K as well as the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and the results of our operations as of and for the year ended December 31, 2022. Economies throughout the world have been and continue to suffer disruptions by the effects of the quarantines, business closures and the reluctance of individuals to leave their homes as a result of the COVID-19 pandemic. In particular, the oil and gas market has been severely adversely impacted by the effects of the COVID-19 pandemic because of the substantial and abrupt decrease in the demand for oil and gas globally followed by the recent resurgence in oil and natural gas prices. In addition, the capital markets have experienced periods of disruption and our efforts to raise necessary capital in the future may be adversely impacted by the continuing effects of the COVID-19 pandemic and investor sentiment and we cannot forecast with any certainty when the lingering uncertainty caused by the COVID-19 pandemic will cease to impact our business and the results of our operations. In reading this Annual Report on Form 10-K, including our discussion of our ability to continue as a going concern set forth herein, in each case, consider the additional uncertainties caused by the COVID-19 pandemic.
Corporate Activities
The Company’s 2023 operating objectives are focused on: 1) raising the necessary funds to finance exploration and development of the Hugoton Gas Field through the Hugoton JV, 2) raising the necessary funds for repayment of obligations that become due, or are in default and/or past due, 3) raising the funds necessary to explore and develop the Properties, including testing and evaluation of noble gas reserves in additional to the oil and gas producing zones, 4) raising the funds necessary to allow the Company to compete for new oil and gas properties that become available for acquisition purposes, and 5) funding our daily operations and the repayment of other obligations that become due, or are in default and/or past due.
Recent financings –
Issuance of Series B Convertible Preferred Stock
May 2023 Issuance - On May 4, 2023, the Company entered into a securities purchase agreement with three (3) accredited investors providing for an aggregate investment of $750,000 by the investors for the issuance by the Company to them of (i) 7,500 shares of Series B Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “May 2023 Series B Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 15,000,000 shares of Common Stock at an exercise price of five ($0.05) cents per share, subject to customary adjustments thereunder. The 7,500 shares of May 2023 Series B Convertible Preferred Stock are convertible into an aggregate of up to 15,000,000 shares of Common Stock. Holders of the warrants may exercise the warrants by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrants. The Company intends to use the proceeds of the May 2023 Series B Convertible Preferred Stock offering for development of Hugoton Gas Field and Central Kansas Uplift Properties and for general working capital purposes.
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the May 2023 Series B Convertible Preferred Stock transaction, to register the shares of Common Stock issuable upon the conversion of the May 2023 Series B Convertible Preferred Stock and the common stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90 th ) calendar day following the closing of the issuance of the May 2023 Series B Convertible Preferred Stock.
On May 5, 2022, Ozark Capital, LLC (“Ozark”) acquired 2,500 shares of Series B Preferred Stock (convertible into 5,000,000 shares of Common Stock), together with warrants to acquire 5,000,000 shares of Common Stock at five cents ($0.05) per share for a total cash contribution of $250,000. Ozark and its affiliates hold over 10% of the shares of the Company’s Common Stock as of December 31, 2022. Accrued dividends on the Class A Convertible Preferred Stock attributable to Ozark were $11,080 and $8,523 for the years ended December 31, 2022 and 2021, respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $5,601 and $ — relative to Ozark’s Series A Preferred Stock as of December 31, 2022 and 2021, respectively.
Issuances of Series A Convertible Preferred Stock
March 2021 Issuance - On March 26, 2021, the Company entered into a securities purchase agreement with five (5) accredited investors providing for an aggregate investment of $2,050,000 by the investors for the issuance by the Company to them of (i) 22,776 shares of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “March 2021 Series A Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 5,256,410 shares of Common Stock at an exercise price of thirty-nine ($0.39) per share, subject to customary adjustments thereunder. The March 2021 Series A Convertible Preferred Stock is convertible into an aggregate of up to 7,117,500 shares of Common Stock. Holders of the warrants may exercise them by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrants. Net proceeds from the issuance of March 2021 Series A Convertible Preferred Stock totaled $1,929,089 after deducting the placement agent fee and other expenses of the offering. The Company used the proceeds of the March 2021 Series A Convertible Preferred Stock offering to complete the acquisition and development of the Properties, to pay-off certain outstanding convertible notes payable (see Note 4) and for general working capital purposes.
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the acquisition of the Properties, which occurred on April 1, 2021, to register the shares of Common Stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90 th ) calendar day following the closing of the acquisition of the Properties, which occurred on April 1, 2021. The Company completed the required registration of these shares on Form S-1, which the Securities and Exchange Commission declared effective on August 4, 2021.
The holders of the March 2021 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its March 2021 Series A Convertible Preferred Stock and/or exercise its Common Stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days advance notice to the Company.
The Company has accrued preferred dividends totaling $199,300 and $174,449 relative to the March 2021 Series A Convertible Preferred Stock which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $44,805 and $ — relative to the March 2021 Series A Convertible Preferred Stock as of December 31, 2022 and 2021, respectively.
The holders of March 2021 Series A Convertible Preferred Stock exercised their rights to convert a total of 3,000 shares of March 2021 Series A Convertible Preferred Stock into 937,500 shares of Common Stock during the year ended December 31, 2022. The holders exercised their rights to convert a total of 700 shares of March 2021 Series A Convertible Preferred Stock into 218,750 shares of Common Stock during the year ended December 31, 2021.
On March 26, 2021, Ozark acquired 1,111 shares of March 2021 Series A Convertible Preferred Stock (convertible into 347,188 shares of Common Stock), together with warrants to acquire 256,410 shares of Common Stock at fifty cents ($0.50) per share for a total cash of $100,000. Ozark and its affiliates hold over 10% of the shares of the Company’s Common Stock as of December 31, 2022. Accrued dividends attributable to Ozark were $11,080 and $8,523 for the years ended December 31, 2022 and 2021 respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $2,800 and $ — relative to the Ozark’s Series A Convertible Preferred Stock as of December 31, 2022 and 2021, respectively.
The holders converted a total of 3,000 and 700 shares of Series A Preferred Stock into common stock during the years ended December 31, 2022 and 2021, respectively.
All holders of the March 2021 Series A Convertible Preferred Stock, including Ozark, have agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its Series A Convertible Preferred Stock and/or exercise its Common Stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days’ advance notice to the Company.
June 2022 Issuance - On June 15, 2022, the Company entered into a securities purchase agreement with an accredited investor providing for an aggregate investment of $500,000 by the investor for the issuance by the Company of (i) 5,000 shares of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “June 2022 Series A Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 1,666,667 shares of Common Stock at an exercise price of thirty cents ($0.30) per share, subject to customary adjustments thereunder. The June 2022 Series A Convertible Preferred Stock is convertible into an aggregate of up to 1,562,500 shares of Common Stock. The holder of the warrants may exercise them by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrant. Net proceeds from the issuance of the June 2022 Series A Convertible Preferred Stock totaled $500,000. The Company used the proceeds of the June 2022 Series A Convertible Preferred Stock offering to pay-off certain outstanding convertible notes payable and for general working capital purposes.
The Company also entered into that certain registration rights agreement, pursuant to which the Company agreed to file a registration statement within forty-five (45) days following the closing of the of the June 2022 Series A Preferred Stock, which occurred on June 15, 2022, to register the shares of Common Stock underlying the warrants. The Company is to use its best efforts to cause such registration statement to be declared effective within forty-five (45) days after the filing thereof, but in any event no later than the ninetieth (90 th ) calendar day following the closing of the offering, which occurred on June 15, 2022.
The holders of the June 2022 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its June 2022 Series A Convertible Preferred Stock and/or exercise its Common Stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days advance notice to the Company.
The Company has accrued preferred dividends totaling $27,260 and $-0- relative to the June 2022 Series A Convertible Preferred Stock which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $27,260 and $ — relative to the June 2022 Series A Convertible Preferred Stock as of December 31, 2022 and 2021, respectively.
There were no conversions during the years ended December 31, 2022 and 2021.
August/September 2022 Issuances – During August and September 2022, the Company entered into a securities purchase agreement with three accredited investors providing for an aggregate investment of $145,000 by the investors for the issuance by the Company of (i) 1,450 shares of Series A Convertible Preferred Stock with a stated/liquidation value of $100 per share (the “August/September 2022 Series A Convertible Preferred Stock”); and (ii) warrants, with a term of five and a half (5.5) years, exercisable six (6) months after issuance, to purchase an aggregate of up to 483,332 shares of Common Stock at an exercise price of thirty ($0.30) per share, subject to customary adjustments thereunder. The August/September 2022 Series A Convertible Preferred Stock is convertible into an aggregate of up to 453,125 shares of Common Stock. The holders of the warrants may exercise them by paying the applicable cash exercise price or, if there is not an effective registration statement for the sale of the shares of Common Stock underlying the warrants within six (6) months following the closing date, as defined in the warrants, by exercising on a cashless basis pursuant to the formula provided in the warrant. Net proceeds from the issuance of the August/September 2022 Series A Convertible Preferred Stock totaled $145,000. The Company used the proceeds of the August/September 2022 Series A Convertible Preferred Stock offering to pay-off certain outstanding convertible notes payable and for general working capital purposes.
The holders of the August/September 2022 Series A Convertible Preferred Stock agreed to a 4.99% beneficial ownership cap that limits the investors’ ability to convert its August/September 2022 Series A Convertible Preferred Stock and/or exercise its Common Stock purchase warrants. Such limitation can be raised to 9.99% upon 60 days advance notice to the Company.
The Company has accrued preferred dividends totaling $5,059 and $-0- relative to the August/September 2022 Series A Convertible Preferred Stock which was charged to additional paid in capital during the years ended December 31, 2022 and 2021, respectively. The Company has outstanding accrued and unpaid preferred dividends totaling $5,059 and $ — relative to the August/September 2022 Series A Convertible Preferred Stock as of December 31, 2022 and 2021, respectively.
There were no conversions during the years ended December 31, 2022 and 2021.
Issuances of Convertible Notes Payable
8% Convertible Notes Payable due September 15, 2022 (in default) - On June 8, 2022, the Company issued to an accredited investor an unsecured convertible note payable due September 15, 2022 (the “June 2022 Note”), with an aggregate principal face amount of approximately $350,000. The June 2022 Note is, subject to certain conditions, convertible into an aggregate of 700,000 shares of Common Stock, at a price of fifty cents ($0.50) per share. The Company also issued a five-year Common Stock purchase warrant to purchase up to 700,000 shares of Common Stock at an exercise price of fifty cents ($0.50) per share, subject to customary adjustments (the “June 2022 Warrants”) which are immediately exercisable. The investor purchased the June 2022 Note and June 2022 Warrant from the Company for an aggregate purchase price of $350,000 and the proceeds were used for drilling and completion costs on the initial well drilled under the Hugoton Gas Field participation agreement and general working capital purposes. The Company also granted the investor certain piggy-back registration rights whereby the Company has agreed to register for resale the shares of Common Stock underlying the June 2022 Warrant and the conversion of the June 2022 Note unless the shares of the Company commence to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the closing date.
The June 2022 Note bears interest at a rate of eight percent (8%) per annum, may be voluntarily repaid in cash in full or in part by the Company at any time in an amount equal to the remaining principal amount of the underlying note and any accrued and unpaid interest.
The underlying notes and warrants contain customary events of default, representations, warranties, agreements of the Company and the investors and customary indemnification rights and obligations of the parties thereto, as applicable.
The Company did not pay the principal balance due on the June 2022 Note upon its maturity on September 15, 2022 and the remaining balance remains due and payable and is therefore in technical default as of December 31, 2022.
On May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000 (including the June 2022 Note), which the Company did not pay by their maturity dates . The Company and the holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable.
8% Convertible Notes Payable due June 29, 2022 (in default) - The Company entered into a securities purchase agreement with two accredited investors for the Company’s 8% convertible notes payable due June 29, 2022 (the “May 2022 Notes”), with an aggregate principal amount of $850,000. The May 2022 Notes are, subject to certain conditions, convertible into an aggregate of 2,125,000 shares of Common Stock, at a price of forty cents ($0.40) per share. The Company also issued an aggregate of 425,000 shares of Common Stock as commitment shares (“Commitment Shares” and, together with the May 2022 Notes and Conversion Shares, the “Securities”) to the investors as additional consideration for the purchase of the May 2022 Notes. The closing of the offering of the Securities occurred on May 13, 2022, when the investors purchased the Securities for an aggregate purchase price of $850,000. The Company has also granted the investors certain automatic and piggy-back registration rights whereby the Company has agreed to register the resale by the Investors of the Conversion Shares. The proceeds of this offering of Securities was used to purchase the Company’s membership interests in GMDOC.
The May 2022 Notes bear interest at a rate of eight percent (8%) per annum, may be voluntarily repaid in cash in full or in part by the Company at any time (subject to the occurrence of an event of default) in an amount equal to 120% of the principal amount of each May 2022 Note and any accrued and unpaid interest, and shall be mandatorily repaid in cash in an amount equal to a) fifty percent (50%) of the then outstanding principal amount equal to 120% of the principal amount of each May 2022 Note and any accrued and unpaid interest in the event of the consummation by the Company of any public or private offering or other financing pursuant to which the Company receives gross proceeds of at least $2,000,000 but not greater than $3,000,000; or b) one hundred percent (100%) of the then outstanding principal amount equal to 120% of the principal amount of a May 2022 Note and any accrued and unpaid interest in the event of the consummation by the Company of any public or private offering or other financing pursuant to which the Company receives gross proceeds of in excess of $3,000,000. In addition, pursuant to the May 2022 Notes, so long as such May 2022 Notes remain outstanding, the Company shall not enter into any financing transactions pursuant to which the Company sells its securities at a price lower than the $0.40 per share conversion price, subject to certain adjustments, without the written consent of the investors.
The conversion of the May 2022 Notes are each subject to beneficial ownership limitations such that the investors may not convert the May 2022 Notes to the extent that such conversion or exercise would result in an Investor being the beneficial owner in excess of 4.99% (or, upon election of the Investor, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.
Pursuant to the purchase agreement for the Securities, for a period of twelve (12) months after the closing date, the investors have a right to participate in any issuance of the Company’s Common Stock, Common Stock equivalents, conventional debt, or a combination of such securities and/or debt, up to an amount equal to thirty-five percent (35%) of the subsequent financing.
The Company also entered into that certain registration rights side letter, pursuant to which, in the event the Company’s shares of Common Stock have not commenced trading on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the closing date, and, thereafter, the Company agreed to file a registration statement under the Securities Act to register the offer and sale, by the Company, of Common Stock underlying the May 2022 Notes in the event that such notes are not repaid prior to such 120-day period.
The Company paid half of the May 2022 Notes principal balance upon its maturity on June 29, 2022 and an additional $112,500 in September 2022 and the remaining balance remains due and payable and is therefore in technical default. With respect to the two May 2022 Notes with an aggregate outstanding principal balance of $312,500 as of December 31, 2022 the Company has reached an agreement with the two investors. On January 10, 2023, the Company amended each of those notes by entering into a letter agreement between the investors and the Company. The Letter Agreement modifies the terms of the May 2022 Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
8% Convertible Notes Payable due October 29, 2022 (in default) - On August 30, 2021, the Company issued to an accredited investor (the “8% Note Investor”) an unsecured convertible note payable due October 29, 2022 (the “8% Note”), with an aggregate principal face amount of approximately $100,000. The 8% Note is, subject to certain conditions, convertible into an aggregate of 200,000 shares of Common Stock, at a price of fifty cents ($0.50) per share. The Company also issued a five and one half-year Common Stock purchase warrant to purchase up to 200,000 shares of Common Stock at an exercise price of fifty cents ($0.50) per share, subject to customary adjustments (the “8% Note Warrant”) which are immediately exercisable. The 8% Note Investor purchased the 8% Note and 8% Note Warrant from the Company for an aggregate purchase price of $100,000 and the proceeds were used for general working capital purposes. The Company also granted the 8% Note Investor certain piggy-back registration rights whereby the Company has agreed to register for resale the shares underlying the 8% Note Warrant and the conversion of the 8% Note unless the shares of the Company commences to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the closing date.
On October 29, 2021, the Company issued to three accredited investors (the “October 8% Note Investors”) unsecured convertible notes payable due October 29, 2022 (the “October 8% Notes”), with an aggregate principal face amount of approximately $550,000. The October 8% Notes are, subject to certain conditions, convertible into an aggregate of 1,100,000 shares of Common Stock, at a price of fifty cents ($0.50) per share. The Company also issued five and one half-year Common Stock purchase warrants to purchase up to 1,650,000 shares of Common Stock at an exercise price of $0.50 per share, subject to customary adjustments (the “October 8% Note Warrants”) which are immediately exercisable. The October 8% Note Investors purchased the October 8% Notes and October 8% Note Warrants from the Company for an aggregate purchase price of $550,000 and the proceeds were used for general working capital purposes. The Company also granted the October 8% Note Investors certain piggy-back registration rights whereby the Company has agreed to register for resale the shares underlying the October 8% Note Warrants and the conversion of the October 8% Notes unless the shares of the Company commences to trade on the NYSE American; the Nasdaq Capital Market; the Nasdaq Global Market; the Nasdaq Global Select Market; or the New York Stock Exchange, within one hundred twenty (120) days after the closing date.
The 8% Note and the October 8% Notes all bear interest at a rate of eight percent (8%) per annum, may be voluntarily repaid in cash in full or in part by the Company at any time in an amount equal to 120% of the principal amount of the underlying notes and any accrued and unpaid interest. Fifty percent (50%) of the 8% Note and the October 8% Notes shall be mandatorily repaid in cash in an amount equal to 120% of the principal amount of the underlying notes and any accrued and unpaid interest in the event of the consummation by the Company of any public or private offering or other financing pursuant to which the Company receives gross proceeds of at least $2,000,000 and one-hundred percent (100%) of the underlying notes plus accrued interest shall be mandatorily repaid in an amount equal to 120% of outstanding principal and interest in cases in which the Company receives gross proceeds of at least $3,000,000. In addition, pursuant to the 8% Notes Note and the October 8% Notes, so long as the underlying notes remain outstanding, the Company cannot enter into any financing transactions pursuant to which the Company sells its securities at a price lower than $0.50 cents per share without the written consent of the 8% Note Investor.
The conversion of the 8% Note and the October 8% Notes and the exercise of the underlying warrants are each subject to beneficial ownership limitations such that the 8% Note Investor and the October 8% Note Investors may not convert the underlying notes or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the investors being the beneficial owner in excess of 4.99% (or, upon election of the investors, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.
The Company, the 8% Note Investor and the October 8% Note Investors have agreed that for so long as the underlying warrants remain outstanding, the investors have the right to participate in any issuance of Common Stock, conventional debt, or a combination of such securities and/or debt, up to an amount equal to thirty-five percent (35%) of such subsequent financing.
The Company did not pay the principal balance due on the 8% Notes and the October 8% Notes upon their maturity on October 29, 2022 and the remaining balance remains due and payable and is therefore in technical default as of December 31, 2022. With respect to the two October 8% Notes with an outstanding aggregate principal balance of $550,000 as of December 31, 2022, the Company has reached an agreement with the two October 8% Note Investors. On January 10, 2023, the Company amended each of these October 8% Notes by entering into Letter Agreement between the October 8% Investors and the Company. The Letter Agreement modifies the terms of the October 8% Notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
On May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000 (including $100,000 principal balance of the notes payable due October 29, 2022 and $350,000 principal balance of the note payable due September 15, 2022), which the Company did not pay by their maturity dates . The Company and the holder of the two convertible notes payable entered into the New Note, exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable.
3% Convertible Notes Payable due March 31, 2026 - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of 3% convertible notes payable (the “3% Notes”) with detachable warrants to purchase 5,732,994 shares of Common Stock for fifty cents ($0.50) per share (the 3% Note Warrants”). The 3% Notes allow for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on March 30, 2026 (the “Maturity Date”). The 3% Notes are convertible as to principal and any accrued interest, at the option of holder, into shares of the Common Stock at any time after the issue date and prior to the close of business on the business day preceding the Maturity Date at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustments. The 3% Note Warrants were valued at $1,605,178 using the Black-Scholes methodology.
Extinguishment of liabilities –
Debt Settlement Agreements - On March 31, 2021, the Company entered into Debt Settlement Agreements with six creditors (five of which were related parties) which extinguished accounts payable and accrued liabilities totaling $2,866,497 in exchange for the issuance of $28,665 in principal balance of the 3% Notes with detachable warrants to purchase the 3% Note Warrants. The 3% Notes allow for prepayment at any time with all principal and accrued interest becoming due and payable at maturity on the Maturity Date. The 3% Notes are convertible as to principal and any accrued interest, at the option of holder of the 3% Notes, into shares of the Common Stock at any time after the issue date and prior to the close of business on the business day preceding March 30, 2026 at the rate of fifty cents ($0.50) per share, subject to normal and customary adjustment. The 3% Note Warrants were valued at $1,605,178 using the Black-Scholes methodology.
Extinguishment of Convertible Note Payable - On March 26, 2021, the Company exercised its right to retire a convertible note payable originally issued in August 2020 (the “August 2020 Note”) in conjunction with the issuance of the March 2021 Series A Convertible Preferred Stock. In accordance with the prepayment provisions contained in the August 2020 Note, the Company paid $453,539 to retire all principal, accrued interest and the 15% prepayment premium.
Extinguishment of Notes Payable – On April 1, 2021, the Company and the holders of two notes payable aggregating $85,000 that were in default reached a settlement whereby the Company issued a total of 245,000 shares of Common Stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated Common Stock purchase warrants, which totaled $123,830, as of April 1, 2021. The extinguishment of the debt obligations resulted in a gain of $55,230, which was recorded in the year ended December 31, 2021.
USNG Letter Agreement –
On November 9, 2021, the Company entered into a letter agreement (the “USNG Letter Agreement”) with U.S. Noble Gas, LLC (“USNG”), pursuant to which USNG provides consulting services to the Company for exploration, testing, refining, production, marketing and distribution of various potential reserves of noble gases and rare earth element/minerals on the Company’s recently acquired 11,000-care oil and gas properties in the Otis Albert Field located on the Properties. The USNG Letter Agreement would cover all of the noble gases, specifically helium, and rare earth elements/minerals potentially existing on the Properties and the Company’s future acquisitions, if any, including the Hugoton Gas Field.
The USNG Letter Agreement also provided that USNG would supply a large vessel designed for flows up to 5,000 barrels of water per day at low pressures, known as a gas extraction/separator unit. The gas extraction/separator unit is a dewatering vessel that the Company may use for multiple wells in the future.
The USNG Letter Agreement required the Company to establish a four-member board of advisors (the “Board of Advisors”) comprised of various experts in noble gas and rare earth elements/minerals. The Board of Advisors will help attract both industry partners and financial partners for developing a large helium, noble gas and/or rare earth element/mineral resources that may exist in the region where the Company currently operates. The industry partners would include helium, noble gas and/or rare earth element/mineral purchasers and exploration and development companies from the energy industry. The financial partners may include large family offices or small institutions.
Pursuant to the USNG Letter Agreement, the Company will pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that the Company receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore, there has been no payment or accrual liability relative to this cash fee provision through December 31, 2022.
The USNG Letter Agreement has an initial term of 5 years, which shall thereafter continue for successive one-year periods, provided that there is no uncured breach, unless otherwise terminated by either party upon a written notice of intent to non-renew.
In consideration for the consulting services to be rendered and pursuant to the terms of the USNG Letter Agreement, the Company issued warrants to purchase, in the aggregate, 2,060,000 shares of Common Stock, at an exercise price of fifty ($0.50) to three of USNG’s principal consultants and four third-party service providers. The Company also issued warrants to purchase, in the aggregate, 1,200,000 shares of Common Stock at fifty cents ($0.50) per share exercise price to three members of the Board of Advisors. The Company granted a total of 3,260,000 warrants to purchase its Common Stock with an exercise price of fifty cents ($0.50) per share in connection with the USNG Letter Agreement and the arrangements described therein. The warrants expire five years after the date of the USNG Letter Agreement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on our financial conditions, changes in our financial conditions, or our results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses except as follows:
Investment in Unconsolidated Subsidiary – GMDOC - On May 3, 2022, the Company entered into the Operating Agreement pursuant to which the Company acquired 17 (or 60.7143%) of 28 limited liability membership Interests in GMDOC, for an aggregate purchase price of $4,037,500, and was subsequently admitted as a member of GMDOC.
With respect to its cash capital contribution, the Company paid a non-refundable cash deposit for the membership interests in the amount of $50,000 on May 3, 2022. The Company paid the remainder of the cash contribution for the membership interests, or $800,000, on May 16, 2022. The remainder of the Company’s capital contribution, or $3,187,500, was financed by the Bank Loan (as defined below).
GMDOC had previously acquired 70% of the working interests in the GMDOC Leases from Castelli Energy, L.L.C, an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC Leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis.
Pursuant to the terms of the Operating Agreement, each member agreed to pay GMDOC, as its capital contribution, $50,000 in cash per Interest, with the remainder to be financed, in part, by a loan to GMDOC from a commercial bank, secured by GMDOC’s property, in the aggregate amount of $6,045,000 (the “Bank Loan”). The principal of the Bank Loan is to be repaid in 84 varying monthly installments, ranging from $170,000 at the beginning to $40,500 at the end of the loan term, with the first installment on July 1, 2022. The Bank Loan bears a variable interest beginning at an initial rate of 6% per annum with one rate adjustment after 36 months subject to a 6% minimum interest rate.
For the Years Ended December 31, 2022 and 2021
Results of Operations
Revenue
The Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1, 2021. Revenues totaled $117,125 and $79,002 for the years ended December 31, 2022 and 2021, respectively. The $38,123 or 48% increase in revenues during the year ended December 31, 2022 as compared to the same period in 2021 reflects the commencement of natural gas and helium sales from the initial Hugoton Gas Field which was connected to the pipeline on August 17, 2022 as well as the timing of the purchase of the Properties. The Company expects its revenues to continue to improve as the price of WTI crude oil remains strong and the Company increases the volume of natural gas and helium gas sold as it continues its drill and complete wells pursuant to its Hugoton Gas Field participation agreement.
During the year ended December 31, 2022, our revenue was substantially impacted by inflation, the COVID-19 pandemic and the Russian war in Ukraine, which has restricted the world supply of oil and gas and thereby increased the average WTI crude oil price. We expect this trend to continue during 2023 and perhaps beyond.
Oil and Gas Lease Operating Expenses
The Company began generating revenues from the production and sale of crude oil since the acquisition of the Properties on April 1, 2021. Total oil and gas lease operating expenses totaled $279,067 and $530,118 for the years ended December 31, 2022 and 2021, respectively. The decrease in oil and gas lease operating expenses during the year ended December 31, 2022 as compared to the same period in 2021 is attributable to significant repairs and rework performed in the year ended December 31, 2022 that did not recur during the year ended December 31, 2021.
Upon completion of our acquisition of the Properties on April 1, 2021, we commenced rework of the existing production wells on the Properties in order to restore the three producing wells to full operational condition. All such rework costs were expensed as routine maintenance instead of capitalized to oil and gas properties and equipment under the full-cost method. In addition, we have performed certain exploration, including testing and evaluation for the existence of noble gas reserves on the Properties, including helium, argon and other rare earth minerals/gases. Testing of the Properties for noble gas reserves has provided encouraging but not conclusive results and the Company has yet to determine the possibility of commercializing the noble gas reserves on the Properties. The Company plans to assess the existing oil and gas reserves on the Properties while continuing the evaluation of the existence of new oil and gas zones and other mineral reserves and specifically the noble gas reserves that the Properties may hold.
During the year ended December 31, 2022, our oil and gas lease operating expenses have been substantially impacted by inflation, the COVID-19 pandemic and the Russian war in Ukraine, which has restricted the supply of production pipe and other materials used in the drilling and rework of oil and gas wells. In addition, experienced oil and gas service professionals have been in high demand in the oil and gas service sector and thereby increasing the cost of oil and gas well services. We expect this trend to continue during the 2023 and perhaps beyond.
Depreciation, Depletion and Impairment
Depreciation, depletion and amortization expense totaled $1,035,827 and $92,502 during the years ended December 31, 2022 and 2021, respectively. Depreciation and depletion expenses were $130,253 and $92,502 for the years ended December 31, 2022 and 2021, respectively. Impairment charges totaled $905,574 and $— for the years ended December 31, 2022 and 2021, respectively.
The Company began generating revenues from the production and sale of natural gas and helium from the Hugoton Gas Field on August 17, 2022 and crude oil since the acquisition of the Properties on April 1, 2021, which was acquired for $900,000 cash plus the assumption of asset retirement obligations of $13,425. The Company allocated the purchase price of $913,425 to oil and gas properties and equipment, which is subject to depreciation, depletion and amortization as the acquisition qualified as an asset acquisition. The Company began generating revenues from the production and sale of natural gas and helium from the Hugoton Gas Field on August 17, 2022, which also marked the beginning of the related depreciation, depletion and amortization.
During the year ended December 31, 2022, the Company changed its strategy regarding the Central Kansas Uplift considering the reduced net cash flows from the sale of crude oil production. The reduction in net cash flows was attributable to lower spot crude oil prices during 2022 compared to 2021 and higher than anticipated operating costs related to the operation of the horizontal wells on the Properties. The Company has shut down the horizontal production wells as of December 31, 2022 and is considering the deepening of the conventional wells on the property to explore for helium and other noble gases that may be present in deeper producing zones. Accordingly, the Company has recorded an impairment charge of $712,812 to reduce the capitalized tangible and intangible costs related to its Central Kansas Uplift properties to zero as of December 31, 2022.
The Company performed the ceiling test to assess potential impairment of the capitalized costs relative to its Hugoton Gas Field Project. The ceiling test indicated an impairment charge of $192,762 was required to reduce the total capitalized costs to $88,687 as of December 31, 2022. Accordingly, the Company has recorded an impairment charge of $192,762 to reduce the capitalized tangible and intangible costs related to its Hugoton Gas Field properties to $88,687 as of December 31, 2022.
Accretion of Asset Retirement Obligation
Total expense for the accretion of asset retirement obligations was $2,222 and $836 for the years ended December 31, 2022 and 2021, respectively. The Company determined the amount of the asset retirement obligation assumed to be $13,425 as of April 1, 2021, the date of the acquisition of the Properties. In addition, the Company commenced production from the Hugoton Gas Field well which began the accretion of its related asset retirement obligations. The obligation relates to legal requirements associated with the retirement of long-lived assets that result from the acquisitions, construction, development, or normal use of the asset. The obligation relates primarily to the requirement to plug and abandon oil and natural gas wells and support wells at the conclusion of their useful lives.
Oil and Gas Production Related Taxes
Oil and gas production related taxes totaled $164 and $1,060 for the years ended December 31, 2022 and 2021, respectively. Such taxes are deducted from gross oil and gas revenue by the crude oil purchaser upon payment to the Company and include primarily severance taxes imposed by the State of Kansas, and Kansas conservation assessment fees. Revenues totaled $117,125 for the year ended December 31, 2022, which resulted in the deduction of $164 in production related taxes. Revenues totaled $79,002 for the year ended December 31, 2021, which resulted in the deduction of $1,060 in production related taxes primarily due to severance taxes paid in 2021. During the year ended December 31, 2021, the Company received a notice from the State of Kansas that exempted the Company from paying severance taxes due to the existing wells’ production levels. Therefore, production related taxes declined as a percentage of revenue during the year ended December 31, 2022 as compared to the same period in 2021.
Other General and Administrative Expenses
Other general and administrative expenses were $1,500,504 for the year ended December 31, 2022, an increase of $463,508, or 45%, from other general and administrative expenses of $1,036,996 for the year ended December 31, 2021. The increase in other general and administrative expenses is primarily attributable to an increase of $549,561 in stock-based compensation due to the noncash compensation awarded to the Company’s executives, members of the Board of Directors, the USNG Letter Agreement, which awarded compensatory warrants to advisory members of the Board of Advisors and other consultants in 2022 and in late 2021. The increase in stock-based compensation was offset by a $75,000 charge-off of one option to acquire a property during the year ended December 31, 2021 that did not recur in the comparable period in 2022.
Equity in earnings of unconsolidated subsidiary – GMDOC
The Company reported equity in earnings of unconsolidated subsidiary of $251,461 for the year ended December 31, 2022, compared to $-0- for the year ended December 31, 2021. Such income resulted from the Company acquiring a 60.7143% membership interest in GMDOC in May 2022. The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
GMDOC had previously acquired 70% of the working interests in the GMDOC Leases from Castelli Energy, L.L.C., an Oklahoma limited liability company. The GMDOC Leases cover approximately 10,000 acres located in Southern Kansas near the Oklahoma border. The GMDOC leases currently produce approximately 100 barrels of oil per day and 1.5 million cubic feet of natural gas per day on a gross basis. GMDOC, LLC generated $414,171 of net income on $2,397,406 of oil and gas revenues during the year ended December 31, 2022. The Company owns a 60.7143% membership interest in such net income or $251,461 which it has reported as equity in earnings of unconsolidated subsidiary – GMDOC during the year ended December 31, 2022.
Interest Expense
Interest expense increased to $913,608 for the year ended December 31, 2022, compared to $108,052 for the year ended December 31, 2021. The increase in interest expense during the year ended December 31, 2022 was attributable to $218,680 of default interest accrued on the convertible notes that were in default at December 31, 2022. Management believes that it will be able to negotiate the waiver of such default interest when it negotiates amendments to the notes in default during 2023. In addition the increase was attributable to the issuance of the various convertible notes payable issued in 2022 and in 2021 that were outstanding during the year ended December 31, 2022 and not outstanding during the year ended December 31, 2021.
Gain on Extinguishment of Liabilities
The Company reported a gain on exchange and extinguishment of liabilities of $-0- and $86,602 in the years ended December 31, 2022 and 2021, respectively.
On April 1, 2021, the Company and the holders of two notes payable aggregating $85,000 that were in default reached a settlement whereby the Company issued a total of 245,000 shares of Common Stock in exchange for the extinguishment of the outstanding principal, accrued interest and associated Common Stock purchase warrants, which totaled $123,830, as of April 1, 2021. The 245,000 shares issued to extinguish the debt obligations resulted in a gain of $55,230 which was recorded in the year ended December 31, 2021.
On March 31, 2021, the Company recorded a net gain on extinguishment of liabilities totaling $31,372, which was attributable to six transactions that extinguished outstanding liabilities as of that date. The Debt Settlement Agreements extinguished accounts payable and accrued liabilities with a total outstanding balance of $2,866,497, for the issuance of $28,665 in principal balance of the 3% Notes. Such 3% Notes were issued with the 3% Warrants, which were valued at $1,605,178. The transaction resulted in a total gain of $1,232,654 of which $124,177 was reported as a gain on extinguishment of liabilities and $1,108,477 was reported as a capital contribution during the year ended December 31, 2021. The $23,000 gain from settlement of litigation extinguished $33,000 of trade payables for a cash payment of $10,000. The loss of $115,805 is related to the early retirement of $365,169 principal balance of the August 2020 Note. There were no similar transactions during the year ended December 31, 2022.
Change in Warrant Derivative Fair Value
The change in warrant derivative liability was an expense of $577,269 during the year ended December 31, 2022, as compared to a gain of $199 during the year ended December 31, 2021. The estimated fair value of the Company’s derivative liabilities, all of which were related to the detachable warrants issued in connection with the issuance of Series A Convertible Preferred Stock, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates. The detachable warrants issued in connection with the issuance of certain Series A Convertible Preferred Stock contained a provision allowing the holder to require cash settlement in certain situations were fundamental transaction, as defined in the warrant agreements have occurred. An event occurred on December 31, 2022 that activated the Holder’s ability to utilize such provisions, therefore the derivative liability was recognized on December 31, 2022.
The conversion feature in certain outstanding notes payable and Common Stock purchase warrants issued in connection with short-term notes outstanding during the year ended December 31, 2021 were treated as derivative instruments because such notes payable and warrants contained ratchet and anti-dilution provisions. The mark-to-market process resulted in a gain of $199 during the year ended December 31, 2021. There were no similar derivatives outstanding during the year ended December 31, 2022. All short-term notes and their related derivative warrants were terminated on April 1, 2021.
Income Tax
The Company recorded no income tax benefit (expense) in the years ended December 31, 2022 and 2021. The Company has been in a cumulative tax loss position and has substantial net operating loss carryforwards available for its utilization at December 31, 2022. The Company has continued to carry a 100% reserve on its net deferred tax assets and therefore recorded no income tax expense or benefit on its income (loss) before income taxes during the years ended December 31, 2022 and 2021.
Net Loss
The Company reported a net loss of $3,940,075 for the year ended December 31, 2022, compared to a net loss of $1,603,761 for the year ended December 31, 2021. This represents an increase in net loss of $2,336,314 for the year December 31, 2022 compared to the year ended December 31, 2021.
Series A Convertible Preferred Stock Dividends
The Company recorded $231,619 and $174,449 in convertible preferred stock dividends in the years ended December 31, 2022 and 2021, respectively. On March 26, 2021, the Company issued and classified its Series A Convertible Preferred Stock as equity securities on its balance sheet. During 2022, the Company issued additional shares of Series A Convertible Preferred Stock, therefore, there were more shares of Series A Convertible Preferred Stock outstanding during the year ended December 31, 2022 as compared to the year ended December 31, 2021. All shares of Series A Convertible Preferred Stock bear a cumulative dividend at a 10% rate based on its stated/liquidation value.
Net Loss Applicable to Common Stockholders
The Series A Convertible Preferred Stock issued in 2022 and 2021 have dividend and/or distribution preferences over our Common Stock and, therefore, such accrued dividend amounts have been deducted from net loss to report net loss applicable to common stockholders of $4,171,694 and $1,778,210 for the years ended December 31, 2022 and 2021, respectively.
Basic and Diluted Net Loss Attributable to Common Stockholders per Share
Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of Common Stock and dilutive Common Stock Equivalents outstanding during the period. Common Stock Equivalents included in the diluted net loss attributable to common stockholders per share computation represent shares of Common Stock issuable upon the assumed conversion of convertible notes payable, Series A Convertible Preferred Stock and the assumed exercise of stock options and warrants using the treasury stock and “if converted” method. For periods in which net losses attributable to common stockholders are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of Common Stock Equivalents would have an anti-dilutive effect.
The Company incurred a net loss attributable to common stockholders during the year ended December 31, 2022, and 2021, therefore all Common Stock Equivalents were considered anti-dilutive and excluded from diluted net loss attributable to common stockholders per share computations. The basic and diluted net loss attributable to common stockholders per share were $(0.20) and $(0.09) for the years ended December 31, 2022 and 2021, respectively.
Potential Common Stock Equivalents as of December 31, 2022 totaled 32,688,238 shares of Common Stock, which included 2,838,580 shares of Common Stock underlying the convertible notes payable, 7,976,875 shares of Common Stock underlying the conversion of Series A Convertible Preferred Stock, 20,430,783 shares of Common Stock underlying outstanding warrants and 1,442,000 shares of Common Stock underlying outstanding stock options.
Liquidity and Capital Resources; Going Concern–
We have had a history of losses and have generated little or no operating revenues for a number of years. In 2020, we began assessing various opportunities and strategic alternatives involving the acquisition, exploration and development of gas and oil properties in the United States, including the possibility of acquiring businesses or assets that provide support services for the production of oil and gas in the United States. As a result, we: 1) acquired the Properties, 2) entered into the Hugoton JV and 3) entered into the GMDOC venture.
The planned development of the development projects previously identified will require us to raise additional capital to accomplish our operating plan, which cannot be assured. Historically, we financed our operations through the issuance of equity and various short and long-term debt financing that contained some level of detachable warrants to provide the holders with a level of equity participation.
Capital Raised
Historically, we have raised funds through various equity and debt instruments through private transactions. The following summarizes the sources of significant liquidity raised during the years ended December 31, 2022 and 2021:
Year ended
December 31, 2022
Capital raised:
Issuance of convertible notes payable together with the issuance of 425,000 shares of Common Stock
Issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants
Issuance of convertible notes payable with detachable Common Stock purchase warrants
Total capital raised
Year ended
December 31, 2021
Capital raised:
Issuance of Series A Convertible Preferred Stock with detachable Common Stock purchase warrants
Issuance of convertible notes payable with detachable Common Stock purchase warrants
Total capital raised
The Company was able to raise liquidity during 2022 and 2021 through the issuance of debt and equity in private transactions with accredited investors. These financial instruments generally require the Company to register the Common Stock underlying the conversion of the Series A Convertible Preferred Stock, the Common Stock purchase warrants and the convertible notes payable. These issuances generally provide the holders with a right to participate in future capital raises and require their approval for the future issuance of securities at rates less than their purchase price. The holders have also agreed that the conversion of the Series A Convertible Preferred Stock, the convertible notes payable and the exercise of the underlying warrants are generally subject to beneficial ownership limitations such that each holder of the financial instruments individually may not convert the underlying Series A Convertible Preferred Stock, convertible notes payable or exercise the underlying warrants to the extent that such conversion or exercise would result in any of the holders individually being the beneficial owner in excess of 4.99% (or, upon election of the holders, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon such conversion or exercise, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to the Company, provided that any increase in such limitation will not be effective until 61 days following notice to the Company.
We will likely continue to issue such convertible notes payable with detachable warrants to acquire Common Stock to fund our operational and capital expenditure plans for 2023.
Capital Expenditures
As of December 31, 2022, we had: 1) acquired the Properties, 2) entered into the Hugoton JV and 3) entered into the GMDOC venture as more fully described elsewhere in this Annual Report on Form 10-K.
Going Concern
The Company has incurred losses from operations, has a stockholders’ deficit, incurred net cash used in operating activities and has a significant working capital deficit as of and for the years ended December 31, 2022 and 2021. The Company must raise substantial amounts of debt and equity capital from other sources in the future in order to fund (i) the development of the Properties acquired on April 1, 2021; (ii) our obligations for exploration and development under the Hugoton Farmout Agreement; (iii) normal day-to-day operations and corporate overhead; and (iv) outstanding debt and other financial obligations as they become due. Some of the Company’s outstanding debt and other financial obligations are currently past due and the Company anticipates that other debt and financial obligations will become past due imminently. These are substantial operational and financial issues that must be successfully addressed during 2023 and beyond.
The Company has made substantial progress in resolving many of its existing financial obligations during the years ended December 31, 2022 and 2021.
The Company will have significant financial commitments to execute its planned exploration and development of the Properties and the Hugoton Gas Field. The Company may find it necessary to raise substantial amounts of debt or equity capital to fund such exploration and development activities and may seek offers from industry operators and other third parties for interests in the Properties in exchange for cash and a carried interest in exploration and development operations or other joint venture arrangement. There can be no assurance that it will be able to obtain such new funding or be able to reach agreements with industry operators and other third parties or on what terms.
Due to the uncertainties related to the foregoing matters, there exists substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financials are issued. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Cash and cash equivalents balances-
As of December 31, 2022, we had cash and cash equivalents with an aggregate balance of $10,163, a decrease from a balance of $260,590 as of December 31, 2021. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $250,427 net decrease in cash during the year ended December 31, 2022:
Operating activities :
$249,841 of net cash used in operating activities. Net cash used in operating activities was $249,841 and $801,553 for the years ended December 31, 2022 and 2021, respectively, an improvement in net cash used in operating activities of $551,712. The improvement in net cash used in operating activities was primarily the result of an increase in non-cash expenses including the change in warrant derivative liability, discount amortization on debt and stock-based compensation, the impairment charge to oil and gas properties, an increase in accounts payable and accrued interest reflected in our cash flows from operating activities for the year ended December 31, 2022 compared to the same period in 2021.
Investing activities :
$1,153,591 of net cash used in investing activities. Cash used in investing activities was $1,153,591 for the year ended December 31, 2022 compared to $900,000 for the year ended December 31, 2021. We utilized funds during 2022 to acquire our membership interest in GMDOC and to drill the initial exploratory well pursuant to the Hugoton Gas Field participation agreement. We utilized funds during 2021 to acquire the Properties.
Financing activities:
$1,153,005 of net cash provided by financing activities. Cash provided by financing activities for the year ended December 31, 2022 was $1,153,005 compared to cash provided by financing activities of $1,951,101 for the year ended December 31, 2021. We raised a total of $1,200,000 from the issuance of convertible notes payable and $645,000 from the issuance of Series A Convertible Preferred Stock with detachable warrants during the year ended December 31, 2022. These financing cash inflows were offset by the repayment of $537,500 principal balance of convertible notes payable and the payment of dividends totaling $154,495 on the Series A Convertible Preferred Stock during the year ended December 31, 2022. The Company raised $1,929,089 through the issuance of Series A Convertible Preferred Stock and $650,000 in convertible notes payable, which was offset by the repayment of $453,539 principal balance of convertible debt and the payment of dividends totaling $174,449 on the Series A Convertible Preferred Stock during the year ended December 31, 2021.
The net result of these activities was a $250,427 decrease in cash and cash equivalents from $260,590 as of December 31, 2021 to $10,163 as of December 31, 2022.
Commitments:
Capital Expenditures . We had no material commitments for capital expenditures at December 31, 2022. However, we are required by the Hugoton Gas Field Farmout Agreement to drill at least three additional gas production wells in 2023 and 2024 in order to maintain the Hugoton JV. We drilled and completed the first Hugoton Gas Field production well in May 2022, which was connected to the pipeline and commenced production on August 17, 2022. We estimate that the expenses related to the drilling program to be approximately $300,000 for drilling and completion of each additional exploratory well.
Repayment of Debt . Debt obligations are comprised of the following at December 31, 2022:
December 31, 2022
Convertible notes payable:
8% convertible notes payable due October 29, 2022 (in default)
8% convertible notes payable due September 15, 2022 (the June 2022 Note) (in default)
8% convertible notes payable due June 29, 2022 (the May 2022 Notes) (in default)
3% convertible notes payable (the 3% Notes)
Total convertible notes payable
Less: Long-term portion
Convertible notes payable, short-term
Debt obligations become due and payable as follows:
Years ended
Principal
balance due
Total
With respect to two of the 8% convertible notes payable due October 29, 2022 with an outstanding aggregate principal balance of $500,000 as of December 31, 2022, the Company has reached an agreement with the two Investors. On January 10, 2023, the Company amended each of those notes by entering into a letter agreement between the Investors and the Company. The Letter Agreement modifies the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
On May 5, 2023, the Company reached an agreement with the holder of two separate convertible notes payable in the aggregate principal face amount of approximately $450,000 (including $100,000 principal balance of the notes payable due October 29, 2022 and $350,000 principal balance of the note payable due September 15, 2022), which the Company did not pay by their maturity dates . The Company and the holder of the two convertible notes payable entered into a new convertible promissory note (the “New Note”), exchanging the outstanding principal amount of the old convertible notes payable into the New Note, with a maturity date of September 30, 2023. Upon issuance of the New Note, the old convertible notes payable were cancelled and the repayment defaults under the prior convertible notes payable were cured with the entry into the New Note. The conversion price of the New Note was reduced from $0.50 per share to $0.40 per share however, the interest rate and other significant terms of the New Note are the same as those of the prior convertible notes payable.
With respect to the 8% convertible notes payable due June 29, 2022 with an outstanding aggregate principal balance of $312,500 as of December 31, 2022, the Company has reached an agreement with the two Investors. On January 10, 2023, the Company amended each of those notes by entering into a letter agreement between the Investors and the Company. The Letter Agreement modifies the terms of the notes by extending each note’s respective maturity date to September 30, 2023. In consideration for the extension, the Company amended the Fixed Conversion Price (as defined in each note) to $0.10, subject to any future adjustments as provided in each of the notes.
With respect to the other notes that were not amended or exchanged on January 10, 2023 and May 5, 2023, the parties are negotiating a forbearance/resolution to such technical defaults which include several alternatives. Such negotiations include i) a reduction in the conversion price of the underlying convertible notes, ii) an extension and a roll-over of the principal into other Company securities, and iii) a combination of the alternatives. The Company can provide no assurance that the parties will reach a mutually agreeable resolution.
Open Litigation.
The nature of the Company’s business exposes its properties, the Company, the Hugoton JV and its interest in GMDOC to the risk of claims and litigation in the normal course of business. Other than as noted above in Part I, Item 3 of this Annual Report on Form 10-K, in our Notes to the Financial Statements or routine litigation arising out of the ordinary course of business, the Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company.
Contractual Obligations
USNG Letter Agreement - Pursuant to the USNG Letter Agreement, the Company is required to pay USNG a $8,000 monthly cash fee beginning at the onset of commercial helium or minerals production and sales, subject to certain thresholds. Such monthly fees will become due and payable for any month that the Company receives cash receipts in excess of $25,000 derived from the sale of noble gases and/or rare earth elements/minerals. The Company has not yet achieved the $25,000 cash receipts threshold, therefore, there has been no payment or accrual liability relative to this cash fee provision through December 31, 2022.
Farmout Agreement to Explore and Develop Unconventional Gas and Brine Materials in the Hugoton Gas Field - On April 4, 2022, the Company acquired a 40% interest in a Farm-Out Agreement by and between Sunflower Exploration, LLC as the Farmee and Scout Energy Partners as Farmor with regards to its oil and gas interests in the Hugoton Gas Field, located in Haskell and Finney Counties, Kansas. The Farmout Agreement covers drilling and completion of up to 50 wells and the Company has joined three other entities in the Hugoton JV to explore for and develop potential oil, natural gas, noble gases and brine minerals on the properties underlying the Farmout Agreement Farm-Out Agreement.
The Hugoton JV will utilize Scout Energy Partner’s existing infrastructure assets, including water disposal, gas gathering and helium processing. In addition, the Farmout Agreement provides the Hugoton JV with rights to take in-kind and market its share of helium at the tailgate of Jayhawk Gas Plant, located in Grant County, Kansas, which will enable the Hugoton JV to market and sell the helium produced at prevailing market prices. The first exploratory well was completed and commenced production and sales of natural gas, natural gas liquids and helium on August 17, 2022 near Garden City, Kansas , The Company is continuing to evaluate the initial flows of both natural gas, natural gas liquids and helium to determine its plan for additional wells on the farmout.
Inflation and Seasonality
Inflation in general has had a material effect on us during the year ended December 31, 2022 and we do believe that inflation will continue to significantly impact our business during 2023 and perhaps beyond. We do not believe that our business is seasonal in nature.
In addition, our oil and gas lease operating expenses have been substantially impacted by the COVID-19 pandemic and the Russian war in Ukraine, which has restricted the supply of production pipe and other materials used in the drilling and rework of oil and gas wells. In addition, experienced oil and gas service professionals have been in high demand in the oil and gas service sector and thereby increasing the cost of oil and gas well services. We expect this trend to continue during 2023 and perhaps beyond.
Critical Accounting Policies
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective, or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:
Note 1 – Going Concern Analysis - In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our financials are issued. When management identifies conditions or events that raise substantial doubt about their ability to continue as a going concern it should consider whether its plans to mitigate those relevant conditions or events will alleviate the substantial doubt. If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of management’s plans, the entity should disclose information that enables user of financial statements to understand the principal events that raised the substantial doubt, management’s evaluation of the significance of those conditions or events, and management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
We performed the analysis and our overall assessment was there were conditions or events, considered in the aggregate, which raised substantial doubt about our ability to continue as a going concern within the next year, but such doubt was not adequately mitigated by our plans to address the substantial doubt as disclosed in Note 1 of the Notes to the Financial Statements.
Note 2 – Oil and Gas Properties and Equipment – The Company was required to perform an allocation of the purchase price for the acquisition of the Properties and to provide the estimated useful lives assigned to the related equipment purchased.
In addition, the accounting for, and disclosure of, oil and gas producing activities require that we choose between two alternatives under accounting principles generally accepted in the United States (“GAAP”): the full cost method or the successful efforts method. We adopted and use the full cost method of accounting, which involves capitalizing all exploration, exploitation, development and acquisition costs. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. Our unproved property costs, which include unproved oil and gas properties, properties under development, and major development projects, were zero through December 31, 2022, and are not subject to depletion. We review our unproved oil and gas property costs on a quarterly basis to assess for impairment and transfer unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost pool during that time. The full cost pool is comprised of intangible drilling costs, lease and well equipment and exploration and development costs incurred plus acquired proved and unproved leaseholds.
Note 3 – Investment in unconsolidated subsidiary – GMDOC - The Company’s investment in its unconsolidated subsidiary - GMDOC requires that the Company assess its control over the operations of GMDOC.
The Company uses the equity method of accounting for equity investments if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee, GMDOC. Management’s judgment regarding its level of influence over the operations of GMDOC included considering key factors such as the Company’s ownership interest, legal form of the investee, its’ lack of participation in policy-making decisions and its’ lack of control over the day-to-day operations of GMDOC.
Note 4 – Debt Obligations – The Company has issued various debt and equity securities that require the Company to estimate the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities issued. Management must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt securities between its debt and equity components.
Note 6 – Stock Options - The Company follows the fair value recognition provisions of Accounting Standards Codification (“ASC”) 718. Stock-based compensation expense is recognized in the financial statements for granted, modified, or settled stock options based on estimated fair values. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility and expected dividends. These estimates involve inherent uncertainties and the application of management judgment.
Note 7 – Warrants - The Company has issued various debt and equity securities (including detachable warrants) that require the Company to estimate the fair value of the debt, its embedded features and any related detachable warrants or other equity-related securities issued. Management must make significant assumption/estimates in order to allocate the proceeds of the issuance of the convertible debt securities between its debt and equity components.
Note 8 – Income Taxes - Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit.
Note 11 – Warrant Derivative Liabilities - Accounting for warrant derivative liabilities requires significant estimates and judgments on the part of management. The estimated fair value of the Company’s warrant derivative liabilities, all of which were related to the detachable warrants issued in connection with various notes payable, were estimated using a closed-ended option pricing model utilizing assumptions related to the contractual term of the instruments, estimated volatility of the price of the Company’s common stock and current interest rates.
